Credit Crisis

What Does Credit Crisis Mean? A crisis that occurs when several financial institutions issue or are sold high-risk loans that start to default. As borrowers default on their loans, the financial institutions that issued the loans stop receiving payments. This is followed by a period in which financial institutions redefine the riskiness of borrowers, making it difficult for debtors to find creditors.

Investopedia explains Credit Crisis In the case of a credit crisis, banks either do not charge enough interest on loans or pay too much for the securitized loan, or the rating system does not rate the risk of the loans correctly. A crisis occurs when several factors combine in the marketplace, affecting a large number of investors. For example, banks will charge teaser rates on loans, but when the initial low payments change, they become too high for borrowers to pay. The borrowers default on the loans, and the loan's collateral value simultaneously drops. If enough lending institutions reduce the number of new loans issued, the economy will slow down, making it even harder for other borrowers to pay their loans.

Unitary Thrift
What Does Unitary Thrift Mean? A company that controls a single savings-and-loan association. Unitary thrifts resemble bank holding companies in some respects, but their financial powers are broader in scope. They are authorized to engage in any type of industrial or commercial business.

Investopedia explains Unitary Thrift Unitary thrifts are allowed to open branches anywhere in the U.S. They can also allocate up to 20% of their assets to commercial loans. Because they are still thrift institutions, they must hold at least 65% of their assets in qualified thrift investments, such as residential mortgages or mortgage-backed securities.

Price Skimming
What Does Price Skimming Mean? A product pricing strategy by which a firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment. Therefore, the skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered over time.

Investopedia explains Price Skimming Firms often use this technique to recover the cost of development. Skimming is a useful strategy when:

-Lowering the price would have only a minor effect on increasing sales volume and reducing unit costs. Commercial Loan What Does Commercial Loan Mean? A debt-based funding arrangement that a business can set up with a financial institution. The competitive difference in interest and loan rates came from the fact that a savings and loan was "mutually owned" by its members. in response to the scandalous failure of a number of prominent S&Ls. Similar to consumer credit. -The high price is interpreted as a sign of high quality. Investopedia explains Federal Savings and Loan Federal savings and loan associations reached their heyday in the mid-1980s after being deregulated just a few years earlier. smaller businesses do not typically have direct access to the debt and equity markets for financing purposes. such as taxfree dividends. Holding Company What Does Holding Company Mean? A parent corporation that owns enough voting stock in another corporation to control its board of directors (and. A line of credit. small businesses should shop around at different institutions to determine which lender offers the best terms for the loan. Historically.-There are enough prospective customers willing to buy the product at the high price. participation in savings and loans begain to . including Charles Keating's Lincoln Savings and Loan. deral Savings and Loan What Does Federal Savings and Loan Mean? A federally chartered savings and loan is a banking institution that functions in a very similar fashion to retail banks and credit unions. Investopedia explains Holding Company A holding company must own at least 80% of voting stock to get tax consolidation benefits. they must rely on financial institutions to meet their financing needs. Investopedia explains Commercial Loan Due to expensive upfront costs and regulation related hurdles. therefore. Therefore. term loans and unsecured loans are just a few examples. However. -The high price does not attract competitors. businesses have a variety of lending products to choose from. the primary purpose of savings and loan associations was to allow members to deposit savings and borrow money at rates that were slightly more competitive than commercial banks. controls its policies and management). However. with no need to pass profits on to a third party. with some slight limitations on the type of services it can offer. The proceeds of commercial loans may be used to fund large capital expenditures and/or operations that a business may otherwise be unable to afford.

Furthermore. Mortgage-Backed Security (MBS) What Does Mortgage-Backed Security (MBS) Mean? A type of asset-backed security that is secured by a mortgage or collection of mortgages. Also known as a "mortgage-related security" or a "mortgage pass through". An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. the government reestablished stronger oversight and created the Office of Thrift Supervision in 1989. Investopedia explains Mortgage-Backed Security (MBS) When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business. Financial Cooperative What Does Financial Cooperative Mean? A financial institution that is owned and operated by its members. the bank acts as a middleman between the home buyer and the investment markets. These financial institutions often pay higher-than-average interest rates and are only accessible to those that have accounts. helps to ensure the safety and stability of member savings and loans. the mortgage must have originated from a regulated and authorized financial institution. These payments can be further broken down into different classes of securities. Instead. In reaction to the growing insolvency of the savings and loan industry. Many financial cooperatives offer products and services that are comparable to those offered by the major diversified banks. Investopedia explains Financial Cooperative Credit unions are the most popular form of financial cooperative because they are owned and operated by their members. savings and loan deposits came under the protection of the FDIC insurance and remain so today. lending and investment dealings. This regulatory body.dwindle by the early 1990s. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency. Thrift banks often . Thrift Bank What Does Thrift Bank Mean? A financial institution focusing on taking deposits and originating home mortgages. The goal of a financial cooperative is to act on behalf of a unified group as a traditional banking service. depending on the riskiness of different mortgages as they are classified under the MBS. This type of security is also commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders. The size of financial cooperatives can vary from only a handful of branches to being widespread with thousands of locations. As part of the act that created this agency. These institutions attempt to differentiate themselves by offering above-average service along with competitive rates in the areas of insurance. and usually pay periodic payments that are similar to coupon payments. itself a division of the Treasury Department.

have access to low-cost funding from Federal Home Loan Banks.CDFI CDFIs focus on serving the needs of the poor and working class within urban and poor rural communities. Also known as "savings and loan associations". The goal is to help these people to become financially self-sufficient. Investopedia explains Branch Banking The Riegle-Neal Interstate Banking & Branching Efficiency Act of 1994 authorized well-capitalized banks to acquire branch offices. There are hundreds of chartered CDFIs operating in the United States. While the main lines of business continue to be loan origination and savings deposits. The thrift banking system was created in an attempt to transition mortgage loan origination away from insurance companies and into banking institutions. They can also receive funding from private sector sources such as individuals. allowing them to increase their contributions to national economic growth and to rebuild run-down communities. Branch Banking What Does Branch Banking Mean? Engaging in banking activities such as accepting deposits or making loans at facilities away from a bank's home office. Investopedia explains Community Development Financial Institution . Branch banking has gone through significant changes since the 1980s in response to a more competitive nationwide financial services market. Department of the Treasury by completing an application.CDFI Mean? A private sector financial institution that focuses on personal lending and business development efforts in local communities. or open new ones. many thrifts offer checking accounts and other basic banking services. anywhere in the United States outside their home states after June 1. corporations and religious institutions. Investopedia explains Thrift Bank Thrift Banks tend to be community-focused. Branch banking networks are gradually evolving into multistate financial services networks where depositors can access their accounts from any banking office. CDFIs can receive federal funding through the U. as early mortgages were often set up as interest-only loans that often couldn't be repaid when balloon payments came due. which allows for higher savings account yields to customers and increased liquidity for mortgage loans. and smaller than retail and commercial banks.S. 1997. Community Development Financial Institution . Financial innovation such as internet banking will greatly influence the future of branch banking by potentially reducing the need to maintain extensive branch networks to service consumers. Most states passed laws enabling interstate branching prior to that date. each with the goal of fostering economic growth within the local community through innovative (and often less stringent) lending . as many of these citizens are underserved or ignored by traditional commercial banks and lending processes.CDFI What Does Community Development Financial Institution .

without interference from the federal government or national corporate hierarchy. This allows poor individuals or families to start their own businesses. including community development banks. They measure their progress not only by dollars earned but also by how the community is growing economically. Microfinance What Does Microfinance Mean? A type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. For example. where the current insurance markets are inefficient or non-existent. injury or death. A microenterprise will usually operate with fewer than 10 people and is started with a small amount of capital. earn income and benefit their communities. Microfinance seeks to help microenterprises by loaning small amounts of capital to these businesses. borrowing money and insurance. Ultimately. the insured people pay considerably smaller premiums. a woman in a developing country may use microcredit to take out a loan and purchase a sewing machine. Microinsurance is often found in developing countries. CDFIs can be considered a form of microfinance.CDFIs tend to be controlled locally. Microenterprise What Does Microenterprise Mean? A small business that employs a small number of employees. A microinsurance plan provides protection to individuals who have little savings and is tailored specifically for lower valued assets and compensation for illness. Investopedia explains Microenterprise Microenterprises serve a vital purpose in improving the quality of life for people in developing countries. Microinsurance What Does Microinsurance Mean? Insurance products that offer coverage to low-income households. microinsurance looks to aid poor families by offering insurance plans tailored to their needs. . She could use the machine to establish a microenterprise that specializes in tailoring.practices. educational efforts and small business lending. Because the coverage value is lower than a usual insurance plan. There are several different structures aCDFIcan take. the goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money. Most microenterprises specialize in providing goods or services for their local areas. The woman would increase her wealth and help her community by providing a service. community development loan funds. microenterprise funds and venture funds. Investopedia explains Microinsurance As a division of microfinance.

Amazingly the women repaid the loan and were able to sustain the business. Socially Responsible Investment . In the article Loth suggests the system started in Bangladesh in 1976. or very low. Common themes for socially responsible investments include avoiding investment in . which would usually harm lower income individuals Microcredit What Does Microcredit Mean? An extremely small loan given to impoverished people to help them become self employed. some opponents of this concept condemn microfinance operations for making profits off of the poor." which explores how this type of loan possibly originated. are designed around smaller amounts of money.Investopedia explains Microfinance Microfinancing is not a new concept. Investopedia explains Microcredit Renee Loth wrote an article in 2002 for the Boston Globe entitled "Women Entrepreneurs. Also known as "microlending" or "microloan". The World Bank estimates that there are more than 500 million people who have directly or indirectly benefited from microfinance-related operations.more than 90% of loans are repaid. Like conventional banking operations. While these interest rates are generally lower than those offered by normal banks. Investopedia explains Microsavings Microsavings plans are usually offered in developing countries as a way to encourage saving for education or other future investment. Small microcredit operations have existed since the mid 1700s. when an economics professor loaned a group of women $27 to finance their own small business. consisting of a small deposit account offered to lower income families or individuals as an incentive to store funds for future use. People who invest in these plans are better prepared to cope with any unforeseen expenses. microfinance institutions must charge their lenders interests on loans. The minimum balance requirements are often waived. Microsavings What Does Microsavings Mean? A branch of microfinance. however.SRI What Does Socially Responsible Investment . allowing users to save small amounts of money and not be charged for the service. the rate of payment default for loans is surprisingly low .SRI Mean? An investment that is considered socially responsible because of the nature of the business the company conducts. Microsavings accounts work similar to a normal savings account. Although most modern microfinance institutions operate in developing countries.

A good way to start with an ethical investing policy is to write down the areas you want to avoid as well as where you want to see your money invested. Investors should read carefully through fund prospectuses to determine the exact philosophies being employed by fund managers. but socially conscious funds typically have one overarching set of guidelines that is used to select the portfolio. as there are dozens of new funds and pooled investment vehicles available for retail investors.SRI "Socially conscious" investing is growing into a widely-followed practice. Investopedia explains Ethical Investing Ethical investing gives individuals the power to allocate capital toward companies that are in line with their personal views. religious or political precepts. or firearms) or to over-allocate to industries that meet the individual's ethical guidelines. Ethical investing is sometimes used interchangeably with socially conscious investing. Ethical Investing What Does Ethical Investing Mean? Using one's ethical principles as the main filter for securities selection. some may choose to eliminate certain industries entirely (such as gambling. Ethical investing depends on an investor's views. Investopedia explains Socially Responsible Investment . gambling and tobacco) and seeking out companies engaged in environmental sustainability and alternative energy/clean technology efforts. whereas ethical investing brings about a more personalized result. Socially responsible investments can be made in individual companies or through a socially conscious mutual fund or exchange-traded fund (ETF). From there you can come up with an asset allocation plan and begin researching individual securities and funds.companies that produce or sell addictive substances (like alcohol. Just because an investment touts itself as socially responsible doesn't mean that it will provide investors with a good return. Mutual funds and ETFs provide an added advantage in that investors can gain exposure to multiple companies across many sectors with a single investment. . Investors should keep in mind that "ethical" does not imply "outperform". whether they are based on environmental. Basic fair trade philosophies call for equal pay for suppliers of raw goods and materials as well as respect for strong environmental practices and a focus on the trading relationships between advanced economies and developing nations. Fair Trade Investing What Does Fair Trade Investing Mean? Investing in companies or projects that promote fair trade with producers in developing nations. alcohol.

which is due largely to increased worldwide exposure to the issue. Investopedia explains Green Economics Green economists perceive nature as being extremely valuable and seek to maintain it. etc. Green Fund What Does Green Fund Mean? A mutual fund or other investment vehicle that will only invest in companies that are deemed socially conscious in their business dealings or directly promote environmental responsibility. Supporters of this branch of economics are concerned with the environment and believe that actions should be taken to protect nature and encourage the positive co-existence of both humans and nature. Fair trade practices aim to help these workers gain a higher standard of living and financial independence. such as alternative energy.MSC . The green economic theories encompass a wide range of ideas all dealing with the interconnected relationship between people and the environment. Green Economics What Does Green Economics Mean? A methodology of economics that supports the harmonious interaction between humans and nature and attempts to meet the needs of both simultaneously. sugar and textiles. and sustainable living.). animal testing. Socially conscious investing is on the rise. Emphasis is placed on creating value through quality rather than on accumulating material items and money. fair trade. which many investors appreciate. A green fund can come in the form of a focused investment vehicle for companies engaged in environmentally supportive businesses.Investopedia explains Fair Trade Investing Fair trade investing mainly deals with trade in agricultural products. green transport. alcohol. as well as increased federal funding for alternative energy and other programs. Based on performance. Green economists assert that the basis for all economic decisions should be in some way tied to the ecosystem. water and waste management. choosing positive company criteria (environmental programs. energy conservation. or a combination of both strategies. Investopedia explains Green Fund A green fund's strategy can be based on avoiding negative company criteria (businesses such as guns. But they do represent a proactive step toward environmental consciousness. Many of the growers of these products are low-income workers who are often marginalized in trade agreements and receive few subsidies from their home governments. Marginal Social Cost . such as coffee. pornography. it is not yet clear whether green funds and socially responsible investing can consistently create better returns for investors. while the companies who actively promote fair trade can show transparency in their business dealings and gain valuable image points with shareholders. gambling.). etc.

This economic pressure created social change as South Africa's government was forced to end racial segregation and give non-whites the right to vote. it can rarely be expressed in tangible dollars. or taking one further action. Sinful Stock What Does Sinful Stock Mean? Stock from companies that are associated with (or are directly involved in) activities that are widely considered to be unethical or immoral. While marginal social cost represents a powerful economic principle. The cost of the produced energy is more than just the rate charged by the company.MSC Mean? The total cost to society as a whole for producing one further unit. If the coal plant's marginal social costs are more than its marginal private costs. Protest Divestment What Does Protest Divestment Mean? The intentional selling of stock or other assets on a large scale to create financial pressure on a corporation or government to force social change. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer.What Does Marginal Social Cost . in an economy.S. Calculated as: Where: MSC = Marginal Social Cost MPC = Marginal Private Cost MEC = Marginal External Cost Investopedia explains Marginal Social Cost . resulting in the direct loss of $1 billion of investment. in the late 1980s. the MEC must therefore be negative. and by 1990 more than 200 U. companies had cut ties with the country. The attention this raised forced many corporations to follow suit. Investopedia explains Protest Divestment For example. The theory helps legislators and economists come up with a framework to "incentivize" companies to reduce the marginal social costs of their actions. but also must include the costs to the external environment and other stakeholders. students at many American universities lobbied their schools' endowment funds to stop investing in South Africa.MSC For example. take the case of a coal plant polluting a local river. The attention the protest garnered put the issue of apartheid in the national spotlight and Congress passed a series of economic sanctions as a result. We know that there are costs incurred by certain acts of production. although their farreaching effects make them difficult to quantify. Protest divestment is a form of shareholder activism. Their end goal was to force South Africa's government to end apartheid. . as society must bear the costs of a polluted river and the effects of that action.

Also known as "sin stock". The fund is considered non-diversified. companies that are leaders in these sectors should produce good returns for shareholders. Investopedia explains Sinful Stock Examples of activities some people may consider sinful include the distribution or production of alcohol. it had outperformed the Russell 1000 Index (its benchmark index) since its inception. tobacco and aerospace/defense sectors.5% annually. to ensure that the level of risk isn¶t greater or less than the fund's target amount of risk exposure. Investopedia explains Vice Fund The Vice Fund has little direct competition based on sector allocations. Target Risk Fund What Does Target Risk Fund Mean? A fund that attempts to expose its investors to a specified amount of risk. therefore. but it is based on the philosophy that sectors like gaming and alcohol have inherently solid demand. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund. The fund has been in operation since 2002 and focuses on so-called "vices" that are considered by many to be socially irresponsible investments. and holdings range from small cap to mega cap companies. The Vice Fund stands in stark contrast to the many socially conscious or responsible mutual funds on the market. The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on . or "sin stocks". Investopedia explains Target Risk Fund Target risk funds typically label themselves as "conservative". such as casino operators and gaming equipment. remain confident that their level of risk exposure will not change substantially. Vice Fund What Does Vice Fund Mean? A mutual fund that invests in gaming. Regardless of the label applied. "moderate risk" or "aggressive" in terms of their risk exposure. tobacco. weapons and sex-related products. and once invested in the fund. the intent is to offer a relatively constant level of risk exposure to investors. The fund invests in both domestic and foreign-based equities. alcohol. but as of 2007. and carries a relatively high expense ratio of greater than 1. This allows investors who are considered highly risk averse to identify and select a fund of funds that has a conservative risk exposure target.

which is the risk of capital being locked up or frozen by government action. Fund managers are paid a fee for their work. The United States is generally considered the benchmark for low country risk and most nations can have their risk measured as compared to the U. economic risk. trust funds or hedge funds) must have a high level of educational and professional credentials and appropriate investment managerial experience to qualify for this position. Investopedia explains Country Risk Country risk can reduce the expected return on an investment and must be taken into consideration whenever investing abroad. These risks include political risk. Country risk is higher with longer term investments and direct investments. Some countries have high enough risk to discourage much foreign investment. A fund can be managed by one person. Country Risk What Does Country Risk Mean? A collection of risks associated with investing in a foreign country. which are investments not made through a regulated market or exchange. and the fee¶s charged for operating the fund (on top of the fees charged by mutual funds owned within the target risk fund) is compensation for the value-added Fund Of Funds What Does Fund Of Funds Mean? A mutual fund that invests in other mutual funds.S. Investors should look for long-term. by two people as co-managers and by a team of three or more people. Investopedia explains Fund Manager The individuals involved in fund management (mutual. sovereign risk and transfer risk. Therefore. Also known as an "investment manager". such as exchange rate risk. can be protected against with a marginal loss of profit potential. pension. consistent fund performance with a fund manager whose tenure with the fund matches its performance time period. The whole point of investing in a fund is to leave the investment management function to the professionals. Other risk. exchange rate risk. Some country risk does not have an effective hedge. which is a percentage of the fund's average assets under management. . Country risk varies from one country to the next. This method is sometimes known as "multi-management". the quality of the fund manager is one of the key factors to consider when analyzing the investment quality of any particular fund. Fund Manager What Does Fund Manager Mean? The person(s) resposible for implementing a fund's investing strategy and managing its portfolio trading activities.

As of January 2007. fund of funds. With this last type. legislative bodies. shares would be sold to the public only by the feeder fund. Master Fund What Does Master Fund Mean? In general. Instability affecting investment returns could stem from a change in government. or military control. if the fund of funds carries an operating expense. when faced with two investments with a similar expected return (but different risks). The outcome of a political risk could drag down investment returns or even go so far as to remove the ability to withdraw capital from an investment. but invested through the corresponding master fund.Investopedia explains Fund Of Funds A fund of funds allows investors to achieve a broad diversification and an appropriate asset allocation with investments in a variety of fund categories that are all wrapped up into one fund. However. an investment vehicle that enables individual investors to invest money into one or more underlying investments that are operated by professional managers. other foreign policy makers. investors are essentially paying double for an expense that is already included in the expense figures of the underlying funds. or feeder funds. and becomes more of a factor as the time horizon of an investment gets longer. Investopedia explains Political Risk Political risks are notoriously hard to quantify because there are limited sample sizes or case studies when discussing an individual nation. Investopedia explains Master Fund Master funds can generally be categorized into three types: discretionary funds. will prefer the one with the lower risk. Political risk is also known as "geopolitical risk". Some political risks can be insured against through international agencies or other government bodies. a fund of funds showed an expense figure that didn't always include the fees of the underlying funds. . the SEC began requiring that these fees be disclosed in a line called "Acquired Fund Fees and Expenses" (AFFE). Political Risk What Does Political Risk Mean? The risk that an investment's returns could suffer as a result of political changes or instability in a country. Risk Averse What Does Risk Averse Mean? A description of an investor who. Historically.

Investopedia explains Unsystematic Risk For example. Unsystematic Risk What Does Unsystematic Risk Mean? Company or industry specific risk that is inherent in each investment." Investopedia explains Systematic Risk Interest rates. recession and wars all represent sources of systematic risk because they affect the entire market and cannot be avoided through diversification. The fund manager of a target risk fund is responsible for overseeing all the securities owned within the fund. Systematic risk can be mitigated only by being hedged. Systematic Risk What Does Systematic Risk Mean? The risk inherent to the entire market or entire market segment. "diversifiable risk" or "residual risk". unsystematic risk affects a very specific group of securities or an individual security. The amount of unsystematic risk can be reduced through appropriate diversification. Investors looking for "safer" investments will generally stick to index funds and government bonds. Whereas this type of risk affects a broad range of securities. and therefore will stay away from adding high-risk stocks or investments to their portfolio and in turn will often lose out on higher rates of return. Even a portfolio of well-diversified assets cannot escape all risk. is considered to be unsystematic risk. Target Risk Fund What Does Target Risk Fund Mean? A fund that attempts to expose its investors to a specified amount of risk.Investopedia explains Risk Averse A risk-averse investor dislikes risk. to ensure that the level of risk isn¶t greater or less than the fund's target amount of risk exposure. Also known as "specific risk". such as a sudden strike by the employees of a company you have shares in. news that is specific to a small number of stocks. . which generally have lower returns. Also known as "un-diversifiable risk" or "market risk.

or make contributions over a period of time. Regardless of the label applied. Therefore. The investor may pay all of the committed capital at one time.Investopedia explains Target Risk Fund Target risk funds typically label themselves as "conservative". This allows investors who are considered highly risk averse to identify and select a fund of funds that has a conservative risk exposure target. remain confident that their level of risk exposure will not change substantially. Committed Capital What Does Committed Capital Mean? A contractual agreement between an investor and a venture-capital fund that obligates the investor to contribute money to the fund. Often. Investopedia explains Committed Capital When an investor commits capital to a venture capital fund. The private equity market can be viewed as riskier than the public equity market. investing in the right business ventures can offer substantial rewards for top tier funds. The manager of a target risk fund is responsible for ensuring that the fund's level of risk exposure is on target. the investor typically has many years to satisfy the agreement. Also known as "commitments". contributions will be made over a period of three to five years after the fund is formed. This often takes place over a number of years. "moderate risk" or "aggressive" in terms of their risk exposure. and once invested in the fund. as returns in the private market tend to have higher dispersion of returns than the public market. . the intent is to offer a relatively constant level of risk exposure to investors. and the fee¶s charged for operating the fund (on top of the fees charged by mutual funds owned within the target risk fund) is compensation for the value-added service.

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