Karl Denninger presents this telling chart in Find the Difference – Why Ponzi Finance Fails (click to enlarge):

debt-by-sector

The light-blue line (financial) shows how incredibly over-levered the financial-sector has become. As Karl notes, at some point the debt becomes unserviceable or makes institutions vulnerable to small fluctuations in asset-values. So far we have answered this problem with more debt, and changes to accounting rules in order to hide losses.

Denninger excerpt:

Glass-Steagall’s repeal was necessary to allow that nice light blue line to continue to advance in 1998.  Paulson’s leverage limit removal was necessary to allow that nice light blue line to continue to advance in 2004.

Yet we now know for a fact that the latter act in fact advanced that light blue line to the point of insolvency – that is, inability to pay interest and principal as due, for Bear Stearns, Lehman, Fannie, Freddie and AIG.

Both of those actions were sold to Congress and The SEC as “financial innovation” but in fact both of those actions were demanded as a means to prevent the natural limit of the Ponzi-based financial scheme from being realized when the hard limits to further Ponzi expansion were reached.