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Cowboy Capitalism

Posted by fairval on March 23, 2008

Some amazing numbers from an article —

Goldman Sachs is using about $40 billion of equity as the foundation for $1.1 trillion of assets. At Merrill Lynch, the most leveraged, $1 trillion of assets is teetering on around $30 billion of equity. In rising markets, gearing like that creates stellar returns on equity. When markets are in peril, a small fall in asset values can wipe shareholders out. So Merrill has a capital adequacy of 3% and Goldman is only marginally better.

Similarly Carlyle Capital was leveraged 32 times, or in other words, had a capital adequacy of 3%.

Amazing how the US authorities allow such ridiculous numbers. With these low capital adequacy numbers, no wonders some of these firms collapse like a pack of cards. While Merrill hasnt collapsed, but it, like Citi etc, has needed emergency fund infusion.


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