Notice I Didn't Say, "Leverage?"

I was just reading the transcript of the 10/06 hearing on Lehman Bros. before the House Committee on Oversight and Government Reform (2008 WL 4458226) and it got me thinking, again about borrowed money. According to Luigi Zingales, a professor at the U Chicago Graduate Business School, Lehman had borrowed 30 times more money than it had on hand. Thus (math ahead!) a 3.3% decline in the value of the stuff purchased with that borrowed money would wipe out Lehman's cash reserve.

Okay, how about an example - you have $100. On the strength of that $100, a bank loans you $3,000. With the $3,000 you buy shares of Google. The Google shares cost $30 each so you buy 100. If Google goes down to $29, you lose your $100. If it goes down to $28, you lose $200.

Zingales also points out that most of Lehman's borrowing was short-term. So, that $3,000 you borrowed from the bank is due in a week. You don't have the luxury of selling when Google is up. You're going to have to sell those shares at the end of the week, no matter what the price is.