Nicholas von Hoffman is the author of A Devil’s Dictionary of Business, now in paperback.
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.
: 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).
: 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.