So how are investors supposed to know which companies use leverage and
which
do not. Typically companies that use leverage have higher returns. So am
I
supposed to invest for lower returns on the assumption that these
companies
do not use leverage and my money is therefore safer?
This whole market is a giant crapshoot. Where am I supposed to put my
extra
money?
Vito
"Papadillos" <papadillos@[EMAIL PROTECTED]
> wrote in message
news:C3F7E60C.584B%papadillos@[EMAIL PROTECTED]
> Financial Times (Blogs)
> John Gapper
> March 7, 2008
>
> Carlyle Capital and the failure of memory
>
> Opinions vary on whether, when the financial system eventually recovers
> from
> the credit crisis, which it does not look like doing any time soon,
things
> will work differently in future.
>
> Some argue that the shock caused by over-complexity in the credit market
> is
> so great that investors will pull back permanently from putting money in
> collateralised debt obligations and the like.
>
> Instead, there will be a long-term swing towards 3re-intermediation2 -
> banks
> providing credit directly from their balance sheets rather than acting
as
> intermediaries that transfer that risk to investors by selling them
> sophisticated securities.
>
> Personally, I do not believe it and Exhibit A for my scepticism is
> Carlyle
> Capital, which has got itself into trouble by leveraging its equity 28
> times
> to buy supposedly impeccably safe AAA-rated mortgage-backed securities.
>
> This is the same trap that befell Long-Term Capital Management only 10
> years
> ago - it employed leverage of nearly 40 times its equity to arbitrage
tiny
> differences in bond prices. When markets became volatile, small
movements
> in
> the prices of those securities brought the fund down because they were
> heavily magnified by leverage.
>
> After Long-Term Capital, there was a lot of talk about how hedge funds
> would
> avoid such high levels of leverage again. But Carlyle Capital has been
> caught out by doing the same thing again.
>
> The broader point is that financial markets have a tendency to repeat
the
> cycle of greed, during which competition reduces yields and forces banks
> and
> funds use more leverage and complexity to make profits, followed by
fear.
>
> During times of fear, everyone regrets what has happened and says it
will
> not happen again. But Carlyle Capital shows that mistakes repeat
> themselves,
> after an time long enough for jobs to change hands and investors to
> forget.
>
> http://blogs.ft.com/gapperblog/
>
>
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