Here is a wonderful example of how leverage causes boom bust episodes even from an individual level.
Take it from Brazil’s billionaire Eike Batista
Last year, Brazilian entrepreneur Eike Batista was the world’s 7th richest man, with a net worth of $30 billion. Batista, riding high on oil fever, even stated, “I will be the world’s richest man,” vowing to overtake Carlos Slim of Mexico, the world’s richest individual.This year Batista is ranked No. 100, worth just $10.6 billion. His fortune is down an astonishing $19.4 billion, or 65%, making him the year’s biggest loser. Batista has been drifting further and further away from the top of the list. Now he is not even one of the top three richest Brazilians.
How leverage has translated to boom and the quasi bust for Mr. Batista
From the Bloomberg,
Eike Batista, the Brazilian billionaire whose oil-company shares fell to a record low last week, is close to selling a stake in MPX Energia SA (MPXE3) as he faces demands from creditors to boost collateral, people with direct knowledge of the matter said.Among Batista’s biggest creditors is Sao Paulo-based Itau Unibanco Holding SA, with about 5.5 billion reais ($2.8 billion) in loans outstanding, said two of the people, who asked not to be identified because the matter is private. Batista borrowed about 4.8 billion reais from Banco Bradesco SA and 1.6 billion reais from Grupo BTG Pactual, not counting a credit line of $1 billion BTG provided earlier this month, the people said.Batista, 56, used shares of his publicly traded companies as collateral for loans that helped build his empire of commodities and energy businesses, held as units of his EBX Group Co., the people said. Shares of his oil and gas company, OGX Petroleo e Gas Participacoes SA (OGXP3), plunged about 85 percent in the past year, and Batista is trying to reduce collateral requirements by selling assets to pay debt, the people said.
At least Mr. Batista still remains a billionaire but appears to be losing his fortune rapidly.
The lesson is that all leverage has a tipping point.
And when number of people suffering from the same malady rises, financial problems transits from the periphery to the core, then the crisis.