Via RGE:

You start with 20,000 euros invested by some investors into a hedge fund of funds; this is all equity. Then, this fund of funds borrows—at a leverage ratio of three—and invests the initial capital and the borrowed funds into an hedge fund. Then this hedge fund takes this fund of funds investment and borrow—at a leverage ratio of two—and invests the raised capital and the borrowed funds into a deeply subordinated tranches of a Collateralized Debt Obligation (that is itself a highly levered instrument with a leverage ratio of nine). So the final investment of 1 million has behind it 20,000 of equity capital and 980,000 of debt. So, if the value/price of the final investment falls by only 2% the entire capital behind it is wiped out. This is a credit house of cards where a dollar of capital is turned into 49 dollars of additional debt to finance an investment of 50. The systemic dangers/risks of this fragile credit house of cards are complicated to assess as they depend on how much of this debt/credit accumulation is concentrated or spread among many financial intermediaries. But, at face value, this kind of leverage ratios looks scary.