Legacy Securities: PPIP Key Terms

Asset-Backed Security (“ABS”)

A type of financial security that is very similar in structure to a mortgage-backed security, but is backed by a pool of consumer loans and generally does not include mortgage loans. Most ABSs are backed by credit card receivables , auto loans, student loans, or other loan and lease obligations.

Asset Coverage Test

A requirement that the total assets of a PPIF be proportionally larger than total debt. In the case of PPIP, the asset coverage ratio is calculated as: ([the market value of the assets held by the PPIF] + [the market value of any assets held by a subsidiary] - [any debt associated with those subsidiary assets]) ÷ the total debt.

Balance Sheet

The balance sheet is a snapshot of a company's financial standing at an instant in time. The balance sheet shows a company's financial position, what it owns (assets) and what it owes (liabilities). The “bottom line” of a balance sheet must always balance (i.e., assets = liabilities + net worth).

Commercial Mortgage-Backed Securities (“CMBS”)

A financial instrument that is backed by a commercial real estate mortgage or a group of commercial real estate mortgages that are packaged together.

Commitment

Any legally binding arrangements that obligate a bank to extend credit in the form of loans or lease financing receivables; to purchase loans, securities, or other assets; or to participate in loans and leases. Commitments also include overdraft facilities, revolving credit, home equity and mortgage lines of credit, eligible ABCP liquidity facilities, and similar transactions. Normally, commitments involve a written contract or agreement and a commitment fee, or some other form of consideration.

Credit Enhancement

Techniques whereby a company attempts to reduce the credit risk of its obligations. Credit enhancement may be provided by a third party (external credit enhancement) or by the originator (internal credit enhancement), and more than one type of enhancement bay be associated with a given issuance.

CUSIP

 CUSIP stands for Committee on Uniform Securities Identification Procedures. Unique identifying number assigned to all registered securities for securities registered in the United States and Canada.

Emergency Economic Stabilization Act of 2008 (“EESA”)

An act to provide authority for the federal government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes.

Ensign-Boxer Amendment

Section 402 of Helping Families Save Their Homes Act of 2007: Amendment to Helping Families Save Their Hones Act of 2009 that calls for increased PPIP oversight and allocates an additional $15 million to SIGTARP with the direction that these funds be prioritized for performance audits and investigations of recipients of non recourse loans under any EESA-funded program.

Eligible Assets

Commercial mortgage-backed securities and Non-Agency Residential Mortgage-Backed Securities issued prior to January 1, 2009 that were originally rated AAA or an equivalent rating by two (2) or more nationally recognized statistical rating organizations without external credit enhancement and that are secured directly by the actual mortgage loans, leases or other assets and not other securities.  At least ninety percent (90%) of the assets underlying any Eligible Asset must be situated in the United States.  For the avoidance of doubt, Eligible Assets do not include any securities backed by loans and other assets ten percent (10%) or more of which are not situated in the United States.

Equity

The ownership interest of stockholders in a company.

Fair Market Value

The price that a knowledgeable buyer and a knowledgeable seller would be able to agree upon in the open market, provided that both have access to sufficient information.

Fair Value

The price that would be received by the holder of that asset in an orderly transaction.

Federal Deposit Insurance Corporation

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for up to $250,000 (through December 31, 2013); by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

Federal Reserve System

The Federal Reserve System, often referred to as the Federal Reserve or simply "the Fed," is the central bank of the United States. It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system.

Federal Reserve Bank

Federal Reserve Banks were established by Congress as the operating arms of the nation's central banking system. The Federal Reserve Banks hold the cash reserves of depository institutions and make loans to them, move currency and coin into and out of circulation, and collect and process millions of checks each day, provide checking accounts for the Treasury, issue and redeem government securities, and act in other ways as fiscal agent for the U.S. government, supervise and examine commercial banks that are members of the Federal Reserve System for safety and soundness, and participate in the activity that is the primary responsibility of the Federal Reserve System, the setting of monetary policy.

Financial Stability Plan

A comprehensive plan to stabilize and repair the financial system, and support the flow of credit necessary for recovery.

Fiscal Year

A yearly accounting period. The federal government's fiscal year begins October 1 and ends September 30. Fiscal years are designated by the calendar years in which they end for example, fiscal year 2009 will begin on October 1, 2008, and end on September 30, 2009. The budget year is the fiscal year for which the budget is being considered; in relation to a session of Congress, it is the fiscal year that starts on October 1 of the calendar year in which that session of Congress began.

Front Running

Entering into a trade while taking advantage of advance knowledge of pending orders from other investors.

Frozen Credit Markets

When widespread disruptions result in lenders being unwilling to lend money and creditworthy consumers and firms cannot get access to loans to make purchases or investments.

Guarantee

A commitment from a third-party lending institution ensuring that liabilities of a borrower will be met. If the borrower fails to make payments, the guarantor will step in and make the payment on the borrower's behalf.

Guaranty

Can be used interchangeably with guarantee. Historically, guarantee had been used as a verb and guaranty had been used as a noun. Guaranty is now primarily seen in financial and banking contexts.

Haircut

Difference in the value of the collateral and the value of the loan (the loan value is less than the collateral value).

Interest

Interest means any payment to a consumer or to an account of the use of funds in an account, calculated by application of a periodic rate to the balance. The term does not include the payment of a bonus or other consideration worth $10 or less given during a year, the waiver or reduction of a fee, or the absorption of expenses.

Legacy Assets

Also commonly referred to as troubled or toxic assets, legacy assets are real estate-related loans and securities (legacy loans and legacy securities) that remain on banks' balance sheets that have lost value but are difficult to price due to the recent market disruption.

Legacy Loans

Underperforming real estate-related loans held by a bank that it wishes to sell, but recent market disruptions have made difficult to price.

Legacy Securities

Troubled real estate-related securities {Residential Mortgage-Backed Securities ("RMBS"), Commercial Mortgage-Backed Securities ("CMBS"), and Asset-Backed Securities ("ABS")} that remain on institutions' balance sheets that have lost value but are difficult to price due to the recent market disruption.

Leverage

The ratio of a company's debt to its equity.

Leverage Cap

For the purposes of PPIP, a limit to the amount of debt a PPIF can assume based on its equity. Calculated as: total debt / net assets.

Leverage on Leverage

Refers to the original design of PPIP in which a private investor could borrow government debt through PPIP and then leverage its equity and the government debt with more government debt through TALF.

Leverage Ratio Test

For the purposes of PPIP, the application of the leverage cap to determine if a PPIF exceeds its limit. Limit to the total debt that a PPIF is allowed to carry. Calculated as: total debt / net assets.

LIBOR

The London Interbank Offered Rate. The rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. LIBOR rates are disseminated by the British Bankers Association.  Some interest rate futures contracts, including Eurodollar futures, are cash settled based on LIBOR.

Liquidation

The sale of a company's assets in order to pay off outstanding debts with the remaining amount being distributed to shareholders. Once this process is complete, the company goes out of business.

Liquidity

A measure of the ease with which assets can be bought and sold in the markets, often characterized by "bid" and "ask" prices that are close, and the presence of a willing pool of buyers and sellers.  In the context of financial institution balance sheets, "liquidity" often refers to the availability of cash for lending.

Mortgage-Backed Securities ("MBS")

Debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private capital. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool.

Non-Agency Residential Mortgage-Backed Securities

Mortgage-backed securities in which the securities, and the loans underlying the securities, are serviced or originated by private investors and not by Fannie Mae or Freddie Mac.

Non-Recourse Funding/Loan

A debt for which the debtor's obligation to repay is limited to the collateral securing the debt and for which a deficiency judgment against the debtor us not permitted, and would limit the amount of a non0recouse debt to the net equity in the collateral, as defined.

Office of Financial Stability (OFS)

An office within the Department of the Treasury created pursuant to the EESA in order to operate the Troubled Asset Relief Program.

Private-Label Residential Mortgage-Backed Securities

A mortgage-backed security that is backed by private-label mortgages.

Pro Forma

In finance, refers to the presentation of hypothetical financial information assuming that certain assumptions will happen.  For example, the ownership interests in New Chrysler are based on the assumption that Fiat will meet its performance goals and obtain an additional 15% of equity from the other equity holders.  If the new equity stake were not reported pro forma, the equity interest of the other equity participants would be higher to account for Fiat's additional 15%.

Public-Private Investment Program ("PPIP")

A coordinated effort between Treasury and FDIC to improve the health of financial institutions holding real estate-related assets. The program is designed to increase the flow of credit throughout the economy by partnering with private investors to purchase real estate-related loans ("legacy loans") and real estate-related securities ("legacy securities") from financial institutions.

Residential Mortgage-Backed Securities ("RMBS")

A financial instrument that is backed by a group of residential real estate mortgages that are packaged together.

Secondary Market

The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold.

Secondary Mortgage Market

The market created by firms such as Freddie Mac, which buy mortgages from lenders and either hold them or sell them to investors. This market provides the funds that lenders need in order to create more loans.

Securities

A security is any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Subprime

Refers to borrowers who do not qualify for prime interest rates because they exhibit one or more of the following characteristics: weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, or bankruptcies; low credit scores; high debt-burden ratios; or high loan-to-value ratios.

Statistical Rating Organizations

Eligible assets which include commercial mortgage-backed securities and non-agency residential mortgage-backed securities issued prior to January 1, 2009, that were originally rated AAA or an equivalent rating by two or more nationally recognized statistical rating organizations without external credit enhancement and that are secured directly by the actual mortgage loans, leases, or other assets and not other securities.

Term Asset-Backed Securities Loan Facility (“TALF”)

A Federal Reserve loan program intended to increase the availability of loans to consumers and small businesses. TARP funds will be indirectly invested in this program through a special purpose vehicle.

Troubled Assets

The term "troubled assets" means
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary of the Treasury determines promotes financial market stability; and
(B) any other financial instrument that the Secretary of the Treasury, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, writing, to the appropriate committees of Congress.

Warrant

The right, but not the obligation, to purchase a certain number of shares of common stock at a fixed price.