On Wall Street [and Las Vegas], the term "leverage" refers to an investor who takes out a loan and gambles with the borrowed money. Astonishingly, this reckless behavior is considered to be civilized and respectable. Ever since 1975, the law said that banks could not be leveraged more than 12 to 1. (For every $1 the Las Vegas drunk owned, he borrowed $12 to gamble with.) This 12 to 1 limit was called the "net capital rule." Starting in 2000, the big banks lobbied the Securities & Exchange Commission (SEC) to remove the net capital rule. The SEC changed the rule in 2004, but not for the small banks; the new deregulation only applied to the biggest of the big banks, because the wise men who run the biggest banks are the most responsible. By 2008, Bear Stearns was leveraged 33 to 1; Merril Lynch was leveraged 40 to 1.
So who was the man who spearheaded this deregulation? Who was the man who personally lobbied the government to give Wall Street the rope it needed to hang itself with?
"We and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place."
-Goldman Sachs CEO Henry M. Paulson's testimony to the SEC on Feb 29, 2000
He's a wise man worthy of our trust and respect. He'll spend that $700 billion responsibly.