Discuss the limitations of financial leverage.

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readerofbooks | College Teacher | (Level 2) Educator Emeritus

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This is a great question and one that is very pertinent to our society today, especially with the collapse of MF Global, the financial firm of John Corzine, the former head of Goldman Sachs and the former government of New Jersey.

A good place to start is to define what financial leveraging is. Financial leveraging is when an investor or company borrows money in the hopes of making more money. If a companies or investor is highly leveraged, then more money is borrowed. The upside can be truly profitable. This is precisely  why many people want go in this direction. However, there are two big problems with being too leveraged.

First, if a person or company is too leveraged, then they might not be able to make their payments. If this happens, then they will go bankrupt. Second, there is the real possibility that the economic climate does not go their way. If this happens, they will lose their initial capital and then some. They could be in serious debt and bankruptcy would be the logical step. This is partially what happened to MF Global, as they held too much of European debt.

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