The curse of too much debt is playing havoc� with the presidential political campaign, with the threat of sovereign defaults in Europe, and with the strained financial condition of banks in Europe, the US, China, and causing a steep decline in takeover and merger activity here is the U.S.
Nations, banks and corporations are late in tackling� this problem for the reason it means deleveraging, less takeover activity, the need to pay off debt with more newer debt– and the absolute mandatory austerity, ie less growth, lower stock prices, higher unemployment all� this implies.
Example; JP Morgan CEO Jamie Dimon said publicly that JPM has $15 billion in lines of credit to Portugal, Ireland, Italy, Greece and Spain, and could under bad circumstances, lose $5 billion of that, a sum that seemed not to shake Dimon.
Example: It has been reported that BankAmerica would like to shift tens of trillions in derivative contracts from the books of its subsidiary, Merrill Lynch & Co, to the Federal Deposit Insurance Corp, so as to avoid the threat to its balance sheet from the possibility not being able to collect on these contracts. No one is confirming this need to pass off huge derivative liabilities� to the federal government.
Debt stands at the summit of the debate over what kind of capitalistic system we want. Because money cost near to nothing, deals were being done in 2006 that were bound to create huge nonperforming loans, losses for pension funds, a black eye for Wall Street– and a huge issue of the coming campaign about the money-making tactics of Republican candidate Mitt Romney.
This should trigger a rigorous debate about Wall Street’s role in the US economy– and its monied influence on the lawmakers in Washington.
Hardly anyone noticed a frank blunt speech by Carlyle founder David Rubenstein in Debai on October 15, 2008– at the very apex of the meltdown that threatened stability of gthe financial system. I wrote abo! ut it th en– and want to repeat its findings as a warning signal just as Carlyle is going to issue its shares publicly.
Credit the brainy Rubenstein for outing the rates of leverage in the financial system. Take Private Equity– the Mitt Romney issue– where most firms were dangerously borrowing $6.20 for every $1.00 in equity capital they had invested in a deal. That’s a� ratio of debt to equity of 6 to 1– meaning that if any deal lost more than 17% in value it was in effect insolvent and unless it sold assets could not pay its debt, or for that matter raise more.
Hedge funds in the fall of 2008, were borrowing on average about $ $4.00 in debt for every $1.00 in equity. The European banks like Deutsche Bank, UBS and Barclays were leveraged up 7 to 10 times more than the Private Equity Crowd– and the American investment banks were basically insolvent with debt to equity in some cases 6-7 times more than Carlyle and Blackstone. While Private Equity might have single transactions file for bankruptcy, entire banks like Lehman had to file for bankruptcy– and Merrill Lynch, Wachovia would have done so without shotgun marriages– and Citigroup and BankAmeriuca would have followed suit without federal bailouts.
Today, the stigma is in Europe. The Greek Prime Minister warned yesterday that $1 trillion� Euros must be refinanced in Europe by the end of March– and that hedge funds owned some 25% of Greece’s debt. Expect the fallout from too much debt everywhere to colr market action and part of gthe public debate about t he future of Capitalism.
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