To explain the concept of leverage, one hedge fund operator uses the analogy of a racing car: “If you go out and have four vodkas and drive a race car on the city streets, you’re gonna crack up and get hurt more than if you’re driving a Chevy. And a lot of people have been driving irresponsibly lately.”
“Leverage can kill you,” admitted an official at the New York Federal Reserve Bank, shortly after the Fed had hosted the rescue of Long-Term Capital Management, which had levered around $4 billion of capital into more than $120 billion on its balance sheet and several times more off balance sheet, before it threatened to spin out of control and take every other car on the road with it.
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