Leverage
is at the heart of the current crises. If one dollar in
assets is used to back $10 in debt, a bank is said to have
leverage of 10:1. The higher the leverage, the more
shaky the financial structure. The leverage
at U.S. money center bank, including Citibank, J.P Morgan
Chase and Bank of America, is about 12:1, but that number
does not include the off-the-books collateral obligations,
such as “revolver” lines of credit through which
these banks are committed to loan. Financial
trading houses had been leveraged at least 25:1 prior to
the bankruptcy of Lehman Brothers. Goldman Sachs, for example
leverage ratio had risen to 26:1 in 2007, which meant just
a 4% decline in the value of its assets would wipe out
its capital.
In
Europe,the leverage is even higher. Deutsche Bank, for example,
had leverage of 60:1 in September 2008. while some Russian
banks have leverage of over 100:1. With leverage of 100:1,
a decline of just one percent in the value of the assets
would wipe out all these Russian banks' capital. Given such
sky-high leverage, it is hardly surprising that confidence
in the financial system is lacking.
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