April 18, 2008

Sometimes formal limits signify fewer limits

Sir Krishna Guha in “Call for investment bank rules to change” April 18 mentions that Bear Sterns had a debt to equity ratio of about 30 times and that "experts argue that the investment banks should be subject to the same capital requirements as commercial banks - requirements that in effect limit their leverage. Not necessarily so!

If investments banks invested in those super senior debt that carried the triple A-tag and that are described by Gillian Tett in “Super-senior losses just a misplaced bet on carry trade” then according to the minimum capital requirements that apply to the commercial banks these could in fact have an even higher leverage…in some circumstances even more than 60 times.