Leveraging - the most dangerous tool in the hands of men
by Secular India on Mar 15, 2008 07:01 PM
Let me give you an example. A flat in Malabar Hills , Bombay - 1500 sqft cost about 2.2 crores in 2005 ; in 2008 January - the same flat was having an estimated market value of 5 crores. Now my name is say Himmat Shah and I want to become really rich in this lifetime - so Himmat goes to ICICI/CIT/HDFC Bank etc and ask them to give him an overdraft of 5 crores by mortgaging his house. He gets his 5 crore and Himmat uses 4 crores to take positions in Reliance Natural , Reliance Petroleum and DLF shares and he uses a crore to subscribe to Reliance Power IPO. The total leverage he has is of 25 crores worth of futures - and if that rises by even 10% - he makes a profit of 2.5 crores in a month....but the market crashes and the shares fall by 40% and he loses 9 crores . His house is worth 5 crores- but that may not have buyers at that rate. The bank loses as it cannot recover the cost. The financial system goes for a toss.
