I don?t have a great deal of respect for our ex-Prime Minister and former Chancellor of the Exchequer, Gordon Brown, but I do rather object to Op/Eds in American newspapers that make him look even more clueless than I already think he is. Reflects badly on the country and all that.
The offending article is this one in the Washington Post. Now it is true that the paper says that it was actually written by Gordon Brown himself but I?m afraid that I really do not believe at all that the man who was in charge of the UK?s financial regulatory system for the vast majority of the millennium so far could possibly have written this:
While many U.S. banks still have leverage ratios that are 10 times their assets, the banks of Germany have a leverage ratio 32 times their assets, and French banks are leveraged 26 times their assets. Europe?s banks have done only a fraction of what their U.S. counterparts did to rid themselves of toxic assets and to recapitalize, leaving them no choice now but to liquidate their assets.
Banks do not leverage assets in order to do anything. Banks leverage their capital in order to purchase assets. This is such a fundamental misunderstanding of the most basic structure of banking that even I cannot believe that Gordon Brown wrote that.
A bank?s assets are the things that it owns. Shares, stocks, bonds, the loans it has made to people, buildings, whatever. A bank?s liabilities are the borrowings it has made to purchase those assets. Such liabilities might be bonds it has issued, money borrowed on the overnight markets, even that 3p left in my bank account each month after the mortgage has gone out.
Capital is the retained profits of the bank (it gets a little more complex, perhaps certain types of bonds, certainly the receipts from issuing new equity, minus depreciation perhaps?.complicated in detail but not at base). Leverage is the act of borrowing lots, or taking on large liabilities, when compared with the amount of capital you have.
Leverage is the ratio of capital to liabilities (or to assets perhaps) but it is not, never has been and never will be any ratio of assets to umm, assets, as is being claimed here. Might the German banks have 32 times their capital base in either assets or liabilities? Sure, could do. Could they have 32 times their assets as assets? Erm, no, not really possible is it. And the other alternative reading, that they have 32 times as much capital as they do assets makes no sense at all in a system of fractional reserve banking.
As I say. Brown really should ask for an apology from the WaPo for this. For I?m certain that this is a mistake that has crept in during the editing process. If I?m wrong about that I will of course apologise profusely to the unnamed editor who I am currently accusing of making Brown himself look a fool. And if I am wrong, if that quote really is the way Brown sent it in (and yes, he does indeed write his own pieces, I know this from people who have subbed his stuff for the London papers) then I?ll admit to a certain surprise that there?s bank still standing in The City if the recently ex-chief regulator really believes such a nonsensical thing.
Leverage is about capital, not about assets.
norman mailer steve mcnair brooklyn bridge lady antebellum marques colston listeria listeria
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