Why you should steer clear of leverage

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[This entry originally appeared on Clare Lynch’s blog, goodcopybadcopy]

The word “leverage” has to be top of my list of words that should be banned. I’d never really come across it since ‘O’ Level Physics. But then I started working in an investment bank and I heard it all the time.

Understandable, you might say. Look up “leverage” on Investopedia and you’ll find that it refers to debt used to finance investment – clearly integral to the way the world of finance works.

But I wasn’t doing million-dollar deals. I was in the marketing department. And people weren’t discussing abstruse financial instruments. They were leveraging talent. They were leveraging diversity. And communication. In fact, any abstract noun found loitering around a memo was liable to leveraged. Worst of all, synergies (whatever they may be) were leveraged.

Ah, I get it. A metaphor. And a clever one at that, implying as it does that the marketing team calls on the miraculous, income-multiplying powers of leverage just as much as those revenue-generating, client-facing, bonus-grabbing hot-shots over in the front office. What a boost for the long-flagging self-esteem of the back-office, ever the Cinderella of the investment bank.

On its first use, I dare say the metaphorical use of the word “leverage” did seem clever. But on its millionth?

These days, my gripe isn’t merely that overuse has propelled our metaphorical leverage well and truly into the realm of cliché. It’s that it’s still being used. A sure sign that the back office isn’t just behind in the salary stakes, but, to put it bluntly, behind the times.

For everyone else has cottoned on to the downside of leverage – hence the credit crunch. Financiers are now all too aware of the exhilaratingly toxic, wealth-devastating properties of leverage. Its ability, when it turns against you, to take out your home, your job, your friendly neighbourhood mortgage provider and, if some are to be believed, the entire western economy.

Yet while their front office brothers have been rapidly deleveraging – fleeing from debt of all kinds – marketing types, HR bods, legal teams and a whole raft of support staff are still dead set on their strategy of leveraging their strategy. It seems that, just like investors in sub-prime MBS debt, they have no real understanding of what they’re dealing with.

But there is an upside. Investors continue to wring their hands about what stage of the credit crunch we’re in – and many a financier has called the bottom, only to be proved wrong by yet another spectacular bank failure.

So here’s my tip. When metaphorical leverage becomes as dirty a word as its literal counterpart, we’ll know we’ve turned a corner. That’s when all those CDOs, SIVs, the wonderfully named ARS debt, and all those other initialism-heavy investments (IHIs anyone?) will start to look attractive again.

In the meantime, smart writers, like smart investors, are steering clear of leverage.

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