Leveraging-Deleveraging–Definition

So I am sure if you have turned on CNN or read any kind of article you have heard about these banks that are “over-leveraged” or that they are attempting to “Deleverage”.  People are asking if the government is giving these banks money, why aren’t they loaning it out?  Well the banks are actually trying to be fiscally responsible, they are taking the steps to reduce debt (deleverage).  By doing this they don’t have cash available to loan out to people because they themselves are trying to protect themselves from over-extending themselves and going belly up.  I have attached official definitions below.  Ironically, the banks are just doing what consumers have been doing in recent years, over extending themselves on credit, myself included.  I borrowed at low rates to do investments, about 14 months ago I realized that I to was heading towards too much leverage (utilizing borrowed money), so I started reeling my investments in, well I am still doing this, it is not easy to do and it takes time, hence our “banking” issues will not be going away overnight.  So we as individuals need to take a lesson out of that playbook and do some deleveraging (decreasing the amount of debt that you have) ourselves.  I think that is what happened with the stimulus package, people used it to get caught up on bills, paid down debt or socked it away.  Well consider the bank bailout the same thing, just on a huge scale.  Now to ask the next question, would it “recapitalize” the banks if they gave more cash to consumers, so people could pay down debt, be it mortgage, credit cards, equity lines.  The answer, yes!  Would this work, yes!  Will they do it, probably not.  I know that is what our last stimulus check went to, if we get another that is where it would go, directly to my highest interest rate account, currently my equity line at 4%.  What did you do with your stimulus check?  And what would you do with another?  If you are getting a tax return what will you be doing with it?  Let us know under comments.

Leverage–The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad, however; it can increase the shareholders’ return on their investment and often there are tax advantages associated with borrowing. also called financial leverage.
Deleverage–A process undertaken by a company in an attempt to reduce its financial leverage. Financial leverage can be beneficial for a company, but if it becomes too risky or harmful, the company may needto deleverage itself by decreasing the amount of debt that it has (by paying it off). also calleddegearing.

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~ by debt2dreams on November 11, 2008.

3 Responses to “Leveraging-Deleveraging–Definition”

  1. recapitalize – ? don’t know exactly what that means if I’m being honest. However I did see a segment on the Today show I believe, and they talked about the last stimulus package and supposedly the govt thought that us consumers would use that check for spending and boost the economy (idiots), when in reality, a high percentage of us just put that money in savings and caught up on bills and such. Personally, I used it to pay down debt, same thing I would do if given another. ^_*

  2. Shawn, the definition I found is Recapitalization…. Restructuring a company’s debt and equity mixture, most often with the aim of making a company’s capital structure more stable. Basically, it is pumping money in so that they can pay down debt so they are more balanced between debt and equity(assets), you know what we are all supposed to be doing 🙂 And bravo for doing the smart thing with the stimulus check, and that is exactly what the banks are doing…so at least we are as smart as the banks….yikes!

  3. I did my “patriotic” duty and paid for a trip to an online computer gaming convention for me and my wife in Vegas 🙂

    We had a blast!

    Then I hired Darcey…hahahaha!

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