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Banks Disclose Tidbits of Hidden Stock Market Leverage of “Securities-Based Lending,” as Known Stock Market Leverage Surges

October 16, 2021

Banks Disclose Tidbits of Hidden Stock Market Leverage of “Securities-Based Lending,” as Known Stock Market Leverage Surges

No one knows total stock market leverage, but it’s huge and ballooning, as we see from the tidbits we’re allowed to see.

No one knows how much total leverage there is in the stock market. Only fragments are reported. Margin loans are reported monthly, and they provide a general idea of the trend in stock market leverage. Some types of leverage are not disclosed at all until something implodes spectacularly, such as Archegos. Other types of leverage are reported in bits and pieces, if at all, by a few banks and broker-dealers in their quarterly financial statements, if they so choose. This includes “securities-based lending.”

Some banks & brokers report securities-based lending, others don’t.

On Thursday and today, some Wall Street banks and broker filed their Q3 earnings reports and supplemental information with the SEC, and a few of them included in their supplemental filings some tidbits about their securities-based lending (SBL).

Securities-based lending is hot; people who want to cash out some of the gains in their portfolios – thank you halleluiah, Fed – but didn’t want to sell, can use their portfolios as collateral for loans by the broker, the proceeds of which can be used for anything – buy more securities, buy a house or a new vehicle, or pay for a divorce settlement.

When asset prices fall enough, the borrowers get a margin call and either have to either come up with some cash and put it into the account, or they have to sell securities and pay down their SBL balances, thereby turning into forced sellers.

Goldman Sachs didn’t disclose anything about its SBL; they’re lumped into a larger loan category.

…click on the above link to read the rest of the article…

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

March 29, 2021

Archegos Implosion is a Sign of Massive Stock Market Leverage that Stays Hidden until it Blows Up and Hits the Banks

Banks, as prime brokers and counterparties to the hedge fund, are eating multi-billion-dollar losses as they try to get out of these secretive stock derivative positions.

The implosion of an undisclosed hedge fund, now widely reported to be Archegos Capital Management, is hitting the stocks of banks that served as prime brokers to the fund. The highly leveraged derivative positions, based on stocks, had blown up spectacularly. Banks get into these risky leveraged deals because they generate enormous amounts of profit – until they blow up and banks get hit as counterparties.

Credit Suisse [CS] is down 13% at the moment in US trading after it warned this morning that “a significant US-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks,” and that it and “a number of other banks are in the process of exiting these positions,” and that the loss resulting from this exit “could be highly significant and material to our first quarter results.” The bank deemed it “premature to quantify” the loss.

Nomura Holdings [NMR] is down 14% at the moment in US trading after it warned this morning that “an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client.” It estimated the loss from this one client at “approximately $2 billion, based on market prices as of March 26.”

As Credit Suisse pointed out, “a number of other banks” are also involved as counterparties to that one unnamed hedge fund, and have been trying to get out of these positions since last week.

…click on the above link to read the rest of the article…

financial markets, archegos, wolf richter, wolfstreet, stock market leverage, credit suisse, banks, nomura

Stock Market Leverage Spikes. Sparks Already Flew. Brokerage Regulator “Concerned.” But Hey, Nothing’s Going to Happen.

February 27, 2018

Stock Market Leverage Spikes. Sparks Already Flew. Brokerage Regulator “Concerned.” But Hey, Nothing’s Going to Happen.

Resting Happily on Smoldering Powder Keg.

There is nothing like a big shot of leverage to fire up the stock market. And that’s what the market got in 2017, when the S&P 500 surged 26%, and in January 2018, when the index soared another 7.5% through January 26 – until suddenly something happened.

One measure of leverage in the stock market is margin debt – the amount individual and institutional investors borrow from their brokers against their portfolios – which surged $22.9 billion in January to a new record of $665.7 billion, according to FINRA (Financial Industry Regulatory Authority), which regulates member brokerage firms and exchange markets, and which has taken over margin-debt reporting from the NYSE.

For the 12-month period through January, margin debt soared $112.2 billion, among the largest 12-month gains in the history of the data series, behind only the 12-month periods ending in:

  • December 2013 ($123 billion)
  • July 2007 ($160 billion)
  • March 2000 ($133.7 billion)
  • November 1997 ($132 billion).

But it’s not just the recent surge; it’s the length of the surge. With only a few noticeable down periods, margin debt has soared for nine years in a row and now exceeds the prior peak of July 2007 ($416 billion) by 60%.

By comparison, over the same period, nominal GDP (not adjusted for inflation) has grown 32%, and the Consumer Price Index has grown 20%. In other words, margin debt has ballooned twice as fast from peak to peak as GDP and three times as fast as the Consumer Price Index.

The chart below shows margin debt based on the FINRA data, which includes margin debt from its own member firms and from NYSE Member firms, and is therefore more complete and larger than the NYSE data was. For example, NYSE margin debt in November 2017, the last month available, was $580.9 billion while FINRA’s data for November showed margin debt of $627.4 billion.

…click on the above link to read the rest of the article…

Reckless Stock-Market Leverage Intoxicates Politicians

February 16, 2015

Reckless Stock-Market Leverage Intoxicates Politicians

The sudden bloodletting that leveraged currency speculators experienced when the Swiss National Bank yanked the cap on the franc should have been a warning: central-bank promises that everything is under control are meaningless. And because of leverage, innumerable trading accounts blew up in a matter of moments.

Leverage acts like a powerful drug. It creates buying pressure and inflates asset prices further on the way up. But when asset prices sink, leverage begets forced selling, which drives down asset prices further, which begets more forced selling….

And stock-market leverage, encouraged by the Fed’s monetary policies that make nearly free money available to all sorts of speculators, has ballooned.

Some of it is closely watched, like margin debt. FINRA’s 4,000 member securities firmsreported that their customers carried $496 billion in margin debt by the end of December, after a multi-year surge. Margin balances had peaked in September at $504 billion, by far the highest in absolute terms, and at 2.8% of GDP, the highest ever in relationship to the economy. Alas, the last two stock-market leverage bubbles ended in phenomenal crashes – the dotcom implosion and the Financial Crisis.

And corporations are issuing mountains of debt to buy back their own shares at peak prices – replacing equity with debt on their balance sheets, leveraging them up to the hilt, like others leverage up their brokerage accounts. In many cases, such as IBM, “tangible net worth” has turned negative, and stockholders are already under water.

Other forms of stock-market leverage are more difficult to quantify, like people borrowing against their home equity lines of credit or their credit cards to plow that moolah into stocks to make that quick buck that their neighbors have been bragging about.

…click on the above link to read the rest of the article…

 

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