Remember that movie called Margin Call? Here is why fiction might soon meet reality...

DawgStreet's picture
Rank: Orangutan | 360

The whole premise of the movie was that an investment bank had borrowed too much on margin and owed more than the bank was worth when it was hit by the financial crisis.

What is concerning here is that, according to an article by the WSJ, the rise of borrowing on margin in recent years might lead to another financial crisis in the near future:

Investors borrowing record sums to bet on stocks exacerbated this month's selloff, after they were hit with calls to reduce those obligations and forced to sell shares to raise cash.

If that debt, known as margin loans, continues to rise at the current pace, analysts warn that big selloffs and sudden bouts of volatility in the stock market could become more commonplace.

Retail and institutional investors have borrowed a record $642.8 billion against their portfolios, according to the Financial Industry Regulatory Authority, as they try to pocket bigger gains by ramping up their exposure to stocks.

Margin debt has been on the rise for years and is generally considered a gauge of investor confidence. The long-running stock rally has helped push debt levels higher since investors tend to be more willing to take loans against investments that are rising in value. However, it can also precipitate a steep market downturn as it did before the burst of the dot-com bubble and the financial crisis of 2008.

Do you think we are facing a real risk here or is this just more speculative trash?

If you read the article, it gives an example of a financial adviser who just recently lost half a million dollars from betting on an ETF using all margin.

I wouldn't even consider that investing. That's pure gambling.

What are your thoughts on buying on margin?

Comments (2)

Feb 26, 2018
DawgStreet:

The whole premise of the movie was that an investment bank had borrowed too much on margin and owed more than the bank was worth when it was hit by the financial crisis.

No it wasn't

Feb 26, 2018
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