The result was catastrophic.
Under the old net-capital rules, broker-dealers' leverage ratios got as high as 12 times their capital. But under the new arrangement, leverage soared as high as 40-to-1.
Investment banks used internal models to reduce the capital they needed to set aside. They then passed along that freed-up capital to their BHC parents, who applied more leverage to that capital.
In the end, they all collapsed. All of them.
Bear Stearns went first, then Lehman Bros., then Merrill Lynch. And then on a Sunday in 2008, Goldman Sachs and Morgan Stanley ran to the Fed to beg to become commercial banks so they could feed at the Fed's discount window and its other liquidity troughs.
And this is where we still are.
Only it's worse now.
Okay, so if you've read this far, we might as well dissect this all the way.
You want the truth about where banks are now and how they're lying? I'll give it to you in my next article and you will need an airsick bag... trust me.
The Next Bank Meltdown Won't Be an "Accident" - Money Morning:
'via Blog this'
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