Financial terms in layman's terms

RTC

The Resolution Trust Corp (RTC) was formed in 1989 by an act of Congress. It is a US governmentowned assetmanagement company given the task of managing impaired assets of the banks and savings and loan institutions that the government had taken over during the last US banking crisis in the late 1980s and early 1990s.

The RTC pioneered use of socalled "equity partnerships" to help liquidate the real estate and financial assets which it had inherited from insolvent savings institutions. While a number of different structures were used, all the equity partnerships involved a privatesector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC based on the corporation's retained equity interest.

Before introducing the equity partnership programme, the RTC also engaged in bulk sales of asset portfolios. The pricing on certain types of assets often proved disappointing, but by retaining an interest in asset portfolios through the equity partnerships, the RTC was able to participate in the strong returns realised by portfolio investors, thereby minimising the cost to taxpayers.

CDOs

Collateralised debt obligations, or CDOs, are financial tools that repackage individual loans into a product that can be sold on the secondary market. These packages consist of auto loans, creditcard debt, mortgage or corporate debt. They are called collateralised because they have some type of collateral behind them. The fall in the US property market has led to CDOs' default.

CDSs

Credit default swaps, or CDSs, are derivatives designed to insure the risk of default on debt. Lehman Brothers is a top10 counterparty in CDSs, holding contracts with a notional value of almost US$800 billion (Bt27.14 trillion).

Short selling

In a short sale, a trader sells borrowed stock, hoping to make a profit by buying it back at a cheaper price.

Many argue that short selling is behind the turmoil in global share markets. They claim hedge funds are deliberately driving down the price of shares in order to make windfall profits when they buy them back.

Auctionrate securities

Auction rate securities, or ARS, are longterm bonds with features of shortterm instruments, as the interest rate is reset at frequent intervals through auctions, which typically occur every seven, 14, 28 or 35 days. As the instrument can be sold through auction, it is classified as a cashequivalent instrument. However, the credit crunch following the US realestate market collapse has paralysed the ARS market.

Subprime loans

Subprime loans are mortgages to borrowers who do not qualify for the best market interest rates because of their deficient credit history. The subprime woes erupted as borrowers were unable to service debts due to the US economic slowdown.