Harvard Business School Teaching Dangerous Nonsense About Leverage


We remarked after Goldman Sachs (GS) came out with earnings, that analysts were already pestering the company about its mere 14x leverage ratio, wondering when they might start to get more aggressive — this after the financial system nearly collapsed due to too much leverage.

Nobody’s learned anything.

Felix Salmon points to this hilarious statement on one of Harvard Business School’s blog regarding Google’s earnings:

    It would not be rational for a public company to be funded only by equity. It’s too inefficient. Debt is a lower cost source of funds and allows a higher return to the equity investors by leveraging their money…

    Back to Google. It’s a nearly $22 billion company with no debt, which is inefficient. The problem for Google is that their cash flow and profit are so strong that they can finance the business with retained earnings. But I predict that as Google matures and growth slows, debt will become an important source of funding.

Yes, you can never be too rich, too thin or too leveraged, at least in the minds of our highly-trained financial geniuses. No matter what the environment, analysts are always pestering the companies are doing about buybacks or dividends (up, please!). We were at a media banking conference in early 2008 (!) and we heard companies being asked about their buyback strategy.

Heck — just to give you a sense of how thoroughly colonized the financial industry mind is — even Meredith Whitney, who to her credit is pretty keenly attuned to the problems of the industry, asked Goldman Sachs a question about their stock buyback schedule. And she’s long-term bearish (still) on the industry!

Almost nobody is innocent here. Management spent the years before the bust doing share buybacks at a crazy pace, proving that they’re horrible traders of their own stock. Activist investors without any real ideas tried their best to oust management that didn’t get with the program of leverage.

And here we are in July, 2009 and HBS students are being told that Google (Google!) ought to be borrowing more to finance itself. We’re officially getting nowhere.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.