Saturday, September 20, 2008

I <3 Creative Destruction

At Marginal Revolution:

...the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP. Fortis bank, which has been in the news recently, has a leverage ratio of "only" 33, but its liabilities are several times larger than the GDP of its home country (Belgium).

The Fed has possibly been bailing them out too (not necessarily by intention), as it is likely that some of these institutions had heavy exposure to the weaker U.S. institutions. Here is the link. Those failures should also put the U.S. regulatory failures in perspective. And what would happen if a big U.K. bank were on the verge of failing? Would the Fed have to step in there too? Contagion is contagion, as Aristotle once said...

These leverage ratios are INSANE! People thought LTCM had extremely high leverage, and yet these guys are almost double that! Why should any citizen have to suffer (by paying taxes for bailouts) because of some rich guys' ridiculously reckless behavior?

Please, Mr. Bernanke, let these companies (I'm referring to the American counterparts) die like they deserve to!


Sean said...

More along these lines:

fatrat said...

When I was trading independently, I got a leverage of 10:1. Some of the best traders I knew got 20:1. I guess at the large institutional level, they can go even higher.

50:1 is insane.