LEVERAGE–HOW BIG AN ISLAND WOULD YOU BUY?

LEVERAGE–HOW BIG AN ISLAND WOULD YOU BUY? John Lanchester is an award-winning novelist who has written for the London Review of Books two of the best articles about the current financial crisis. In the October 20 issue his article puts in perspective the degree of leverage that some financial institutions have had. He writes: “The ratio of Barclays’ assets to its equity in June hit 61.3 to 1. Imagine that for a moment translated to your own finances, so that you could stretch what you actually, unequivocally own to borrow more than sixty times the amount. (I’d have an island. What about you?)” Of course, individuals are different from banks, but you can get a picture of some of the pressures that are out there if you now imagine trying to hold on to that island when even five per cent of your creditors ask for their money back. (The 61.3 ratio is not that extreme; the Samuelson article I linked to today gives a ratio of 30 to 1 as common for investment banks and hedge funds).