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Subprime abstractions.

Article Excerpt
THE RECENT FINANCIAL LOSSES IN THE U.S. CREDIT MARKET associated with home mortgages have received a great deal of media attention. Among others, Merrill Lynch wrote off $23 billion in assets while Citigroup wrote off $24 billion (Stewart, 2008b). This is, to paraphrase an old aphorism, some serious money.

While there are a variety of bases by which to study the unfortunate credit woes of some American financial institutions and individual investors, principles of general semantics can provide some insight to the process by which this occurred. In particular, what general semantics says about our use of varying degrees of abstract terms and responses to those terms can have a real impact on the size of our pocketbook.

People typically respond to words as if the words embody the actual reality or experience implied. General semantics tells us that words are but symbols that may suggest an outline of some phenomenon, and a given word is not the thing referred to (Hayakawa, 1972). This perspective may seem like a mere academic distinction, yet time and again people experience problems in various aspects of their lives, such as with their finances, when they react to a situation as if that situation reflects a word-meaning reality they hold.

To illustrate the increasing difference between the reality people presume financial terms refer to and the actual objects of their experience, a visual representation of this relationship will be adapted to a modification of Hayakawa's Abstraction Ladder (1972).

11. Obligation

10. Loan

9. High Yield Bond

8. Consolidated Debt Obligations or CDO

7. Undocumented loan

6. Liar loan

5. Subprime mortgage

4. Prime mortgage

3. Insured municipal bond

2. AAA, AA, A, BBB, 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 other lenders in financial businesses.]

The terms lower on the ladder are more explicit, descriptive, and less abstract in referring to a physical context or reality, so there should be greater understanding between people in using them. Terms higher on the ladder increasingly overgeneralize the original concepts of loan and risk, so it is more difficult to know if people are using these terms in the same way. Beginning with Step 2 and through the subsequent steps, the credit risk of financial instruments referred to become 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 to someone or an organization with the expectation that the borrower will repay that same amount of money, with interest....

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