Wednesday, September 15, 2010

Remembering the "Moneygeddon": Can You Say "Subprime" in Spanish?

It's hard to believe that two years have passed since the dramatic week that started on a Friday when the leaders of the major Wall Street banks converged on the headquarters of the New York Federal Reserve. As has been chronicled in many books, articles and movies, the head honchos failed to come up with a solution to save Lehman Brothers, which was allowed to go under on Sunday evening (despite one firm offer from Britain's Barclays), nearly bringing down the rest of the international financial system with it. There are many human anecdotes from that dramatic week that punctuate how dire the situation was. To select only a single one: Mohammed El-Erian, one of the leading fund managers in the world, called his wife after the run on money market funds and told her to withdraw as much cash as she could from the ATMs because banks (i.e., all banks) might not open their doors the following morning. You have to take a step back to gauge the gravity of this story. This man is probably a millionaire several times over and he is telling his wife to take out $500 or $1,000 or whatever she can get because that is the only thing they might have to live on for the next few weeks. That is simply Great Depression territory. Scary, scary.

As we all know, the "Clusterf**** to the Poorhouse" (as the Daily Show dubbed it) began with the least complicated of financial products: the humble mortgage. Except these mortgages had a twist: they were subprime mortgages. By now everyone is familiarized with the concept. Thanks to ultra-low interest rates, people with low credit scores began to be granted home loans. Back before the housing bubble, banks had found that some people with bad credit scores could actually be granted mortgages and that the default rate was relatively low, since payments on a house tend to be the last payment that is cut when economic hardship hits. This was a niche activity, however. But once everyone with good credit scores had remortgaged in the early 2000s, the market had no one else to turn to. So banks and originators expanded the subprime niche by many multiples to keep the profit machine churning. The theory was that as long as rates stayed low, even people with unspectacular credit could make their regular payments and renew at the ultra-low rates when the basement teaser rates ended. This time was different. Eventually, rates began to inch upward only slightly (as expected), but there were massive defaults (which was not expected), and institutions all over the world crumbled and the rest is history.

Now, given its status as one of the major buzzwords of 2008, the term has received several different translations in Spain's El País:

 La Comisión Nacional del Mercado de Valores del Reino Unido (FSA por sus siglas en inglés) ha multado con 17,5 millones de libras (21,2 millones de euros) a Goldman Sachs por no informar sobre la investigación abierta en Estados Unidos por un fraude relacionado con las hipotecas subprime, tal y como le obliga la ley británica.

hipotecas de baja calidad (subprime) [Eng. low-quality mortgages]

 hipotecas de alto riesgo ("subprime") [Eng. high-risk mortgages]

las subprime (hipotecas basura) [Eng. junk mortgages]

Therefore, you have a reasonably large selection for a single (often authoritative) source. However, "hipotecas basura" and "hipotecas subprime" by far get the most hits on that archive.

Now, one thing to keep in mind is that the word "subprime" is an elegant example of financial re-branding. To understand that, think of the analogous case of junk bonds, which are debt securities with a higher yield. Why do they offer a higher yield? Well, because they are issued by companies with less-than-sterling credit. To receive money from the market, they have to pay more than a more reputable company. Thus the less-than-admiring moniker of junk bonds. When these low-quality bonds became a hot property in the 1980s, bright young things began thinking up ways of selling them off. But for that you needed a shiny new name. "Junk" bond simply wouldn't do. "How about high-yield bond?" "Hmmm, that sounds a LOT better. Kind of like a new, improved sort of bond." After all, higher yield is good, right? And thus was born another speculative mania using completely inappropriate assets.

The term "hipoteca basura" suggested by the Spanish newspapers is a nod at this history. And it is certainly suggestive, since it points out emphatically (in a way the original English original doesn't) that we are talking about junk mortgages. The word "subprime" is a nifty little sleight of hand. See this pile of mortgages held by people with lower credit scores? They're packaged into junk mortgage CDOs. And, by the art of securitization and the intricacies of the rating system, they are transmuted into AAA-rated subprime bonds. Sounds better, right? "They're not junk, they're just not-good, less-than-prime, prime-minus, subprime." Voilá, another catastrophe is born.

Therefore, if it is up to you, by all means use "hipoteca basura." It is blunt, suggestive and calls to mind an entire spectrum of meanings that help us think about the Moneygeddon in Spanish. However, keep in mind that it is a loaded term, with heavily negative connotations that your audience or client may not like. In conclusion, all of the options taken from El País are valid, but weigh beforehand the nuances of every one of the options before committing yourself to one. And for God's sake don't buy subprime mortgage bonds.

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