Deleveraging: Defined as Getting Out of Debt Before Creditors Realize that You Are Broke

The major banks are deleveraging, reducing their debt to asset ratio.

They are worried that in the event or a run, they could go into Bear Stearns style meltdown, and that if Congress of the SEC start increasing margin requirements, that they will be caught flat-footed.

Additionally, the leverage that they retain is being moved to longer term loans, which insulates them from a panic, at the cost of higher interest rates.

We still have a way to go down as this all unwinds, but one consequence will be higher interest rates, as the availability of money decreases, and supply and demand drives the price higher.

Leave a Reply