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Margin Calls Mount On Loans Against Stock Portfolios Used To Buy Homes, Boats, "Pretty Much Everything"
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
In a securities-based loan, the customer pledges all or part of a portfolio of stocks, bonds, mutual funds and/or other securities as collateral. But unlike traditional margin loans, in which the client uses the credit to buy more securities, the borrowing is for other purchases such as real estate, a boat or education.
The result was “dangerously high margin balances,” said Jeff Sica, president at Morristown, N.J.-based Circle Squared Alternative Investments, which oversees $1.5 billion of mostly alternative investments. He said the products became “the vehicle of choice for investors looking to get cash for anything.” Mr. Sica and others say the products were aggressively marketed to investors by banks and brokerages.
From the Wall Street Journal article: Margin Calls Bite Investors, Banks
Today’s article from the Wall Street Journal on investors taking out large loans backed by portfolios of stocks and bonds is one of the most concerning and troubling finance/economics related articles I have read all year.
Many of you will already be aware of this practice, but many of you will not. In a nutshell, brokers are permitting investors to take out loans of as much as 40% of the value from a portfolio of equities, and up to a terrifying 80% from a bond portfolio. The interest rates are often minuscule, as low as 2%, and since many of these clients are wealthy, the loans are often used to purchase boats and real estate.
At the height of last cycle’s credit insanity, we saw average Americans take out large home loans in order to do renovations, take vacations, etc. While we know how that turned out, there was at least some sense to it. These people obviously didn’t want liquidate their primary residence in order to do these things they couldn’t actually afford, so they borrowed against it.
In the case of these financial assets loans, the investors could easily liquidate parts of their portfolio in order to buy their boats or houses. This is what a normal, functioning sane financial system would look like. Rather, these clients are so starry eyed with financial markets, they can’t bring themselves to sell a single bond or share in order to purchase a luxury item, or second home. Of course, Wall Street is encouraging this behavior, since they can then earn the same amount of fees managing financial assets, while at the same time earning money from the loan taken out against them.
I don’t even want to contemplate the deflationary impact that this practice will have once the cycle turns in earnest. Devastating momentum liquidation is the only thing that comes to mind.
So when you hear about margin loans against stocks, it’s not just to buy more stocks. It’s also to buy “pretty much everything…”
From the Wall Street Journal:
Loans backed by investment portfolios have become a booming business for Wall Street brokerages. Now the bill is coming due—for both the banks and their clients.
Among the largest firms, Morgan Stanley had $25.3 billion in securities-based loans outstanding as of June 30, up 37% from a year earlier. Bank of America, which owns brokerage firm Merrill Lynch, had $38.6 billion in such loans outstanding as of the end of June, up 14.2% from the same period last year. And Wells Fargo & Co. said last month that its wealth unit saw average loans, including these loans and traditional margin loans, jump 16% to $59.3 billion from last year.
In a securities-based loan, the customer pledges all or part of a portfolio of stocks, bonds, mutual funds and/or other securities as collateral. But unlike traditional margin loans, in which the client uses the credit to buy more securities, the borrowing is for other purchases such as real estate, a boat or education.
Securities-based loans surged in the years after the financial crisis as banks retreated from home-equity and other consumer loans. Amid a yearslong bull market for stocks, the loans offered something for everyone in the equation: Clients kept their portfolios intact, financial advisers continued getting fees based on those assets and banks collected interest revenue from the loans.
This is the reason Wall Street loves these things. You earn on both sides, while making the financial system much more vulnerable. Ring a bell?
The result was “dangerously high margin balances,” said Jeff Sica, president at Morristown, N.J.-based Circle Squared Alternative Investments, which oversees $1.5 billion of mostly alternative investments. He said the products became “the vehicle of choice for investors looking to get cash for anything.” Mr. Sica and others say the products were aggressively marketed to investors by banks and brokerages.
Even before Wednesday’s rally, some banks said they were seeing few margin calls because most portfolios haven’t fallen below key thresholds in relation to loan values.
“When the markets decline, margin calls will rise,” said Shannon Stemm, an analyst at Edward Jones, adding that it is “difficult to quantify” at what point widespread margin calls would occur.
Bank of America’s clients through Merrill Lynch and U.S. Trust are experiencing margin calls, but the numbers vary day to day, according to spokesman for the bank. He added the bank allows Merrill Lynch and U.S. Trust clients to pledge investments in lieu of down payments for mortgages.
Clients may be able to borrow only 40% or less of the value of concentrated stock positions or as much as 80% of a bond portfolio. Interest rates for these loans are relatively low—from about 2% annually on large loans secured by multimillion-dollar accounts to around 5% on loans less than $100,000.
80% against a bond portfolio. Yes you read that right. Think about how crazy this is with China now selling treasuries, and U.S. government bonds likely near the end of an almost four decades bull market.
About 18 months ago, he took out a $93,000 loan through Neuberger Berman, collateralized by about $260,000 worth of stocks and bonds, and used the proceeds to buy his share in a three-unit investment property in the Bushwick section of Brooklyn, N.Y. He says that his portfolio, up about 3% since he took out the loan, would need to fall 25% before he would worry about a margin call.
Regulators earlier this year had stepped up their scrutiny of these loans due to their growing popularity at brokerages. The Financial Industry Regulatory Authority put securities-based loans on its so-called watch list for 2015 to get clarity on how securities-based loans are marketed and the risk the loans may pose to clients.
“We’re paying careful attention to this area,” said Susan Axelrod,head of regulatory affairs for Finra.
I think the window for “paying close attention” closed several years ago.
All I have to say about this is, good lord.
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Flush!
Time to pick up boats, houses and etc on the cheap!
Not quite yet, but soon....
"But unlike traditional margin loans, in which the client uses the credit to buy more securities, the borrowing is for other purchases such as real estate, a boat or education."
Oh, these guys are going to get an education alright.
I'm glad the economy is back to normal. I was feeling kind of worried that we haven't been partying like it's 2006.
Guilty as charged. And only paying 1.25% on loan too. Insanity.
Although we're using it to operate a profit generating business and not buying boats and sport cars with it.
and for the record, you can not get a multi-million $ open end operating line credit to carry inventory cost any other way these days. Period. 99.999% people dont have a Picasso to go pawn.
Margin is the adult version of playing with a can of gasoline and a box of matches...
Actually, this is brilliant.
These investors can't SELL the stocks, or they would crash the market their money comes from. So, instead, they borrow against it, buy what they want, and the shitshow goes on.
Once Netflix and Apple get hammered down, there will be massive margin calls indeed.
Not that it's possible that a stock that trades at 260 pe and more would ever go down....
I think I'll just short those 2 starting tomorrow. Plenty of downsite if the market would tank.
I want a 150ft yaht, but I only have $1.
The time for getting a good price on your sellable items is getting short.
Good thing I just had a yard sale!
Anyone seen Larry Ellison this week?
No, I avoid Hell during tornado season.
Whole Hawaiian Islands ain't cheap.
I wonder if anyone has calculated how many routers it takes to buy a whole Hawaiian Island...
Im sitting on the lanai looking at it right now...went fishing out there a couple days ago looks pretty barren just a few lights on.
Back to the Pool.
RIPS
Last I heard he was buying everything on margin, as opposed to actually selling shares in his little NSA/CIA JV. He could be Morgan Stanley's ONLY margin client, unless he has changed his ways since then...
"People want certainty "? And certainty they will get, in spades.
Long Chuck's Downtown Wrecker and Repo.
DEEZ NUTS FOR PRESIDENT 2016 - 2216!!!!!
USSA needs 200 years of DEEZ NUTS !!
lasvegaspersona:
You wouldn’t be reading this if your bosses weren’t kidnapping my babies to continue printing your credit, which is becoming increasingly worthless, and assigning the debt to me, on threat of imprisonment, in a State of electronic Martial Law, enforced by majority participation confirmed at the ballot box.
Funny, all the first responder heads with six figure pensions are retiring in Las Vegas.
Margin Call Yo Mama!
Time for a SHANGHAI CLOSE BABY!!!
My level of sympathy for people who took out these types of loans: zero.
So if I read this right, the Client keeps the money, and the Investment House keeps the
worthless asswipe stocks and bonds. Is that right? The loan is secured by the worhtless asswipe.
Right?...Right?
I am sure there are call triggers and they probably charge them when they liquidate.
I wonder if the HFT algo's have a trip once their loan values hit a 'sell' point.
...and it's gone.
"I wonder if the HFT algo's have a trip once their loan values hit a 'sell' point.
...and it's gone. "
'Running the stops' OR 'the most shorted' OR both ?
You have to sell it as a good thing!
And they probably don't hold those stocks, they're probably sold 10 times over in the futures markets with a 20% markup.
presented without comment....
http://www.marketwatch.com/investing/index/DJIA
death to the moneychangers......
Should have BTFD!
I feel pity and true sorrow for many people in the world, these ain't those people.....
The fellow down the block woke everyone up last night making lots of fuss when he suddenly realized all the noise was from a tow truck grabbing his car at 3 am out of his driveway. Evidently he thought "just walking away" years ago was so far back that he was "safe." However, my lawyer told me as long as the creditor refreshes the judgment every so often they can carry it forward indefinitely.
"Just walking away," has some blowback. When all these repos go up for sale, and there will be alot of them, they may go pretty cheap for those who saved money on the sideline for this plunge. At some point, houses will also plunge.
"adding that it is “difficult to quantify” at what point widespread margin calls would occur."
That's a lie. They are the custodian of the assets and hold the paper on the loans. They know their price, they know the amount of the loan and at what point a call on such a loan would be triggered. They have that number to a fine decimal point.
"Difficult to quantify" my ass. That's why computers exist. Unless they are doing it with with a slide rule and guys in green-brimmed hats they know EXACTLY the margin call decay rate on their clients who have these loans.
On that point; anyone need a slide rule?
I gotta whole briefcase full of'em.
"That's a lie. They are the custodian of the assets and hold the paper on the loans. They know their price, they know the amount of the loan and at what point a call on such a loan would be triggered. They have that number to a fine decimal point. "
Why do I get a mental picture of someone nonchalantly scaling fish in front of a Bloomberg terminal?
First, it was only about over-priced artwork. But, then they came for the boats & hos. Before you know it margin calls will force liquidation of pretty little stacks of phyzy...BITCHEZ!
Good luck finding all of that phyzy at the bottom of bodies of water, if all of the piss-poor boating skillz around the 'Hedge are any indication.
If you read ZH and have a boat, I'm not getting on it.
#41
The F'ing Catalina Wine Mixer
What is this??!
How dare YOU borrow against inflated shares in deeply indebted corporations that have never made a cent that we hold in trust for you at an undisclosed location and may or may not have rented out to evil short sellers?
Next thing you peons will want is to withdraw YOUR bank account balances every night instead of allowing US to sweep it all into OUR after-hours trading and clearing systems to play the Foreign Markets with, or demand that we GIVE YOU some of what WE win gambling with YOUR money!
Only MF Global and JPMorgan should have the right to rent or rehypothecate YOUR assets or make a profit doing so!
You dont have to pay capital gains and its a low interest rate....
Now that's what I call recycling.
Nice. So I can use my stock portfolio to collatoralize an 80% loan to buy a sweet ass boat and a ton of PMs and an insurance policy. Then have a boating accident, get a margin call and pay back the loan with the insurance money... Sweet!
https://www.youtube.com/watch?v=DJnKm6ftPu0
Don't worry.
It's like Uber with your stawks instead of a car -and your Broker does the driving!
The Trading Desk and the Bank do it every day with your bank balances and portfolio and don't tell you OR share a cent of whatever they make with you.
Doing it youself -borrowing against your own assets and paying a vig just makes the process easier for the Trading Desk/Bank to allocate you assets into the re-hypothecation catapault for a profit.
-Now they are hocking/renting your shit twice: once to someone else AND once to YOU.
-Well... At least twice.
-Ok, more than twice...
And you wonder why Apple stock was so aggressively rescued. If the sucker hit $90 billions of dollars worth of margin loans probably would have come due.
Are you implying that this might have something to do with an email to Jim Cramer??
I wonder how many millions of dollars Tim Cook has borrowed against his Apple share stash to buy more Apple shares?
Bezos
Zuckerberg
Musk
Hastings
Nadella
etc...
TBTF would mean it's a SURE THING, right?
Put Jamie and Lloyd and Warren down for $500,000,000 each against their respective TBTF franchises.
https://www.youtube.com/watch?v=nV59cxMsFnU
that makes me feel sort of warm and fuzzy inside.
It's what TSA checks at the airport are intended for
Hmm. I just thought they enjoyed fisting.
America is on a "GREED" kick. The US Stock Market isn't a place for "intelligent investing". It's a sandbox for spoiled 5-year old kids who think they are entitled to everything.
DON"T ask why we are headed into a tough Bear Market. The situation speaks for itself.
I am literally floored. I had to read this article twice. This is supposed to be the "Smart Money"
I hope they all get it right in the ass.
More like the "lucky money". Behind every billionaire is some dipshit offspring ready to be a millionaire.
The issue is WE get it in the ass when THEY do this shit.
Too Big To Fuck
Means YOU get stuffed
When Mr Cuffs bluffs
Gets too roughs...
Buckwheats for everybody!
You can't have your stock and sail your boat too.
Zion is a scheme, not an ethnicity..
This is what those junk mailers from your bank inviting you to visit with a "private banker" relate to. Good luck!
[Xzibit]
Yo dawg, we heard you like loans and stocks so we put a loan on your stocks so you can stock your loans while you loan your stocks.
[/xzibit]
We'll bundle em into a CDO-squared and tranch em out to your Grandma's pension fund.
Oh, before I forget; Grandma is gonna need to stay with you for awhile.
I resemble that remark -- almost got a margin call on Monday!
P.S. Thanks, PPT, for saving my ass. Where should I send the coke & hookers?
No word on HE-LOC Repayments this fall?
Casino is open, betting commencing in 1, 2, 3...
This couldn't happen with a Medium of Exchange (MOE) functioning under a properly managing process.
¯\_(><)_/¯
Those assholes deserve to lose everything.