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Thursday, February 27, 2014

Simon Johnson — Truth from the Top

One of those points is that the world’s largest financial firms have equity that is worth only about 4% of their total assets. As shareholders’ equity is the only real buffer against losses in these corporations, this means that a 4% decline in their assets’ value would completely wipe out their shareholders – taking the companies to the brink of insolvency.

In other words, this is a fragile system. Worse, the current regulatory treatment of derivatives and of funding for large complex financial institutions – the global megabanks – exacerbates this fragility.
Project Syndicate
Truth from the Top
Simon Johnson | Professor of Economics, MIT Sloan

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