This page has been archived and commenting is disabled.

Visualizing 4th Degree Leverage

Submitted by Tyler Durden on 10/06/2010 17:40 -0400

It is sometimes remarkable that 3 years into the biggest crisis of all time, some people are still unclear as to how some of the most degenerate gamblers, also known as Wall Street workers, took an asset, and added leverage up to the 4th (and even 5th) degree to it. Hopefully the attached chart will explain clearly why even with world GDP at about $50 trillion, the total leverage associated with it is estimated at around one quadrillion. What is surprising is that it is only $1 quadrillion. The chart below can easily be extended by one more level, to include such Frankenstein monsters as CDOs Cubed. Furthermore, when using a leverage "creep" model such as the one below, it is easy to see why when the underlying asset's cash flows either stop or are severely impaired, how tens if not hundreds of billions of associated debt become worthless. And at the end of the day, the person holding the leverage⁴ or leverage⁵ basically bets the house (bought with other people's money) on the smallest incremental moves higher, and prays these continue as every underlying change in values is magnified by 4-5 orders of magnitude. The second they end it is game over, and the securitized system collapses.

Source: SocGen

- advertisements -

Wed, 10/06/2010 - 17:49 | 630555 Rodent Freikorps

My head hurts now.

Wed, 10/06/2010 - 23:37 | 631255 LowProfile

Well, last I checked it was 1.44 quadrillion, so there.

Wed, 10/06/2010 - 17:54 | 630567 Italian Job

It's like one of those mirrors at Spencer gifts, but with money.

Wed, 10/06/2010 - 17:56 | 630570 Comrade de Chaos

Living it large is PRICELESS. For everything else, there is the FED Liberty 33 Express.

Wed, 10/06/2010 - 17:56 | 630573 Sudden Debt

And that's why there will be a QE3, 4, 5, 6, 7, 8, 9, 10...

Wed, 10/06/2010 - 18:22 | 630609 Spalding_Smailes

And to think the european banking system/leverage city is saturated with this rmbs' garbage.

Wait till they are forced to do a 180 and start bailing out the bankers again, I think at that point you will see blood in the streets.

Since the europeans stuffed uncle ben & tiny tim at the last G20 meeting, I think you are on your own to deal with this mess ...

Wed, 10/06/2010 - 18:10 | 630591 FunkyMonkeyBoy

You'd think they would have come up with recursive leverage by now, none of this 3x or 4x layered amateurish rubbish, let's go infinite on it's ass.

Wed, 10/06/2010 - 18:50 | 630676 snowball777

I believe that happened when the Fed agreed to accept their trash as collateral.

Wed, 10/06/2010 - 18:34 | 630637 breezer1

eyewatering.

Wed, 10/06/2010 - 18:54 | 630678 InconvenientCou...

a notional dollar for every boson in all the physical FRN's in the world. cool.

Wed, 10/06/2010 - 19:06 | 630705 max2205

Can I 40 x a reverse mortgage

Wed, 10/06/2010 - 19:14 | 630719 Ieetseelmeet

It is amazing how a little fright can clear your vision.

Wed, 10/06/2010 - 19:57 | 630812 OutLookingIn

Jim Sinclair was right when he called these things "financial weapons of mass destruction."

Wed, 10/06/2010 - 19:58 | 630814 shushup

I'm glad someone is finally talking about leverage.

I've said for years that the prevention of the same financial crises happening again is to reduce the amount of leverage used on high risk assets.....such as subprime and FHA MBS. If excessive leverage had not been allowed then the real estate bubble would not have happened. The appetite for this product would not have been there and therefore could not have been originated.

Wed, 10/06/2010 - 20:41 | 630900 surfsup

Funny how a usury system always sees the development of ways and means to out exponentialize the draw of the VIG. Always think "one step" bigger than that which in front of you -- there IS always more. Thanks for getting us in that mode Tyler -- may the pips be with you...

Wed, 10/06/2010 - 22:30 | 631100 AbbeBrel

One nit picking detail : "collapses" should be "is collapsing". Well, humm. OPB's "Toxie" died last month. Maybe "collapsed" is the better word. But I digress from my true hidden agenda:

Actually I have a question: But first a reference: If you follow dshort.com's Consumer Metrics Institute's Daily Growth Index charts - if the index isn't bottoming it appears to be at a local minimum, and if history rhymes, per Doug: - maybe it is 192 days from now to the next S&P bottom - then:

what is the best leverage us individual investors can utilize, but with the following constraint:

-> we can't depend on the govsters to bail our counterparty during the crash (think the Squid with AIG)

-> the ante into the game has to be a reasonably small bet

-> the market is liquid, so unwinding the bet isn't too slow / painful / expensive

So far the 3x bear funds appear to be the most attractive, or VIX calls ... Maybe buying some puts on clear losers, such as HOG? Any favorites out there in ZH-land. Cheers, AB

Wed, 10/06/2010 - 22:56 | 631173 brodix

The miracles of complex math. If the banks had collapsed in 08, it would have been the equivalent of a hundred finacial hydrogen bombs. But since the Fed has saved us, now it's all just one

big

black

Thu, 10/07/2010 - 01:59 | 631233 honestann

If we had 100 hydrogen bombs, the best use for them is to drop them on the 100 largest financial institutions, starting with the federal reserve.

Beats the eternal black hole that is otherwise inevitable.

Wed, 10/06/2010 - 23:22 | 631228 trav7777

All this leverage is the credit growth the system required.

Credit has to grow.

Thu, 10/07/2010 - 01:23 | 631399 Something Wicke...

Something Wicked This Way Comes's picture

My calculations put this at the sixth level...a fuckpillion. At that level, no amount of accounting buggery can conceal it.

Thu, 10/07/2010 - 05:33 | 631549 doolittlegeorge

who you callin' "degenerate." i'm well dressed with a fine haircut and a well trained manner about me young man. as for youuuuu people....

Thu, 10/07/2010 - 06:13 | 631648 Diggintunnels

Perhaps you don't understand. You have to take truly asinine risks, that is the only way you can be assured a bailout. One must ensure that you take everyone else down with you if you fail; therefore, guaranteeing yourself free bailout money (taxpayer looting). It's the equivalent to leveraged moral hazard...

Thu, 10/07/2010 - 08:54 | 631849 Astute Investor

Hopefully the attached chart will explain clearly why even with world GDP at about $50 trillion, the total leverage associated with it is estimated at around one quadrillion. What is surprising is that it is only $1 quadrillion.

Not sure why everyone is so concernced about a global economy leveraged 18.2x = 5% down. Call me when total leverage reaches one centillion.

Thu, 10/07/2010 - 11:03 | 632182 Grand Supercycle

Updated FTSE weekly chart:

http://stockmarket618.wordpress.com

Wed, 11/10/2010 - 06:43 | 715725 cheap uggs for sale

Visualizing 4th Degree Leverage

Comment viewing options