tag:blogger.com,1999:blog-7905515.post1375163815830837910..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: Corporate Leverage Did Not Cause the BubbleEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-7905515.post-68131988967406768842009-03-09T13:26:00.000-05:002009-03-09T13:26:00.000-05:001) those banks that had increases in leverage, lik...1) those banks that had increases in leverage, like Citi, were outliers.<BR/>2) the average leverage of financial institutions was stable over the past 15 years.<BR/>3) there is a relation between leverage and stock performance from 2006 to present, but only among Inv Banks.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-56028025544401325592009-03-09T12:56:00.000-05:002009-03-09T12:56:00.000-05:00So what's the explanation for the investment banks...So what's the explanation for the investment banks that were leveraged 30:1? Were they outliers? Did they become more leveraged because of losses?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-5331480447773082702009-03-06T17:10:00.000-06:002009-03-06T17:10:00.000-06:00I'd say that the leverage created a situation wher...I'd say that the leverage created a situation where the system lacked the usual buffers. When something went wrong, rather than having a shallow recession we have a historic depression.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-40704613792870709652009-03-06T14:48:00.000-06:002009-03-06T14:48:00.000-06:00This link (http://us1.institutionalriskanalytics.c...This link (http://us1.institutionalriskanalytics.com/pub/IRAStory.asp?tag=238)<BR/>explains that the increase in commercial bank leverage took place at the holding company level. In other words, the parent's problem is that the capital belongs to FDIC insured banks, so if they are stripped away, the parent company is left with an unsustainable amount of leverage.<BR/><BR/>It's an issue worth taking into account in your analysis.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-4303072102442507162009-03-06T13:00:00.000-06:002009-03-06T13:00:00.000-06:00Leverage is defined as following: Total Assets/(To...Leverage is defined as following: Total Assets/(Total Assets-Total liabilities)<BR/><BR/>The refinements look the same.<BR/><BR/>This is at the Parent Company (consolidated) level.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-88180149286797843202009-03-06T12:56:00.000-06:002009-03-06T12:56:00.000-06:00When you calculate the leverage ratio of "commerci...When you calculate the leverage ratio of "commercial banks", does that mean that you are omitting the leverage of the bank holding companies?<BR/><BR/>It would be really helpful if you were a little more detailed about the data you're using for these calculations.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-33968773086098852062009-03-06T09:05:00.000-06:002009-03-06T09:05:00.000-06:00That's a good point. I'm just picking on the conv...That's a good point. I'm just picking on the conventional definition of leverage, that the 30:1 leverage of Citi using on balance sheet assets and liabilities, say, was a cause of this problem.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-12743463475665302672009-03-06T08:54:00.000-06:002009-03-06T08:54:00.000-06:00I'm not sure of your data sources but two issues:1...I'm not sure of your data sources but two issues:<BR/>1) CDS don't really show up a "leverage" and that market grew enormously (even if you believe net vs gross, which I don't)<BR/>2) The off balance sheet world is not picked up here, it was my former stomping grounds and it was very big and grew at a very nice clip through this time frame, so if you added in all the conduits, sivs and structured notes you would see lines that look differntRCJhttps://www.blogger.com/profile/15573564128419589706noreply@blogger.com