A Menagerie of New Investments
QUESTION: Can you tell me what carsand tigers are, as they apply to investments? My teen-age son came home from school the other day talking about a class investment in these things aimed at teaching the students something about investing money. I was too embarrassed to let on that I don’t have a clue what these things are.--S. H.
ANSWER: Don’t be too hard on yourself. It is nearly impossible even for Wall Street professionals to keep all of these newfangled investments straight. Besides tigers and cars, the financial markets are replete with cats and colts, opossums and lions, stars and darts.
Actually, on Wall Street, they spell “tiger” TIGR. It is an acronym for Merrill Lynch’s Treasury Investment Growth Receipts. But no doubt this only further confuses you.
Most simply put, these are types of securities. TIGRs are simply long-term Treasury bonds that Wall Street securities specialists have purchased, repackaged and then resold to investors. These securities behave like zero-coupon bonds, so-called because they pay no interest at all.
Their appeal is twofold: They are sold at a fraction of what they will be worth when they mature and, as long as their issuer doesn’t default, their return is entirely predictable. Before an investor ever puts up his money, he knows exactly what he is entitled to receive upon maturity.
So much for TIGRs.
CARs are an even more recent Wall Street invention. It is Salomon Bros.’ shorthand for Certificates of Automobile Receivables, another way of saying securities backed by car loans. Drexel Burnham Lambert’s version bears a similarly clever moniker: FASTBACS, short for First Automotive Short-Term Bonds and Certificates.
Want to throw a few snappy names your son’s way? Try CATS, Salomon Bros.’ version of Merrill Lynch’s TIGRs. Or hit him with COLTS, short for Continuously Offered Long-Term Securities. And if you want something still more esoteric, go with OPOSSMS, Options to Purchase Or Sell Specific Mortgage-backed Securities.
Q: Ever since Congress started talking seriously about tax reform, I’ve been reading the business page of the Los Angeles Times much more closely than I ever did before. I’ve learned a lot. But frankly, some of the business language is a mystery to me. For example, how can one have unearned income? Or how is it possible that any activity is passive?--L. L.
A: You’re absolutely correct that the business world is loaded with words that have no meaning to most consumers. “Unearned income” is a tax man’s description of income received for reasons other than services rendered. Hence, interest income is regarded as “unearned” for tax purposes, while salaries aren’t.
As for the term “passive activity,” it is used to describe a trade or business in which the taxpayer doesn’t actively participate. (For purists, the actual tax code phraseology is “materially participate.”)
A limited partnership qualifies as a passive activity because the limited partners aren’t in charge of managing the venture; they just put up the money.
The context in which you probably have heard the term used, however, doesn’t seem to fit this description. Under the new tax laws, all rental activities are considered passive activities. This is true even if the taxpayer spends his entire work time managing or otherwise dealing with the property he is renting out.
Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Los Angeles Times, 780 Third Ave., Suite 3801, New York, N.Y. 10017.
