The pain ahead

| September 27, 2008

When I first saw this graph in the sidebar of an article over at CNN Money, I kept looking for the United States and couldn’t find it.

Then I looked a few inches above the rest of the countries.

Ouch.

Here’s what the article has to say:

The dangers of leverage in a market where asset prices are falling have been well established by this month’s collapse of WaMu (WM, Fortune 500) and Lehman Brothers, and the federal rescues of Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and AIG. All five firms had borrowed heavily to support mortgage portfolios whose value is declining by the day as the housing bubble of earlier this decade deflates. In response, firms from Goldman Sachs (GS, Fortune 500) to General Electric have pledged to raise capital and reduce borrowings.

What’s remarkable, however, is the degree to which the U.S. banking system as a whole suffers from the overleverage problem – which helps to explain why banks such as Wachovia (WB, Fortune 500), off 28% in trading Friday, and Morgan Stanley (MS, Fortune 500) continue to come under pressure.

Merrill Lynch commodities strategist Francisco Blanch writes in a report Thursday that the ratio of total loans to deposits in the U.S. hit 3.5 to 1 last year. That’s more than double the ratio found in the second most highly leveraged banking system, Russia’s, and more than triple the ratios in the U.K., Germany and Japan.

Interesting times ahead.  ..bruce w..

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Category: Credit Backlash, Economics, Geopolitics, Main, Recession Watch

About the Author ()

Webster is Principal and Founder at Bruce F. Webster & Associates, as well as an Adjunct Professor of Computer Science at Brigham Young University. He works with organizations to help them with troubled or failed information technology (IT) projects. He has also worked in several dozen legal cases as a consultant and as a testifying expert, both in the United States and Japan. He can be reached at bwebster@bfwa.com, or you can follow him on Twitter as @bfwebster.

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