These days, even people who pay attention only to gallery openings and
baseball scores are suddenly paying attention to what's happening on Wall
Street. Investment bankers and hedge fund managers are crafting financial
instruments the likes of which have never been seen by the industry, the
consumer or the Federal Reserve. As mortgages melt down, the market gyrates, and
the regulators make their pronouncements, here is a short list of some of the
business terms and their meanings that are driving our wild financial ride.
Additional Capital : A financial lifesaver for banks
and investment houses swamped by losses and the threat of bankruptcy. The
additional capital raised to cover the emergency is obtained by printing and
selling more stock, thus lessening the value of the stock already in existence.
Raising money under these circumstances is very expensive and sometimes
involves a guarantee that the buyers of the new stock will receive some kind of
dividend before anybody else gets paid--an additional sock in the nose to the
current stockholders. The need to raise additional capital is not always due to
the stupidity and incompetence of the people running the company. Sometimes it's
for such profitable purposes as buying new machinery or expanding the factory
(back in the days when we had factories).
Basil II : Not to be confused with a medieval king of
Bulgaria or a Byzantine emperor. The Basil II accords are an international
agreement on banking practices designed to prevent--guess what? A worldwide
banking crisis. Heavy-money players such as the United States and the EU are
signatories to the agreement, whose provisions nobody quite understands and
which nobody has been able to put into effect, but which everybody agrees are
necessary to maintain the present high level of world prosperity.
Blank Check Company : A company with a pot of money and no
business. First, you start a company. Second, you flush a covey of slap-happy
investors who have lost the sense they were born with. After you have their
money, you go looking for some kind of business for the company to get into.
Compare a blank-checker with the men and women who tart up, go to the ATM to
withdraw money and then head to a pickup bar. By the end of the evening some of
them are in business. Most are not.
Collateralized Debt Obligation (CDO) : Take a bunch of
commercial loans for which there is collateral of some kind or other, smoosh
them together into one big loan or bond and voilà! You have a CDO.
Whether you want the CDO depends on how good the underlying loans and collateral
are. It appears that many of the investment bankers selling CDOs were too busy
buying houses in the Hamptons to find out.
Counterparty : The name for the other guy or institution in
a deal, otherwise known as he who is left holding the bag. If you lend me $10,
we are each counterparties to the loan. A committee has been formed to find out
why this word is needed.
Credit Default Swap : Warren Buffett is supposed to have
called credit default swaps and their kinky kindred arrangements "financial
weapons of mass destruction." (Also see Liquidity Put.)
A credit default swap works this way: Company A gets a loan, usually in the
form of a bond, from Company B, but Company B worries that Company A may not pay
the loan when it comes due. So Company B makes a deal with Company C. In return
for regular payments, Company C will make good any loses suffered by Company B
in case Company A welches on the deal.
So a credit default swap is a form of insurance... but if Company B has a
mind to, it can buy a dozen or more credit swaps from Company C or some other
entity. In the event that Company A fails to pay back the money, Company B
stands to make a huge profit. Worse yet, Companies H and M, which had nothing to
do with the deal, can nevertheless do a credit default swap based on whether or
not Company A lives up to its promise to repay Company B.
Credit default swap mutations, immutations, transmutations, remutations and
permutations are endless and perilous. At present an estimated $4.5 trillion in
credit default swaps is swirling around in financial outer space. If they land
in a black hole, the business world will end with a bang. Then comes the
whimper.
Doges of Wall Street and Greenwich, Connecticut : These are
the 5,000-6,000 people who sit atop the nation's major financial institutions,
banks, hedge funds, etc.
