This Is How Leverage in the Financial System Lives OnBy
Investors look to a bevy of derivatives to increase returns.
Rumors of leverage’s death have been greatly exaggerated.
In the aftermath of the 2008 financial crisis an abundance of leverage — borrowed money used to amplify returns — was blamed for exacerbating losses on subprime mortgages and contaminating the banking system with catastrophic results. Since then a host of new rules have been enacted to reduce financial leverage, including penalizing certain derivatives positions, such as the credit default swaps (CDS) villainized in the crisis, as well as outright curbing the amount of borrowing allowed at big banks…
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