"What we've told our investors is that we do not intend to take on leverage of north of four times our equity, Mr. Barlow said.
In some ways, the deal allows the hedge fund to take on leverage, the financial term for borrowing money to enhance returns.
You may well want a core of regulated banks that cannot blithely create credit, take on leverage and secrete assets off their balance sheets, as today's banks have done.
They can invest more aggressively to expand, use the cash flow to de-leverage, take on leverage to make an acquisition or to fund capital expenditures, buy back stock, or raise dividends".
Barclays Capital calculates that companies have taken on more leverage: the ratio of their debt to earnings, before interest, depreciation and tax, has increased.
There should be two parts to such a charge: A portion to cover the risk a firm creates for itself and its investors by taking on excessive leverage, and a portion to cover the risk that leverage creates for the system as a whole.
In good times, banks can increase their ROE simply by taking on more leverage (borrowing).
Banks, for example, responded to lower levels of volatility by taking on more leverage, not anticipating the sudden need for liquidity that occurs during a serious downturn.
Rather than looking on them as a useful but limited tool, banks and other institutions used them as a substitute for proper risk management, and as a justification for taking on more leverage and more risk.
In a lengthy footnote, Mr. Greenspan wrote that it was "interesting speculation" to ask whether investment banks would have avoided taking on extraordinary leverage — as much as 20 to 30 times tangible capital — had they remained partnerships instead of incorporating, as a 1970 ruling permitted broker-dealers to do.
