Fool's Gold

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asset-backed commercial paper (ABCP)

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a short term security that commonly lasts between overnight and 180 days. it is typically issued by a bank of other financial institution, backed by physical assets such as trade receivables, commercial loans, or holdings of bonds. until 2007 it provided cheap funding

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asset backed security (ABS)

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a security that is backed by a portfolio of assets or cash flows from assets that are normally placed in a specially designated vehicle. the assets often (but not always) are loans. the assets are usually diversified, ideally to help reduce risk

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bank capital

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the margin by which creditors are covered if the bank's assets are liquidated. a measure of a bank's financial health is its capital/asset ratio, which bank regulations require to be above a prescribed minimum

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basel accord

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a set of regulations that establishes levels of bank capital drawn up by the basel committee on banking supervision (BCBS), a committee of international central bankers and supervisors. the first accord, known as Basel I, was drawn up in 1988. in 2004, a Basel II accord was published that was designed to align capital with risk in a closer manner. the secretariat for the committee is in the Bank of International Settlements (BIS) in the Swiss city of Basel

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BISTRO (broad index secured trust offering)

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J.P. Morgan's proprietary name for the idea of creating CDOs out of credit derivatives. It was first launched in 1997 and was the forerunner of the synthetic CDO structure that later became widespread

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Collateralized debt obligations (CDOs)

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a form of asset-backed security. they are typically created by bundling together a portfolio of fixed income debt (such as bonds) and using those assets to back the issuance of notes. such notes usually carry varying levels of risk. cash CDOs are created from tangible bonds, bonds, or other debts; synthetic CDOs are created from credit derivatives.

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Collateralized loan obligations

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CDOs built out of loans, which are usually "leveraged loans" (those extended to companies whose debt is rather noninvestment grade)

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conduit

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an entity that funds itself by issuing short-term debt and invests in assets such as trade receivables, commerical loans, or bonds. it is backed up by credit lines from a bank and closely affiliated with a bank, but it does not always appear on a bank balance sheet. structed investment vehicles (SIVs) are closely related to conduits

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correlation

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the degree to which asset prices, events, or risks move in the same manner

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credit default swaps (CDS)

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a contract between two parties, where the buyer pays a regular fee to the seller in exchange for a guarantee that he will be compensated in the case of any default on a stipulated piece of debt. CDS contracts are similar to insurance in some senses, but they are not regulated in the same manner, can be freely traded, and can be struck even if the buyer does not own the debt he wishes to "insure."

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credit derivatives (CD)

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a bilateral contract between a buyer and seller whos value derives from the credit risk attached to an underlying bond, loan, or other financial asset. typically they are designed to compensate one party if that underlying asset goes into default. CDS (credit default swaps) are one form of credit derivatives but not the only one.

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derivative

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a financial instrument whose value derives from an underlying asset, most normally commodities, bonds, equities, or currencies

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gaussian copula

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a statistical technique developed by David Li, a former J.P. Morgan analyst, for measuring the level of correlation and default probabilities in CDOs

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leverage

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techniques that can magnify returns (or losses). the phrase is most commonly used to refer to debt, since the application of debt to a financial structure or strategy can magnify returns and losses. however, less commonly, the phrase can also be used to describe the manner in which the structure of a CDO, or other derivates, magnifies investor exposure to price swings

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leverage ratio

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most commonly used to describe the ratio between equity and debt, or earnings and debt, in relation to a CDO or company

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leveraged finance

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funding for companies that carry a rating below investment grade. it included high-yield bonts (bonds to companies rated below investment frade) and leveraged loans (loands to the same category of comapanies.) in this decade it was widely used to fund private equity bids, also known as "leveraged buyouts."

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liquidty

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the degree to which assets can be traded freely or not

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monoline

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a specialist bond insurance company that insures investors against the default of municipal goverment bonds, structured credit, and other assets. the insurance premium is usually paid by the issuer, not by the investor

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mortgage-backed bond

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bonds that are issued from a special-purpose vehichle that holds a portfolio of mortgages. these bonds are often issued in several tranches of riskiness

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repurchase, or "Repo," Market

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a market where two participants agree that one will sell securities to another and make a commitment to repurchase equivalent securities on a future specified date, or on call, at a specified price. in effect, it is a way of borrowing or lending stock for cash, with the stock serving as collateral

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special purpose vehicle (SPV)

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a shell company that is created to hold a portfolio of assets, such as bonds or derivatives contracts, and then issue securities backed by those assets. it may be created by a bank, but is a separate legal entity

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structured investment vehicle (SIV)

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an entity that operates in amanner similar to a conduit but does not enjoy complete credit support from a bank, and has external equity investors who bear the first risk of losses

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super-senior risk

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the most senior part of the capital strucutre of a CDO, which is the least exposed to the risk of deaful.t such risk used to always carry triple-A designations from the credit ratings agencies

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tranche

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a class of securities that are issued by a collateralized debt obligation or asset-backed security that carries a certain level of risk. normally, CDOs issue several different tranches of securities including a senior tranche (least risky), junior or equity tranche (msot risky), and mezzanine tranche (in between).