The risk of leverage

A big number of good companies have been humbled lately due to their excessive borrowing (and/or particularly that of their controlling shareholders). To me, these are just statistics.

Until today. A friend who is the controlling shareholder of a listed company has just called to say that his stock price has fallen sharply due to his borrowing (with his corporate stakes as the pledge). He may have become bankrupt despite his many enterprises. His financiers (the broker-dealers) will be left with no option but to sell his shares even faster. And his personal debts will only grow on the back of his breach of this or that undertaking.

I was very saddened though not surprised. Four years ago, he discussed his daring activities with me. I lobbied strongly against high leverages. I have warned him repeatedly since then. But his call today shows that I have been a terrible lobbyist and unsuccessful adviser.