Japan in Their Own Words (JITOW)/日本からの意見

The Collapse of Leveraged Capitalism
SHIBUSAWA Ken / Chief Executive Officer, Shibusawa & Company

October 23, 2008
My first encounter with investment banks came when I returned to the United States – where I grew up - to obtain my MBA. Investment banks, servicing major corporations and institutional investors, were popular at business schools as the star player of global market-driven capitalism.

I entered the freshman class at an investment bank, and along with my colleagues from other top U.S. business schools, were given an orientation course on the values, code of conduct, and other "traditions" of Wall Street. As a part of this training course, I was on the dealing floor on October 19, 1987, Black Monday. On that single day, stock markets plunged 20%. As a rookie to the financial world, I really did not understand what was going on around me. I watched my assigned mentor blurted out "Oh my God…" in disbelief, and when the dealing room in the equity department was sealed off, I knew something had gone terribly wrong.

About a decade later in 1998, I was working for a major hedge fund. Another major hedge fund, Long Term Capital Management, collapsed under a massive load of leverage. To avoid the chain reaction of a global financial market collapse, the U.S. Federal Reserve Bank orchestrated a rescue plan where private financial institutions were the source of capital injected into the troubled fund, and the world was saved from a credit meltdown.

Today, another decade later, the very collapse of the global financial system that we feared ten years ago, has become a chilling reality. But the cause is basically the same – excessive leverage (borrowed money) to achieve excessive gains. It would not be an exaggeration to say that we are experiencing an end of an era. An era of leveraged capitalism, whose collapse now threatens the stability of the global economy.

Leveraged capital has been the source of the very lucrative returns enjoyed by Wall Street and funds. Securitization and derivatives are essentially forms of leverage that maximizes profitability on minimum capital. While "on a roll," you can accelerate your profits by leveraging. But once the direction turns the other way, excessive leverage will cause sudden rigor mortis as working capital dries up. Instead of being supported by a sturdy foundation of credit, the financial system collapsed like a castle of a deck of cards.

De-leveraging is not to say that money has vanished from the world. Therefore, we should not be overly pessimistic. What we are seeing just may be writing on the walls that suggest a paradigm shift away from excessive leveraged capitalism.

In the beginning, indirect financing was a mechanism by which financial institutions accumulated assets that originated from individuals and the private sector. Without this mechanism, these private-sector assets, in the form of savings, would have been otherwise scattered about in the society like tiny puddles or drops of dew, without any power to drive the growth of the economy. These tiny puddles and dew drawn into financial institutions were transformed into a mighty river, which contributed to the source of strength to drive the economy. You can do very little alone, but in great numbers, greatness can be achieved. This is "good" leverage.

The curtain has suddenly dropped on the era of leveraged capitalism. This was a period where when the common households' most risky "debt," through the magic wand called securitization, were transformed into products that ended up as "assets" on the financial institutions' balance sheets. This was great deal people doing these deals, but obviously disastrous for people now left "holding the bag."

Perhaps what we are hearing from behind curtains is a prelude. This prelude is for an era of common sense direct financing, where people's "assets" – not "debt" – are entrusted to asset management firms with common sense investment vision. The original source of true long term capital is not about large or small, but it must be based on assets, not debt or leverage.
The English-Speaking Union of Japan

澁澤 健 / シブサワ アンド カンパニー株式会社 代表取締役

2008年 10月 23日








(筆者はシブサワ・アンド・カンパニー株式会社 代表取締役。)
一般社団法人 日本英語交流連盟

English Speaking Union of Japan > Japan in Their Own Words (JITOW) > The Collapse of Leveraged Capitalism