Bear necessities: The A to Z of the credit crunch

House prices falling, markets tumbling, mortgages vanishing, redundancies looming...As the economy lurches from one crisis to the next, even hedge-fund sharks are struggling to understand what's really going on. But fear not: Sean O'Grady can steer us all through the jargon-infested waters
Click to follow

Credit crunch. It has started to dominate our lives, though we may not – yet – have been personally crunched ourselves. The world's financial system is in chaos. Banks are being bailed out. Credit is getting harder and harder to find, even for those with squeaky-clean records. Where only a few months ago there was confidence bordering on recklessness, now there is simply fear. Where once the Royal Bank of Scotland felt confident enough to offer a shih-tzu dog in Manchester a gold credit card with a limit of £10,000, now the Royal Bank itself, like most of its peers, is finding it hard to borrow money itself.

The banks, in other words, are even fearful – especially fearful, in fact – of lending to each other. They are "hoarding liquidity", as they call it, because they can't be sure of getting their money back. No one quite knows where the bodies are buried – the ultimate size of the losses that will be suffered on devalued mortgage-backed securities tied to an American housing market that has gone into a tailspin. Indeed, because that process is yet to play out, no one can know what those losses will be. It is not a question of the banks hiding their problems – "lack of transparency" in the jargon – but of an unknowable future. Hence the all-pervading nervousness. And that means you will finder it tougher to get a mortgage or a car loan, and the company you work for will experience problems borrowing money to fund investment plans. It is pushing the world towards recession.

Few really understand it – even on Wall Street and in the City. Those that do claim to comprehend the difference between SIVs and CDOs and who keep an eager eye on the iTraxx and the Case-Shiller Index are probably the dangerous ones – the very people who got us into this mess by being too clever by half. Then again, there have always been financiers who've told the world, and maybe even convinced themselves, that "this time it's different" – the four most dangerous words in the English language.

Well, this time was no different. People who shouldn't have been loaned money duly defaulted; house prices and share prices didn't go up indefinitely, as they never do; bankers made the same mistakes they always did.

It may be that as the late, great JK Galbraith observed, the only thing required for a crash is for sufficient time to elapse since the last one and, thus, for its lessons to be forgotten.

Much of this bluffers' guide sounds new but, in principle, is as old as money and human arrogance; all will return, reinvented and with ever more preposterous labels sometime in the future. The pity is that so many of us – everyone with a pension fund, with savings, with a mortgage, with a job – will suffer for the errors of a very few. But at least if we learn to speak their language, we can understand how we got here.

Adam Applegarth

Former chief executive of Northern Rock. Enjoyed a colourful private life and was the toast of the City. Having turned his bank into "Northern Wreck", he received a £760,000 pay-off, a £346,000 pension top-up and continues to enjoy a cut-price staff mortgage.

American Home Mortgage

Ultimate symbol – and a fair part of the cause – of what has gone wrong. Having sold a few too many dodgy mortgages to willing or unwilling victims wanting to live the American dream (sub-prime loans), what was once one of that nation's largest independent home-loan provider filed for bankruptcy, after laying off the majority of its staff. (See also Sub-Prime; Countrywide; Bear Stearns; Bizarre Victims of the Credit Crunch).

Asset-backed commercial paper (ABCP)

Sounds more impressive than it is, as some have learned to their cost. Commercial paper is simply an IOU written by a company or a bank. The fact that it has some collateral – an asset – attached to it is no use if the asset is worthless, or becomes so, or if lots of other people think it might be worthless.

ABS (Asset-Backed Security)

Almost anything with some kind of collateral; see Commercial Paper.

Bank of England

Lender of last resort to the British banking system, run by Mervyn King (qv). Has been busy lately. Will lend almost any amount to anyone, which sounds a bit like a sub-prime lender.


Second-biggest banking group in the UK and subject of some wild and surely unjustified speculation, though not as wild and surely unjustified as that surrounding HBOS. Barclays Capital helped design SIVs and SIV-lites (see SIV, SIV-lite), and is now helping to rescue some of them, such as Cairn Capital. The man in charge of Barclays Capital (Europe) reportedly went missing for a time (see Sensible, Captain) further worrying the markets and pushing the Barclays share price down. See also Diamond, Bob.


"Before Crunch". A golden age. The bull run. A financial state of grace. It couldn't go on like that.

Bear Market

What happens when the bull run (qv) stops and you get a mauling.

Bear Stearns

American investment bank that has been the biggest casualty to date, taken over by JP Morgan with American taxpayers' money. One of Bear Stearns's funds was called the High-Grade Structured Credit Strategies Enhanced Leverage Fund, which says it all. UBS, Morgan Stanley, Lehman Brothers, and Goldman Sachs are others who admit vast losses as a result of badly performing assets. See Predictable Victims of the Credit Crunch; Bear Market

Bernanke, Ben

The Chairman of the Federal Reserve of the United States, and thus the lender of last resort to America's banks. Bernanke's hobby is the history of the Great Depression. He once referred to a statement by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation. Hence his occasional nickname of "Helicopter Ben" . His chopper has been seen quite frequently over Wall Street recently. See also Moral Hazard, Greenspan, Alan

Bizarre Victims of the Credit Crunch

The squeeze has reached unexpected places far away from America: Northern Rock, Sachsen Bank, BNP Paribas, IKB. Even Australia.

Black-Box Trading

See Quant.

BNP Paribas

Closed three of its funds when the crisis broke; that is, it told investors they couldn't get at their money. Has since relented.


Large sums paid to bankers in good times; $310.9bn last year. Could be lower in 2008.

Borrow Short, Lend Long

Classic banking error widely practised recently. If for some reason you can't continue to borrow short and you can't realise your longer-term assets you are, as they say, exposed. See also SIVs.

Brown, Gordon

Nothing to do with him, but it could cost him his job, too.

Bull run

When shares prices go up.

Cable, Vince

Warned about the credit bubble long before it was fashionable and urged nationalisation of Northern Rock on the Government months before they drifted into it.

Cahill, Edward

See Sensible, Captain

Cairn Capital

An SIV (qv) connected to Barclays. Troubled.

Carry Trades

The buying of high yielding currencies and selling of low yielding currencies (eg Yen). Leaves one exposed.

Case-Shiller Index

The principal US house-price index. Average prices in the main 10 cities in the US fell by 4 per cent last year. Some economists are predicting house prices could drop by between 15 per cent and 30 per cent in the next few years.


Can it keep the rest of the world going with its demand for raw materials and capital goods? Only if we still covet their hazardous toys. See Global Imbalances.


An ABS (qv) structure similar to a CMO (qv), but with a portfolio of bonds as collateral, instead of a portfolio of Mortgage Backed Securities (qv) and/or mortgage loans. A sponsor transfers the collateral into a Special Purpose Vehicle (SPV), such as a trust or corporation, which has no other assets and which issues claims. A typical CBO has more than one "tranche" or "tier", and a more junior tranche has more risk of default.


Collateralised debt obligations: securities backed by a pool of bonds, loans, and other assets. Collateralised debt obligations amount to a $3 trillion market. The "debt obligations" can be anything from collections of mortgages to car loans or credit card/receivables.


A debt security backed by a pool of commercial or personal loans (eg car-finance loans). A sponsor transfers the collateral into a Special Purpose Vehicle (SPV), such as a trust or corporation, which has no other assets and which issues claims.


Collateralised mortgage obligations. A type of mortgage-backed security, where different streams of interest and/or repayment of principal are assigned to different classes of CMO holder.

Commercial Paper

Shorter-term loans issued by banks and bank subsidiaries in vast quantities at low rates of interest. The money raised was used to invest in high-yielding securities backed by sub-prime mortgages – in effect bundles of these shonky loans. In the good old days investors were happy to take these on and renew them when they expired; now no one knows which are toxic. See Borrow Short, Lend Long.


The magical stardust that keeps investment exciting and economies moving.


Another word for SIVs (qv). Conduits are used by banks to fund lending to clients at cheaper rates than they themselves would be able to provide.


Much feared. The notion that the dreaded lurgy will spread from the US mortgage market through the credit markets to equity markets around the world, to such an extent that it triggers a recession. See R-Word; Confidence.

Could It Happen Here?

It already has, to some degree. In the UK, sub-prime mortgages account for about 6 per cent of the market – about half of the proportion prevailing in America. How big is your mortgage?


America's largest mortgage-lender and the recent recipient of a $2bn injection from Bank of America. Things must be bad.


When shares fall by more than 20 per cent.

Credit Crunch

Where we are. No one's lending, because no one can be sure they'll get paid back and no one knows where those bad American sub-prime loans have wound up. Increasingly that means they won't lend to you either. Bad news.

Darling, Alistair

Unlucky, some say.

Diamond, Bob

Chief executive of Barclays Capital and in the firing line. Managed to make £15m in salary and bonuses last year; could be less next time.


The European Central Bank. Something of a bit-part player until it became clear that many European banks had got themselves into trouble by investing in sub-prime-backed investments. It has had to pour vast amounts of cash into the European banking system.

Episodic Liquidity Assistance

Bankers' version of running a slate at the pub.


As Warren Buffett says: "It's when the tide goes out that you see who's been swimming without their shorts on."

Federal Reserve

United States Fed. Main job to keep the markets out of trouble.

Financial Services Authority

Not its finest hour.

George W Bush

The 43rd President of the United States and one of the few to wreck both foreign and economic policy. Errors of omission rather than of commission.

Global Imbalances

America owes China too much money.

Greenspan, Alan

The most important figure in the global economy in the past 20 years. Left the Fed after 18 years in January last year. But arguably left an unfortunate legacy – the long run of easy credit and the "Greenspan Put" (qv). Chairman of the Federal Reserve from 1988 to 2006. The man who underwrote the bubble. After the collapse of the dotcom boom in the spring of 2000, the attacks of September 11 2001 and the Enron/accounting scandals of 2002, the Fed lowered interest rates until they reached a nadir of 1 per cent in June 2003, where they stayed for a year before gently rising. Such historically low levels (negative in real terms) had the desired effect of bolstering financial markets, but also fed through to consumer price-inflation and, more dangerously, a real estate and financial bubble. It also created the Greenspan Put (qv). Greenspan was also phlegmatic about the sub-prime phenomenon: "Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately." Aged 81 and still having fun.

Greenspan Put

A one-way bet. The assumption that intervention by the Fed and other central banks will always bail out the markets with an interest-rate cut when they get themselves into difficulties.

Hedge Funds

They used to sell shares they didn't own; nowadays just an umbrella term for huge private investment funds that buy shares, bonds, securities and companies that they probably shouldn't. Usually looking for opportunities at the unconventional end of the market.

The High-Grade Structured Credit Strategies Enhanced Leverage Fund

Proof that you really shouldn't invest in things you can't understand. A Bear Stearns banker's idea of fun.


German bank that had to be rescued after getting into trouble.

Injection of Liquidity

Things are bad when investment houses have to go looking for cash from the Bank of England or the Federal Reserve.


Indicator of how risky bonds issued by banks and large private companies are in relation to safe government-backed debt.

Jean-Claude Trichet

President of the European Central Bank since January 2003. He was put on trial with eight others charged with irregularities at Credit Lyonnais, one of France's biggest banks. Trichet was in charge of the French treasury at that time. He was cleared in June 2003. Ideally suited to run the ECB in turbulent times.

Jumbo mortgages

Too big to handle.

Kerviel, Olivier

Former trader at Société Générale accused of massive fraud. Nothing to do with the Credit Crunch really.

King, Mervyn

Bank of England Governor. Worried about "moral hazard" (qv).

Lender of Last Resort

What central banks are. It's regarded as a good idea for the Bank of England or the Fed or the ECB to lend to banks in trouble because the failure of one bank would lead to a crisis of confidence in the banking system, and economic damage.

Liar's Loans

Self-certified mortgages. Originally designed to help the self-employed, some borrowers simply made up their earnings and, by accident or design, their lenders failed to check them out.

LIBOR Spreads

Never been bigger. These mean that even if the Bank of England cuts interest rates it won't do you any good. Bad.


The ability to turn an asset or security into cash quickly.


Memorable nickname for private-equity interests coined by Franz Müntefering, former German vice-chancellor.


Mortgage-backed securities. "Secured" via mortgages and their underlying property. Fine if the mortgages are alright; but less secure if they're sub-prime and defaulting.

Moral Hazard

Term used by central bankers for a danger long known to the insurance business. The idea goes like this: if you protect someone too well against an unwanted outcome, that person may behave recklessly. Thus, if the markets always think that you'll cut interest rates every time there's a crash, you just end up having to cut rates by more and more as the crashes get bigger and bigger. Also known as the Greenspan Put (qv).

Near Prime

Not-very-creditworthy people and their debts.

Negative Amortisation

The monthly payment is insufficient to cover the interest cost. The interest not paid is added to the mortgage debt. Thus, if you pay down a mortgage it is "amortised" and if the debt increases you have "negative amortisation." See Sub-prime (qv).

Ninja loans

Acronym for No Income No Job or Assets. So why give them a mortgage? See also Liar's Loans, Sub-prime.

Northern Rock

Former building society based in Newcastle that was a bizarre early victim of the Crunch. Apparently it raised lots of money from the credit markets rather than schoolkids emptying their piggybanks out in the branches of traditional high-street branches and was thus thought to be in a sticky position. The shares tanked, but have since recovered as attention turned to the bigger fish that is Barclays (qv).


"Other People's Money". Traditional City term that eases the conscience and aids sleep.

Paradigm, New

Something – the Web, China, the sheer braininess of Wall Street – that renders laws of economics obsolete. Interchangeable with "This Time It's Different".

Predictable Victims of the Credit Crunch

Bear Stearns, Morgan Stanley, Lehman Brothers and Goldman Sachs, plus assorted hedge funds and private-equity houses. Horrendous as the losses are, it's hard to shed a tear. Not to be confused with Bizarre Victims of the Credit Crunch (qv), who are generally to be pitied.

Private Equity

In the boom they borrowed huge amounts to buy undervalued companies. There were more than $3 trillion "worth" of mergers and acquisitions in the first half of 2007. About $1.1 trillion of these 2007 acquisitions have been debt-laden "leveraged takeovers" by private-equity firms. But the actual financing of $300bn or more of this predatory takeover activity has not been accomplished yet. As much as $180bn of this unsold – and now unsellable – $300bn or more of takeover debt is on the books of four leading investment banks. See Predictable Victims of the Credit Crunch; Locusts.


Quantitative funds. Hedge funds sometimes use "black box" computer programmes to buy and sell shares, bonds and other assets according to predetermined rules. However, like the less mathematically sophisticated Sod's Law back in the real world, they often only go to show that if something can go wrong, it will. The greatest misuse of rocket science since the V1 programme.


Recession. Don't mention it. Technically, two successive quarters of negative growth.


"While there is no basis for predicting a recession right now, the risks have surely gone up. The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now," says former US Treasury Secretary Larry Summers, now a professor at Harvard. He should know.

Responsible lending

What's that?

Sachsen SB

Had to be rescued by fellow German bank Landesbank Baden-Württemberg because of prospective losses from its involvement in the sub-prime crisis, making it one of Europe's biggest victims.

Sandler, Ron

New boss of Northern Rock since nationalisation. Making the best of a bad job.


Where lenders bundle up housing loans into pools of assets and sell the cash-flows as a bond or a "mortgage-backed security".

Sensible, Captain

Edward Cahill, aged 33, so called because he was a "safe pair of hands". A former executive at Barclays Capital who was briefly described as "the new Nick Leeson". He has since instructed lawyers.


Structured Investment Vehicles. Not the most transparent. These are specialist funds of money, kept off the parent bank or hedge fund's published balance-sheet and thus away from the prying eyes of shareholders, analysts and journalists. It wouldn't matter much except that many of these funds invested in what are now illiquid assets, such as securities backed by sub-prime mortgages. The SIVs paid for these long-term investments by borrowing short-term at low interest rates, by issuing bonds called Commercial Paper (qv). Now no one wants it, so the funding for the SIVs' activities has seized up.


A structured investment vehicle that had an even more relaxed attitude to the assets it was buying. Cairn High Grade Funding was an example of a new but relatively small breed of structured investment vehicle called a SIV-Lite. Only about half a dozen have been launched and four of those were structured by Barclays Capital. Overall, Barclays believes its exposure to the SIV-Lite market will not exceed £75m. Dresdner Kleinwort recently said that SIVs have "already shown their weaknesses. They are too exposed to the US residential mortgage sector, have limited liquidity support, lack a bank sponsor, are primarily funded through commercial paper and have a modus operandi based on funding long-duration assets with short-term liabilities."


Special Purpose Vehicle. Ancestor of the SIV around at the time of the last crash in the late 1980s.

S&P (or Standard & Poor's)

The world's biggest credit-rating agency, and now, arguably, the world's biggest scapegoat for the sub-prime crisis. It gave some sub-prime securities too good a rating. The boss has resigned.


Prime borrowers are those who are likely to repay their debts. Sub-prime borrowers aren't. The dark side of the property boom, the sub-prime market was fuelled by – and in turn itself helped to fuel – spiralling house prices, which meant people simply had to extend themselves more and more to buy a home; plus liberalisation, deregulation and intense competition for business on the part of banks and mortgage brokers made sub-prime borrowers attractive customers.

Loans on huge salary multiples and at cheap introductory rates were the norm. Things were fine while interest rates were low, but as they rose, those coming off cheap fixed-rate deals were in for a shock. Overstretched on their jumbo mortgages, they have defaulted. According to the US Department of Treasury guidelines issued in 2001: "Sub-prime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories." Also known as second-chance lending. Not as the more accurate "no-chance" lending.

Summers, Larry

Treasury Secretary under Bill Clinton. He puts it well: "You have three vicious cycles going on simultaneously. A liquidity vicious cycle – in which asset prices fall, people sell and therefore prices fall more; a Keynesian vicious cycle – where people's incomes go down, so they spend less, so other people's income falls and they spend less; and a credit accelerator, where economic losses cause financial problems that cause more real economy problems."

Super-Jumbo Mortgages

The elephant in your living room. Possibly the elephant in your kitchen, bedroom and en-suite shower room, too. Even bigger than a jumbo mortgage and even less affordable. Anything from half a million to $20m.

This Time It's Different

The bull run can't end. It always does. See also Paradigm, New.

Toxic Loans

The clue's in the name. A loan that damages the borrower's financial health.


A thousand billion, or a million million (1,000,000,000,000). A billion is a thousand million (1,000,000,000). A thousand trillion is a quadrillion. A thousand quadrillion is a quintillion. Zillions and squillions? Now you're talking real money.


Once mighty Swiss-based group that manages $2 trillion of OPM (qv). Now in big trouble and will have to raise $14.8bn in a rights offer. The boss has gone.

Vulture Funds

Nicer than they sound. Finance, like nature, needs its scavengers. A vulture fund is a financial organisation that specialises in buying securities in distressed environments, such as high-yield bonds in or near default, or equities that are in or near bankruptcy. It is rumoured that the Bank of England are going to be buying trillions of devalued securities soon, with your money.


Money the banks will never see again. The latest estimate puts the global total at $1.2 trillion.


The language the politicians used when they discovered they'd have to pay for the banks' follies.

Yield, Search For

New term for that most old-fashioned of vices, greed. Low interest rates earlier this decade meant that investors were prepared to take on ever riskier assets for a little more return. They "mispriced risk".


The lowest tranche of bonds in a typical structured CMO. Holders get their payments after everyone else. Or, in current conditions, never.

Looking for credit card or current account deals? Search here