Extreme Leverage
Many banks, as well as other companies, have proved not very resistant to crisis because their capital is insufficient. Banks used every regulatory loophole to manage with less of their own capital. The business model of hedge funds is also based on working with extremely high rates of debt. In the real economy, leveraged buyouts-that is, corporate takeovers financed by credit-have become fashionable. The result of the huge debt load is an immense interest burden that companies can only bear if business is good. But in difficult times, small amounts of capital provide no buffer to absorb losses.