Reading the 385-page proposal to restructure $32-billion of paralyzed asset-backed commercial paper is like taking a trip to a foreign country. Make that a foreign country 300 years ago.
Full of helpful phrases such as “bespoke pool,” “Gaussian Copula correlation” and “Compressed Super Senior Tranches,” the report on modern derivatives reads more and more like a medieval torture manual. Across the land last week the cry went out: “Somebody explain this!” Then came the second cry: “In English!” To put our readers out of their misery, the Law Page offers the following glossary:
Bespoke pool: Bankers love bespoke, not just when it comes to perfectly tailored custom-made suits from which the word derives. The financial world is now full of bespoke pools of assets tailored to the exact specifications of buyers, many of whom are now in trouble and attempting to sell the stuff. The problem is, bespoke, by definition, doesn't fit anyone else.
Gaussian Copula: Carl Friedrich Gauss was a child prodigy who grew up to become known as the “prince of mathematicians.” If he were alive today he might be one of the few able to understand just what the financial derivatives underlying much of the frozen ABCP are worth. Alas, he died in 1855, bequeathing a legacy of formulas such as the Gaussian Copula used to predict everything from the movement of planets to the weather, and lately to guesstimate the value of derivatives contracts.
Monte Carlo simulation model: We always suspected there was gambling in the ABCP notes. The Monte Carlo simulation is something that analysts use to simulate potential defaults on a portfolio of loans, such as those underlying ABCP.
Leveraged super senior: Super and senior. Sounds solid, doesn't it? Safe, too. If only. So-called leveraged super senior derivatives are at the heart of the ABCP fiasco. They serve as a kind of giant insurance policy issued by ABCP trusts to insure baskets of bonds. ABCP trusts earn easy premium money as long as bond values are robust. In the current credit market storm the ABCP trusts are hurting as much as insurers walloped by hurricane Katrina.
Master asset vehicles: ABCP rescuers want to take 47 wounded ABCP series of notes and roll them into three Hummer-sized vehicles that collectively will have healthier underlying assets and financial support. The catch is it could take up to nine years before ABCP investors can drive away with their money.
Spread loss trigger: It's not a ranch named after Roy Rogers' faithful horse. It's the planned new threshold for determining when ABCP trusts are on the hook to ante up extra collateral to lenders.
Spread loss matrix: Something Keanu Reeves definitely wouldn't get. This matrix is a table outlining when changes in bond prices force ABCP trusts to put up more collateral.
Gap risk: The risk that by purchasing those Gap khakis you're eyeing, you will end up looking like the kind of geek who would structure a derivative. Okay, we're joking, but can you blame us? The real explanation is just too boring for words.
On the run index: They have got to be kidding.
