Equity tranche: The riskiest part of a CDO which takes the first loss in the event of default. Popular with hedge funds which pick up performance fees from investing in equity tranches right up to the moment they blow up. See incentives.
F
Fees: The raison d’etre of Wall Street. The means by which wealth is transferred from its owners to those entrusted to manage it. See investment banks, private equity, hedge funds, rating agencies, money managers, etc.
Financial engineering: Whereas conventional engineering seeks to take weak structures and make them solid, financial engineering aims at the opposite.
Financial Journalist: While most journalists are illiterate, financial hacks are also innumerate. “When you stand at the summit of financial journalism, you are at sea level.” (James Grant, editor of Grant’s Interest-Rate Observer)
Fund of funds: The loading of fees upon fees. Institutions which speed up the transfer of wealth from owners to managers, as described above.
G
Greater fools: Wall Street’s ever expanding clientele.
Greenspan: The patron saint of carry traders.
H
Hedge funds: A lucrative compensation scheme for professional investors, who get to charge roughly 10 times as much as traditional money managers while generating, in aggregate, similar returns. See loser’s game.
Home: A building constructed on weak financial foundations. See delinquencies.
I
Initial public offering: An exit route for alternative investment managers who expect the jig is up.
Implied equity: A measure employed by private equity to forgo investing any real equity in a buyout.
Incentives: The incentives of most Wall Street professional involve asymmetric pay-offs. Known less formally as heads-I-win, tails-you-lose. See Where are the Customers’ Yachts?
Institutional investors: Simple-natured fellows possessed of an incurable tendency to extrapolate from past performance.
Interest cover: The ratio between a company’s debt servicing requirements and its cash flow. Buyout borrowers have recently driven interest coverage ratios to “barely 1.Ox” (Moody’s).
International carry trade: The practice of borrowing cheaply abroad to fund investments at home. Popular with Hungarian and Polish home-buyers and unpopular with central bankers in Switzerland and Japan.
Investment banks: Wall Street firms that find clever and original ways to bring the financial system to the brink.
Investment bankers: Financiers who find clever and original ways to put their own interests before those of their clients.
J
Junk: Riskier corporate bonds are known as “high yield” during the early part of the credit cycle. But as the cycle progresses, both their credit quality and yield diminish, at which point they are properly designated “junk.”
K
KKR: The original buyout firm. Founder Henry Kravis says he shouldn’t be congratulated on buying a company but on selling it. Unfortunately, Kravis has been so busy taking other companies private this year that he missed the chance to sell his firm to the public when the opportunity beckoned. See Pulling the IPO.
L