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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).

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