…that you may not have heard of.

The big news this year was about the CDO (collateralized debt obligation), MBS (mortgage-backed security) and SIV (structured investment vehicle), but there are many other marvels of financial engineering that, when they went wrong, brought the pain almost as hard as the names that were tossed around the most.

Breakingviews chronicles seven of them. Not all are always going to be bad in practice, but they all have the potential to be completely boneheaded. I’ll do my best to translate their list:

1. PIK (payment-in-kind) toggles: If you can’t pay the interest on bonds you have issued – just issue more bonds. Sure, the rate will go up, but if you are on the short bus to Default City anyway, it doesn’t really matter what the interest rate is, does it?
2. Minibonds: They’re not bonds, they’re derivatives… and the only thing “mini” is the value when you consider that many of them were merely derivatives with Lehman as a counterparty.
3. CVRs (contingent value rights): This would be like if I bought a cow but I didn’t want to pay the seller his full price and I gave him some future option on the cow. If I get a lot of milk from the cow, the seller sweeps in and takes it all (yes, I buy the cow, he gets the milk for free). If the cow dies the seller is hosed. I should just buy a cow from someone easier to haggle with.
4. Accumulators: A currency hedge that limits your profits, but not your losses? Brilliant!
5. Cash-settled options: It’s just an option which pays out in cash, which, to be honest, is how 99% of us deal with our options and futures in practice – seriously, folks, when was the last time you took delivery on a barrel of oil? Breakingviews gives an example of some German company who got soaked doing this though, so just read their example.
6. Debt accordions: Not to be confused with The World’s Tiniest Violin, which we play sometimes when CEOs get emo, a debt accordion is a provision in a loan that lets a borrower expand their senior, secured debt, without consulting with anyone who already holds any of their senior, secured debt. Only a problem when things go south and suddenly original debtholders are fighting for scraps with the new guys.
7. Ponzi schemes: see Madoff, Bernard. This is one I would never have included on the list; it’s outright fraud with no practicable use whatsoever. But, oh well. That’s what happens when you work with other peoples’ lists. I have to agree that I wish these would die in a fire though.

Anything you’d include that they skipped over?