How the devil defines prime broker, valuations and yachts

How the devil defines prime broker, valuations and yachts

Roughly a century ago, the American writer Ambrose Bierce compiled The Devil’s Dictionary. In his celebrated lexicon, Bierce displayed a profound understanding of finance, which he defined as “the art or science of managing revenues and resources for the best advantage of the manager". Below are several other of his definitions touching on the subject of money:

Debt: An ingenious substitute for the chain and whip of the slave-driver.

Mammon: The god of the world’s leading religion. His chief temple is in the holy city of New York.

Riches: The savings of many in the hands of one.

Wall Street: A symbol of sin for every devil to rebuke. That Wall Street is a den of thieves is a belief that serves every unsuccessful thief in place of a hope in Heaven.

While Wall Street’s ethos has not changed since Bierce’s time, it is time to update and enlarge The Devil’s Dictionary of Finance for the world of hedge funds, private equity, structured finance, subprime equity, etc.

Part II: M through Z


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. See taxes.

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.


Negative amortization: Mor-tgages provided to people who couldn’t afford the initial interest payments. The principal accrues for a year or so, after which interest payments rise (“reset") and the home is repossessed. Increasingly popular for funding leveraged buyouts and commercial real estate deals, where negam loans go under fancy names, such as “non-accretive interest rate swaps".

NINJA loans: Loans provided to people with “no income, no job and no assets". An example of mortgage broker wit.


Overconfidence: The universal willingness to pay large fees to investment managers in the hope of achieving better than average returns. See institutional investors.


Prime broker: The unit of an investment bank that services hedge funds. Prime broker loans to hedge funds are now securitized and sold on to hedge funds.

Private equity: A branch of the investment industry run by deal makers rather than investors. This may explain why, despite a quarter of a century of generally rising asset prices, generally falling interest rates, and huge dollops of leverage, investors in buyout funds would, on average, have been better off leaving their money in the stock market. The same cannot be said of private equity’s General Partners. See Steve Schwarzman.


Quantitative finance: The misbegotten attempt to turn finance into a branch of physics.

Quants: The name given to second-tier mathematicians and physicists who surrender science and scruples in exchange for Porsches.


Rating agencies: The highly profitable cartel of private firms that provide investment quality ratings on bonds. Bondholders cannot complain about the quality of these ratings because, a) they are paid for by the issuers of debt and b) the rating agencies say they are only expressing an opinion. The US constitution doesn’t require that opinions be either accurate or free from conflicts of interest.

Regulators: Government-employed lawyers, who having failed to get employment in Wall Street, have trouble understanding what’s going on in Wall Street.

Risk: The flawed attempt to precisely measure an uncertain future.

Risk premium: A gauge of investors’ willingness to lose their clients’ money. A high risk occurs only after a lot of clients’ money has been lost and reflects the money managers’ fear of losing their jobs.


Structured credit: The greatest invention of quantitative finance that conceals risk in complexity while facilitating the extraction of further fees by investment banks, credit rating agencies, collateral managers, hedge funds, etc.

Structured investment vehicle: An off-balance sheet vehicle designed to generate fees for American banks and insolvency for German ones.

Subprime: The practice, initially profitable, of providing loans to those who can’t repay them.


Toggle notes: Loans to leveraged buyouts, which at the behest of the borrower, switch from payment of interest in cash to what’s called payment “in kind", or rather in further notes. As the toggle is likely to be exercised when cash has run out and the company’s notes are likely to be near worthless, kind is not a nice description of this type of payment.


Underwriting standards: The outcome of a conflict between a banker’s fear of losing money and his desire to earn a bonus. Over the course of the cycle, the bonus looms larger than the fear of loss, and underwriting standards decline.


Valuation: An argument with the market price.


Withdrawals: The belated action of investors on waking up to discover a hedge fund manager has been playing fast and loose with their money. The hedge fund industry is trying to remove this inconvenience by “locking-up" its investors. See Bear Stearns’ High-Grade Structured Credit Strategies Enhanced Leverage Fund, Dillon Read Capital Management, Basis Capital’s Basis Yield Alpha Fund and many more to come, no doubt.


X: “A needless letter" (Ambrose Bierce, The Devil’s Dictionary)


Yachts: “Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor.

He said, ‘Look, those are the bankers’ and brokers’ yachts’.

‘Where are the customers’ yachts?’ asked the naive visitor.

(An ancient story, retold by Fred Schwed, Jr).


Zombies: A plague of the corporate living dead. The usual legacy of widespread financial engineering. Also, Wall Street slang for German bankers.