In the 1930s, there was a stretch where you could borrow more against the real estate than you could sell it for. I think that's what's going on in today's private-equity world.
I've nothing against Goldman Sachs. But Goldman Sachs isn't an investment bank. Goldman Sachs is a hedge fund. It's bigger than any hedge fund. It's more leveraged, to the power of three or five, than any hedge fund.
Equity is the cushion that protects financial institutions from unexpected changes in the value of their assets. The greater the leverage, the smaller the losses required to wipe out a company's equity, leaving it without enough money to repay the people who hold its debt.
Usually, you measure appetite of investors by their ability or willingness to take a bit of leverage on their positions.
We've always been modestly leveraged, and we've never believed in a great deal of leverage on either our private equity business or on our investment banking business. And I think it really goes back to my uncle and dad growing up in the Depression and just seeing what happened to people who were overly levered.
The financial system has to be regulated, we have to end with the tax havens, and it's necessary that the central banks in the world should control a little bit the banks' financing because they cannot bypass a certain range of leverage.
Today, even small entities that trade complex instruments or are granted sufficient leverage can threaten the global financial system.
My old firm, Goldman Sachs - traditionally, the best banks are leveraged 8:1. When we had the financial crisis in 2008, the investment banks were leveraged 35:1. Those rules had specifically been changed by a guy named Hank Paulson. He was secretary of Treasury.
The Bankers' New Clothes makes a simple, powerful argument: that banks need to raise more capital. It is entirely persuasive that the extent of their leverage makes the financial system fragile, and it clearly and patiently demolishes all the counter-arguments made by the banks and their lobbyists.
Maturity transformation is a central part of the economic function of banks and many other types of financial intermediaries.
Legislative reforms in the 1990s and the public/private structure led managements to expand the GSEs' balance sheets to enormous size, underpinned by wafer-thin slivers of capital, driving high shareholder returns and very high compensation for management.
When you're levered 9 to 1, it'd be unreal for a bank to go down.
People love leverage when it's working. I mean, it's so easy to borrow money from a guy at X and put it out at X.
I've lived through periods of illiquidity before. Asset prices come down. The economy slows or even goes into recession. Then the cycle re-starts. We buy at lower prices with less leverage.
Give anyone a lever long enough and they can change the world. It's unreliable levers that are the problem.
It appears that Wall Street is not acting as a force for economic expansion, providing access to capital for companies that make things. Rather, it seems, Wall Street is using government bailouts to lever up.
If you look back to the most spectacular blow ups in history, you can always tie them to a couple things: They were extraordinary complicated strategies that maybe even the practitioners themselves didn't understand, and they were overleveraged.
I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.
The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks.
If I'm a bank, and I'm making risky loans, I have an incentive, if I can, to make those loans using other people's money: in other words, to make highly leveraged loans.
Leverage is great when it works, and when it doesn't work, it creates a lot of issues. So I think if you limit the amount of leverage that people can borrow, or that banks can borrow, I think you'll find that you'll have a lot less issues going forward.
I play with leverage.
A risk-insensitive leverage ratio can be a useful backstop to risk-based capital requirements. But such a ratio can have perverse incentives if it is the binding capital requirement because it treats relatively safe activities, such as central clearing, as equivalent to the most risky activities.
You should command and demand the tenfold leverage on your dollars when you give it away as well.
