rpodos

Investment Bank Crisis: The Greatest Show on Earth

Poking around for recent commentary on capital reserve ratios, and ended up on Andy's article. I'm in accord: leverage is the fundamental issue (as it has been in past crises).

I have a simple idea:

* If you are a bank, broker/dealer, or insurance company, in ANY part of your operations, and
* If your GAAP reported gross revenues are greater than US$50 billion,
* Then, your company, as a whole, must adhere to Basel II capital reserve requirements.

Note: Obviously, the exposure from 'new' instruments, like CDS and future alternatives, must be included.

Comment: Sufficient minimum capital requirements, and appropriate reporting, will, at least, give the marketplace the time necessary to see the deterioration in fundamental leverage and safety margins (invisible hand). Thus, 30:1 at Lehman, and g*d-knows-what at AIG, would be visible in adverse markets, as opposed to landing like a bomb out of nowhere.

2nd comment: If you actually look at market value D/E ratios for major public companies in the US and Europe (sorry, not familiar enough with Asia), Basel II would not be overly restrictive by any means.

But it would put a lid on speculative overexposure.

-RLP

(btw, I come from commercial real estate... we know ALL about over leverage!!!)