Executive Intelligence Review
This glossary appears in the May 27, 2005 issue of Executive Intelligence Review.

Glossary of the Global Financial Casino

Hedge Fund: A form of mutual fund used by wealthy individuals and institutions to engage in aggressive speculative activities prohibited to ordinary mutual funds. Hedge funds are restricted by law to no more than 100 investors per fund, and these investors are presumed to be sufficiently knowledgeable to understand the risks. Most hedge funds have extremely high minimum investment amounts ranging from $250,000 to well over $1 million.

Derivative: A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards, and various combinations thereof.

Credit Derivative: A contract between two parties which uses a derivative to transfer credit risk from one party to another, in exchange for a fee. For example, an investor who owns bonds issued by General Motors might buy a credit derivative from his investment bank, which will pay off should General Motors default on the bonds. In return, the investor pays the investment bank a fee, which the bank considers sufficient to run the risk that it will have to pay. If there is no default, the bank makes a tidy profit.

Collateralized Debt Obligation: CDOs are securities backed by pools of assets, mainly non-mortgage loans or bonds. In exchange for interest charges, buyers of the CDOs bear the credit risk of the collateral, which means that if any of the loans or bonds in the pool are not repaid, the holders of the CDOs take the loss. CDOs are made up of tranches, with various maturities and risk characteristics, with the equity tranches carrying the most risk, and therefore paying the highest interest rate to the buyer.

Capital Structure Arbitrage: A form of arbitrage which exploits differences in the pricing of a company's stock price and its debt. These bets are growing rapidly because of the development of the credit derivatives market.

Over-the-Counter Derivative Contracts: Privately negotiated derivative contracts that are transacted outside of organized exchanges.

Exchange-Traded Derivative Contracts: Standardized derivative contracts transacted on an organized exchange, and which usually have margin requirements.

Off-Balance Sheet Derivative Contracts: Derivative contracts that generally do not involve booking assets or liabilities (for example, swaps, futures, forwards, and options).

Swap: A deal in which two counterparties agree to swap the cash flows from different financial instruments, such as securities paying fixed and variable interest rates. A Credit Default Swap is a form of credit derivative in which the buyer pays the seller in exchange for an agreed-upon payment should the specified "credit event," such as a default or the breaking of a loan covenant, occur.


The reader is advised that the technical descriptions above do not begin to do justice to the insanity of the processes they describe. Credit derivatives, for example, do not really provide protection against a default, since the institutions which issue them are often in precarious financial positions themselves, and sell the derivatives because they are desperate for the cash flow. In the current environment, a credit derivative is mainly used to provide the accounting fiction that certain mostly worthless assets on a company's books still have value. The derivatives market, overall, is designed to hide the bankruptcy of the system by providing virtual assets to paper over gaping holes in the system, as well as garnering cash flow from selling mafia-like protection to companies ravaged by market manipulations. One of the chief agencies of such manipulations are the hedge funds, which act as front men for the Anglo-American central banks and their sibling financial institutions. George Soros is a prime example of this phenomenon.

—John Hoefle
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