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Posting this comment will be like farting into a hurricane, but here goes. Company like Facebook has a serious problem and their stock drops ... precipitously.

Posting this comment will be like farting into a hurricane, but here goes. Company like Facebook has a serious problem and their stock drops ... precipitously. CEO of said company instead of selling their equity in their company has taken out loans against their equity in order to decrease their tax burden and cash in on the value of their equity. What amount of decrease would cause a margin call from lenders for the forced sale of said equity and subsequently the loss of majority stake in their own company? Now obviously only the lenders know this information and assuming I have the rough order of operations correct. Could this be a potential chink in the armor of founders / CEOs / anyone who takes out low interest loans against the equity they hold in their company? Maybe my understanding of this is too simplified.

osrec 5y ago
Margin calls don't really exist as far as loans are concerned. Once you have agreed collateral, and an agreed schedule of payment, you only get in trouble if you miss a payment, regardless of how the collateral fluctuates in value.
- gunshai 5y ago
  Okay, but as the value of the collateral approaches 0 your lender asks you to increase your collateral correct?
  - odonnellryan 5y ago
    Yes. But banks won't loan 100% on equities. This scenario would just be basically impossible.
    - gunshai 5y ago
      I am not sure you understand my question / hypothetical. A bank is not the only form of a lender first off, second the reason there isn't a 100% loan on an equity is that it's understood that the value of the underlying collateral can fluctuate. These are called over collateralized loans.
- MichaelBurge 5y ago
  I currently have a $150k margin loan, and it absolutely will lead to forced liquidation if the collateral drops in value: Interactive Brokers was clear about that. Separately, my bank tried to sell me a "Pledged Asset Line of Credit" that would also have required the collateral to maintain a certain value or there would be forced liquidations. Can you link an example of a bank or similar that lets you borrow against stock or options collateral without margin call risk?
  - osrec 5y ago
    A margin loan is very different to the kind of financing agreement a company will enter into. You are using the money at IB to speculate, and probably purchasing volatile assets at that. A company will generally utilise that money very differently, and it is unlikely that a lending institution will accept shares as collateral due to the wrong way risk (i.e. if they can't service their debt, their shares are probably losing value too, so probably not good as collateral).
    - xwdv 5y ago
      He might not be speculating, he might be holding a bunch of SPY shares and simply withdrew $150k as a margin loan so he can make a purchase on a house or car but not pay taxes on gains yet from selling his shares, opting instead to pay off the loan over time through regular deposits.
      - osrec 5y ago
        He is still speculating on the SPY and his ability to pay off the loan depends on how the SPY holds its value. A market crash would hurt his ability to pay off the loan.
        xwdv 5y ago
        No it doesn’t. His loan is the same no matter what SPY’s value is. He pays it by depositing money he earns from his day job, not by selling shares. If SPY crashes very hard his broker may force him to pay the loan very quickly, either by adding more money or by selling off his shares to cover the loan.
- dtnewman 5y ago
  That might be true for a house or a small scale loan, but once you are dealing with billions I doubt that’s the case. I assume that it works as follows: you have $1b in stock, Bank gives you $500m line of credit. If stock goes down enough they force a sale, but they only sell against what you have actually Utilized in your line of credit. If you are Mark Zuckerberg and worth more than $100 billion, you probably don’t have any issues. If you add up all of his houses and planes and cars it probably doesn’t add up to more than 1% of that. He’s fine.
- fieldcny 5y ago
  Loans based on assets like stocks/bonds/other assets with highly variable prices always have collateral requirements. If the loan is backed by 100M in facebook shares and the price of stock drops in half you will have to hand over more stock for collateral. If the price doubles, you can ask for your collateral back. It is doubtful Z has any margin call issues as he has so much stock, I can't imagine he would have pledged even 5% of it for loans, so he can just hand them another chunk without even blinking (which he generally doesn't do any way)
joshmlewis 5y ago
I don't know much about this but from the limited amount of I've read it is probably only a portion of the equity owned, and generally when borrowing against an asset the lender will not give you 100% of that assets value to protect from downside risk. Another probability is that it was adjusted in the past, potentially year(s) ago, and FB's stock price a year ago was almost $100 a share less than current so a $10 drop is not a big deal in the long term. You raise an interesting question though and I'd like to know the answer as well!
odonnellryan 5y ago
Nah. Almost certainly he could lose 100% of that value of the stock without being at risk of anything like this (as in, he probably put up $100m if he wanted a $50m loan, etc..) Even if he didn't, the bank would let him move funds in without forcing him to sell.
cavisne 5y ago
It's happened [1] but for it to happen to a company with the structure of Facebook a lot of things would have to go wrong. For starters Zuck owns Class B shares which have 10x the votes of Class A shares. I'm sure a bank would happily loan him money against his Class B shares, but any forced liquidation would involve a transfer to Class A shares. Zuck could lose a lot of shares and still maintain control of the company. [1] https://www.wsj.com/articles/a-board-struggles-with-its-ceos-borrowing-1454031068 https://www.wsj.com/articles/a-board-struggles-with-its-ceos...
- gunshai 5y ago
  This was the reply I was really looking for, thank you.

osrec 5y ago

Margin calls don't really exist as far as loans are concerned. Once you have agreed collateral, and an agreed schedule of payment, you only get in trouble if you miss a payment, regardless of how the collateral fluctuates in value.

gunshai 5y ago
Okay, but as the value of the collateral approaches 0 your lender asks you to increase your collateral correct?
- odonnellryan 5y ago
  Yes. But banks won't loan 100% on equities. This scenario would just be basically impossible.
  - gunshai 5y ago
    I am not sure you understand my question / hypothetical. A bank is not the only form of a lender first off, second the reason there isn't a 100% loan on an equity is that it's understood that the value of the underlying collateral can fluctuate. These are called over collateralized loans.
MichaelBurge 5y ago
I currently have a $150k margin loan, and it absolutely will lead to forced liquidation if the collateral drops in value: Interactive Brokers was clear about that. Separately, my bank tried to sell me a "Pledged Asset Line of Credit" that would also have required the collateral to maintain a certain value or there would be forced liquidations. Can you link an example of a bank or similar that lets you borrow against stock or options collateral without margin call risk?
- osrec 5y ago
  A margin loan is very different to the kind of financing agreement a company will enter into. You are using the money at IB to speculate, and probably purchasing volatile assets at that. A company will generally utilise that money very differently, and it is unlikely that a lending institution will accept shares as collateral due to the wrong way risk (i.e. if they can't service their debt, their shares are probably losing value too, so probably not good as collateral).
  - xwdv 5y ago
    He might not be speculating, he might be holding a bunch of SPY shares and simply withdrew $150k as a margin loan so he can make a purchase on a house or car but not pay taxes on gains yet from selling his shares, opting instead to pay off the loan over time through regular deposits.
    - osrec 5y ago
      He is still speculating on the SPY and his ability to pay off the loan depends on how the SPY holds its value. A market crash would hurt his ability to pay off the loan.
      - xwdv 5y ago
        No it doesn’t. His loan is the same no matter what SPY’s value is. He pays it by depositing money he earns from his day job, not by selling shares. If SPY crashes very hard his broker may force him to pay the loan very quickly, either by adding more money or by selling off his shares to cover the loan.
dtnewman 5y ago
That might be true for a house or a small scale loan, but once you are dealing with billions I doubt that’s the case. I assume that it works as follows: you have $1b in stock, Bank gives you $500m line of credit. If stock goes down enough they force a sale, but they only sell against what you have actually Utilized in your line of credit. If you are Mark Zuckerberg and worth more than $100 billion, you probably don’t have any issues. If you add up all of his houses and planes and cars it probably doesn’t add up to more than 1% of that. He’s fine.
fieldcny 5y ago
Loans based on assets like stocks/bonds/other assets with highly variable prices always have collateral requirements. If the loan is backed by 100M in facebook shares and the price of stock drops in half you will have to hand over more stock for collateral. If the price doubles, you can ask for your collateral back. It is doubtful Z has any margin call issues as he has so much stock, I can't imagine he would have pledged even 5% of it for loans, so he can just hand them another chunk without even blinking (which he generally doesn't do any way)

joshmlewis 5y ago

I don't know much about this but from the limited amount of I've read it is probably only a portion of the equity owned, and generally when borrowing against an asset the lender will not give you 100% of that assets value to protect from downside risk. Another probability is that it was adjusted in the past, potentially year(s) ago, and FB's stock price a year ago was almost $100 a share less than current so a $10 drop is not a big deal in the long term. You raise an interesting question though and I'd like to know the answer as well!

odonnellryan 5y ago

Nah. Almost certainly he could lose 100% of that value of the stock without being at risk of anything like this (as in, he probably put up $100m if he wanted a $50m loan, etc..) Even if he didn't, the bank would let him move funds in without forcing him to sell.

cavisne 5y ago

It's happened [1] but for it to happen to a company with the structure of Facebook a lot of things would have to go wrong. For starters Zuck owns Class B shares which have 10x the votes of Class A shares. I'm sure a bank would happily loan him money against his Class B shares, but any forced liquidation would involve a transfer to Class A shares. Zuck could lose a lot of shares and still maintain control of the company. [1] https://www.wsj.com/articles/a-board-struggles-with-its-ceos-borrowing-1454031068 https://www.wsj.com/articles/a-board-struggles-with-its-ceos...

gunshai 5y ago
This was the reply I was really looking for, thank you.