The Investment Scientist

Archive for September 2019

How a financial crisis comes about?  I am gonna use a simple styled example to illustrate the key elements that lead to a financial crisis: easy creditleveragecontagionshock amplification.

ABC Shipping has 100 vessels. The market value of a vessel is normalized to 1. (You can imagine that as 1 million dollars.)  Because of easy credit (low-interest rates,) the company uses debt financing to the fullest extent. Banks demand a loan-to-value ratio of no more than 60%, so ABC Shipping borrows 60, and has its own capital of 40.

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Now imagine, ABC Shipping is doing well operationally speaking, but the industry is Read the rest of this entry »


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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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