This is a very short article however there is a significant amount of in class material relating to chapter twelve and also a bit of chapters one and two. The article, ‘Legacy’ weighs on J.P. Morgan, illustrates how investment firms such as Citi group, J.P. Morgan and others take advantage of a company’s debt to equity ratio, offering leveraged loans to companies or individuals for homes that already have a considerable amount of debt or do not qualify. Lenders associate leveraged loans with default so they are also associated with relatively high risk and return, or principle one of finance. Allot of the leveraged loans were for mortgages that turned negative once interests rates drastically changed. The benefit of this kind of loan as discussed in class with the degree of financial leverage is that the firm can finance its assets with a fixed interest rate to avoid change in the future and to hopefully increase the ultimate return to stockholders, that is if they are optimists and things go well.
J.P Morgan, had $217 billion of U.S. leveraged loans last year, most of which were sold off to other institutions in the secondary market for around 80 cents on the dollar. Currently the Firm is trying to fix the past of a bad image by referring to the troubled loans as “Legacy” loans in order to give the impression of recuperation and the sense that the firm is “fixing” its image.
After reviewing chapter twelve and learning about a firms Degree of operating leverage which is the relationship between (operating income or Earnings before interest and taxes) and its (earnings per share), It is apparent why they are referred to as leveraged loans, because it takes into account the fixed “interests” of the loan in order to maximize share worth or earnings per share.
“‘Legacy’ weighs on J.P. Morgan” by Heidi N. Moore of the Wall Street Journal is an article about how the investment firm is trying to recuperated from a years worth of poor management in...