I understand how leverage works, Host. I have a client whom it killed, whom I had to help out of a mess.
But leverage killing wealth is not what you posted:
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more regulation translates to bringing their leverage down to the level of the regulated banks who also get to use the Fed discount window.
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The regulation is what's killing the wealth according to that sentence. Leverage, when used properly, can create wealth - but it's tied to risk, and sometimes risks go sour as it did with Bear. How much risk should you handle? More than regulators will let you, less than some people will want. Those who lend the money for the leverage are at risk, too - if they take the risk of lending too much, they get slammed as well. That's called a market.
The Fed keeps leverage down for entities it helps because it wants to cut its own risk. Can't blame the Fed, but that doesn't mean there is some ideal level of risk that the Fed knows and others don't. Like most bureaucrats, the Fed will choose low risk levels. That puts a ceiling on profitability, because reward follows rational risks.
Oh, and if someone is leveraged 30:1 on a large percentage of his wealth, then he's a fool and deserves to go under, right?
I'm with you that losses by people who took risks and lost shouldn't be socialized. That's what we have bankruptcy laws for.