（Chapter 18）Global banks are deleveraging to implement the policy, explain to investors what?
（1）"Leverage" of the definition:
The so-called “leverage" Simply put, that is: an individual, he took out a dollar, but the amount of investment he made, but several times more than capital investment.
The “deleveraging" refers to: reduce the use of financial leverage in the process.
Banks or financial institutions to borrow through a variety of methods or tools of money, returned to the lender’s administrative measures.
Individual banks or financial institutions to implement “deleveraging" policy, will the financial markets and economy have a significant adverse impact far-reaching.
If the entire financial market, have entered the process, most financial institutions or investors will be forced or voluntary, and the way past the use of leverage, borrowing money, taking out, then these effects, obviously cannot be ignored.
Some scholars believe that if this trend spread, then, the original support a large number of complex financial markets, a combination of derivatives, leverage magnified investment tools will be directly or indirectly destroy.
When the financial markets, derivatives markets shrinking, related industries, such as equities, commodities, real estate and other industries will suffer heavy losses, the cash liquidity of financial markets will be substantially reduced, leading to economic recession.
Even institutional investors believe that the U.S. is about to enter the massive deleveraging process, this effect will gradually spread to the real economy, leading the U.S. into recession, the economic adjustment period may take a decade.
“Deleveraging" will lead to any serious consequences?
“Deleveraging" will impact the current commodity markets and capital markets?
（2）What is “leveraged finance"?
“Leveraged Finance" means: the headquarters of financial institutions, to name a member company, its assets, as collateral for debt financing, then, with the finance company or other financial steps to the raising of debt capital available to parent or other members of the business use.
The “deleveraging" means: remove “leveraged finance" operations, to borrow money, return to the lending financial institutions.
（3）Areas of economics, “deleveraging" means what?
In layman’s terms, “deleveraging" is a company or individual, the use of financial leverage to reduce the frequency and amplitude, the original money borrowed through a variety of ways, returned to the lending institution, this situation has gradually formed an economic trend.
This trend, a great economic impact on society, and even may lead to liquidity dried up, even, so that the financial crisis continues to deepen and expand.
Most people think, “deleveraging" consists of five stages, namely, the deleveraging of financial products, financial institutions deleveraging, investor deleveraging, consumer deleveraging, de-globalization (trade protectionism .)
Of course, this is not entirely different in five stages, often have time and space of the intersection.
Let me once again to talk about economics in the “leverage" contains something meaningful.
For example: you have a 1W dollars to invest, (assumption: each1W can make 1W or lose money 1W), if money is your own, that is not leveraged elements.
If 5000 is borrowed, that is to use a lever.
In the case of leverage, assuming that the principal with 5000 +5000 make the 1W, borrowers pay principal in 5000, 500 of interest (assumed), then you have a loan after a net profit of 2W-1W-500 = 9500.
But if you do not have leverage, take only the principal amount of 5000 to earn 5,000, then your income, less the 9500-5000 = 4500.
However, the assumptions: investment results, and no earned money, the opposite is losing money, in the case of using the leverage, the loss will be magnified.
（4）Banking sector “deleveraging" mean what?
Banking sector “deleveraging" means: the bank will reduce the investment to support the guests.
Because we know speculators guests, use the leverage of banks particularly, for example: investors, if he do not intend to use bank loans to buy houses, investors, one million dollars to buy a house, assuming the house price is 100 million, investment who can only buy a house.
If using bank funds to leverage resources, buying houses, the down payment reduced to 10%. Then the value of 1 million houses, 100,000 dollars can buy a house. You can buy ten houses, speculation guests to purchase the investment house, to expand 10-fold, that is: if your speculation, could have earned 10%, however, the leveraged speculation, you can earn 100 percent. If you can earn 20%, you can earn as much as 200%.
“Deleveraging" This is a speech language, and now is becoming a global fund manager and economists, the mouth of the popular vocabulary.
From the Antarctic to the Arctic, from Wall Street to Hong Kong from the U.S. Federal Reserve chairman to the top of the hedge fund manipulator, mouth talking about, are the term, and, hidden behind it, that precarious, startling step by step the financial markets.
In the minds of some people, “deleveraging" is sure to be the next era of keyword, it reveals significant changes in global financial markets, the relative in the past three decades, the world’s financial development, make new amendments.
Financial people, the original use of a variety of ways, such as: housing loans, car loans, credit cards, derivative financial products and other channels, borrow money, return to lending money to financial institutions.
Leverage is considered to be: the main reason for the subprime mortgage crisis, because, according to statistics, there are some financial institutions, the proportion of speculative leverage, funds have been as high as 60 times.
When these financial institutions, the occurrence of huge losses, they will gradually reduce the risk of asset size, asset size and risk reduction process is called deleveraging.
(5) European and American market called “deleveraging", there are three main areas:
(A) changed the rules of the credit market, some companies, previously to the assets of the enterprise, the financial markets, bonds, and now, while providing high interest rates, but also difficult to find, to the financing market;
(B) The total number of about 8 trillion dollar securitization market has not yet to recover, seriously affect the total amount of U.S. consumer credit;
(C) All countries are being discussed to increase the financial institutions, statutory capital ratio, to reduce the financial institutions, leverage ratio, which is a long-term structural change.
(6) Bank or financial institution, “deleveraging", would lead to what serious consequences?
“Deleveraging" affect current commodity and capital markets:
“Deleveraging" of the first stage:
“Deleveraging" from the “deleveraging of financial products," began.
Financial boom in the number of securities on the basis of the assets, resulting in a large number of derivative structured financial products. For example,CDO, CDS, etc. This is the “leveraged financial products."
When the downward trend in U.S. real estate prices, mortgage default rates rise, which influence is reflected in the various built on subprime mortgage loans on the basis of housing, derivatives prices.
This is due to operating leverage, derivative products, can amplify the intrinsic value of assets. “Deleveraging of financial products" is the type of derivative financial products, market wiped out the process.
“Deleveraging" of the second stage:
Financial institutions, “deleveraging"
Over a longer period of time, not just investment banks, commercial banks even have to buy a large number of leveraged financial products.
These financial institutions, funding sources including commercial banks to absorb the short-term deposits and investment banks in capital markets, lending cash back, for example: notes on the bond financing. As low interest rates and ample liquidity in cash, a significant reduction in the cost of borrowing, therefore, most financial institutions have a lot of cash flow.
Financial institutions, a large amount of cash back loans, investments in financial derivatives, due to various types of commodities, the upward trend in the financial markets reversed the result, causing huge losses, reality forced the banks need to write down bad assets, and significantly increase the bank’s overall balance sheet risk exposure to asset classes.
This is the financial institutions, “deleveraging."
“Deleveraging" of the third stage – the investors, “deleveraging":
Financial institutions, “deleveraging", seriously weakened the intermediary function of financial institutions.
In the financial markets, in particular in credit costs have risen sharply, credit conditions become very harsh.
So to those who rely on financial institutions, access to some types of short-term sources of funds of institutional investors (for example: hedge funds), the lack of a source of cash, therefore, can only sell its holdings of assets (particularly high-risk assets) in order to keep enough cash saved to prepare for contingencies (for example: the wave of investor redemptions).
「去杠杆化」的第四階段 —消費者的「 去杠杆化」。
“Deleveraging" of the fourth stage – the consumer’s “deleveraging."
Consumers join the ranks of the sale of assets, adding all kinds of assets (particularly housing, real estate) prices fell, and produced by the negative wealth effect. European and American countries are the family unit, on behalf of consumers, the only choice they can do, is to increase the net savings net household wealth to alleviate the decline, these consumers can only be improved by reducing debt or saving rate to achieve financial balance of the family. This kind of slowdown in consumption at the expense of increased savings, in turn, will further exacerbate the real economy fundamentals, increasing the rate of deterioration and decline into the consumer industry.
“Deleveraging" of the fifth stage:
Facing the deterioration of economic fundamentals, governments have introduced policy options to stimulate the economy. Effect of the policy is not only: the scale of government-led spending, but also depends on its “multiplier effect" in size. If you want to enlarge the “multiplier effect", and only require the government spending, as much as possible for the purchase of products manufactured in the country.
Otherwise, the stimulating effect, through imports, and the “leakage" to the country’s economic system, but cannot make their own economic benefit this way, it is trade protectionism, the glamorous reasons.
Governments in implementing the “take care of himself “, the result is “global deleveraging", or so-called “de-globalization."
To the Financial tsunami ravaged regions around the world, wherever it went, devastated. While governments around the world means exhausted, for financial reforms in the hope reconstruction.
The world’s largest bond fund PIMCO, Bill Gross investment King said: the world will enter a “new normal."
What he means is: financial markets, banks’ deleveraging, “the time has come, because the government’s measures to control banks, becoming more and more strict.
The world’s economic locomotive the U.S. domestic consumption, but also gradually downward.
The United States in order to promote economic growth, so that national debt, even though, there are fiscal surplus countries such as China, is dedicated to helping, but also difficult to make up, the funding gap.
U.S. bond King Bill Gross’s latest view is that Bank of America’s “deleveraging" process, has led to three major U.S. asset classes: stocks, bonds, real estate prices continue to fall overall.
Gross believes that the global financial markets, is currently in a “deleveraging" process, resulting in most of the asset prices are declining, such as: gold, diamonds, grains such things.
Gross said：Once the deleveraging process, including risk spreads, liquidity spreads, volatility levels, as well as futures will rise.
Asset prices will therefore be affected.
Moreover, a process will not be one-way, but influence each other and mutually reinforcing.
For example, investors, when realized, will be the sub-prime risk, investors will be lifted on the investment in the secondary bond leverage, those and these bonds are arbitrage bonds of the other, or hold these bonds of other investors, as well as other varieties bonds they hold, will suffer severely affected.
I message to investors: Prior to the financial tsunami blasting, equipment response skills. Get through the Pre-dawn darkness.
My blog published on this site all content is purely personal opinion to share, did not constitute investment advice for any person.