Leverage: The substitution of debt for skill in order to enhance investment performance or profitability. In theory, any gains from leverage are offset by a commensurate increase in risk. In practice, this theory is ignored.
Leveraged buyout: The debt-funded purchase of a company. Immensely profitable to private equity firms when profits and valuations rise and, owing to management and other fees, still very profitable to private equity when valuations and profits decline.
Leveraged loans: The rocket fuel that powers the LBO industry. Originated by banks but quickly passed on to hedge funds and stuffed into collateralized debt obligations.
Liar loans: Mortgages provided to those who economize with the truth. See mortgage brokers.
Liquidity: A vogue term which provides an aura of financial sophistication to its user, as in, “an excess of liquidity drove the market higher, today” or “a lack of liquidity drove the market lower, today.”
Loser’s game: The recognition that investors, in aggregate, are engaged in a zero-sum game—one person’s gains are equal to another’s losses, less the cost of transactions. Those who make fewest mistakes and have the lowest management expenses end up winning the loser’s game. The irrefutable consequence of this finding is that institutional funds should be largely invested in low-cost index funds. It is a tribute to the marketing power of the Wall Street that this isn’t the case.
Lucky fool: A person who owes his success to luck rather than skill, but is unaware of the fact. As it takes several decades of performance data for statisticians to distinguish luck from skill in the investment game, the number of lucky fools on Wall Street must always remain indeterminate. See Steve Schwarzman.
M
Mark-to-model: The use of a mathematical model to value complex securities, such as CDOs. “The combination of precise formulas with highly imprecise assumptions can be used to establish practically any value one wishes” (Ben Graham). Particularly useful to investors who wish to delay the recognition of a loss. See CDOs.
Master Limited Partnership: A clever corporate structure favoured by private equity and hedge funds on going public. Provides investors with few of the traditional governance safeguards, while allowing alternative asset managers to avoid paying corporation tax on their earnings.
Mortgage-backed securities: A former blue chip of the Wall Street casino which on becoming tarnished is rapidly losing currency. See withdrawals.
Mortgage broker: A person who, in exchange for a fee, will exaggerate the income of a mortgage applicant.