Collateral
An asset pledged as security for a loan, which the lender can seize if the borrower defaults. Reduces lender risk and typically enables lower interest rates.
Used in the Books
This term appears in 3 chapters:
"...ution: One of the world's largest professional services firms completely dissolved. 85,000 employees lost jobs. Partners lost capital investments. Collateral damage*: Only a few hundred employees were involved in Enron fraud. 85,000 paid the price. Houston office made the decisions."
"If it failed, Marvel would lose everything. The numbers: $525 million credit facility from Merrill Lynch. Non-recourse debt. Collateral: film rights to ten characters (Iron Man, Captain America, Thor, Black Panther, Ant-Man, Avengers, Doctor Strange, Hawkeye, Nick Fury, Cloak & Dagger..."
"Credit rating downgrade (Sept 2008): Moody's and S&P downgraded Lehman's credit rating, triggering contractual obligations to post collateral and repay short-term debt. Lehman lacked liquidity. 3. Counterparty withdrawal: Hedge funds pulled $5 billion from Lehman in Sept 2008."
Biological Context
Nature's collateral: hostage mechanisms in mutualistic relationships. Acacia trees provide food and shelter to ants; the ants become dependent and must defend the tree to protect their investment. Each partner's investment serves as collateral for the other's cooperation.
Business Application
Collateral enables transactions that wouldn't otherwise occur by reducing counterparty risk. Real estate, inventory, and receivables commonly serve as business collateral. The quality and liquidity of collateral affects borrowing capacity and cost.