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Glossary

A work in progress.

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Derivatives are complicated financial instruments. They are like buying an insurance policy on a home you don’t own. Except you’re not the only one taking out an insurance policy on that home. Perhaps hundreds of other people are also buying insurance policies on that same home.  And when the home burns down, all the policy holders need to be paid. This, of course, can be disastrous. For example, in 2008, investors bought trillions of dollars worth of derivatives when they wanted to bet that mortgage-backed securities would lose value when homeowners defaulted on their mortgages. In other words, they wanted to get paid when mortgages went bad.  And once that began to happen in large numbers, all those investors needed to be paid all at once, resulting in the financial crisis.  AIG, in particular, was a company who had sold many of those derivatives.  And when the purchasers of those derivatives came to collect their money, AIG didn’t have enough to pay all of them.  They were over-leveraged.  They had sold too many insurance policies on the same product.

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Stop-Loss Insurance is coverage purchased by employers in order to limit their exposure under self-insurance medical plans. So, the definition of stop-loss insurance applied to Wall Street would read: bank-betting exposure covered by taxpayer bailouts!

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