What are these guys talking about?

What a week this is turning out to be - and what a difference a week can make on Wall Street these days.

The latest in the turmoil consuming financial markets started last week when Federal officials met with Wall Street's titans to help arrange a rescue for two big investment banks holding too many "mortgage-backed securities," now practically worthless as a result of the ongoing housing crisis. Henry Paulson, Ben Bernanke and company refused to back any deal to rescue Lehman Brothers and Merrill Lynch with taxpayer money - pushing Lehman into bankruptcy and Merrill into a merger with Bank of America.

Then, mammoth insurer AIG warned of big losses from its own bad bets on U.S. real estate, but this time the Fed’s leaders agreed to provide up to $85 billion in credit to rescue AIG from certain bankruptcy because they said its collapse could pose systemic risk to the world financial system. As markets the world over reacted with fear to this, the Fed, along with several other central banks, injected $180,000,000,000 additional dollars into the world financial system, to shore up confidence and get banks to start lending to each other again.

Now, all of Washington has stepped into the fray to try to rescue Wall Street from itself - with Paulson and Bernanke negotiating with Congressional leaders to craft some sort of bailout in which the government agrees to buy up to $700 billion dollars of distressed mortgage-related assets from financial institutions, so they can remove them from their balance sheets.

The details are being hammered out right now - but we can assume it may resemble the bailouts to the Savings-and-Loan industry, or Chrysler two decades back: the government sets up an entity to buy and hold these assets, and sells them at a later date - hopefully making a profit in the process.

But, to shore up financial stock prices, the SEC took the unprecedented move of temporarily banning the "short selling" of stocks for 799 financial firms. And in the same breath, the Treasury and the Fed stepped in to guarantee troubled money market mutual funds, as fears grow that funds values could fall below the $1.00 a share threshold, as one did last week.

To top it all off, Goldman Sachs and Morgan Stanley – the last two independent investment banks standing on Wall Street - have both decided to transform themselves into "bank holding companies," meaning they will be able to acquire other banks and will be subject to more federal regulation, which will likely make the economy last turbulent.

Let’s define some of the financial jargon being thrown around by those big (bald) talking heads on TV this week as all these stories further unfold:

1. Mortgage-backed security: Banks lend money to homeowners through home mortgages; these loans are then bought from the banks and sliced up and repackaged into securities that investors buy and sell just like stocks. Those investors make money off the homeowners' monthly interest payments. The nation's housing crisis has forced many Americans to skip payments, or worse, foreclose on their homes, so investors don’t get the interest payments. That's why the securities become toxic assets to have on a company's balance sheet: nobody wants to buy them, and there's no market for them. Thus, all those institutions that hold these mortgage-backed securities - and they’ve got a lot of them! - are in big trouble.

2. Derivatives:A mortgage-backed security is a derivative security by definititon, because it derives its value from another financial security - in this case, home loans. But, there are some really complex derivatives out there using mathematical formulas that not even some financial wizards on Wall Street can comprehend - and a lot of those derivative securities get their values from the real-estate market, again wreaking havoc on Wall Street because financial firms hold too many of them.

3. Short-selling: This is a strategy used by sophisticated investors to make money when a stock price goes down. Investors will borrow stocks then sell them on the open market, betting the price will go down. They later buy back the stock and return the shares they borrowed. The short seller pockets the difference between the sell and buy price, and makes his profit - if in fact the stock price goes down. Bottom line, selling a stock "short" is a legal way to make money in the stock market. Peddling rumors about the state of a company's finances in order to drive down the price of stock you may be shorting is illegal. Apparently, the SEC fears that could happen in the chaos gripping Wall Street, and wants to prevent that from happening.

4. Credit Default Swap:This is a type of credit derivative which you can think of like an insurance policy: a seller agrees to make payments to buyer in the event of a predetermined credit event, usually a default on loans. The buyer pays fixed payments in exchange for this insurance. Thus, the seller of the CDS is making a bet that something won’t happen- that the loan won’t default. Leading up to the credit crisis, CDSs were widely used to bet that certain companies would fail. AIG’s participation in the CDS market largely contributed to their huge losses.

We'll see what Washington finally does to "bailout" Wall Street from its bad investments– and whether any benefits from it extend out to "Main Street."

Posted by: Ali Velshi - CNN Senior Business Correspondent
Filed under: Finance • Living • Velshi