September 27, 2008

Risky business

[via: WebMetricsGuru]

The investment banks funded 25 % of their balance sheets with overnight loans because it was much cheaper than taking on longer term debt. In addition the banks had massive leverage (around 3 % equity and 97 % debt), which made the firms fragile. When their assets (like mortgage-backed securities) turned out being worth much less than thought, it is not hard to understand why things turned very bad in a heartbeat.

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