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["Don Bowen" <don.bowen AT earthlink.net>]

> "Hedgefund", "leverage"...it means nothing to me.

Did you buy your farm with a down payment?  That is leverage.  Say you buy a
$100,000 home for 20% down or $20,000.  That is a 5:1 leverage.  If a 100#
person wanted to move a 500# rock they could get a lever six feet long then
place a fulcrum at one foot from the rock and place the lever at the one
foot mark.  

The loan is secured by the property.  If you default they can sell the
property for $100,000 and use the 20% for fees and profit.  But what happens
if the property drops by 20%.  Now they cannot make a profit if it is sold.

The problem is that some of these instructions were leveraging 30:1 and even
higher.  They would borrow say $100,000 then loan out $3,000,000 on the
strength of that loan.  What is those loans are used as further leverage?
Those loans just grow and grow until the house of cards falls from the
slightest shock.  A big part of that shock was the housing bubble pop.  The
underlying properties were no longer worth $100,000 and the original loans
were made with no down so any down turn puts the stack at risk.

I do not fully understand hedge funds myself.  They are made deliberately
opaic and some have leverage rations of over 300:1.  They did return huge
bonuses to the fund managers.

One of the major problems beside deregulation and lax supervision is that
fund managers passed all responsibility for managing and calculating risk
over to computer programs.  Greed and numbers that told you what you wanted
them to, not a good combination.

Don Bowen  KI6DIU
http://www.braingarage.com/Dons/Travels/journal/Journal.html