Subprime abstractions.

Subprime abstractions. THE RECENT FINANCIAL LOSSES IN THE U.S. CREDIT MARKET associatedwith home mortgages have received a great deal of media attention. Amongothers, Merrill Lynch Merrill Lynch & Co., Inc. (NYSE:MER TYO: 8675 ), through its subsidiaries and affiliates, provides capital markets services, investment banking and advisory services, wealth management, asset management, insurance, banking and related products and services on a global basis. wrote off $23 billion in assets while Citigroupwrote off $24 billion (Stewart, 2008b). This is, to paraphrase par��a��phrase?n.1. A restatement of a text or passage in another form or other words, often to clarify meaning.2. The restatement of texts in other words as a studying or teaching device.v. an oldaphorism aphorism(ăf`ərĭz'əm), short, pithy statement of an evident truth concerned with life or nature; distinguished from the axiom because its truth is not capable of scientific demonstration. , some serious money. While there are a variety of bases by which to study theunfortunate credit woes of some American financial institutions andindividual investors, principles of general semantics gen��er��al semantics?n. (used with a sing. verb)A discipline developed by Alfred Korzybski that proposes to improve human behavioral responses through a more critical use of words and symbols. can provide someinsight to the process by which this occurred. In particular, whatgeneral semantics says about our use of varying degrees of abstractterms those which express abstract ideas, as beauty, whiteness, roundness, without regarding any object in which they exist; or abstract terms are the names of orders, genera or species of things, in which there is a combination of similar qualities.See also: Abstract and responses to those terms can have a real impact on the size ofour pocketbook. People typically respond to words as if the words embody em��bod��y?tr.v. em��bod��ied, em��bod��y��ing, em��bod��ies1. To give a bodily form to; incarnate.2. To represent in bodily or material form: the actualreality or experience implied. General semantics tells us that words arebut symbols that may suggest an outline of some phenomenon, and a givenword is not the thing referred to (Hayakawa, 1972). This perspective mayseem like a mere academic distinction, yet time and again peopleexperience problems in various aspects of their lives, such as withtheir finances, when they react to a situation as if that situationreflects a word-meaning reality they hold. To illustrate the increasing difference between the reality peoplepresume pre��sume?v. pre��sumed, pre��sum��ing, pre��sumesv.tr.1. To take for granted as being true in the absence of proof to the contrary: We presumed she was innocent. financial terms refer to and the actual objects of theirexperience, a visual representation of this relationship will be adaptedto a modification of Hayakawa's Abstraction Ladder (1972). 11. Obligation 10. Loan 9. High Yield Bond 8. Consolidated Debt Obligations or CDO (Collaborative Data Objects) A programming interface from Microsoft for accessing MAPI-based e-mail, calendaring and scheduling servers. Originally called "OLE Messaging" and "Active Messaging," CDO wraps the Enhanced MAPI library into a COM object that provides the 7. Undocumented loan 6. Liar Liar - MIT Scheme loan 5. Subprime mortgage 4. Prime mortgage 3. Insured municipal bond 2. AAA AAA:see American Automobile Association. (Triple A) A common single-cell battery used in a myriad of electronic devices of all variety. Like its double A (AA) cousin, it provides 1.5 volts of DC power. When used in series, the voltage is multiplied. , AA, A, BBB BBBA medium grade assigned to a debt obligation by a rating agency to indicate an adequate ability to pay interest and repay principal. However, adverse developments are more likely to impair this ability than would be the case for bonds rated A and above. , and the additional letters through B, C, and D,which reflect the credit risk of owning the financial security. 1. [The concepts of loan and risk as known to bankers and otherlenders in financial businesses.] The terms lower on the ladder are more explicit, descriptive, andless abstract in referring to a physical context or reality, so thereshould be greater understanding between people in using them. Termshigher on the ladder increasingly overgeneralize Verb 1. overgeneralize - draw too general a conclusion; "It is dangerous to overgeneralize"overgeneraliseextrapolate, generalize, infer, generalise - draw from specific cases for more general cases the original conceptsof loan and risk, so it is more difficult to know if people are usingthese terms in the same way. Beginning with Step 2 and through thesubsequent steps, the credit risk of financial instruments referred tobecome progressively higher. [ILLUSTRATION OMITTED] Levels of Financial Abstraction 1. Loans and risk. In the financial world of banks, mutual funds,individual investors, and so on, a loan is a sum of money given tosomeone or an organization with the expectation that the borrower willrepay that same amount of money, with interest. Risk refers to thepossibility that the borrower will fail to repay all the principal loanamount and interest, creating a harm for the lender, the chance that thelender will lose money. Loan and risk are intimately related in their financial applicationfor those people, corporations, and government agencies considered theleast credit worthy (the highest risk). They are charged the highestprevailing interest rate on their loans (if they are given a loan). 2. Credit ratings (AAA/Aaa through D). These credit ratings areapplied to bonds, which are loans given to a corporation or a governmentagency, and are supposed to symbolize the credit worthiness of theorganization seeking the loan. A bond assigned a letter designation of"AAA" is deemed to have virtually no credit risk, one with an"AA" rating a little more risk, "A" still more risk,and so on through bonds given a "D" credit rating (highlyrisky). At this point, some general semantics principles and concepts canbe applied to the terms on the abstraction ladder. The principle of self-reflexiveness (Hayakawa, 1962) suggests thatwe use words to discuss other words, and we can gain some meaning whenwe do that. For example, we can speak about the underlying assets of aloan. Yet our discussions become divorced from reality when we overlookthat the underlying assets of loans differ, which can determine thereturn of principal. Further, what may originally have been a mortgage(home loan) can be spoken and thought about as a high-yield bond High-yield bondSee: Junk bondhigh-yield bondSee junk bond. in oneof its derivations, as a loan (in general), or even as an obligation.This can lead to confusion because, as these labels become moreabstract, they increasingly omit o��mit?tr.v. o��mit��ted, o��mit��ting, o��mits1. To fail to include or mention; leave out: omit a word.2. a. To pass over; neglect.b. specific characteristics. People becomeless clear with themselves and with others about the meaning in theirown cognition cognitionAct or process of knowing. Cognition includes every mental process that may be described as an experience of knowing (including perceiving, recognizing, conceiving, and reasoning), as distinguished from an experience of feeling or of willing. . Additionally, we could speak about certain bonds (a typeof loan) as having the same AA credit rating, but overlook the number ofcredit-related factors that have been condensed con��dense?v. con��densed, con��dens��ing, con��dens��esv.tr.1. To reduce the volume or compass of.2. To make more concise; abridge or shorten.3. Physicsa. in creating that rating.As a general rule, AA rated municipal bonds are safer than AA ratedcorporate bonds. The fiscal fitness of each borrowing organization isdifferent even though they may have received the same rating. The principle of non-identity (Hayakawa, 1962) suggests that thecredit rating is not the actual credit worthiness of the borrowingorganization (the word is not the thing). Further, the principle ofnon-allness suggests that the rating does not say all about the creditworthiness of the borrowing organization. This was illustrated by someof the credit ratings issued by Standard & Poors and Moody's,which are said to have assigned AAA/Aaa ratings to some of the subprimeor repackaged mortgage loans, according to according toprep.1. As stated or indicated by; on the authority of: according to historians.2. In keeping with: according to instructions.3. Shah (2008) and Stewart(2008a). In actuality ac��tu��al��i��ty?n. pl. ac��tu��al��i��ties1. The state or fact of being actual; reality. See Synonyms at existence.2. Actual conditions or facts. Often used in the plural. , the repackaged loans were of high risk (meaningBB/Ba and below in credit status, typically termed "junk")because the underlying assets were individuals with low credit scoresand/or too few assets to receive a prime (regular) loan. The symbol"AAA" is not the thing referred to (the actual credit risk).Moreover, the word does not say all about the likelihood of repayment. Zuckerman (2007) claims that some investors invested in financialsecurities because these securities had "AAA" ratings. Thisbehavior is an example of an intensional (philosophy) intensional - A description of properties, e.g. intensional equality, that relate to how an object is implemented as opposed to extensional properties which concern only how its output depends on its input. orientation, responding to(buying) a label as if it reflects or is the underlying reality when itclearly is not. Buying certain AAA rated bonds exposed investors to agreat deal of risk and financial loss. 3. Municipal bonds. Municipal bonds, issued by American states andmunicipalities, are normally considered very safe and when they arecoupled with insurance they are often given AAA credit ratings. This isthought to guarantee the return of an investor's principal andinterest. The principle of nonidentity suggests that for investors, whatcounts is the reality represented by the word. Insured is never certainas it depends on the ability and desire of the source to do what it saysit will do. "Guarantee" is a symbol, separate from actualbehavior, and during 2007, some municipal bond issuers who purchasedinsurance discovered that the guarantees they'd received werequestionable (Jaffe, 2008) since some of the insurers also insured bonds Insured bondA municipal bond backed both by the credit of the municipal issuer and by commercial insurance policies.insured bondA municipal debt obligation for which interest and principal are guaranteed by a private insurance company. connected to subprime (high risk) mortgages which have had a highdefault rate. This is another example of an intensional orientation, aspeople paid more attention to the AAA label than to the actual creditworthiness of the governmental body issuing the bond and/or the insuringbusiness. 4. Prime mortgages. Prime mortgages are regular loans given topeople who have good credit and they are expected to be repaid on timeand in full. The term prime has a positive connotation con��no��ta��tion?n.1. The act or process of connoting.2. a. An idea or meaning suggested by or associated with a word or thing: . While it appearsthat this type of loan should not be included on the abstraction ladderwith the other risky loans, many of the prime loans weren't soprime after all as some homeowners who bought more expensive houses thanthey could afford have recently defaulted (Simon, 2008). Again, the wordprime is not the thing. Further, there is a difference in the creditworthiness of people who have prime loans, and it would be in the lenderor titleholder's interest to know that difference. 5. Subprime mortgage. Subprime mortgage is the credit term that hasrecently garnered so much attention in the media. Subprime is aeuphemism eu��phe��mism?n.The act or an example of substituting a mild, indirect, or vague term for one considered harsh, blunt, or offensive: "Euphemisms such as 'slumber room' . . . , attempting to make something that is not highly rated (sub)associated with something that has a positive connotation (prime). Theseller of "subprime" may hope the buyer emphasizes"prime" when conceptualizing the product, service, or personbeing referred to. Subprime mortgages represent a type of loan granted to people whohad a lower than acceptable credit score, few, if any, assets, andpossibly not even a job. Being a higher risk, they were charged a higherinterest rate for this type loan. These subprime mortgages were thenpooled and sold in lots to investors, such as financial institutions. Tosome people, these repackaged loans were attractive investments sincethey generated a higher yield than a regular mortgage. As with the other labeled categories in this discussion, it cannotbe presumed that all subprime mortgages are alike. This is evident inthe finding that as of December 2007, about two-thirds of the peoplewith subprime adjustable-rate loans were not in jeopardy of losing theirhomes (Farrell & Knox, 2008). With a broader view of subprime loans Subprime LoanA loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans.Notes:Subprime loans tend to have a rate that is 0.1% to 0.6% higher than the prime rate. ,Kerch (2008) reports that 85 percent of subprime mortgages are currenton their payments. 6. Liar loan. A Liar loan is one type of subprime mortgage. It is afairly explicit term, denoting the behavior of a borrower knowinglybeing inaccurate about his or her financial status on the mortgageapplication form, and a mortgage broker knowingly recognizing andaccepting these distortions by granting such a loan to a high-riskborrower. When that loan is sold to a third party who has no directcontact with the liar and the third party also has an incentive to sellthat loan to someone else, less scrutiny is given to the extensionalreality of the loan by the third party and the next investor after them,who probably never saw or had a chance to see the actual, falsifiedapplication. They were likely to have only abstract words for what theyhad just purchased. 7. Undocumented loan. An undocumented loan is one in which theperson seeking a loan provides no written documents substantiating sub��stan��ti��ate?tr.v. sub��stan��ti��at��ed, sub��stan��ti��at��ing, sub��stan��ti��ates1. To support with proof or evidence; verify: substantiate an accusation.See Synonyms at confirm. his/her assets or income. A likely reason for an individual to seek sucha loan is that the person has few or no assets. As with liar loans, suchloans are highly risky and fall into the "subprime" category. 8. Consolidated Debt Obligation. Consolidated Debt Obligation orCDO is a financial security comprised of multiple subprime mortgages(and possibly some other high-risk investments) sold together as a unitto investors. At face value, the term does not suggest a negativeconnotation and could simply mean that multiple loans are bundledtogether. Since this is a more general term, it is further up theabstraction ladder than the more specific ones. As CDOs containedsubprime loans, they posed a high risk for those purchasing them, andmany people have lost money with that purchase (Zuckerman, 2008). A lotof detail about the type of loans within a CDO is omitted in the acronym acronym:see abbreviation. A word typically made up of the first letters of two or more words; for example, BASIC stands for "Beginners All purpose Symbolic Instruction Code. CDO. 9. High Yield Bond. The term high yield bond is used for monetaryloans sought by businesses or governmental bodies whose ability to repayis doubtful. To compensate for this, the organization is forced to paymore for the loan by giving the investor a high rate of interest. Suchbonds are rated BB/Ba all the way to D, and some are even un-rated. High yield bonds are also known as Junk bonds junk bond,a bond that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. , a term that is moreexplicit about the reality of the credit worthiness of the business ororganization behind the bond. Although not as disparaging dis��par��age?tr.v. dis��par��aged, dis��par��ag��ing, dis��par��ag��es1. To speak of in a slighting or disrespectful way; belittle. See Synonyms at decry.2. To reduce in esteem or rank. a term as liarloans, junk does suggest a negative connotation. This is why financialbrokers and institutions selling junk bonds call them high yield to drawthe buyer's attention away from the high risk of such loans. Notall high yield or junk bonds are alike. There are different levels ofrisk. Again, the word is not the thing The term junk bond seems closer to extensional reality, in terms ofrisk description, than either "undocumented loan" and"CDO," but it is also a more expansive term that includesdifferent types of junk such as CDOs, undocumented loans, subprimemortgages, liar loans, and all sorts of loans given to businesses thatare a credit risk. 10. Loan. A loan is something that is provided temporarily tosomeone for his or her use. You can loan someone $5, a car, a brushcutter cutter,small, one-masted sailing vessel, with a rig similar to that of a sloop except that it usually has a sliding bowsprit and a topmast. From 1800 to 1830 cutters were in service between England and France. , and so on. Sometimes something is loaned for nothing in returnand sometimes something is loaned for something of additional of value,like a bank loaning a sum of money at a certain interest rate. Someloans are not repaid or returned, and such outcomes may get relabeledas: gift, loss, theft, etc. 11. Obligation. Obligation is a broad term that can refer to anycontract or promise to follow a specific course of action, such as anobligation to cut your neighbor's grass, give a co-worker a ride towork, replace a sack of rice your brother gave you, repay a car loan youreceived from a local bank, etc. None of these (and other) obligationsare alike, which means that all of them should be thought of andresponded to differently. Obligation, in the context of this article, can also refer tosubprime mortgages. Borrowers had an obligation to make their principaland/or interest payments, Ironically, some people getting the subprimemortgages may not have felt a great deal of obligation to stay currentin their payments or possibly didn't know how to fulfill theirobligation because they got their low credit scores by not handlingcredit wisely in the past. Furthermore, the initial mortgage lenders maynot have felt much of an obligation to ensure they loaned money topeople who realistically could afford the loans because many of theseloans were sold to third parties. The third parties, and any additionalparties who held the mortgage titles, were not only far removed from theextensional reality at the bottom of the Abstraction Ladder, many ofthem were removed from their investment capital, as well, when themortgages they held defaulted. Some observations General semantics offers extensional devices to avoid makinginaccurate and incomplete assumptions due to overgeneralizations. Two ofthose devices are indexing and dating. Indexing is an attempt to use our language in an effort todiscriminate dis��crim��i��nate?v. dis��crim��i��nat��ed, dis��crim��i��nat��ing, dis��crim��i��natesv.intr.1. a. between and among similar objects, "... people orevents that are covered by the same label but are really quitedifferent" (DeVito, 2006, p.l23). For example, indexing would haveus mentally (and verbally) use a different numerical subscript (1) In word processing and scientific notation, a digit or symbol that appears below the line; for example, H2O, the symbol for water. Contrast with superscript.(2) In programming, a method for referencing data in a table. whenthinking about each AAA-rated State of California General ObligationBond ([bond.sub.1] is not the same as [bond.sub.2], [bond.sub.3] is notthe same as [bond.sub.4]), particularly since state GOs can differ intheir yield (interest amount) and duration (length to maturity).Furthermore, we would look into what specific sorts of debt obligationsare being bundled into a consolidated debt obligation (CDO). Dating requires that we mentally and verbally attach a date tostatements we make, to account for ongoing changes within us and in theworld around us. A CDO sold in January 2006 is not the same as a CDOsold in January 2007 or in January 2008. A 1994 Orange County,California Orange County is a county in Southern California, United States. Its county seat is Santa Ana. According to the 2000 Census, its population was 2,846,289, making it the second most populous county in the state of California, and the fifth most populous in the United States. , A-rated Muni Bond (when the county went bankrupt) was notthe same as a 1996 A-rated bond from the same agency. These differingdates would make all the difference for any potential investor.Everything in the world is constantly changing even though our use oflanguage sounds as if people, objects, and the environment stay thesame. Conclusion Hayakawa (1972) noted long ago that general semantics is "...concerned with the relationship between language and reality, betweenwords and what they stand for in the speaker's or the hearer'sthoughts and emotions ..." (p.vii). General semantics advises us tocontinually differentiate between and among the observable ob��serv��a��ble?adj.1. Possible to observe: observable phenomena; an observable change in demeanor.See Synonyms at noticeable.2. facts we facein our lives. The more specific and descriptive we are, the lesswe'll fool both ourselves and others. The further our word meaningsare removed from the reality of our actual experience, the greaterlikelihood we will misunderstand mis��un��der��stand?tr.v. mis��un��der��stood , mis��un��der��stand��ing, mis��un��der��standsTo understand incorrectly; misinterpret. the basic experience before us andrespond to it in an ineffective manner. References DeVito, J. Human Communication: The Basic Course, 10th ed. Boston:Pearson Education Pearson Education is an international publisher of textbooks and other educational material, such as multimedia learning tools. Pearson Education is part of Pearson PLC. It is headquartered in Upper Saddle River, New Jersey. , Inc., 2006. Farrell, G. and Knox, N. "More U.S. homeowners are facingforeclosure foreclosureLegal proceeding by which a borrower's rights to a mortgaged property may be extinguished if the borrower fails to live up to the obligations agreed to in the loan contract. ," Gannett News Service, in Pacific Daily News, March 8,2008. Hayakawa, S. I. The Use and Misuse of Language. Greenwich, CT:Fawcett Publications, Inc., 1962. Hayakawa, S.I. Language in Thought and Action. New York New York, state, United StatesNew York,Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of : HarcourtBrace Jovanovich, Inc., 1972. Jaffe, C. "Stupid Investment of the Week," inMarketWatch, March 6, 2008, http://www.marketwatch.com/News/Story/Story. Kerch, St. "Monday's Personal Finance Stories," inMarketWatch, March 17, 2008, MarketWatche-Newsletter<reports@marketwatchmail.com> Shah, A. "Emerging From a Bad Mood(y's)?," in SmartMoney Magazine, January, 2008. Simon, R. "Some Borrowers Rescued," in MarketWatch, March3, 2008, http://www.marketwatch.com/News/Story/Story Stewart, J. "Fallout fallout,minute particles of radioactive material produced by nuclear explosions (see atomic bomb; hydrogen bomb; Chernobyl) or by discharge from nuclear-power or atomic installations and scattered throughout the earth's atmosphere by winds and convection currents. From the Mortgage Mess," in SmartMoney Magazine, January, 2008a. Stewart, J. "Cheap, For a Reason," in Smart MoneyMagazine, March, 2008b. Zuckerman, M. "More Risky Business," in U.S.News &World Report, September 24, 2007. Zuckerman, M. "Preventing a Panic," in U.S.News &World Report, February 11, 2008. * Mike Griffin (Assoc. Prof., Communication) was introduced togeneral semantics by Drs. Hunt, Rebstock, and Barnlund while completinga BA (1977) and MA (1980) in Speech and Communication Studies from SanFrancisco State University ••[ . He earned an EdD in Organization andLeadership from the University of San Francisco ••[ in 1987, and has beenteaching Communication courses for the University of Guam UOG's motto: to enlighten, to discover, to serve... The University of Guam, located in Mangilao, Guam, is a land-grant institution accredited by the Western Association of Schools and Colleges. since 1988.