What is the "SEC exemption which allowed brokerages to increase leverage to 60:1 from 12:1"?

[Eric J in MN]

Ian Welsh writes:

The man overseeing the bailout is the ex-CEO of Goldman Sachs, a Wall Street Company. He helped cause the crisis.

Paulson helped obtain the SEC exemption which allowed brokerages to increase leverage to 60:1 from 12:1.

The money is Paulson's to use for buying commercial and residential mortgages and mortgaged backed securities as he chooses. No one has any oversight over him, and he can pay any price he wants to, including face amount of the debt.

Courts cannot review his decisions, not can any regulators. He has to report to Congress once every six months.

He gets 700 Billion dollars to use as he sees fit, looking after the taxpayer is a "consideration" not a requirement.

Can someone explain the "increase leverage" line to me?

[Zynx]

1. That means that a firm can take on more debt as a percent of equity.

For example, on $1 of equity they used to be able to borrow $12 against it. Now they can borrow $60. What that means is that if they sustain a 1.666667% decline, their equity is wiped out. Before it would take an 8% decline to do that.

[Eric J in MN]

4. Thanks. Do you know what Henry Paulson's role was in changing the limit...

...or what decade the limit was changed?

[quartz]

2. Here´s a try:

If you bring 100 dollars to the bank, then the bank has the right to work with 12 times that amount.

For example, the bank can borrow 1200 dollars from someone at, for example 3% interest, and loan that money out to a second person at, for example, 6% interest. The bank makes 3% interest on 1200 dollars, just because you gave them 100 dollars security.

If the leverage of 60 to 1 is allowed, the bank can work with up to 6000 dollars, as long as they have the 100 reserves from you.

The risk at 60 to 1 is much higher than at 12 to 1.

[Eric J in MN]

3. Thanks, that helped me to understand. NT

NT

[WCGreen]

5. From what I understand, that 12:1 ratio was based on the multiplying factor

of money. Which simply means your dollar invested will percolate through the economy and actually create a certain amount of economic activity. In this case, I believe they were basing this ratio on the fact a dollar would be used 12 times before it essentially expired as a economic engine.

[Eric J in MN]

6. Do you know what role Henry Paulson played in changing the law...

...or what decade the law was changed?