Wednesday, May 23, 2007

It’s a Mad, Mad, Mad, Mad World / Duffy

excellent stuff from Kevin Duffy. make sure you click on the headline to read the entire report.

extrem lesenswert. bitte unbedingt auf die überschrift klicken um den kompletten report zu lesen.

....More than in any previous cycle, a sophisticated assembly line has developed to facilitate the creation of credit and expansion of leverage. The days of the neighborhood banker on a first name basis with his customer are long gone. Loans are now originated, packaged into securities by Wall Street, endorsed by insurance companies and ratings agencies, and sold to investors. The assumption is that each of the gatekeepers is unbiased and financially sound. Yet commercial banks such as Citigroup have assets-to-equity of 12 times, investment banks are typically levered 25-to-1, and bond insurers like Ambac and MBIA guarantee 80 to 90 times their capital. If a chain is only as strong as its weakest link, there is plenty that could go wrong with the great intermediation of credit creation.

Investment banks have reveled in an elevated role during this credit cycle. In the past six years, the Fed grew its balance sheet 50%, money supply expanded 60%, and the Top Five investments banks increased total assets by 160%......

In the latest quarter, the total assets of Goldman Sachs exceeded total bank credit at the Fed for the first time

In addition, investment banks are no longer content to play with other peoples’ money ("OPM"). They are putting record amounts of their own capital at risk. For example over two-thirds of Goldman Sachs’ net revenue now comes from trading and principal investments versus one-third five years ago......

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