The road to hell is paved with positive carry.
Those in financial circles are likely aware that the above quote is a colloquialism used to highlight that excessive leverage can generate cash flow, but that unless properly and prudently unwound the leverage itself can ultimately lead to financial armageddon. We have witnessed this scenario time and again.
Wall Street specifically, and our economy at large, are continuing to lick their wounds and attempt to recapitalize from the “road to hell” we experienced beginning in 2008. While the financial system as a whole deleverages, Ben Bernanke and his Fed minions have leveraged up in an attempt to ‘ease the pain.’ Just yesterday, Fed officials highlighted that they would continue to leverage up if need be.
In the process, I believe they will simply be moving further
that road to
you know where
Just how much has the Fed leveraged up? Let’s navigate.
Forbes recently asked, Could a Federal Reserve Bank Go Bust?
104:1!! YIKES!! Yes, the Federal Reserve Bank of New York is carrying $104 of assets for every $1 of equity capital. Does that sound like a house of cards to you?
We all know that Ben Bernanke and his sidekick Timmy-boy remain the dealers extraordinaire in the shell game that masquerades as our capital markets, but what happens if and when Ben and Timmy lose control. Why do Ben and Tim quake and quiver while the debate on the raising the debt ceiling continues? For the very simple reason that raising the debt ceiling is a necessary function which allows the shell game to continue and is needed to allow the Fed to unwind this leverage. Hopefully.
Make no mistake, though, the shell game and the road to hell are fraught with very real risks. How so?
Perhaps the Fed is profitable on paper, BUT what if the Fed had to sell their holdings? What if the market value of the Fed’s holdings plummeted and creditors were less willing to provide financing for all those borrowed funds which the Fed needs given its leverage?
Ron Paul’s worst nightmare.
Why do you think the shiny yellow stuff is regularly making new highs? Navigate accordingly.
Larry Doyle is a Wall Street veteran, having worked at such banks as First Boston, Bear Stearns and Union Bank. He blogs at www.senseoncents.com