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Wednesday, September 17, 2008

It's all about Over-leveraging. AIG and Morgan Stanley (MS) ...

"As a small businessperson, you have no greater leverage than the truth." - Paul Keating.



Yeah, that's right, AIG is being bailed out to the tune of $85 billion dollars. Just think about that. Just stop ... and think about that number. I mean, most of the articles that I've read? They are writing the number in that manner.

"AIG is being bailed out to the tune of $85 billion dollars".

They are not saying:

"AIG is being bailed out to the tune of $85,000,000,000.00" Quite frankly, I think we should start putting all the zeros back when we write that number.

I keep hearing this question. All of the business news anchors keep asking this question: "How did this happen? How did a financial institution like Lehman Brothers that survived the Great Depression go out of business?". The fact that they are asking you this question, really shows how little they understand about economics. I said it yesterday, and I'll say it again. It's very simple. It's called: over-leveraging. What Richard Suttmeier calls the "alphabet soup" of special, complex packages that did nothing more than over-leverage these institutions into a rising real estate market; such as CDO's.

I could talk about how these packages were designed and packaged. I could draw models. But that would take about 4 pages. Instead. Let's keep this simple. What is leverage? It's risking more than what you have. It's laying $2.00 on the table? To risk $6.00 for profit. So if you it turns out well? Then fantastic. You have $8.00. If not? You're not $4.00 in the hole. That's as simple as I know how to make it.

It's not really that difficult. Honestly. It's not. Over-leveraging was what triggered the stock market crash of 1929. It's what destroyed so many banks and financial institutions at that time. But wait? Weren't there safeguards put in place after the Great Depression, to make sure that institutions couldn't over-leverage themselves?

Of course there were.

And no laws were technically broken this time around. They didn't leverage themselves into the financials as they did in 1929. They leveraged themselves into the real estate market this time. Because by leveraging themselves to the real estate market with completely new investment packages? They by-passed all of the rules on the books.

But leverage, is still leverage. It's still exceedingly dangerous, no matter what venture it is applied to. Especially when the num-nuts that are engaged in the leveraging process were making asinine comments such as: "The real estate market always goes up"

It's time to go back to conservative banking. The question at this point, is do financial institutions even know how to engage in conservative banking? Can they resist the fast buck, for the prudent return? Because at this point? That "crack of the whip" that you are hearing mentally? Is the Federal Reserve telling all taxpayers to get back to work.

Daddy needs a new pair of shoes.

I wrap up my thoughts on Morgan Stanley (MS) in the following video. One that is much shorter than what I've been producing as of late. I also will talk about the new layout for the daily blog (Video Included) ...

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