IT'S ONLY AN EDITORIAL...

but it's by the editors of Bloomberg News, so it can't be dismissed as "progressive propaganda."

European Bankers Hooked on Gambling Will Need Capital Intervention: View
By the Editors Sep 8, 2011 5:00 PM MT

At the same time, bankers are campaigning against regulators’ efforts to address a root cause of the problem:

Big banks’ addiction to excessive leverage, or to using borrowed money to boost their shareholders’ returns.

To fully grasp their position, it helps to understand why they find leverage so attractive. Consider two banks,both with $100,000 in assets. The first got the entire $100,000 from its shareholders, giving it a 100 percent capital ratio. The second raised only $1,000 in equity and borrowed the rest, giving it a 1 percent capital ratio.
In the first case, a $1,000 profit on the assets will generate a meager 1 percent return on the shareholders’
$100,000 investment. In the second case, the same $1,000 gain will produce a 100 percent return on equity.
The second option also has a steep downside: A loss of only $1,000 can wipe out the shareholders.

At a big, systemically important bank, high leverage allows executives to play a heads-I-win-tails-you-lose
game with taxpayers. In good times, the leverage makes the bank extremely profitable to shareholders,
allowing executives to collect juicy bonuses. In bad times, as the European experience yet again demon-
strates, governments have no choice but to step in and bail out the banks, and executives have nothing
to fear but a highly remunerative exile.

Simple, hard-to-circumvent capital rules should be the primary condition of any taxpayer-financed solution to Europe’s financial troubles, and there’s no good reason the required level should be any lower than 20 percent. The only losers would be leverage-obsessed bankers, who might have to go cold turkey and earn a living by finding productive uses for their shareholders’ money.