Financial Bailout
Will U.S. and overseas action stem the global crisis?
By Thomas J. Billitteri

Bowing to doomsday warnings that the U.S. and global financial systems could collapse, Congress passed a $700 billion rescue bill early this month. Part of a sweeping $1 trillion government plan to calm the stock market and unfreeze credit — the unprecedented rescue came amid mounting fears of a deep recession and the collapse of such major financial institutions as Lehman Brothers and Washington. . . .

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• Will the bailout plan work?
• Did Fannie Mae and Freddie Mac cause the financial crisis?
• Should Congress adopt tougher regulatory reforms?

Should Fannie Mae and Freddie Mac be privatized?

Lawrence J. White Professor of Economics, Stern School of Business, New York University; former member, Federal Home Loan Bank Board. Written for CQ Researcher, September 2008	Dean Baker Co-director, Center for Economic and Policy Research. Written for CQ Researcher, September 2008

Glossary of Key Financial Terms

Alternative-A mortgage: "Alt-A" mortgages are considered riskier than prime mortgages — which only lend to individuals with high credit scores — but less risky than subprime mortgages, which go to those with low credit. Borrowers tend to have higher credit — sometimes "A-rated" — than subprime borrowers, but the application process often involves little or no documentation of income.

Collateralized debt obligation (CDO): An unregulated, investment-grade security backed by a pool of bonds, loans and other assets. Each CDO has various levels of risk, known as tranches. The higher the risk, the higher the reward so long as the underlying investments are free from default.

Credit-default swap: An unregulated type of "insurance" in which a buyer makes a series of payments in exchange for the right to receive a payoff if a credit instrument goes into default. Many sellers of swaps for mortgage-backed securities could not pay their buyers after subprime borrowers defaulted on their mortgages.

Leverage: Borrowing large amounts of capital to complete a broad range of transactions.

Mortgage-backed security: An asset-backed security whose cash flow is determined by the principal and interest payments of a set of mortgage loans. Payments are made over the lifetime of the underlying loan.

Prime mortgage: A high-quality mortgage eligible for purchase or securitization in the secondary mortgage market. Such loans have a low default risk and are only made to borrowers with good credit.

Stated income loan: A mortgage — sometimes called a "liar loan" — where the lender does not verify the borrower's income. Mainly intended for people who have difficulty documenting their income, they are particularly easy targets for fraud.

Subprime mortgage: Carries a higher interest rate and generally goes to borrowers with a history of loan delinquency or default, bankruptcy or those with limited debt experience.

— Darrell Dela Rosa