Comments on MoneyAisle Blog: Lehman, Merrill Lynch, AIG: A Crisis of Confidence...

I agree to your comment andrew.Nice article. Maybe...

2008-09-19T10:11:00.000-04:00

I agree to your comment andrew.
Nice article. Maybe I will have a link to this.

There's good debt and bad debt. I think simply loo...

2008-09-17T09:19:00.000-04:00

There's good debt and bad debt. I think simply looking at ratios without knowing how the money is being used is risky.

@Anonymous ... I think we are saying the same thin...

2008-09-16T20:54:00.000-04:00

@Anonymous ... I think we are saying the same thing. Banks are highly levered as you indicate, and the balance between maximisation of return versus risk is as old as the hills.

Here are some non-financials and note the D/E is nothing close to the Banks.

GE
Total Assets 846,988.00
Total Liabilities 728,602.00
Total Equity 118,386.00
6 :1

Amazon
Total Assets 6,322.00
Total Liabilities 4,092.00
Total Equity 2,230.00
1.8 :1

Google
Total Assets 29,179.79
Total Liabilities 3,266.77
Total Equity 25,913.01
0.1 :1

IBM
Total Assets 120,928.00
Total Liabilities 92,663.00
Total Equity 28,264.00
3.3 :1

Colin, if we use that metric, that would exclude m...

2008-09-16T13:26:00.000-04:00

Colin, if we use that metric, that would exclude most public financial companies. The biggest component of equity on the balance sheet is typically (or should be) retained earnings. For a public company, if I see a large amount of retained earnings, the first question that would come to my mind, is why isn't that company leveraging that cash to invest or grow their business? Is the best use of their earnings to simply sit there idle?

I checked some big financial firms balance sheet and looked at their D/E ratio.

Goldman Sachs
Liabilities: 1,043,327,000
Equity: 44,818,000

Bank of America
Liabilities: 1,554,184,000
Equity: 162,691,000

Morgan Stanley
Liabilities: 996,735,000
Equity: 34,493,000

Nice catch. The answer is however and unfortunate...

2008-09-15T21:21:00.000-04:00

Nice catch. The answer is however and unfortunately simple, and contains far reaching consequences. In my years as a Banker, rule #1 in lending is to look first at the debt to equity (D/E) ratio. Anything approaching or over 2 :1 required serious consideration for additional security.

Lehmans D/E is 30 :1

In plain language that means for every dollar of debt, they have only 3.3c of equity. If there is an asset write down of 3.25% or more, then they are insolvent.

Take a look at any Banks balance sheet. This is the dirty little secret of Banking, that actually means Banks survive only by the grace of the Government.

Total Liabilities 668,573.00
Total Equity 22,490.00