De-leveraging, moral hazard, friends and recession
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I heard a lot of buzz words in this Bear Stearns crisis, $100 oil, Spitzer scandal, global housing bust…world. Just list some new words I found interesting:
This one is easy for me (because I don’t have much to leverage on). I was a little astonished by the leverage ratio of investment banks such as Goldman Sachs (see the GS balance sheet here) and Bear Stears. As of Nov 2007, Bear Stears has (in thousand dollars)
Total Liabilities 383,569,000
Total Stockholder Equity 11,793,000 (Net Tangible Assets $11,793,000)
Debt/Equity ratio is 32.5, in other words, they control $32.5 of asset while they have $1 to back it up. If they lose 3% in their assets (due to investment loss), all their equities are gone. Because Bear is heavily invested in mortgage back securities (MBS) and MBS pretty much went to trash can lately, I think a 3% loss is easy to achieve. (Therefore the bailout and fire sale of Bear in the weekend).
By Comparison, king GS is slightly better. As of Nov 2007, GS has (in thousand dollars)
Total Liabilities 1,076,996,000
Total Stockholder Equity 42,800,000 (Net Tangible Assets $37,708,000 )
Debt/Equity ratio is 25.1
No moral hazard
People who make and sell toxic coolaids got rescued by Bush and Co., after people who bought toxic coolaids got bailed out by the “Hope Now”.
What about the good people (like you and me) who never involved in the toxic coolaids business (being a producer or consumer)? Should we got an honary mention somewhere? Mr. President?
*Coolaid analolgy was stolen from my investor idol Warren Buffett.
Bear and Spitzer fell for different reasons, but they have one thing in common: they don’t have many friends, or be more precise, they don’t have any friends who can throw help when they needed most.
Interestingly as reported in the news, Bear Stears was asked to participate in LTCM bailout by Fed in 1998, all the Wall Street investment banks joined, Bear declined. Some say this time Fed got its revenge. We all know Spitzer don’t have friends in Wall Street, but it surprised me he seems did not have any friends in politics.
The US is already in recession. But it appears things are not bad because as I saw on TV, a dozen of egg cost about $4.50 in New York, and about $6.50 in London (I am sure the average income of Londoners are lower than New Yorker). Japan has been in recession since 1990, and it seems most people there still survived and had fun. When Germany joined the “Euro zone”, the inflation is much higher than the inflation we have in the US now.
My point is life probably will be tougher for average Joe, but it won’t be as bad as people in Germany and Japan. Because many underlining strength of US economy is largely intact: innovation, immigration, financial system (yes thanks to Mr. Paulson and Mr. Bernenke)…