That may not sound like rocket science but the formula escaped those who took leveraged positions in morgtage-backed securities in 2006.On a final note, thanks to readers for the comments.
Take leveraged and inverse ETFs, widely used as short substitutes.
Here's why: Moody's found that many companies that take out leveraged loans do them in pairs, by signing a term loan and a revolving credit facility that they plan to renew regularly.
American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky because home prices can and do decline, as we have learned so painfully.
"You're taking a big leveraged bet on a new philosophy," said Mr. Martilotti of Bear , Stearns referring to the rear-wheel drive cars.
"If you have a more highly regulated financial industry, and less highly leveraged — taking less risk, using less borrowed money to take risk — you're unlikely to see the same big run-ups in profits that we've enjoyed in recent years," she says.
It also requires that traders be disciplined enough to follow the rules necessary for taking advantage of leveraged markets.
For example, a bailout is not about throwing water out of a ship but about putting money into something, while hedge funds have nothing to do at all with the original meaning – of hedging a bet – but rather they are a mechanism by which a lot of money is put together by investors which is then used to take highly-leveraged risks.
The extent of this decline has been disguised by a booming economy.Banks, which themselves have become more leveraged (by taking on more debt compared with their equity), have lent to companies that, in turn, have also become more leveraged.
Many retailers became "highly leveraged" - taking on big debts to keep trading, thus exposing them to takeover bids by rivals.
