Some Bailout Definitions

As promised I was going to help with some of the financial lingo, reading a Time article I got some definitions of some of the terms you may hear flying around with all this bailout stuff. 

Commerical Paper, a type of short-term IOU companies issue to raise cash needed to cover their day-to-day operations.  The example the guy used on the audio was a company needed 1M to cover costs, he would get .99M one day and the next would pay back the 1M.  That is what Paulson put 200B into, the market dried up and no big company could cover a potential shortfall, this is done everyday and no big deal, sometimes you have an overage and sometimes you have a shortfall, that is where commerical paper comes in and is vital to keep the engine of the economy going.

Partial Nationalization, when the US buys a big stake in a company, such as investing 250B in private banks.  Now also according to the audio link I attached to the last post, this was another decision made that was better than the alternative, which was to buy all the banks “junk”.  By becoming shareholders, the US govt now has Preferred Stock in these banks, which is a type of stock that usually lacks voting rights but pays dividends ahead of common stock.  All this meaning the bank still has to deal with their “junk”, and won’t just get to unload it on the govt.  AND it means the taxpayers will actually probably make money off this deal, and of course it has infused cash into the banks so they can breathe again and start lending, which will inturn free up the markets for commerical paper….making sense?  Okay according to accounts, these banks weren’t to pleased with this option, with BOA CEO balking at the terms of 5% dividend yields, the Govt saying too bad this is the only deal you are going to get as far as help getting you out of the mess you are in.  Another term that was referred to in the article was Senior Debt, if a company goes belly up, holders of these bonds get repaid before other creditors do.  I am not sure how this is tied into the bank deals but it sounds like the Govt is stacking the cards in favor of the taxpayers.   Do you agree?

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~ by debt2dreams on October 19, 2008.

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