Bezzle: “At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country’s businesses and banks. This inventory—it should perhaps be called the bezzle—amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression, all this is reversed. Money is watched with a narrow and suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.” (John Kenneth Galbraith, The Great Crash)
Blackstone: Private equity firm run by former investment banker Steve Schwarzman. In a recent interview with the Wall Street Journal, the billionaire emphatically denied he was a “marauding, low-class, low-brow inflictor of random damage”. See Lucky Fool.
Bridge loans: Temporary loans provided by banks to finance leveraged buyouts. A financial hot potato. But as the head of Citigroup, Chuck Prince, recently observed, “As long as the music is playing, you’ve got to get up and dance.”
Bull: Politely speaking, the stuff and nonsense of Wall Street’s daily conversation.
C
Carry trade: The act of borrowing cheaply and lending at a higher rate. Popular with hedge funds when short-term rates collapsed after the dotcom bust, viz. Charlie Munger of Berkshire Hathaway, “Never have so many people made so much money with so little talent.” See Greenspan.
China: A Communist country bent on undermining its capitalist enemies by gorging them on debt. In furtherance of this policy, the People’s Bank of China has recently taken a sizeable stake in Blackstone.
Collateralized Debt Obligation (CDO): A dumping ground for loans off-loaded by banks, which are pooled, sliced up and stamped with investment-grade ratings.
Covenant-lite: Loans for leveraged buyouts, which have many of the risks of equity without any of the upside.
Credit: Long ago, when she first appeared amongst us, “Lady Credit” was said to be attracted to a person’s character, probity and trustworthiness. With age, she has become less choosy.
Credit default swaps: A means for transferring risk. Lenders can now insure against the risk that a borrower goes bankrupt. Instead, they are now exposed to the risk that the seller of default protection, in an unregulated $30 trillion market, goes belly up.
Croupier’s take: The annual charge for managing institutional money, which includes fund managers’ fees and brokerage commissions. Conservatively estimated by Charlie Munger at roughly 3% of principal p.a.
D
Debt: A lingering disease left behind after Lady Credit has taken flight.
Delinquencies: The inevitable consequence of providing money to those who can’t afford to pay either the interest or principal on a loan.
Dividend deal: A debt-funded dividend paid shortly after a buyout. Serves to boost private equity returns at the expense of creditors.
Downgrade: A reduction in the quality of a credit rating. Normally occurs after the deterioration of fundamentals, but before the event of a default. This action protects the reputation of the rating agencies but not the wealth of bondholders. See subprime.
E
EBITDA: Earnings before interest, cash, depreciation and amortization. The maximum cash flow available to finance a buyout. When all EBITDA is used for debt service, nothing remains to invest in a company’s ongoing operations. See Zombies.