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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 yo

by 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.
  - MichaelBurge 5y ago
    > A margin loan is very different to the kind of financing agreement a company will enter into The original post you were replying to talked about founders borrowing against their company's shares as individuals, not companies. > it is unlikely that a lending institution will accept shares as collateral due to the wrong way risk That's my point: Nobody's getting a special financing deal on their company stock as individuals to eliminate their margin call risk. Multi-billion dollar hedge funds get a personal contact at the bank, but even they will get margin-called borrowing against stocks as collateral if it goes against them.
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)

by osrec 5y ago

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.
- MichaelBurge 5y ago
  > A margin loan is very different to the kind of financing agreement a company will enter into The original post you were replying to talked about founders borrowing against their company's shares as individuals, not companies. > it is unlikely that a lending institution will accept shares as collateral due to the wrong way risk That's my point: Nobody's getting a special financing deal on their company stock as individuals to eliminate their margin call risk. Multi-billion dollar hedge funds get a personal contact at the bank, but even they will get margin-called borrowing against stocks as collateral if it goes against them.

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)