100% Leverage?

Does this mean what I think it does?

Credit Crisis? Just Wait for a Replay: One of the more remarkable facts about the subprime crisis is that total losses to the financial system may be about equal to the amount of subprime loans that were issued. On the face of it, that appears absurd, since many such loans will be paid off, and those that default will not be total losses. But, Mr. Seides said in an interview, “the financial leverage placed on the underlying assets was so high” that the losses multiplied, as the profits did when times were good.

“When there is more leverage” and things go wrong, he said, “there are more losses.”

They resold layered participations in the same underlying loan so many times that it ends up with leverage over 100%? Given that substantial profits are taken out along the way, how does that work even if everyone pays off like they are supposed to?

Update: Krugman is puzzled too.

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2 Responses to 100% Leverage?

  1. It works like in the Producers. Perhaps these loans were meant to fail.

  2. Adam says:

    Hi James, want to buy into our new production, Prisoners of Love?

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