Ignominious seven that rocked 2008

The financial crisis of 2008 was full of surprises. Among the most stupefying were the tales of financial wheezes people thought were a good idea during the preceding bull market. More will surely emerge as gallons of toxic waste slosh out of banks and hedge funds in 2009. While waiting for the full inventory, here are seven that with luck we won't see again.
    PIK toggles: These debt features were popular in 2007, but it wasn't until 2008 that toggles started to be flicked. PIK stands for payment-in-kind, and
means issuers can substitute more bonds for actual cash interest payments whenever they want. Sometimes the "rate" goes up when the toggle is switched. That is cold comfort when it becomes apparent the bonds are not worth anything like face value because the company is going to the wall.
    Minibonds: Retail investors in Asia vacuumed up minibonds earlier in 2008, attracted by the fact these instruments, supposedly backed by a lineup of "safe" banks, had a higher-than-normal yield and were available in small amounts. The catch? They weren't bonds at all, but derivative products, some of which had Lehman Brothers as a counterparty. Investors were effectively paying for Lehman to insure its own portfolio. When Lehman cracked, so did thousands of nest eggs.
    Contingent value rights:
CVR's help fudge the fact that a buyer and a seller can't agree on price. The buyer simply gives the seller a CVR, or an option on the spoils if the buyer's investment does well. Kohlberg Kravis Roberts & Company used a twist on the theme when it delisted its European arm, giving shareholders new American-listed stock and a CVR. .
    Accumulators: The accumulator, also known as the "Ikill-you-later," is a device used to hedge cross-currency transactions. It limits the amount of profit the holder can make, but not the losses. That makes it cheap, and dumb. Citic Pacific lost $2 billion on accumulators when the Australian dollar fell hard.
    Cash-settled options:
These options, which pay out in cash rather than actual shares, are not new or bad. But in Germany they became a battering ram for corporate raiders. Schaeffler, a ball-bearing firm, used cash-settled options to seize control of Continental, a car parts maker. These options do not need to be disclosed in Germany even though the holder can, in practice, easily get the underlying shares.
    Debt accordions: These provisions in some loans let the issuer expand them later, like an accordion, to let in new investors. During the squeeze, subordinated investors in a couple of leveraged companies got a grim ultimatum: slide into the accordion on the company's senior debt and take a big loss, or end up with peanuts if the company goes bust.
    Ponzi schemes: Take money from Peter. Wait a bit, then take money from Paul. Use Paul's money to pay back Peter, proclaim your stupendous rate of return, and repeat. The Ponzi scheme, named after the 1920s fraudster Charles Ponzi, reached new heights in 2008 with the discovery of a fraud that Bernard Madoff, who somehow duped some of the world's biggest I-banks, put at $50bn. NYT NEWS SERVICE

BERNARD MADOFF