- Bank Holding Company - an institution or firm that is suppose to deal only with savings and loans. This type of bank does not directly deal with banking activities. In comparison to a Investment house, who actively participates in activities such as trading, investment banking, and so on. The major point about this is, depending on the type of activities the firm involves itself with, is a major determinant of who their chief regulator is.
The problem with this is in today's world you have had many of these bank holding companies a.k.a "your traditional savings and loans bank" start to participate in investment banking, which leaves that firm in a grey area, or in between regulators. More on this later...
- Cash Flow - the stream of income or money that is provided by a asset, whether it may be annually, monthly, daily, etc.
i.e. Let's say you had money in a savings account that paid you $50 in interest every year. This means the cash flow provided by this asset (your savings account) is $50 annually.
- Conglomerate - Hugely relevant to the idea of "Too Big too Fail" which has become the new hot topic on CNN and on Capitol Hill - a conglomerate is a firm who operates in multiple sectors of the economy. The original firm may expand their operations into another sector of the fiance industry which they previously have never dealt with; they may accomplish this by actions such as acquiring another firm, merging, or opening another department/branch from within. (This becomes a problem for regulatory agencies)
i.e. A traditional savings and loans bank, who only dealt with deposits and administering simple loans, opens up an investment banking department. The firm experiences great success and grows financially, then decides to use their new profit stream to acquire a small real estate business, expanding their reach into a third sector.
- Derivative - In a gen ed course about globalization, I had a guest professor come in and say there is about 7 trillion dollars of financial derivatives out there. I always wondered what a derivative is, well I'll have you know that with my limited beginning experience in college with financial studies, and with my reading and research on the topic, there is no exact or explicit definition for a financial derivative. Quite ironic is it, that this ambiguous term has such a huge market in our economy. The best definition that I can give you is a financial derivative is a financial instrument, who's value is determined from other financial instruments. That is to say that the value of a derivative is based on underlying components - you can see how this can get quite tricky when you create another financial instrument or derivative, based on another derivative.
i.e. I get a 5 yr loan from you for 10 dollars at a 10 percent interest rate. So every year up until that 5th year when I have to pay everything back to you, I have to pay you $1. You then take my loan break it up into different pieces and sell it to investors as a security. Then one of those investors can conceivably take that security they purchased and further securitize it, or go through the same process of breaking it up into even smaller and more complex securities and sell them. Now the value of the instrument created in the last step is completely dependent on that initial 5-yr loan I took out from you. Worst case scenario, I default in my second year of the loan, what do you think happens to the value of that last security that was based on another security that was based on the cash flow of the second year of my loan? - you can just imagine the trickle down effect from this. Hopefully this gives you a good sense of what a deritivative is.
- Financial Instrument - this is basically anything written that has a monetary value or that is a receipt or evidence of a monetary transaction.
i.e. You could basically say that a check is a financial instrument, it's value is the amount of the check.
- Regulatory Agency - generally, an agency with oversees a particular sector of the an economy and has the right to imposed rules or regulations, including punishment, to any company under its jurisdiction. In the case of the finance and banking industry, jurisdiction for a agency is usually determined by the type of business the firm partakes in, or whom the firm gets it's charter from. Keep in mind that it is possible for 2 agencies to overlap in jurisdiction, especially in the case of conglomerates - this is not necessarily a bad thing. (I will specificially speak about jurisdiction is regulation later on.) Furthermore, we can break this term into 2 very distinct categories for our purposes:
Government Affiliated Regulatory Agency - this is an agency that is created or charted by the government and is usually bankrolled by the government. Each agency varies in aspects such as autonomy, which is the freedom enjoyed by the agency. This autonomy is defined by the amount of oversight the agency is subject to, in other words the amount of government boards and departments which the agency has to answer to. An agency like the Federal Reserve has a relative high autonomy level, even thought the credibility of the Fed has been criticizedlately.
SRO (Self-Regulating Organization) - think NYSE. An SRO is an organization that has the right to regulate it's own members. The NYSE is an exchange, or phsyical setting for an auction where securities are bought and sold (In contrast to a OTC or Over the Counter market, think NASDAQ). Companies actually have to pay the NYSE in order to be able to sell their stock on the exchange. This goes for any other exchange or OTC market. In turn, the exchange has the right to police their members if they are found of wrong doing. It is important to remember though that SRO's have to answer to government agencies, this will be a more important detail when I explain regulation indepth.
- Securities - Just a fancy term which stands for a financial instrument that is marketable, or that can be bought and sold.
i.e. Let's say there was a market or demand for checks, and checks were actively traded (bought and sold). Furthermore, securities are usually broken into categories - equity and debt. The main difference of how these instruments are structured by organizations are simply for taxation reasons, there are pro's and con's for each type of security, determined by tax laws.
Equity - this is a type of security that represents an ownership stake. Easiest way to think of it is as a share of stock. You buy a share of a corporation, which basically means you lent the corporation money in exchange for a stake in the ownership of the organization. The catch with equity is that your income or payment is residual, this means that you get only what is left over after all liabilities (bills, debt, etc.) are paid off. This is why it is legal for companies to decide not to pay dividends for a period of time; dividends are the last things to get paid out and sometimes a company will postpone dividends for financial reasons.
Debt - however debt is quite the opposite. Equity is subordinated to debt - which means that Debt must get paid first and foremost before any equity holders are paid. Types of debt are bonds, loans, mortgages, etc.
i.e. If a company declares bankrupt, equity holders cannot even stake a claim in any assets until all debt obligations (short term and long-term) are paid first.
- Securitization - this is the structured process where cash-flow producing assets are broken up and reorganized or packaged into securities. So simply, it is the process that investment firms undertake when they take a large group of assets that produce cash flows, like mortgages, and just break them up into separate pieces, only to take these pieces and package them in a certain way that makes them marketable/desirable to investors.
