[Extract from The Nature of the Beast]
Almost every institution involved in the financial system is, in the jargon, highly leveraged. This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks. What does “highly leveraged” mean? It means you are betting a small amount of your own money plus a lot of other peoples’ money on a large return. If the return is positive, you make a handsome profit. However if the return is negative you lose not only your stake but potentially everything you own.