margin call

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
by William D. Cohan
Published 15 Nov 2009

At this point, Friedman said sarcastically, “We did it for you,” and then added seriously: “We did it because we had no choice, basically, but it's a good line.” Quental then spoke about the margin calls coming from the people sitting in the audience. “Obviously, we've taken in a heavy level of margin calls,” he said. “All of you are aware of that. We've covered all those calls up until yesterday, when we asked all of you to hold off until we had this meeting. We have some pending margin calls, which Ralph will talk about in a minute. We've made every attempt to meet the margin calls that have come in over the last few weeks, but they have been quite significant. We're also experiencing high margin calls in [the] High-Grade [Fund] as well. Lastly, the portfolio team is working hard at selling assets and focusing on the things that could move relatively quickly.

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Since these were the very assets that Thornburg (and Bear Stearns) used as collateral for its short-term borrowings, soon after February 14 the company's creditors made margin calls “in excess of $300 million” on its short-term borrowings. At first, Thornburg used what cash it had to meet the margin calls. But that did not stop the worries of its creditors. “After meeting all of its margin calls as of February 27, 2008, Thornburg Mortgage saw further continued deterioration in the market prices of its high quality, primarily AAA-rated mortgage securities,” the company wrote in a March 3 filing with the SEC. This new deterioration of the value of its prime mortgages resulted in new margin calls of $270 million—among them $49 million from Morgan Stanley, $28 million from JPMorgan on February 28, and $54 million from Goldman Sachs.

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By March 7, the Carlyle hedge fund was hitting the wall, as more margin calls were pouring in and the fund could not meet them despite having a $150 million line of credit from the Carlyle Group in Washington. The fund's publicly traded shares were suspended. “Although the Company believed last week that it had sufficient liquidity, it was informed by its lenders this week that additional margin calls and increased collateral requirements would be significant and well in excess of the margin calls it received Wednesday,” John Stomber, the CEO, said in a statement. “The Company believes these additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital.

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett
by Jack (edited By) Guinan
Published 27 Jul 2009

By using leverage in this way, the investor magnifies his or her potential gains and losses. Related Terms: • Debt • Leverage • Margin Call • Interest Rate • Maintenance Margin Margin Call What Does Margin Call Mean? A broker’s demand for an investor to deposit additional money or securities to bring a margin account up to the minimum maintenance margin requirements; sometimes referred to as a fed call, maintenance call, or house call. Investopedia explains Margin Call An investor would receive a margin call from his or her broker if one or more of the securities purchased on margin (with borrowed money) decreased in value below a certain point.

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The Investopedia Guide to Wall Speak 31 Investopedia explains Buy to Cover These investors, who bet on a stock price’s decline, hope to buy back the shares at a lower price than the price at which the shares were sold short. There is no time frame for short investors, who can wait as long as they wish to repurchase the shares. However, if a stock begins to rise above the price at which the shares were shorted, the investors’ broker may force them to execute a buy to cover order to meet a margin call. To avoid margin calls, investors should keep enough buying power in their accounts to make a buy to cover trade, based on the current market price of the stock. Related Terms: • Maintenance Margin • Short (or Short Position) • Short Interest • Naked Shorting • Short Covering Buyback What Does Buyback Mean?

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First, a broker cannot extend any credit to accounts with less than $2,000 in cash (or securities). Second, the initial margin of 50% is required for each initial margin trade. Third, the maintenance margin states that an equity level of at least 25% must be maintained. The investor will receive a margin call if the value of securities falls below the maintenance margin. Related Terms: • Leverage • Margin Account • Regulation T—Reg T • Margin • Margin Call Managerial Accounting What Does Managerial Accounting Mean? The process of identifying, measuring, analyzing, interpreting, and communicating information in the pursuit of a company’s business goals. Also known as cost accounting.

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again
by Nicholas Dunbar
Published 11 Jul 2011

If the value declines sufficiently, the hate-to-lose-money repo lender sends out a margin call—a demand for instant cash to make up for that loss in collateral value. If the margin call is not met, the bond can be liquidated or sold. Margin calls acutely concentrate the minds of traders, which makes their lives fundamentally different from those of traditional lenders or insurance company executives who see the world through long-term spectacles. The discipline imposed by short-term collateral funding gives investment bankers a profound respect for market valuation. They are equally likely to inflict margin calls on others (such as hedge funds) as they are to be on the receiving end of one.

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Treasury announces MLEC initiative to rescue SIVs (October) King County, WA, discloses SIV exposure Merrill Lynch reports $6 billion of super-senior CDO losses and fires Stan O’Neal (November) Citigroup discloses $55 billion of subprime exposure and fires Chuck Prince Morgan Stanley discloses proprietary trading CDO losses Goldman Sachs reports record annual trading revenues of $31 billion; Dan Sparks, Josh Birnbaum, and other Goldman mortgage traders receive bonuses of $15–$20 million each PWC auditors express concern about implications of Goldman margin calls for AIG’s accounts; AIGFP chief Joseph Cassano concedes that if Goldman is right, AIG has lost $5 billion (December) AIG investor conference during which Cassano dismisses low-ball margin calls as “drive-bys” Goldman pitches distressed CDO trades to London hedge funds, creating prices to justify AIG margin calls John Paulson reports $20 billion in revenues from his “big short” on subprime Greg Lippmann receives $50 million bonus from Deutsche Bank Royal Bank of Scotland closes takeover of ABN AMRO 2008 (January) New York Insurance Department announces efforts to recapitalize monolines (February) HSH Nordbank files lawsuit against UBS over North Street 4 deal AIG publicly reveals that its auditor, PWC, has identified a “material weakness” in its CDO valuations and reports $11 billion of super-senior writedowns SEC’s Macchiaroli makes a return visit to Bear Stearns UBS reports full-year CDO writedowns of $18.7 billion (March) Bear Stearns suffers a loss in counterparty confidence and is taken over by J.P.

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Because of the problems Gasvoda was having, Sparks had started to write down the market value of the originators’ mortgages, and that meant asking for additional margin to cover the difference. But when Sparks made his margin call, the originators couldn’t pay. As Gasvoda recounted to Sparks, “We just sent our guys in to collect some files. And they kicked our employees out of their building with a security guard.” Sparks and Gasvoda began to realize that the same thing was happening at all the Wall Street firms—they were demanding their money in buybacks or margin calls, and as a result the mortgage originators were dying like flies. Sparks was left with subprime mortgages he couldn’t sell and loans that weren’t being repaid.

The Great Crash 1929
by John Kenneth Galbraith
Published 15 Dec 2009

Any serious shock to confidence can cause sales by those speculators who have always hoped to get out before the final collapse, but after all possible gains from rising prices have been reaped. Their pessimism will infect those simpler souls who had thought the market might go up forever but who now will change their minds and sell. Soon there will be margin calls, and still others will be forced to sell. So the bubble breaks. Along with the downturn of the indexes Wall Street has always attributed importance to two other events in the pricking of the bubble. In England on September 20, 1929, the enterprises of Clarence Hatry suddenly collapsed. Hatry was one of those curiously un-English figures with whom the English periodically find themselves unable to cope.

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Babson had said nothing new. Hatry and the Massachusetts Department of Public Utilities were from a week to a month in the past. They became explanations only later. The papers that Sunday carried three comments which were to become familiar in the days that followed. After Saturday's trading, it was noted, quite a few margin calls went out. This meant that the value of stock which the recipients held on margin had declined to the point where it was no longer sufficient collateral for the loan that had paid for it. The speculator was being asked for more cash. The other two observations were more reassuring. The papers agreed, and this was also the informed view on Wall Street, that the worst was over.

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Again the ticker was far behind, and to add to the uncertainty an ice storm in the Middle West caused widespread disruption of communications. That afternoon and evening thousands of speculators decided to get out while—as they mistakenly supposed—the getting was good. Other thousands were told they had no choice but to get out unless they posted more collateral, for as the day's business came to an end an unprecedented volume of margin calls went out. Speaking in Washington, even Professor Fisher was fractionally less optimistic. He told a meeting of bankers that "security values in most instances were not inflated." However, he did not weaken on the unrealized efficiencies of prohibition. The papers that night went to press with a souvenir of a fast departing era.

A Mathematician Plays the Stock Market
by John Allen Paulos
Published 1 Jan 2003

The $100,000 you owe now constitutes 67 percent of the $150,000 ($15 × 10,000) market value of your WCOM shares, and you will receive a “margin call” to deposit immediately enough money ($25,000) into your account to bring you back into compliance with the 50 percent requirement. Further declines in the stock price will result in more margin calls. I’m embarrassed to reiterate that my devotion to WCOM (others may characterize my relationship to the stock in less kindly terms) led me to buy it on margin and to make the margin calls on it as it continued its long, relentless decline. Receiving a margin call (which often takes the literal form of a telephone call) is, I can attest, unnerving and confronts you with a stark choice.

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When she went upstairs, I ducked out of the store and made the margin call. My illicit affair with WCOM continued. Occasionally exciting, it was for the most part anxiety-inducing and pleasureless, not to mention costly. I took some comfort from the fact that my margin buying distantly mirrored that of WorldCom’s Bernie Ebbers, who borrowed approximately $400 million to buy WCOM shares. (More recent allegations have put his borrowings at closer to $1 billion, some of it for personal reasons unrelated to WorldCom. Enron’s Ken Lay, by contrast, borrowed only $10 to $20 million.) When he couldn’t make the ballooning margin calls, the board of directors extended him a very low interest loan that was one factor leading to further investor unrest, massive sell-offs, and more trips to Borders for me.

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Kozlowski, Dennis Kraus, Karl Krauthammer, Charles Kudlow, Larry Lakonishok, Josef Landsburg, Steven Lay, Ken LeBaron, Blake Lefevre, Edwin Leibweber, David linguistics, power law and Lo, Andrew logistic curve lognormal distribution Long-Term Capital Management (LTCM) losing through winning loss aversion lotteries present value and as tax on stupidity Lynch, Peter MacKinlay, Craig mad money Malkiel, Burton management, manipulating stock prices Mandelbrot, Benoit margin calls margin investments buying on the margin as investment type margin calls selling on the margin market makers decimalization and World Class Options Market Maker (WCOMM) Markowitz, Harry mathematics, generally Greek movies and plays about outguessing the average guess risk and stock markets and Mathews, Eddie “maximization of expected value” principle mean value. see also expected value arithmetic mean deviation from the mean geometric mean regression to the mean using interchangeably with expected value media celebrities and crisis mentality and impact on market volatility median rate of return Merrill Lynch Merton, Robert mnemonic rules momentum investing money, categorizing into mental accounts Morgenson, Gretchen Motley Fool contrarian investment strategy PEG ratio and moving averages complications with evidence supporting example of generating buy-sell rules from getting the big picture with irrelevant in efficient market phlegmatic nature of mu (m) multifractal forgeries mutual funds expert picks and hedge funds index funds politically incorrect rationale for socially regressive funds mutual knowledge, contrasted with common knowledge Nash equilibrium Nash, John Neff, John negatively correlated stocks as basis of mutual fund selection as basis of stock selection stock portfolios and networks Internet as example of price movements and six degrees of separation and A New Kind of Science (Wolfram) Newcomb, Simon Newcombe, William Newcombe’s paradox Niederhoffer, Victor Nigrini, Mark nominal value A Non-Random Walk Down Wall Street (Lo and MacKinlay) nonlinear systems billiards example “butterfly effect” or sensitive dependence of chaos theory and fractals and investor behavior and normal distribution Nozick, Robert numbers anchoring effect Benford’s Law and Fibonacci numbers and off-shore entities, Enron Once Upon a Number (Paulos) online chatrooms online trading optimal portfolio balancing with risk-free portfolio Markowitz efficient frontier of options. see stock options Ormerod, Paul O’Shaughnessy, James P/B (price-to-book) ratio P/E ratio interpreting measuring future earnings expectations PEG variation on stock valuation and P/S (price to sales) ratio paradoxes Efficient Market Hypothesis and examples of Newcombe’s paradox Parrondo’s paradox St.

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction
by Richard Bookstaber
Published 1 May 2017

In the financial markets our day-to-day mode of operation is to reduce meaningful interactions, to fly under the radar. We try to minimize the impact of our transactions to keep from moving the market and to protect against signaling our intent. But not so when a crisis hits. When investors face margin calls, when banks face runs or teeter on default, the essential dynamic of a crisis cascades through the system, changing prices, raising credit concerns, and altering the perception of risk, thereby affecting others, even those not directly exposed to the events precipitating the crisis. We’ve all learned from each of these crises.

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Any notion of an analytical process gives way because the world does not look rational—at least it does not follow normal assumptions and what you would normally observe. Meanwhile, the common crowd that shared similar views, that is more or less comfortable with the level of the market and the pace of the world, scurries in all directions. Some are fighting for their lives in the face of margin calls and redemptions, others stepping onto the sidelines to become observers. Can we tell any of this ahead of time? The Four Horsemen of the Econopalypse Social and economic interactions, colored by experience, are parts of human nature that, when joined together, create complexity that exceeds the limits of our understanding.

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Some of this will be spelled out in the governance structure and policies and procedures, some will be communicated to their investors.18 And during times of crisis, some of the heuristics are hard wired, without any ability for the agents to alter their course; most notably when it relates to issues of margin calls or forced liquidations due to reduced availability of funding.19 Each agent has its own set of heuristics. These will vary from one agent to the next, but generally speaking, the heuristics will be along these lines: the prime broker limits the funding it provides based on the collateral it holds and the haircut required by the cash provider; the trading desk will make a market based on the internal limits it is given for inventory, where those limits will depend on the availability of funding and the willingness to hold risky inventory; hedge funds maintain a target leverage—too high and there is the risk of margin calls and forced liquidation, too low and their returns suffer; and cash providers lend based on the dollar value of the collateral and a haircut based on the perceived creditworthiness of a borrower and the liquidity of the market.

Rogue Trader
by Nick Leeson
Published 21 Oct 2015

I was sure our phones were tapped: it was just impossible that so many big tickets could get in front of me. They’d beaten me by less than a second every time. I’d lost more money, God knows how much more. I’d gone in trying to reduce the position and ended up buying another 4,000 contracts. I tried to clear my head: today was Thursday, and my birthday was just two days away now. SIMEX would make a margin call tomorrow for at least another $40 million. It could never happen. I was giving up the fight. I slipped away from the trading floor and walked quickly outside. I nodded and grinned at a few people. I noticed a lot of astonished, elated faces staring at me, sweating and flushed as if they’d just come off a dance floor.

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But if they then saw the true balance of the 88888 account – which was automatically part of their system – and subsequently saw the open position as 100 contracts, they would immediately question what this liability was. Then they’d find out that not only was it an unauthorised position, it was larger than most of the authorised ones. I’d be marched off the trading floor and leave my stripy jacket behind. The third problem was the most ominous of all. Each day SIMEX makes a margin call and requests funds. In a highly complicated calculation, SIMEX demands margin payments to take into account not only any money you’d lost today but also the money you might lose, under normal market conditions, the next day. The contracts in Account 88888 would show up on their screens as a Barings client account, and they would send through a request for a small percentage of the liability, depending upon the market’s volatility.

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But I was sitting on a loss at the month-end – a yen loss which could only be concealed by a yen credit. Futures and options work in funny ways in Singapore – they can be funded by a combination of US dollars and Japanese yen. The initial margins are payable in either dollars or yen, but the daily variation margins calls are due in yen. As I scribbled around the boxes, it dawned on me that if I sold options, I would actually receive a premium, a payment from whoever bought them – this would be in yen, and I would be able to use it to balance the yen deficit in the 88888 account. I drew up two columns, a profit and loss column and a balance sheet.

The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders
by Kate Kelly
Published 2 Jun 2014

But instead, those peak prices from July 2008 had reversed, dropping the U.S. oil contract price based on the future price of West Texas crude from nearly $150 to about $34 during the winter of 2008 and 2009, turning what Delta had thought would be insurance policies to help it survive inflated jet-fuel prices into expensive liabilities. The airline’s bad timing had been such that at the end of 2008, unexpectedly low crude prices had resulted in margin calls, or demands for additional cash from its banks, of $1.2 billion, the sum required simply to keep the poorly functioning hedges intact. It was much the same scenario that Emirates Airline had faced during that period, when Morgan Stanley’s ingenious plan for curbing the Middle Eastern carrier’s exposure to runaway fuel expenses led instead to a crushing margin call of more than $4 billion, prompting John Mack’s emergency visit to Dubai. Compared to 2009, the year 2010 was far better for Delta.

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A Texas native . . . new chief executive: Dan Reed, “Executive Suite: Delta Chief Takes Unlikely Flight Path,” USA Today, February 14, 2008, http://usatoday30.usatoday.com/travel/flights/2007-10-21-delta-ceo-anderson_N.htm and author reporting. $1.2 billion: Matt Cameron, “Airlines Use Aircraft as Alternative to Cash in Margin Calls,” Risk, August 17, 2009, http://www.risk.net/print_article/risk-magazine/news/1530797/airlines-aircraft-alternative-cash-margin-calls. new record high each month: Food and Agriculture Organization of the United Nations, “World Food Prices Reach New Historic Peak,” February 3, 2011, http://www.fao.org/news/story/en/item/50519/icode/. twenty-six-year-old Tunisian fruit and vegetable vendor: Kareem Fahim, “Slap to a Man’s Pride Set Off Tumult in Tunisia,” New York Times, January 21, 2011, http://www.nytimes.com/2011/01/22/world/africa/22sidi.html?

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The floor of the Emirates trading range had now been pierced, and although the cost of West Texas crude was by now impossibly low—ranging in the $50s by November—the cost of the “swap” portion of the trade the airline had arranged with Morgan Stanley, which was repriced every day based on the latest market movements, was exploding. At that point, Morgan made a massive “margin call,” or demand for additional cash as a down payment on the ongoing swap trade, to Emirates of more than $4 billion. The put options, or rights to sell crude, that the carrier had sold to Morgan were by now well below their “strike,” or target price. While the details of the paper transaction were confusing, the economic impact of it could be understood simply: if Morgan Stanley had wanted to collect on the puts, Emirates could, effectively, have had to buy crude oil from Morgan for $70 per barrel and receive as little as $50 per barrel in return.

Beat the Market
by Edward Thorp
Published 15 Oct 1967

For instance, after Mack Trucks warrants were sold short at 17⁄, they rose to 35fl. This seems to indicate that the investor was wiped out! But actually, depending on how quickly his broker reacted, he would have received margin calls as the warrants rose above 22fi. We assume that he then covered part of his short position rather than ante up more money. If he received a margin call for every 1 point rise in the warrant, his loss would amount to about $20,000 because the warrant then fell from 35fl to 23/8. If his broker were not alert and he was asked to cover only when the warrant rose more than 1 point, his loss would have been greater.

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For example, if the 200 Molybdenum warrants we sold short rise from 13 to 20, the lender demands $200 times the point rise, or $1,400 additional collateral. This reduces our margin to $420 from an initial $1,820. However, to meet the 30% maintenance margin requirement, our broker wants on deposit 30% of the current market value of the 200 warrants. They are at 20, the market value is $4,000, and 30% of this is $1,200. We will get a margin call from our broker requesting us to increase the margin from $420 to $1,200. We deposit the additional $780 if we wish 38 to remain short; otherwise the broker will cover our short position. Most margin accounts are not opened by investors who intend to sell short but buy customers who wish to buy without putting up the full price.

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When the warrants fell from 51/8 to 3fi, enough purchasing power was generated to sell short the additional 200 warrants. Of course, if one had been sure that the decline would be continuous, more warrants should have been shorted at every possible opportunity. Soon after the additional 200 warrants were shorted, we received a margin call. When we protested, the margin clerk recalculated and still claimed margin was required. Finally, however, when the head margin clerk tallied the account, he was satisfied that no margin was needed. This once again indicated that we must constantly check our own accounts and not blindly accept the statements of brokerage houses.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

Bids were coming in at 50 cents. Merrill was selling us out. There were not bids on half the items. That’s when the world woke up. That could be the wake-up call. That margin call. —Jimmy Cayne, former CEO of Bear Stearns (Cohan 2010) Overcoming Cayne’s resistance, Bear Stearns took over counterparties’ repo positions on the less-levered fund, a move designed to relieve the stress the hedge funds felt from counterparty margin calls. On June 21, Bear announced that it would provide up to $3.2 billion for the fund to take over these counterparty positions. The hedge fund fiasco also highlighted problems with management communication.

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Think of it as a margin requirement. Leverage is asset size divided by account equity. You usually change your leverage by changing your numerator. If you lose a lot of money, leverage starts going up rapidly and involuntarily because of the denominator. You may be subject to a margin call. You can’t wait until this margin call to begin selling the numerator.25 If you have billions on each side of a market-neutral portfolio, you cannot wait too long to begin reducing your positions. You come in on Monday, you can’t wait for four days, so you start unwinding today. The big guys had to start de-levering, funds, like GSAM, BGI, Citadel, and AQR.26 This never happened before, so there was no rule for when to cut the positions.

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For example, if a trade was expected to converge in three months, LTCM tried to finance the trade with a three-month contract, arranging these contracts as far as six months out in a practice called term-financing. (Counterparties wouldn’t usually accept further-out contracts.) LTCM had two-way, mark-to-market provisions on all its over-the-counter contracts. This avoided any need to shut down a profitable trade because of one-sided margin calls. A trader might be short interest rates on one side of a position and long interest rates on the other side of the position. If overall interest rates decline, one side of the position loses money and the other side makes money. If the margin were marked to market on only one side of the trade, the trader would have a financing problem—even though the trade had not lost money.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

Brokers that had been willing to lend freely to the shadowbankers suddenly reversed themselves now that their trades were going wrong: Rather than accepting $1 million of collateral, or “margin,” to back every $100 million of bonds, the brokers demanded $3 million or $5 million to protect themselves from the danger that a hedge fund might prove unable to repay them. To meet the brokers’ margin calls, hedge funds had to liquidate holdings on a grand scale: If you are leveraged one hundred to one, and if your broker demands an extra $4 million in margin, you have to sell $400 million worth of bonds—quickly. As hedge funds liquidated bond positions, the selling pressure drove their remaining holdings down, triggering yet further margin calls from brokers. The scary pyramiding of debt, which had fueled the bond bubble in good times, now accelerated its implosion.

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Citadel had planned for a crisis, but not a crisis on this scale, and nothing could insulate it from what was going on around it. Other hedge funds, which had done less to lock in their financing securely, faced margin calls that forced them to dump convertible bonds and other positions; the weight of their selling caused Citadel to suffer yet more losses. Rumors that Citadel might be about to go under seemed to surface at dizzying speed. Citadel had been hit with margin calls! The Fed was calling Citadel’s trading partners, asking the size of their exposures! The truth was that the Fed was indeed calling around Wall Street, telling banks not to pull loans; but whether this saved Citadel or served to fuel the rumor mill could be debated.

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But although economic logic explained the reaction in the United States, no such logic could explain what happened next: Bond markets in Japan and Europe cratered. Far from being spooked by an expected surge in inflation, Japan was grappling with the threat of deflation, and yet ten-year Japanese interest rates jumped by seventeen basis points on March 2. As brokers issued yet more margin calls to hedge funds, the logic of leverage transmitted the trouble to Europe. In order to raise capital, hedge funds off-loaded an estimated $60 billion worth of European bond holdings, and long-term interest rates spiked upward.18 The frenzy of selling created sharp losses across Wall Street. Paul Tudor Jones, whose great strength was to sense how other traders were positioned, failed to spot the danger in Europe, and in the spring of 1994 his fund was down sharply.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
by Lasse Heje Pedersen
Published 12 Apr 2015

When short sellers are forced to close their short positions, they are forced to buy the share back and, when many short sellers do this simultaneously, the stock price can be driven up—a “short squeeze.” A short squeeze feeds on itself: As the buying drives the price up, more short sellers may be forced to close their positions as they cannot make their margin calls, leading to further buying, higher prices, and more margin calls. There are two reasons why short sellers face margin calls when stock prices rise. First, their positions are marked to market each day, so if a stock price increases from $100 to $105, then short sellers must pay $5 per share shorted. Second, when prices move against a short seller, the dollar value of the position increases, leading to higher margin requirements (since margins are typically a fixed percentage of value).

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The upshot of all this is that the hedge fund earns a lower interest rate on the cash backing its short sales than the interest rate on the loan that finances the long positions. • Margin call. When implementing leverage or short-selling, you cannot be as laid back as a long-term unleveraged investor. You need to monitor your positions and cash levels continuously to make sure that your cash levels are above the minimum margin requirement. If a hedge fund has insufficient cash in its margin account (e.g., because of losses on its positions), it receives a margin call from its prime broker. This means that it receives notice that it needs to add cash to its account or reduce positions.

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This means that it receives notice that it needs to add cash to its account or reduce positions. If the hedge fund does not do one or the other, the prime broker will liquidate the positions. Receiving a margin call is itself a negative. Even if the hedge fund successfully adds cash, repeated margin calls are a sign of problems and can eventually lead the prime broker to terminate the arrangement or increase margin requirements. Hence, hedge funds naturally try to keep excess margin capital. (Some hedge funds have all their capital in their margin account, while others have most of their cash in a money market fund, moving it into the margin account as needed.) The overall economics of funding a portfolio are quite general, but the specific institutional arrangements depend on the type of security.

Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Published 30 Sep 2018

Prior to the Crisis, senior or “leveraged” loans—even those with credit problems—had rarely traded at prices below 96 cents on the dollar. Thus we felt we were well insulated from the possibility of margin calls (demands from lenders for additional equity capital) that, under our borrowing agreement, could come only if the average market price of the loans in the portfolio got down to 88. But in the aftermath of the Lehman bankruptcy, loan prices fell to unprecedented levels, pressured by, among other things, banks’ fire sales of portfolios abandoned by levered holders who received margin calls of their own and failed to meet them. Thus 88—and a margin call and meltdown—became a real possibility for us. We were able to get time to respond from our lender, and we set about raising additional equity from the fund’s investors with which to reduce the fund’s leverage from 4-to-1 to 2-to-1.

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At the newly reduced level of leverage, the fund was protected from a margin call unless the average price of our loans fell to an unimaginable 65. But with the total absence of buyers and the continuation of margin-call- and hedge-fund-withdrawal-related selling, the loan market continued to spiral downward, as the notion of “the right price” gave way to widespread concern that no price could be counted on to hold. Thus the average price on our loan portfolio neared 70. It fell to me to get the leverage down from 2-to-1 to 1-to-1, in which case we could completely eliminate the contractual covenant that introduced the risk of a margin call. Now I was offering the fund’s investors a chance to pay to retain the fund’s loans at yields to maturity that were well into double digits, and levered returns on the overall fund in the 20s (before fees and potential losses due to defaults).

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The downgradings, breaches and defaults caused the prices of mortgage backed securities to collapse, and the resultant loss of confidence caused the market liquidity for these instruments to dry up. With terrified buyers taking to the sidelines—and terrified holders increasingly eager to sell (or forced to sell by margin calls)—the result was a dramatic downward spiral in the prices of mortgage backed securities. These negative developments collided head-on with new regulations, designed to increase transparency, which required banks’ assets to be “marked to market.” But with prices in free-fall and liquidity non-existent, it was hard to have faith in any price chosen.

Stress Test: Reflections on Financial Crises
by Timothy F. Geithner
Published 11 May 2014

The financial crisis was a tough time to be any financial firm, but it was an impossible time to be a financial firm that provided insurance against the failure of other financial firms and financial instruments. As those firms and instruments lost value, AIG was getting crushed by incessant margin calls, prompting rating agencies to consider new downgrades, which would lead to additional margin calls. The company was once again on the brink of default itself, even after our twelve-figure assistance package. Default was not an option, not unless we wanted a global stampede that could have made the aftermath of Lehman look relatively mild. But we didn’t want to keep throwing money into a bottomless pit.

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I also warned that the firms that ended up with subprime exposure would find it even harder than usual to assess their risks, because of the complexity and the newness of the financial instruments into which the mortgages were sliced and diced. And I explained that the drift of risk from simple loans in traditional banks to structured products in leveraged nonbanks increased the danger of a “ ‘positive feedback’ dynamic,” a vicious cycle that could amplify a crisis. If asset prices fell, firms and investors would need money to meet margin calls, prompting fire sales that would drive asset prices even lower, and so on. But March 2007 was pretty late in the game to be warning about subprime. And my view was that the only effective way to reduce the risks ahead was for supervisors to make sure significant financial firms had enough capital and liquidity to survive a crisis.

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We also failed to anticipate the savage depth of the Great Recession, or the debilitating feedback loop between problems in the financial system and problems in the broader economy. A mere drop in housing prices could not have triggered mass mortgage defaults or depression-level losses in the banking system, but as unemployment increased and jobless homeowners missed payments, actual and expected mortgage losses increased as well, triggering margin calls and selloffs of mortgage-related assets, making the economy, unemployment, and the housing market worse. We weren’t prepared for that kind of doom loop. You could say our failures of foresight were primarily failures of imagination, like the failure to foresee terrorists flying planes into buildings before September 11.

The Quants
by Scott Patterson
Published 2 Feb 2010

Over sushi and wine, the two started hashing out their ideas about what had triggered the meltdown. By the time they were through—they closed the restaurant—they had a working hypothesis that would prove prescient. A single, very large money manager had taken a serious hit from subprime assets, they theorized. That, in turn, would have triggered a margin call from its prime broker. Margin call: two of the most frightening words in finance. Investors often borrow money from a prime broker to buy an asset, say a boatload of subprime mortgages. They do this through margin accounts. When the value of the asset declines, the prime broker calls up the investor and asks for additional cash in the margin account.

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Ratings agencies such as Moody’s and Standard & Poor’s were also downgrading large swaths of CDOs, pushing their value down even further and prompting more forced selling. Margin calls on funds with significant subprime holdings were rolling across Wall Street. Funds that primarily owned mortgages were stranded, since the only way they could raise cash would be to dump the very assets that were plunging in value. Multistrat funds, however, had more options. At least one of these funds—there may have been several—had a large, highly liquid equity quant book, Rothman and Levin reasoned. The fund manager must have looked around for assets he could dump with the utmost speed to raise cash for the margin call, and quickly fingered the quant equity book.

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By 1998, nearly every bond arbitrage desk and fixed-income hedge fund on Wall Street had copied LTCM’s trades. The catastrophic results for quant funds a decade later were remarkably similar. Indeed, the situation was the same across the entire financial system. Banks, hedge funds, consumers, and even countries had been leveraging up and doubling down for years. In August 2007, the global margin call began. Everyone was forced to sell until it became a devastating downward spiral. Near midnight, Rothman, luggage still in tow, hopped in a cab and told the driver to take him to the Four Seasons. As he leaned back in the cab, exhausted, he pondered his next move. He was scheduled to fly to Los Angeles the next day to visit more investors.

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

Banks may mark positions at high prices to prevent complex, illiquid securities being sold at a discount, and pushing down values. If the securities actually traded, then the lower market price would be used to value positions, increasing losses and margin calls for more collateral on already cash-strapped investors. Alternatively, a lower price is used to force margin calls and selling, allowing dealers to buy the assets cheaply. The entity’s own credit risk was now required to be used to establish the value of its liabilities, resulting in gains for credit downgrades and losses for credit upgrades. If a bank has issued $100 bonds and the market price drops to $80 (80 percent), then it records a gain.

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Subprime mortgages predicated on low rates, rising house prices and the ability to refinance on favorable terms defaulted. Losses were significant but not huge. But mortgage defaults also triggered paper losses on highly rated securities used as collateral for borrowing. Borrowers sold everything to meet the need for cash to margin calls, forcing down prices setting off new margin calls, causing losses to radiate through the financial system. In 1929, JP Morgan’s Thomas Lamont had tried to calm markets: “There has been a little distress selling.... Air holes caused by a technical condition...the situation was ‘susceptible of betterment.’”3 As the stock market fell, John D.

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Unable to borrow directly, they had invested in hedge funds, SIVs and CDOs to access the hidden fruit of leverage. As the value of the securities used as collateral fell, investors who had borrowed found lenders asking for more collateral. Hedge funds, conduits, and SIVs did not have the money to meet the margin calls. Forced selling set off of a new round of price falls, restarting the entire cycle. At Bear Stearns, Ralphie’s Funds owned AAA and AA-rated MBSs funded by $600 million in equity and $10 billion in short-term borrowings. In good times, the leverage ensured good returns but now it worked in reverse.

Firefighting
by Ben S. Bernanke , Timothy F. Geithner and Henry M. Paulson, Jr.
Published 16 Apr 2019

But once the housing bubble popped, fear of losses created a financial stampede, as investors and creditors frantically reduced their exposure to anything and anyone associated with mortgage-backed securities, triggering fire sales (where cash-starved investors are forced to sell their assets at any price) and margin calls (where investors who bought assets on credit are forced to put up more cash) that in turn triggered more fire sales and margin calls. The financial panic paralyzed credit and shattered confidence in the broader economy, and the resulting job losses and foreclosures in turn created more panic in the financial system. A decade later, that doom loop of financial fear and economic pain has begun to recede in the public memory.

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A financial crisis is a bank run writ large, a crisis of confidence throughout the system. People get scared and want their money back, which makes the money remaining in the system less safe, which makes more people want their money back, a self-reinforcing doom loop of fear, fire sales, capital shortfalls, margin calls, and credit contractions that can produce a stampede for the exits. Once a stampede begins, it becomes rational to run to avoid getting trampled, and hesitation can be deadly. Perception and reality both matter, because runners will keep running until they’re confident not only that they don’t have a rational reason to run, but that others will have the confidence to stop running as well.

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And if your creditor suddenly demands repayment of the loan, or forces you to post additional collateral, you might have a real problem, especially if you don’t have a lockbox full of Treasuries for emergency use only. You might have to sell the asset immediately to avoid default, and if others with similar assets hold similar fire sales, the price of the assets will drop further, triggering more fire sales and margin calls and defaults, and so on down the drain. If you happen to be a financial firm, your creditors might sour on your commercial paper, stop renewing your overnight repo loans, or force you to post more collateral, the modern equivalents of bank runs. That’s how panic spread after the housing bubble popped.

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Published 10 May 2010

When the boom becomes a bust, the results are also predictable. The falling value of the asset at the root of the bubble eventually triggers panicked “margin calls,” requests that borrowers put up more cash or collateral to compensate for falling prices. This, in turn, may force borrowers to sell off some of their assets at fire-sale prices. Supplies of the asset soon far outstrip demand, prices fall further, and the value of the remaining collateral plunges, prompting further margin calls and still more attempts to reduce exposure. In a rush for the exits, everyone moves into safer and more liquid assets and avoids the asset at the focus of the bubble.

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That’s not necessarily a problem: the price may rebound to $100 million in due course. But the investment bank may get worried and make a margin call, demanding that the original leverage ratio be restored. That means that the hedge fund must come up with $4.75 million in new equity ($4.75 million is one twentieth of $95 million). If the hedge fund can raise the money, things may work out. If not, the hedge fund has to sell the asset at $95 million and see its equity wiped out. That alone is hardly a tragedy: margin calls happen, and people (or hedge funds) lose their shirts all the time. The bigger problem is the risk that the hedge fund scrambling to raise equity is not alone.

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Suddenly countless investors are seeing their $100 million CDO fall in value to $95 million. Suddenly all of them get margin calls, demanding that they put up more equity. Perhaps some of them can raise it, but many more will be forced to sell their CDO at whatever the market will bear. And if too many of them do this at once, the CDO may no longer fetch $95 million; it may drop to $90 million or $85 million. When that happens, borrowers must sell off even more of their assets to meet new margin calls. This creates a cascade of fire sales, as too many sellers chase too few buyers. Even worse, lenders nervous about the solvency of borrowers may start requiring an even greater equity margin and lower leverage ratios as a condition of rolling over the debt.

Big Debt Crises
by Ray Dalio
Published 9 Sep 2018

One analyst described Monday’s waves of sell orders as “overwhelming and aggressive.”37 Trading volume again broke records. Another wave of margin calls went out and distressed selling among levered players was prevalent.38 But markets rallied into the end of Monday’s session, so losses were smaller on Monday than they’d been on Saturday. Tuesday’s session saw small gains and Wednesday’s opened quietly. But any hopes that the worst had passed were shattered before the market closed on Wednesday. An avalanche of sell orders in the last hour of trading pushed stocks down sharply, which triggered a fresh round of margin calls and more forced selling.39 The Dow suffered what was then its largest one-day point loss in history, falling 20.7 points (6.3 percent) to close at 305.3.

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An avalanche of sell orders in the last hour of trading pushed stocks down sharply, which triggered a fresh round of margin calls and more forced selling.39 The Dow suffered what was then its largest one-day point loss in history, falling 20.7 points (6.3 percent) to close at 305.3. Because the sell-off was so sharp and came so late in the day, an unprecedented number of margin calls went out that night, requiring investors to post significantly more collateral to avoid having their positions closed out when the market opened on Thursday.40 Many equity holders would be required to sell. Everyone who worked on the exchange was alerted to be prepared for the big margin calls and sell orders that would come Thursday morning. Policemen were posted throughout the financial district in the event of trouble. New York Stock Exchange Superintendent William R.

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–New York Times March 10, 2008 Slipping Away “As you know we have a vague fear that the degree of levered counterparty positions that have built up over the years creates a kind of house of financial cards. With financial markets making new lows, new problems are popping up. More and more entities are failing on margin calls, and this is flowing through to the dealers who have the exposures when entities fail on margin. Financials were crushed Monday as rumors of liquidity trouble at Bear Stearns flew. While we don’t have any view on rumors, the quantity of major entities failing on margin calls (TMA, Carlyle Financial) is likely creating trouble at many dealers. The counterparty exposures across dealers have grown so exponentially that it is difficult to imagine any one of them failing in isolation.

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems
by Irene Aldridge
Published 1 Dec 2009

The change order can specify the change in the limit price, the order type (buy or sell), and the number of units to process. A change order can also be placed to cancel an existing limit order. Some execution counterparties may charge a fee for a change order. A margin call close order is one order traders probably want to avoid. It is initiated by the executing counterparty whenever a trader trades on margin and the amount of cash in the trader’s account is not sufficient to cover two times the losses of all open positions. The margin call close is executed at market at the end of day, which varies depending on the financial instrument traded. Most broker-dealers and ECNs provide phone support for clients.

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As Table 6.3 shows, on an average day between October 1, 2003 and May 14, 2004, the most common orders—both by number of orders and by volume—were stop-loss or take-profit (22 percent and 23 percent, Daily Distributions of Trades per Trade Category in FX Spot of Oanda TABLE 6.3 FXTrade, a Toronto-Based Electronic FX Brokerage, as Documented by Lechner and Nolte (2007) Transaction Record Buy Market (open) Sell Market (open) Buy Market (close) Sell Market (close) Limit Order: Buy Limit Order: Sell Buy Limit Order Executed (open) Sell Limit Order Executed (open) Buy Limit Order Executed (close) Sell Limit Order Executed (close) Buy Take-Profit (close) Sell Take-Profit (close) Buy Stop-Loss (close) Sell Stop-Loss (close) Buy Margin Call (close) Sell Margin Call (close) Change Order Change Stop-Loss or Take-Profit Cancel Order by Hand Cancel Order: Insufficient Funds Cancel Order: Bound Violation Order Expired Total: Percentage of Orders per Order Count 13.10 10.61 8.27 10.27 5.41 4.76 3.22 Mean Daily Trading Volume in EUR Percentage of Orders by Trade Volume percent percent percent percent percent percent percent 167,096 135,754 110,461 140,263 61,856 48,814 23,860 2.92 percent 14,235 1.20 percent 0.46 percent 6,091 0.52 percent 0.46 percent 6,479 0.55 percent 3.14 3.49 2.18 2.55 0.12 0.17 3.01 22.36 14.13 11.48 9.34 11.86 5.23 4.13 2.02 1.09 1.64 1.67 1.98 0.06 0.10 5.18 22.71 percent percent percent percent percent percent percent percent percent percent percent percent percent percent percent 12,858 19,401 19,773 23,391 733 1,213 61,229 268,568 percent percent percent percent percent percent percent percent 2.41 percent 0.28 percent 44,246 10,747 3.74 percent 0.91 percent 0.20 percent 860 0.07 percent 0.65 percent 100.04 percent 4,683 1,182,611 0.40 percent 100.00 percent 72 HIGH-FREQUENCY TRADING Popularity of Orders as a Percentage of Order Number and Total TABLE 6.4 Volume among Orders Recorded by Oanda between October 1, 2003 and May 14, 2004 Number of Orders, Daily Average Total Volume in EUR Percent of All Open Orders That Are Buy Orders 55 percent 55 percent Percent of Market Orders That Are Buy Orders 55 percent 55 percent Percent of Open Buy Limit Orders Executed Percent of Open Sell Limit Orders Executed 60 percent 61 percent 39 percent 29 percent Total Long Positions Opened per Day 1,647 190,956 Closing the Long Position Sell Market (close) Sell Take-Profit (close) Sell Stop-Loss (close) Sell Limit Order Executed (close) Sell Margin Call (close) 63 21 16 3 1 73 10 12 3 1 Order Type Total Short Positions Opened per Day Closing the Short Position Buy Market (close) Buy Take-Profit (close) Buy Stop-Loss (close) Buy Limit Order Executed (close) Buy Margin Call (close) percent percent percent percent percent 1,367 61 23 16 3 1 percent percent percent percent percent percent percent percent percent percent 149,989 74 9 13 4 0 percent percent percent percent percent respectively), buy market open (13 percent and 14 percent), sell market open (11 percent), and sell market close (10 percent and 12 percent by order number and volume, respectively).

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As Table 6.3 shows, on an average day between October 1, 2003 and May 14, 2004, the most common orders—both by number of orders and by volume—were stop-loss or take-profit (22 percent and 23 percent, Daily Distributions of Trades per Trade Category in FX Spot of Oanda TABLE 6.3 FXTrade, a Toronto-Based Electronic FX Brokerage, as Documented by Lechner and Nolte (2007) Transaction Record Buy Market (open) Sell Market (open) Buy Market (close) Sell Market (close) Limit Order: Buy Limit Order: Sell Buy Limit Order Executed (open) Sell Limit Order Executed (open) Buy Limit Order Executed (close) Sell Limit Order Executed (close) Buy Take-Profit (close) Sell Take-Profit (close) Buy Stop-Loss (close) Sell Stop-Loss (close) Buy Margin Call (close) Sell Margin Call (close) Change Order Change Stop-Loss or Take-Profit Cancel Order by Hand Cancel Order: Insufficient Funds Cancel Order: Bound Violation Order Expired Total: Percentage of Orders per Order Count 13.10 10.61 8.27 10.27 5.41 4.76 3.22 Mean Daily Trading Volume in EUR Percentage of Orders by Trade Volume percent percent percent percent percent percent percent 167,096 135,754 110,461 140,263 61,856 48,814 23,860 2.92 percent 14,235 1.20 percent 0.46 percent 6,091 0.52 percent 0.46 percent 6,479 0.55 percent 3.14 3.49 2.18 2.55 0.12 0.17 3.01 22.36 14.13 11.48 9.34 11.86 5.23 4.13 2.02 1.09 1.64 1.67 1.98 0.06 0.10 5.18 22.71 percent percent percent percent percent percent percent percent percent percent percent percent percent percent percent 12,858 19,401 19,773 23,391 733 1,213 61,229 268,568 percent percent percent percent percent percent percent percent 2.41 percent 0.28 percent 44,246 10,747 3.74 percent 0.91 percent 0.20 percent 860 0.07 percent 0.65 percent 100.04 percent 4,683 1,182,611 0.40 percent 100.00 percent 72 HIGH-FREQUENCY TRADING Popularity of Orders as a Percentage of Order Number and Total TABLE 6.4 Volume among Orders Recorded by Oanda between October 1, 2003 and May 14, 2004 Number of Orders, Daily Average Total Volume in EUR Percent of All Open Orders That Are Buy Orders 55 percent 55 percent Percent of Market Orders That Are Buy Orders 55 percent 55 percent Percent of Open Buy Limit Orders Executed Percent of Open Sell Limit Orders Executed 60 percent 61 percent 39 percent 29 percent Total Long Positions Opened per Day 1,647 190,956 Closing the Long Position Sell Market (close) Sell Take-Profit (close) Sell Stop-Loss (close) Sell Limit Order Executed (close) Sell Margin Call (close) 63 21 16 3 1 73 10 12 3 1 Order Type Total Short Positions Opened per Day Closing the Short Position Buy Market (close) Buy Take-Profit (close) Buy Stop-Loss (close) Buy Limit Order Executed (close) Buy Margin Call (close) percent percent percent percent percent 1,367 61 23 16 3 1 percent percent percent percent percent percent percent percent percent percent 149,989 74 9 13 4 0 percent percent percent percent percent respectively), buy market open (13 percent and 14 percent), sell market open (11 percent), and sell market close (10 percent and 12 percent by order number and volume, respectively).

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
by Tim Lee , Jamie Lee and Kevin Coldiron
Published 13 Dec 2019

Entering that year, LTCM managed just under US$5 billion, but with an estimated leverage of 25 to 1, it controlled securities worth US$125 billion. Leverage not only multiplies the assets under a hedge fund’s control; it also directly reduces its margin for error, in turn making the portfolio much less stable. Even a relatively small loss on a highly levered portfolio can trigger a margin call. To meet the margin call, positions must be liquidated, often in adverse market conditions, and a vicious circle of forced selling can be triggered. In other words, the US$125 billion of securities controlled by LTCM was vastly more unstable than that same amount under the control of a traditional investor.

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Assume, for example, that “the person” is a bank, or a shadow bank, or a hedge fund, or a corporation—an entity that does not feel any such things. Could such an entity ever need one more dollar to save its life as surely as if it were a person starving to death? It could if, and only if, it were levered. It could need one more dollar in the face of ruin risk. It could need one more dollar to answer the fatal margin call. One more dollar has value even to a speculator who does not need it for himself. Because someone else, somewhere, does. So its value is the yield it can earn by lending it out to give that person or entity the leverage she needs, by trading with her to give her the liquidity she needs. A dollar is most valuable when it can earn the most.

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The Fed lends dollars to the European Central Bank or appropriate national central bank, which then on-lends the dollars to the distressed borrower (via a domestic bank). The effect of this is that the dollar borrower, who has in place a carry trade, is not forced to liquidate his position; he is relieved from the pressure of the margin call that afflicts levered traders during a carry crash. In the absence of the central bank intervention, he would be forced to buy dollars in the The Fundamental Nature of the Carry Regime  105 foreign exchange market to repay his dollar funding, an act that would put further downward pressure on the domestic currency exchange rate with the dollar.

The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters
by Gregory Zuckerman
Published 5 Nov 2013

Souki had been unwilling to sell any of his nearly three million Cheniere shares, worried about the message it might send investors and confident that bigger gains were ahead. So he had borrowed money to pay for his expensive lifestyle, pay his taxes, and pay other expenses, using the shares as collateral. As the stock plummeted, Souki received a margin call from his lenders, forcing him to sell over two million of his shares to pay back the debt. By the end of June 2008, he was left with just 600,000 shares of his company, worth nearly $3 million. A few weeks later, the stock was below three dollars a share. Souki was worth a few million dollars, but it mostly was in real estate, which wasn’t liquid and was tumbling in value.

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The Goldman manager relayed disturbing news: The Chesapeake shares that McClendon had used as collateral had dropped so dramatically that they no longer held enough value to back the approximately $300 million that McClendon had borrowed from the investment bank. Come up with more collateral fast or we’re going to have to sell your shares to help satisfy your debts, the Goldman executive told McClendon. The Chesapeake cofounder was getting a “margin call” from Goldman, as if he were a gambler under pressure to repay debts to his bookie after a bad losing streak. Only in this case, the bookie was facing his own strains caused by the plummeting market. McClendon had to do something to stop Goldman. If they sold his shares, Chesapeake likely would sink even further and he’d suffer the kind of embarrassment few chief executives had ever endured.

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“What I never dreamed could happen, did happen,” McClendon later said.3 “I honestly did not feel it was risky to have one dollar of margin debt for every three dollars of stock value.” On Friday, October 10, McClendon tried to explain what had happened to shareholders. The company issued a statement saying that McClendon had “involuntarily” sold “substantially all” of his Chesapeake stock over the previous three days to satisfy margin calls, blaming the “extraordinary circumstances of the worldwide financial crisis.” “In no way do these sales reflect my view of the company’s financial position or my view of Chesapeake’s future performance potential,” McClendon said in the statement, adding that he was “very disappointed” by the turn of events.

Stock Market Wizards: Interviews With America's Top Stock Traders
by Jack D. Schwager
Published 1 Jan 2001

In that type of market, where there are no bidders, it doesn't make any difference what you own; everything collapses. That in itself might not have been catastrophic, as the market eventually recovered. The problem was that I was heavily leveraged, and I had a huge margin call. Although I could have borrowed the money to cover my margin call, I thought doing so would be unwise. It was a valuable, albeit traumatic, lesson in the evils of leverage. How much did you lose? I don't remember the exact intramonth figures, but I can tell you that I was up over 100 percent for nine months going into the fourth quarter, and I finished the year only slightly above breakeven.

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I still have the trade slips right here in my desk drawer. It wasn't until last year—seventeen years after this happened—that I was able to pull them out and look at them. I had a margin call in excess of one million dollars on my account, which is what I would have had to put up if I wanted to hold the short stock position instead of buying it back. Technically, you are supposed to have five days to meet the margin call, but the firm was on me to cover the position right away. M A R K D. C O O K * That night I called my mother, which was the hardest phone call I ever had to make. I felt like a complete failure.

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In 1979 when gold prices exploded, I sold options on gold stocks. I figured out that I could sell a combination [the simultaneous sale of a call and put] on ASA for more money than the margin I had to put up for the trade. At that time, the margin department hadn't figured this out. As a result, I could put on any size position and not get a margin call. There was only one slight problem—the stock took off on me. I made a little bit on the puts, which expired worthless, but lost a lot on the calls, which went way in the money. It was back to the drawing board again. How did you have enough money to cover your losses? Oh, I was a very good broker.

The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors
by Spencer Jakab
Published 1 Feb 2022

It encouraged risky behavior by its clients because it profited from that behavior.[16] But when you get more and more people to take big risks, then the market itself is affected. It creates a lot of volatility and weird price changes, and, eventually, if you encourage the use of borrowing, some of those people will get “margin calls”—forced sales to pay back that money that can leave them wiped out. If that happens to an individual Robinhood user, then it is tough luck for that person—he or she should have read the fine print. Please put up more cash, or we have to liquidate your portfolio. But margin calls can happen to brokers too, and their creditors are more cautious—they don’t wait for a broker to actually face a shortfall. That could bring the whole industry down like a row of dominoes.

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Since the 1970s the Federal Reserve has mandated that such loans be capped at 50 percent. What it means is that investors with $1,000 in qualified stock can borrow up to another $1,000 by using their portfolio as collateral. If those stocks fall sharply, then they would need to find more cash or be forced to sell some of that stock—a margin call. Whatever might be done to put speed bumps on retail trading, whether it is instituting a tax or taking some other measure, it would likely be anathema to Tenev, Griffin, and many others in the finance industry. WallStreetBets users might think of it as a move to placate hedge funds, but—Plotkin’s experience notwithstanding—those funds would probably be sorry to see less turnover in the market too.

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Current short fees are like 60% and from some figures we can draw on, we estimate that around 70% of the shorts got in under $7, GameStop is currently nearing $10. 70% of the shorts are underwater. Even if you don’t believe that any of their initiatives will work you have to admit that the company will be able to continue operating for another two years off the new console hype alone. When the stock hits roughly $15, we can expect to see several margin calls trigger a fucking massive short squeeze. There were relatively few mentions of GameStop on the forum the following month, but they began to rise in early November. For example, the stock was mentioned 84 times on November 13 and 180 times on November 15, according to TopStonks.com. The next day, Cohen released a public letter urging a road map to control costs, a focus on profitable stores, and a better e-commerce business.

Derivatives Markets
by David Goldenberg
Published 2 Mar 2016

The tick size in CL is $.01/bbl and the contract refers to 1000 bbl of underlying crude oil. Therefore a movement in the futures price of $.01/bbl corresponds to how many dollars? c. How many ticks would the CL futures price have to move downward in order for the trader to receive a margin call? d. How much must be deposited into the account once the margin call is received? In order to understand the application of all of the definitions in this section, some examples will help. Example 1 1. An individual sells (shorts) one Dec. Comex (part of the Cmegroup) gold futures contract at $F0,T=$1600/oz. To get the specifications for this contract, one goes to cmegroup.com and looks under metals.

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It is pretty clear that the investor lost money here due to the futures price rising against a short futures position. The amount of the loss is, The minus sign indicates a loss. Would the investor receive a margin call? In order to answer this question, we have to calculate the ‘equity’ in the investor’s account. The precise definition is given in definition 9 above. Customer’s Equity =Initial Margin(s)+unrealized gains on open futures positions–unrealized losses on open futures positions =$7425–$2000 =$5425<$6750=maintenance margin level. Indeed, there would be a margin call. The investor would have to supply an additional amount into his account to bring the equity up to the initial margin (not just to the maintenance margin level).

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However, when the price of the underlying dramatically increases (as in S&P 500 futures), one can expect initial margin requirements to also increase. b. Maintenance Margin is a level. This level must be maintained at all times. Think of this as 75 to 80% of the initial margin level. The rule is that, if the equity in a customer’s account falls below the maintenance margin level, then the customer gets a margin call requiring him to deposit funds into the account in order to bring the equity back to the initial margin level. 9. The Equity in a customer’s account consists of initial margins plus unrealized gains on open futures positions minus any unrealized losses on open futures positions. 10. The Close of the Market is roughly the last 30–60 seconds of trading during the close.

The Investment Checklist: The Art of In-Depth Research
by Michael Shearn
Published 8 Nov 2011

The other way is for the manager to take out a loan, using the stock as collateral, to pay the tax, which has the effect of deferring the tax. The main risk to this is that if the stock price drops below a certain price, the manager will face a margin call. Managers Who Sell Stock to Meet Margin Calls During 2008, when the S&P 500 dropped by more than 37 percent, many managers had to sell stock to meet margin calls. One of the more noteworthy sales during this time was from Aubrey McClendon, co-founder and CEO of Chesapeake Energy Corporation, who was forced to sell 94 percent of his holdings for $569 million to meet margin calls when Chesapeake’s stock price dropped 65 percent.33 Key Points to Keep in Mind Learn about the Background of Senior Managers The most logical predictor of the future success of a business is its management.

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One business that uses permanent equity capital instead of short-term funds to finance its business is global asset manager Brookfield Asset Management. In 2010, Brookfield was funded by $30 billion of permanent equity capital. CEO Bruce Flatt explained why, “This is capital that does not come due, has no margin calls and whether it trades for less in the market due to external factors has very little effect on the capital base.”9 Over the years, Brookfield has been strengthening its permanent equity capital in order to strengthen its balance sheet. For example, in 2001 when Brookfield converted debentures, which are mid- to long-term debt, into common shares, this added permanent equity to Brookfield’s capital base.

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If you are unable to determine the motivation behind the purchases or sales, then you do not have enough information to draw a conclusion, and you need to be careful to not make assumptions. Some of the most common reasons are listed here and described in more detail in the following paragraphs: 10b5–1 programs Tax purposes Margin calls Personal reasons, such as commitments to charities that need to be funded Executive Officers Who Sell Shares under the Terms of a 10b5–1 Program A 10b5–1 program is set up under SEC regulation designed to allow insiders to buy or sell company shares in an orderly pattern without having to worry about allegations of improper use of insider information.

Business Adventures: Twelve Classic Tales From the World of Wall Street
by John Brooks
Published 6 Jul 2014

In brokerage offices, employees were kept busy—many of them for most of the night—at various special chores, of which by far the most urgent was sending out margin calls. A margin call is a demand for additional collateral from a customer who has borrowed money from his broker to buy stocks and whose stocks are now worth barely enough to cover the loan. If a customer is unwilling or unable to meet a margin call with more collateral, his broker will sell the margined stock as soon as possible; such sales may depress other stocks further, leading to more margin calls, leading to more stock sales, and so on down into the pit. This pit had proved bottomless in 1929, when there were no federal restrictions on stock-market credit.

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And at the close of trading on May 28th nearly one stock in four had dropped as far as that from its 1961 high. The Exchange has since estimated that 91,700 margin calls were sent out, mainly by telegram, between May 25th and May 31st; it seems a safe assumption that the lion’s share of these went out in the afternoon, in the evening, or during the night of May 28th—and not just the early part of the night, either. More than one customer first learned of the crisis—or first became aware of its almost spooky intensity—on being awakened by the arrival of a margin call in the pre-dawn hours of Tuesday. If the danger to the market from the consequences of margin selling was much less in 1962 than it had been in 1929, the danger from another quarter—selling by mutual funds—was immeasurably greater.

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Breaking down the public individuals into income categories, the Exchange calculated that those with family incomes of over twenty-five thousand dollars a year were the heaviest and most insistent sellers, while those with incomes under ten thousand dollars, after selling on Monday and early on Tuesday, bought so many shares on Thursday that they actually became net buyers over the three-day period. Furthermore, according to the Exchange’s calculations, about a million shares—or 3.5 per cent of the total volume during the three days—were sold as a result of margin calls. In sum, if there was a villain, it appeared to have been the relatively rich investor not connected with the securities business—and, more often than might have been expected, the female, rural, or foreign one, in many cases playing the market partly on borrowed money. The role of the hero was filled, surprisingly, by the most frightening of untested forces in the market—the mutual funds.

How to Speak Money: What the Money People Say--And What It Really Means
by John Lanchester
Published 5 Oct 2014

Then the person who sold you the wheat rings you up and says, sorry old boy, margin call, we need some more money to cover that wheat you’ve bought. You stump up another $10,000 to cover the new margin. That’s fine if you have the money—but if you don’t, and especially if you have bought lots of similar contracts and have lots of margin calls arriving simultaneously, then suddenly you’re in real trouble. If you had gone the full monty and used your $100,000 to buy $1,000,000 of wheat on margin, you’d have just used the power of margin to lose all your money, and another $50,000 on top. In finance, a margin call can also be triggered by doubts about an institution’s creditworthiness.

…

The great lesson of Kindleberger’s book is to be wary of certainty. The history of manias, panics, and crashes is largely the story of people who were certain: nothing makes it more likely that you will get something completely wrong than the certainty that you have got something completely right. margin call When you buy something on margin—usually a derivative—you are putting down only a piece of the full price of an asset, to cover the amount that is thought to be at risk. Say you’re buying $100,000 of wheat futures, with a contract date a year away. You’re certain not to want all that wheat, and you and the person selling to you are well aware of the fact: what you’re doing is holding on to the contract for a bit and then selling it on.

…

In finance, a margin call can also be triggered by doubts about an institution’s creditworthiness. In the collapse of Lehman Brothers, one of the short-term triggers was other banks deciding Lehman needed to put up more collateral—in effect to raise more money against the possibility of a margin call. margin, high and low Margin in this sense is the amount of profit a business owner makes by selling something. An Italian restaurant owner once told me that more than anything else in the world, he loves pasta. I asked him why, expecting an answer along the lines of Marcella Hazan’s remark that nothing had contributed more to the sum of human happiness than humble-seeming pasta.

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History
by Diana B. Henriques
Published 18 Sep 2017

There already was sand in the machine, the kind of computer trouble that Jerry Corrigan had confronted nearly two years before at the Bank of New York—the kind of blindsiding mechanical malfunction that can erupt in any high-speed crisis. Because of a software flaw, the reports sent out by the Merc clearing system after the close on Monday had failed to reflect a margin call collected earlier in the day, making it appear that the Merc was calling for an additional $2.5 billion, not a total of $2.5 billion. That had thoroughly spooked a number of already nervous banks, and credit had tightened sharply. Nerves in the banking industry were further rattled when the Fedwire, the critical electronic highway that moved cash from bank to bank, broke down entirely on Monday between 11 a.m. and 1:30 p.m., New York time, overwhelmed by the unprecedented volume of traffic it had to handle.

…

The Chicago Board of Trade, characteristically, would have nothing to do with a Merc-led trading halt. Its MMI pit, thinly populated and wildly volatile, continued to trade. And thank God for that, thought Blair Hull, a well-known trader on the Chicago Board Options Exchange and the only member of his small trading firm who also had a seat on the Chicago Board of Trade. Hull needed to meet a margin call. With the CBOE closed, he hurried to the Board of Trade’s trading floor, stepped into the MMI pit, and began buying to cover a short position that was costing him a lot of money. Sellers swarmed him, and he quickly bought what he needed. And on the strength of his buying, the MMI futures contract suddenly rallied, spurting up beyond any sensible level, as it regularly did.

…

The market’s relentless decline since August and the historic collapse the previous week had cost Teddy Wang a lot of money. By sunrise in Hong Kong the previous Saturday morning, Wang owed Charles Schwab $124 million, and if he didn’t pay, Schwab would be on the hook for the full sum. In response to two margin calls from the firm, Wang paid $40 million. Then, with his margin debt at the still-fatal level of $84 million, he stopped returning Schwab’s calls. Wang’s disappearance ratcheted up the pressure. As a publicly traded company, Schwab had ten days under U.S. securities law to disclose any material change in its financial condition; time would run out on Thursday, October 29.

Sabotage: The Financial System's Nasty Business
by Anastasia Nesvetailova and Ronen Palan
Published 28 Jan 2020

The principle, however, has remained: if you want to make money – real money – in finance, you need to find ways of sabotaging either your clients, your competitors or the government. If you are big enough, you can succeed on all three fronts. 2 WE ALL ARE IN IT TOGETHER Sabotage and the Cycle of Debt Will Emerson, a senior bank executive played by Paul Bettany in the movie Margin Call, explains the function of banking to a younger colleague, who is about to lose his job in the upcoming financial meltdown: If people want to live like this… with their big cars and these houses that they haven’t even paid for. Then you are necessary. The only reason they can continue to live like kings is because we’ve got our fingers on the scale in THEIR favor.

…

Collectively, they need to do exactly what Veblen observed more than a hundred years ago: they make money by sabotaging their clients, their competitors, their governments and, ultimately, the market itself. 3 BE FIRST, BE SMARTER AND CHEAT Sabotage by Financial Innovation Another character from the movie Margin Call, John Tuld, beautifully played by Jeremy Irons and based apparently on a composite of the real-life personalities of John Thain of Merrill Lynch and Lehman’s Dick Fuld, lectures his board at a critical point of reckoning for his bank: ‘There are three ways to make a living in this business… Be first, be smarter or cheat.’1 But what if you don’t have to choose between the three ways?

…

By March 2008 Sloan’s clients had withdrawn $25bn from Bear.17 Bear’s fatal week began late on a frozen day, Friday, 7 March 2008, when a major European bank18 declined Bear’s request for a short-term $2bn loan.19 ‘Being denied such a loan is the Wall Street equivalent of having your buddy refuse to front you $5 the day before pay day,’ Fortune wrote.20 On the following Monday a major rating agency downgraded all MBSs issued by Bear.21 On Tuesday, 11 March, the Fed announced that it would make $200bn in Treasury securities available for struggling securities firms, starting on 27 March.22 Investors drew the conclusion that the Federal Reserve was preparing to bail out a failing securities firm, and Bear Stearns appeared to be a likely institution of concern. That very Tuesday, Bear’s new CFO, Samuel L. Molinaro, went on CNBC to dispel the rumours about Bear’s position: ‘There is no liquidity crisis. No margin calls. It’s nonsense,’ he said emphatically. As he was on air, three major Wall Street banks, Goldman Sachs, Credit Suisse and Deutsche Bank, received a large amount of novation requests for Bear Stearns from hedge funds, among them Citadel Investment and Paulson & Co.23 Novation requests enable financial firms to sell a contract which transfers credit risk to a third party in exchange for a fee.

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management
by Alexander Elder
Published 28 Sep 2014

A successful trader is a realist. He knows his abilities and limitations. He sees what's happening in the markets and knows how to react. He analyzes the markets without cutting corners, observes himself, and makes realistic plans. A professional trader cannot afford illusions. Once an amateur takes a few hits and gets a few margin calls, he swings from cocky to fearful and starts developing strange ideas about the markets. Losers buy, sell, or avoid trades due to their fantastic ideas. They act like children who are afraid to pass a cemetery or look under their bed at night because they are afraid of ghosts. The unstructured environment of the market makes it easy to develop fantasies.

…

What separates winners from losers isn't intelligence or secrets, and certainly not education. The Undercapitalization Myth Many losers think that they would trade successfully if they had a bigger account. People destroy their accounts either by a string of losses or a single abysmally bad trade. Often, after the loser is sold out, unable to meet a margin call, the market reverses and moves in the direction he expected. He starts fuming: had he survived another week, he would have made a fortune instead of losing! Such people look at market reversals that come too late and think that those turns confirm their methods. They may go back to work and earn, save, or borrow enough money to open another small account.

…

For example, if gold trades at $1,500/oz and you buy a 100-oz contract on a $7,500 margin and catch a $75 price move, you'll gain 100%. A beginner looks at these numbers and exclaims, “where have I been all my life?” He thinks he's found a royal road to riches. But there is a catch. Before that market rises $75, it may dip $50. That meaningless blip will trigger a margin call and force a small speculator's account to go bust—despite his correct forecast. Easy margins attract adrenaline junkies who quickly go up in smoke. Futures are very tradable—but only if you follow strict money management rules and don't go crazy with easy margins. Professionals put on small initial positions and pyramid them if a trade moves in their favor.

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

Overly optimistic buyers lose their confidence, and sellers become more confident. Late buyers especially worry about their positions, and often start selling to stop their losses. Traders who financed their positions on margin may have to sell their positions to satisfy margin calls from their brokers. Other long holders who have placed stop loss orders also will start to sell. Order anticipators may anticipate these margin calls and stop orders, and sell before them. A crash occurs when the combined effect of all their selling causes prices to fall quickly. * * * ▶ You Believe You Are Right, but … (Confidence Is Everything) Even when value traders believe that prices greatly differ from fundamental values, they may lack the confidence to trade on their opinions.

…

For example, RCA—which proved to be one of the strongest radio stocks—did not rise to a new high until 34 years after the crash. FIGURE 28-1. Dow Jones Industrial Average, 1900-1950 Source: Dow Jones and Co., at www.djindexes.com. The crash partly occurred because traders needed to sell stock to satisfy margin calls following the decline in stock prices over the previous month. Much selling undoubtedly also was due to value traders who sold the market short, and to speculators who anticipated the sell orders that the margin calls would create. * * * ▶ Market Failures or Market Corrections? Analysts generally cannot attribute the large price changes that occur in broad-based market crashes to unexpected bad fundamental news of commensurate importance.

…

The various exchanges therefore amended their coordinated halt rules in early 1998 to provide for halts at 10, 20, and 30 percent thresholds, as described above. ◀ Source: NYSE Rule 80B at www.nyse.com/pdfs/lm9815.pdf. * * * Finally, a trading halt rule may decrease transitory volatility by allowing traders greater time to respond to intraday margin calls and to remove stop loss orders. When traders are unable to satisfy their margin calls, brokers will trade to stop their losses. Since stop loss orders further imbalance an uninformed order flow, a halt that reduces their numbers may reduce transitory volatility. Arguments Against Opponents of trading halts and price limits offer two arguments that suggest these circuit breakers may actually increase transitory volatility.

Ethics in Investment Banking
by John N. Reynolds and Edmund Newell
Published 8 Nov 2011

The fact that this value (or power) exists and is used does not render such use necessarily unethical, although at times when its use goes clearly beyond any reasonable exercise Ethical Issues – Clients 121 of a contractual right it is likely to raise ethical problems. An additional question should be posed to the original advisers on debt structuring, in terms of whether they have fully explained the “option value” being conceded by potentially allowing such a hold-out. Margin calls Similarly, borrowing against securities raises specific problems. These relate to the power given to a lender to divest the security under certain circumstances. The lender, under these circumstances, may only be concerned with making whole the original loan. This can result in inefficiently timed (and obviously so) sales of securities, at the worst possible terms for the borrower, who therefore experiences significant economic harm.

…

This can result in inefficiently timed (and obviously so) sales of securities, at the worst possible terms for the borrower, who therefore experiences significant economic harm. As with the discussion on hold-out value, the borrower may have given away value without realising how significant it is, not appreciating the significant option value associated with decisions to sell (or buy) securities. In practice, the market can anticipate some major margin calls or defaults, and consequently the price of affected securities is likely to be adversely affected. Under these circumstances, the duty of the lender is to recover the debt rather than speculate on the future value of the security, leading to apparently economically inefficient behaviour, to the detriment of the borrower.

…

Index ABACUS, 7, 16–17, 46, 63–4, 68, 73, 78 Abrahamic faiths Christianity, 52–4 Islam, 54–5 Judaism, 56 abuse market, 14, 70, 75, 84–8 personal, 159 of resources, 127–8 abusive management practices, 157 abusive trading, 93 adult entertainment, 56 advisers financial, 109 investment banking, 111 sell-side, 107, 111–13 trusted, 108–9, 125 advisory fees, 119, 124 advisory markets, 73 agents, 65 aggressive behaviours, 118–19 Alpha International, 9 American Bar Association, 19 Anderson, Geraint “CityBoy”, 8 Anglican Communion, 53 Anglicanism, 53 annual general meeting (AGM), 29, 54 Aquinas, Thomas, 34, 37 Aristotle, 34 Arjuna, 57 attrition rate, 132 authorisation, informal, 81, 98 BAE Systems, 48 bait and switch, 102–3, 158 bank debt, 82–3, 120 banking regulations, 16 Bank of America, 16 Bank of Credit and Commerce International (BCCI), 12 Bank of England, 25 Barclays Capital, 139 Bar Council, 19 Bayly, Daniel, 8 Bear Stearns, 5, 16, 76 beauty parade, 110 behaviours aggressive, 118–19 discriminatory, 129–31 of Hedge fund, 12 investment banking, 3 management, 131–2 market, 71 misleading, 86 unethical, 68 virtuous, 37 Benedict XVI, Pope, 6, 52 Bentham, Jeremy, 36 Bernanke, Ben S., 96 Besley, Tim, 42 Beyond the Crash (Brown), 4 Bhagavad Gita, 57 bid price, 64 big cap, 65, 85 black box approach, 114 Blackstone Group, 20 Blankfein, Lloyd, 47, 63–4, 68, 78 bluffing, 113 Boesky, Ivan, 12 bonds government, 23 investment grade, 118 junk, 118 bonus pools in public ownership, 136–9 Bootle, Roger, 4 Bribery Act 2010, 129 British Academy, 42 Brown, Gordon, 4, 135 Buddhism, 57 bullying, 159 170 Index business ethics of fiduciary duties, 27 of financial crisis, 12–32 within governments, 59 of market capitalism, 12–14 of regulation, regulatory changes and, 18–21 of religion, 51–62 of shareholders, 27–9 strategic issues with, 30–1 Business Ethics Center, 56 Business Judgment Rule, 20 Business Standards Report, 46 buy recommendation, 115 capitalism market, 12–14 modern, 54 see also casino capitalism capital markets, 155 advisory markets vs., 73 conflicts of interest in, 112–14 cardinal virtues, 37 Caritas in Veritate (Benedict), 6, 52 cash compensation, 132, 134 casino capitalism emergence of, 43 in investment banking, 3 speculative, 16, 93 categorical imperative, 34, 59, 69 Caterpillar, 48 Central Finance Board of the Methodist Church (CFB), 54, 59 chief executive officer (CEO), 116 Christianity, 52–4 Anglican Communion, 53 Methodist Church, 53 Roman Catholic Church, 53 Christian Old Testament, 34 Church Investors’ Group (CIG), 135 Church of England, 9, 53, 58 Citigroup, 19, 112 claiming credit, 134 clients confidential information, 120 conflicts of interest, 105–10 171 duty of care, 105 engagement letters, 122–3 fees, 115–18 financial restructuring, 119–20 hold-out value, 120–1 honesty, 101–5 margin-calls, 121 practical issues, 110–15 promises, 100–1 restructuring fees, 121–2 syndication, 118–22 truth, 101–5 Code of Ethics, 47–50, 147–51 for Goldman Sachs business principles, 46 in investment banking, 47–9 Revised, 47 collatoralised debt obligations (CDOs), 30, 42, 75 command economies, 13 commercial banking, 19–21, 25 communication within markets, 88 Companies Act 2006, 27 compensation cash, 132, 134 defined, 132 for employees, 135 internal issues on, 8 for junior bankers, 136 levels of, 132–3, 138 objectivity of, 144 political issues with, 6, 137 restrictions on, 10 competitors, 113 compliance corporate, 20 danger of, 20 frameworks for, 68, 146 regulatory, 18 requirements of, 6 confidential information, 120 conflicts of interest, 105–10, 158 with capital markets, 109–10 with corporate finance, 107–8 personal, 47 with pre-IPO financing, 110 with private equity, 110 172 Index conflicts of interest – continued reconciling, 68–70 of trusted advisers, 108–9 consequentialist ethics, 36–7, 42 corporate compliance, 20 Corporate/Compliance Social Responsibility (CSR), 7 corporate debt, 17 corporate entertainment, 128–9, 159 corporate finance, 107–8 Corporate Sustainability Committee, 152 Costa, Ken, 9 Cox, Christopher, 96–7 creative accounting, 12 credit crunch, 17 credit default swap (CDS), 71 credit downgrade, 17, 76 Credit Lyonnais, 12 creditors, restricted, 121 credit rating, 75–7 calculating, 76 inaccurate, 5 manipulating, 75, 156, 158 unreliability of, 17 credit rating agencies, 76 Crisis and Recovery (Williams), 53 culture, 46, 136, 151 customers, 69 Daily Telegraph, 84 Debtor in Possession finance (DIP finance), 80 debts bank, 82–3, 120 corporate, 17 junior, 118 rated, 77 senior, 118 sovereign, 17 deferred equity, 5 deferred shares, 133 Del Monte Foods Co., 107 deontological ethics, 34–6 stockholders, 41–2 trust, 40–1 derivative, 27, 30 dharma, 63–4 Dharma Indexes, 57 discounted cash flow (DCF), 27 discount rate, 27 discriminatory behaviour, 129–31 distribution, 15, 35, 66 Dodd–Frank Wall Street Reform and Consumer Protection Act, 25 dotcom crisis, 94 dotcom stocks, 17 Dow Jones, 55–6 downgrade credit, 17, 76 defined, 76 multi-notch, 17, 76 duties, see rights vs. duties duty-based ethics, 66–8 duty of care, 105 Dynegy, 8 Earnings Before Interest Tax Depreciation and Amortisation (EBITDA), 27 economic free-ride, 5, 21 economic reality, 137 effective tax rate (ETR), 140 emissions trading, 14 employees, compensation for, 135 Encyclical, 52 engagement letters, 122–3, 159 Enron, 8, 12, 17, 20, 76 enterprise value (EV), 27 entertainment adult, 56 corporate, 128–9, 159 sexist, 159 equity deferred, 5 private, 2–3, 12, 110 equity research, 88–9, 113–15 insider dealing and, 83–4 ethical behaviour, 38–9 Ethical Investment Advisory Group (EIAG), 53, 58 ethical investment banking, 145–7 ethical standards, 47 Index ethics consequentialist, 36–7, 42 deontological, 34–6 duty-based, 66–8 exceptions and, effects of, 89–90 financial crisis and, 4–8 in investment banking, 1 in moral philosophy, 1 performance and, 8–10 rights-based, 66–8 virtue, 37–8, 43–4 see also business ethics; Code of Ethics Ethics Helpline, 48 Ethics of Executive Remuneration: a Guide for Christian Investors, The, 135 European Commission, 89 European Exchange Rate Mechanism (ERM), 17 exceptions, 89 external regulations, 19, 31 fair dealing, 45 Fannie Mae, 43 Federal Home Loan Mortgage Corporation, 43 Federal National Mortgage Association, 43 fees, 115–18 advisory, 107, 116 restructuring of, 121–2 2 and 20, 13 fiduciary duties, 27–8 financial advisers, 109 Financial Conduct Authority (FCA), 26 financial crisis, business ethics during CDOs during, 90 CDSs during, 90 ethics during, 4–8, 12–34 investment banking and, necessity of, 14–15 market capitalism, 12–14 necessity of, 14–15 non-failure of, 21 positive impact of, 18 problems with, 15–17 reality of, 16 speculation in, 91 173 Financial Crisis Inquiry Commission, 76 Financial Policy Committee (FPC), 25 financial restructuring, 119–20 Financial Services Modernization Act, 19 Financial Stability Oversight Council, 25 firm price, 67 Four Noble Truths, 57 Freddie Mac, 43 free-ride defined, 26 economic, 5, 21 in investment banking, 24 FTSE, 55 Fuhs, William, 8 General Board of Pension and Health Benefits, 54, 59 German FlowTex, 12 Gift Aid, 141 Glass–Steagall Act, 19 Global Settlement, 113 golden parachute arrangements, 133 Golden Rule, 35, 150 Goldman Sachs, 7, 16, 45, 63 Business Principles, 45–6 charges against, 78 Code of Business Conduct and Ethics, 45, 68 Code of Ethics for, 47–8 Goldsmith, Lord, 27 government, 59 business ethics within, 60 guarantees of, 24 intervention by, 22–3 government bonds, 23 greed, 4–5 Green, Stephen, 8–9 gross revenues, 59 Hedge fund behaviour of, 12 failure of, 21 funds for, raising, 2 investment fund, as type of, 3 rules for, 133 174 Index Hennessy, Peter, 42 Her Majesty’s Revenue and Customs (HMRC), 140–1 high returns, 28, 110 Hinduism, 56–7 Hobbes, Thomas, 36 hold-out value, 120–1 honesty, see trust hospitality, 128–9 hot IPOs, 94 hot-stock IPOs, 94 HSBC, 9, 28, 152 Ijara, 55 implicit government guarantee, 22–3 Independent Commission on Banking, 25 inequitable rewards, 6 informal authorisation, 81, 98 Initial Public Offering (IPO), 7 of dotcom stocks, 17 hot, allocation of, 94 hot-stock, 94 insider dealings, 83–4, 155 equity research and, 83–4 ethics of, 66, 70 laws on, 84 legal prohibition on, 82 legal restrictions on, 10 legal status of, 82 legislation on, 74 restrictions on, 83 rules of, 82, 90 securities, 70 insider trading, 12 insolvency, 24–5 institutional greed, 4 integrated bank, 28 integrated investment banking, 2, 30, 67, 106, 108 interest payments, 59–60 interest rate, 60 internal ethical issues, 126–43 abuse of resources, 127–8 corporate entertainment, 128–9 discriminatory behaviour, 129–31 hospitality, 128–9 management behaviour, 131–2 remuneration, 132–9 tax, 139–41 internal review process, managing, 134 investment banking, 94 casino capitalism in, 3 Code of Ethics in, 47–9 commercial and, convergence of, 20–1 defined, 2 ethics in, 1 free-ride in, 24 integrated, 2, 30, 67, 108, 112 in market position, role of, 65–6 moral reasoning and, 38 necessity of, 14–15 non-failure of, 19–20 positive impact of, 18 recommendations in, 94–7 sector exclusions for, 58–9 investment banking adviser, 121 investment banking behaviours, 3 investment banking ethics committee, 151–3 investment bubbles, 95 investment fund, 3 investment grade bonds, 118 investment grade securities, 76 investment recommendations, 94 investments personal account, 128, 156 principal, 15, 28 proprietary, 29 IRS, 140 Islam, 54–5 Islamic banking, 6, 54–5 Jewish Scriptures, 34 Joint Advisory Committee on the Ethics of Investment (JACEI), 54 JP Morgan, 16 Judaism, 56 junior bankers, 139 junior debt, 118 junk bond, 118 “just war” approach, 38 Index Kant, Immanuel, 35, 69 karma, 57 Kerviel, Jérôme, 44, 80 Krishna, 57 Law Society, 19 Lazard International, 9 leading adviser, 41 Leeson, Nick, 12, 44, 81 legislative change, 25–6 Lehman Brothers, 5–6, 15, 21, 23, 31, 43, 76 lenders, 26, 131 lending, 59–60 leverage levels of, 25 over, 75, 80, 119 Levin, Carl, 17, 63–4, 68 light-touch regulations, 4 liquidity market, 95 orderly, 25 withdrawal of, 24 loan-to-own, 80 Locke, John, 34 London Inter-Bank Offered Rate (LIBOR), 23 London School of Economics, 43 London Stock Exchange, 65, 71, 84 long-term values, 147 Lords Grand Committee, 27 LTCM, 23 lying, 101 MacIntyre, Alasdair, 38 management behaviour, 131–2 margin-calls, 121 market abuse, 14, 70, 75, 86–8, 155 market announcements, 88 market behaviours, 74 market capitalism, 12–14 market communications, 88 market liquidity, 95 market maker defined, 65–7 investment bank as, 66 primary activities of, 65 175 market manipulation, 75 market position, role of, 104 market rate, 117 markets advisory, 73 capital, 73, 117–18, 158 communication within, 88 duties to support, 71–2 primary, 103 qualifying, 70, 82 secondary, 103 market trading, 41 Maxwell, Robert, 12 Meir, Asher, 56 mergers and acquisitions (M&As), 41, 79 Merkel, Angela, 93 Merrill Lynch, 8, 16 Methodism, 53 Methodist Central Finance Board, 59 Methodist Church, 54 Midrash, 56 Milken, Michael, 12 Mill, John Stuart, 36 Mirror Newspaper Group, 12 misleading behaviours, 86, 105 mis-selling of goods and services, 77–9, 155 modern capitalism, 54 moral-free zones, 31 moral hazard, 22, 70 moral philosophy, 1 moral reasoning, 38 moral relativism, 38–9, 49, 68 Morgan Stanley, 47 multi-notch downgrade, 17, 79 natural law, 34, 37 natural virtues, 37 necessity of investment banking, 14–15 New York Stock Exchange (NYSE), 65, 71 New York Times, 8 Noble Eightfold Path, 57 Nomura Group Code of Ethics, 47 normal market trading, 71 Northern Rock, 43 176 Index offer price, 64 off-market trading, 71–3, 90, 155 Olis, Jamie, 8 on-market trading, 70–1 oppressive regimes, 61 option value, 121 Orderly Liquidation Authority, 25 orderly liquidity, 25 out-of-pocket expenses, 127–8 over-leverage, 75, 80, 119, 158 overvalued securities, 155 patronage culture, 131, 142 Paulson, Henry M., 86 Paulson & Co., 78 “people-based” activity, 67 P:E ratio, 27 performance, 8–10 personal abuse, 159 personal account investments, 128, 156 personal account trading, 128 personal conflicts of interest, 45 pitching, 102, 159 Plato, 37 practical issues, 110–15 competitors, relationships with, 113 equity research, 113–15 pitching, 111 sell-side advisers, 111–13 pre-IPO financing, 110 prescriptive regulations, 31, 145 price tension, 79, 113 primary market, 103 prime-brokerage, 2 principal investment, 15, 28 private equity, 2–3, 12, 110 private trading, 94 Project Merlin, 133, 141 promises, 100–1 proprietary investment, 29 proprietary trading, 15, 25, 66, 150, 155 Prudential Regulation Authority (PRA), 26 public ownership, bonus pools in, 136–9 “pump and dump” strategy, 86 qualifying instruments, 70, 87 qualifying markets, 70, 82 quality-adjusted life year (QALY), 36 Quantitative Easing (QE), 23 Queen Elizabeth II, 42 Qu’ran, 54 rated debt, 77 rates attrition, 132 discount, 27 interest, 60 market, 117 tax, 140 rating agencies, 76 Rawls, John, 35, 136 recognised exchanges, 71 Regal Petroleum, 84 regulations banking, 16 compliance with, 28 external, 19, 31 light-touch, 4 prescriptive, 31, 145 regulatory changes and, 18–20 securities, 114 self, and impact on legislation, 19 regulatory compliance, 18 religion, business ethics in, 51–62 Buddhism, 56 Christianity, 52–4 Governments, 59 Hinduism, 56–7 interest payments, 59–60 Islam, 54–5 Judaism, 56 lending, 59–60 thresholds, 60 usury, 59–60 remuneration, 132–9 bonus pools in public ownership and, 136–9 claiming credit, 134 ethical issues with, 142–3 internal review process, managing, 134 1 Timothy 6:10, 135–6 Index research, 156 resources, abuse of, 127–8 restricted creditors, 120 restructuring of fees, 121–2 financial, 119–20 syndication and, 118–22 retail banks, 16 returns, 28, 156 Revised Code of Ethics, 47 right livelihood, 57 rights-based ethics, 66–8 rights vs. duties advisory vs. trading/capital markets, 73 conflict between, reconciling, 68–70 duty-based ethics, 66–8 off-market trading, ethical standards to, 71–2 on-market trading, ethical standards in, 70–1 opposing views of, 63–74 reconciling conflict between, 68–70 rights-based ethics, 66–8 Roman Catholic Church, 52 Royal Dutch Shell, 85 Sarbanes–Oxley Act, 20 Schwarzman, Stephen, 20 scope of ethical issues, 7–8 secondary market, 103 sector exclusions for investment banking, 58–9 securities investment grade, 76 issuing, 103–5 overvalued, 155 Securities and Exchange Commission (SEC), 7, 16 Goldman Sachs, charges against, 78 rating agencies, review by, 77 short-selling, review of, 96–7 securities insider dealing, 70 securities mis-selling, 77–9 securities regulations, 114 self-regulation, 19 sell recommendation, 115 177 sell-side advisers, 107, 111–13 Senate Permanent Subcommittee on Investigations, 46 senior debt, 118 sexist entertainment, 159 shareholders, 27–9 shares, deferred, 133 Shariah finance, 55 short-selling, 94–7, 154–5 Smith, Adam, 14, 35–6 social cohesion, 53 socially responsible investment (SRI), 56 Société Générale, 44, 80 solidarity, 53 Soros, George, 17 South Sea Bubble, 90 sovereign debt, 17 speculation, 91–4, 155 in financial crisis, 93 traditional views of, 91–3 speculative casino capitalism, 16, 91 spread, 21 stabilisation, 89 stock allocation, 94–7 stockholders, 41–2 stocks, dotcom, 17 Strange, Susan, 43 strategic issues with business ethics, 30–1 syndication, 119 and restructuring, 118–22 systemic risk, 24–5 Takeover Panel, 109 Talmud, 56 taxes, 139–41 tax optimisation, 158 tax rates, 140 tax structuring, 140 Terra Firma Capital Partners, 79, 112 Theory of Moral Sentiments, The (Smith), 14 3iG FCI Practitioners’ Report, 51 thresholds, 60 1 Timothy 6:10, 135–6 178 Index too big to fail concept, 21–7 ethical duties, and implicit Government guarantee, 22–3 ethical implications of, 26–7 in government, 22–3 insolvency, systemic risk and, 24–5 legislative change, 25–6 Lehman, failure of, 23 systemic risk, 24–5 toxic financial products, 5 trading abusive, 93 emissions, 14 insider, 12 market, 41 normal market, 71 off-market, 71–83, 90, 155 on-market, 70–1 personal account, 128 private, 94 proprietary, 15, 25, 66, 150, 155 unauthorised, 7 “trash and cash” strategy, 86 Travellers, 19 Treasury Select Committee, 26 Trinity Church, 53 Trouble with Markets, The (Bootle), 4 trust, 40, 53 trusted adviser, 108–9, 125 truth, 101–5 bait and switch, 102–3 misleading vs. lying, 101 securities, issuing, 103–5 2 and 20 fee, 13 UBS Investment Bank, 9 unauthorised trading, 7, 80–1, 155 unethical behaviour, 68 UK Alternative Investment Market, 89 UK Business Growth Fund, 133 UK Code of Practice, 141 UK Independent Banking Commission, 4, 22 United Methodist Church, 54, 59 United Methodist Investment Strategy Statement, 59 US Federal Reserve, 24, 25 US Financial Crisis Inquiry Commission, 4 US Open, 126 US Senate Permanent Subcommittee on Investigations, 64, 73 US Treasury Department, 132 universal banks, 2, 21, 28, 67 untoward movement, 85 usury, 59–60 utilitarian, 84 utilitarian ethics, 49, 84, 139 values, 9, 46, 119–21, 148 Vedanta, 57 victimless crime, 82 virtue ethics, 37–8, 43–4 virtues, 9, 34 virtuous behaviours, 37 Vishnu, 57 Volcker, Paul, 25 Volcker Rule, 2, 25 voting shareholders, 29 Wall Street, 12, 19, 53 Wall Street Journal, 20 Wealth of Nations, The (Smith), 14 Wesley, John, 53 Wharf, Canary, 18 Williams, Rowan, 53 Wimbledon, 127 WorldCom, 12, 17, 20, 76 write-off, 80 zakat, 55 zero-sum games, 118–22 

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street
by Kate Kelly
Published 14 Apr 2009

True to its name, the fund attempted to goose, or enhance, returns by upping the amount of leverage it employed, borrowing about $10 for every $1 it had in cold, hard cash or collateral. That was less leverage than an average Wall Street firm employed, but more than many of the better-managed hedge funds. The riskier fund’s lenders were a who’s who of Wall Street, and now they smelled blood. A number of lenders, including J.P. Morgan, made margin calls on Cioffi’s funds, and when he couldn’t make good, they threw him into default. Hoping to monetize some of their assets, Cioffi and Tannin began a fire sale of the bonds they held, off-loading at least $8 billion into the markets in May and June. Still they couldn’t keep up with investor and lender demands.

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Encouraged by the preliminary earnings results, he began preparing for the annual media conference, set to begin March 10 at the swanky Breakers hotel in Palm Beach, Florida. It was the week before Bear would fail, and worrisome signs were already appearing. Days prior, the London hedge fund Peloton Partners LLP had collapsed, unable to secure enough cash to meet a flurry of margin calls—demands for more cash or collateral—from lenders. Bad buzz was also encircling Carlyle Capital Corporation, a London-based unit of the Washington, D.C., private equity firm Carlyle Group, which was said to be having margin problems as well. Similar problems were besetting Thornburg Mortgage, a home-loan provider to customers with good credit.

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Bear was the firm that refused to bail out Long-Term, whose CEO wouldn’t leave his office for a meeting and who would fight a rival firm over a turkey sandwich, much less an interest rate on a loan. Now one of Bear’s money managers had proven himself incompetent. The lenders felt it was absurd that Cioffi expected them to give him a break on collateral demands or a grace period on margin calls. So the curtain lowered on Cioffi’s funds, and soon, in short order, on Spector, Bear’s profitability, and Cayne himself. In August and September 2008, Ace Greenberg and Steve Meyer began arguing with Tom Marano over the size of his mortgage portfolio. They didn’t like his holdings, or his hedge—a huge short bet on financial firms like Wells Fargo and Wachovia that he referred to as “the chaos trade.”

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
by Satyajit Das
Published 15 Nov 2006

This triggered large losses on MG’s hedge transactions, around $1 billion. The hedge losses were offset by unrealized gains on the forward sales to clients. Its margin between its sales contracts and oil purchases was broadly intact. MG’s hedges had worked – well, almost. MG needed to pay the exchange $1 billion in margin calls on its futures positions but it didn’t have the ready cash. The loss was covered by the profits on the oil products it had sold, the only problem being that the profits would arrive over five to ten years. MG needed the cash now. Metallgesellschaft reacted to the crisis decisively by hiring a raft of consultants who recommended closing out the hedges.

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Metallgesellschaft created a substantial industry: academics who had never traded now held forth at length on ‘issues’ such as whether MG’s positions were a ‘true’ hedge. What should have been done when the liquidity crisis occurred? Erudite, unending debate ensued. The hedges had not worked, there had been ‘basis’ risk, ‘trading‘ risk (the large size of the position) and ‘funding’ risk (MG had apparently forgotten that it needed money to make potential margin calls). MG had come close to collapse. Me too In 1999, Ashanti Goldfields set out to prove conclusively that hedging disasters were not the preserve of first world companies. Ashanti, a Ghanaian gold miner, hedged its gold production by entering into forward sales of gold. Through the late 1990s, central banks sold off their gold reserves, forcing the gold price lower.

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Ashanti, like MG, had to post cash to cover losses on its forward positions. Dealers were unprepared to take country risk on Ghana and counterparty risk on Ashanti. The losses triggered significant collateral calls; Ashanti was not able to meet the DAS_C04.QXP 8/7/06 98 8:39 PM Page 98 Tr a d e r s , G u n s & M o n e y unexpected margin calls. This necessitated the extensive restructuring of Ashanti, including the sale of a key Tanzanian mine, dilution of its equity shareholders and the restructuring of its hedge positions. Banks fête many companies as ‘sophisticated’ hedgers. There are flattering profiles in financial magazines about their operations.

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market
by Steven Drobny
Published 31 Mar 2006

Soon thereafter it went as high as $600. I was in Colombia at the time and got a call in my hotel room from my assistant informing me that I had received a margin call. I did not think it was possible and asked my assistant to verify it. Not only had I received a margin call on my short position, but to add insult to injury, I had also sold a bunch of calls on Amazon with strikes way out-of-the-money.The options were now in-the-money, exacerbating the margin call. It was a traumatic lesson in learning how to manage a portfolio—in this case my personal net worth, which immediately went down by 20 percent—but it was also a great lesson about the timing of a view.You can be right, but your timing can be totally wrong.

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He was not immune to blowups in spite of his superior intellect and understanding of global markets. In the early 1900s, he successfully speculated in global currencies on margin before switching to the commodity markets.Then, during the commodity slump of 1929, his personal account was completely wiped out by a margin call. After the 1929 setback, his greatest successes came from investing globally in equities but he continued to speculate in bonds and commodities. Skidelsky adds, “His investment philosophy . . . changed in line with his evolving economic theories. He learned a lot of his theory from his experience as an investor and this theory in turn modified his practice as an investor.”

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ered only two years later, the intensity of Black Monday for traders who lived through it has certainly left its mark. Most notably, the notions of liquidity risk and fat tails were introduced to the wider investment community without mercy. Entire portfolios and money management businesses were obliterated on that day as margin calls went unfunded. Indeed, even so-called “portfolio insurance” hedges didn’t work as the futures and options markets became unhinged from the cash market. 1600 1400 S&P 500 Index 1200 1000 1987 U.S. Stock Market Crash 800 600 400 200 0 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 9 19 9 8 19 8 7 19 8 6 19 8 5 19 8 19 8 3 4 19 8 2 FIGURE 2.3 19 8 1 19 8 19 8 19 8 0 0 S&P 500 Index, 1980–2005 Source: Bloomberg. 12 INSIDE THE HOUSE OF MONEY FAT TAILS “Fat tails” are anomalies in normal distributions, whereby observed outcomes differ from those suggested by the distribution.

All the Devils Are Here
by Bethany McLean
Published 19 Oct 2010

The Bear team had made money on short positions they had placed on the ABX, but the volatility was worrisome. Because the higher-rated securities were supposed to be nearly riskless, the Bear Stearns hedge funds were highly leveraged: only about $1.6 billion of the $20 billion was equity. The rest was borrowed. Earlier in February, they’d started to get margin calls, meaning that their lenders were demanding more collateral. They’d met the margin calls, but their fears had not abated. Trying to calm the others, Cioffi told them about the time he and Warren Spector, Bear’s co-president, with whom Cioffi had risen through the ranks, had been caught with a big bond position way back when. They didn’t panic, and they ended up making a lot of money.

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On August 17, CFO Patti Dodge sends an e-mail to Brad Morrice, the CEO: “We started the quarter with $400mm in liquidity and we are down to less than $50mm today,” she writes. In explaining the problem to the company’s board, Morrice cites “continued difficult secondary market conditions leading to warehouse line margin calls, higher investors kick outs [meaning that wary investors are refusing to purchase loans] and loan repurchases.” Internally, top management begins receiving a weekly report monitoring its problems. It is entitled “Storm Watch.” Does Wall Street know about New Century’s problems? Of course it does!

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What Frost and Forster knew—and Sullivan and Lewis didn’t—was that embedded in AIG-FP’s swap contracts were those collateral triggers. AIG-FP’s counterparties, who had been paying it millions of dollars over the years to insure their triple-A tranches, had the right to demand what amounted to cash margin calls if one of three things happened: if AIG’s rating dropped to single-A or below; if the ratings on the super-senior tranches AIG was insuring were lowered by the rating agencies; or if the value of the tranches fell—even without a ratings downgrade. In all the time FP had been writing credit protection on multisector CDOs, no one could ever imagine any of these things ever happening.

Boom and Bust: A Global History of Financial Bubbles
by William Quinn and John D. Turner
Published 5 Aug 2020

The ticker tape, which telegraphed stock prices around the country, ran for 104 minutes after trading ended, so traders had an agonising wait to discover how much money they had lost. When the dust settled, the DJIA had ended the day down 6.3 per cent, at that time the greatest daily fall since before 1914. And worse was expected to come because these losses triggered margin calls – recalls of broker loans that forced leveraged traders to immediately sell their stocks to avoid default. The sell-off was expected to be so fierce that the New York Police Department closed off one entrance to Wall Street, with wagons and men stationed throughout the financial district.45 The Thursday morning trading was as frenzied as expected, with 1.6 million shares changing hands in the first half hour, mostly from 123 BOOM AND BUST ruined margin accounts.

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When trading reopened on Monday morning, however, it was immediately clear that there were many more sellers than buyers. Whereas Black Thursday had been characterised by pockets of illiquidity where shares could not be sold, on Monday their prices simply dropped substantially, often by $1–$2 at a time. These sales came primarily from two sources: shareholders who had been issued with margin calls over the weekend; and foreign investors, particularly British investors, many of whom had recently had funds frozen due to the bankruptcy of a major British financier.49 Prices fell further in the afternoon as it became clear that neither the Federal Reserve nor the private banks were prepared to 124 THE ROARING TWENTIES AND THE WALL STREET CRASH intervene.

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However, none of these can plausibly explain the timing or scale of the crash.78 This has led some to conclude that the crash was caused either by a sudden unexplained change in investor sentiment, or was simply a ‘mystery’.79 In fact the crash was neither a response to a specific incident nor a mystery: it was simply a consequence of the market’s underlying structure. The quantity of outstanding broker loans in the autumn of 1929 meant that any sufficient fall in prices would lead to a significant number of margin calls. This in turn would force traders to liquidate, depressing prices further. Essentially, the fuel for the bubble could be removed at any moment. This vulnerability was widely understood, since the quantity of broker loans was publicly available, and as a result the market became much more volatile.

When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A)
by Scott McCleskey
Published 10 Mar 2011

A firm’s leverage is customarily expressed as a ratio of borrowed money to hard assets (that is, loan to collateral). It makes winning bets into huge winning bets, but can work just as powerfully in the other direction in case of a loss. Of course, losses happen all the time and so a mechanism is built into the process in order to protect the parties loaning the money. This is the margin call. A margin call requires the borrowing party to pony up more cash or other collateral to back up the loan if the investment bought with the borrowed money has dropped significantly in value (the investment is the initial collateral). So now view the Bear Stearns collapse from the point of view of the rest of the market.

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See International Organization of Securities Commissioners (IOSCO) issuer-pays model, 85, 88, 97–98, 154 J Joint (House and Senate) Economic Committee, 101 K Kanjorski, Paul, 98–99 King, Governor Mervyn, 19 L Lehman Brothers, 8, 22, 25, 38, 77, 87, 134 leverage, 6, 16, 147, 159, 177–78, 184 lobbying, 92, 99–100, 104, 126, 131, 171 Long Term Capital hedge fund collapse, 11 Long Term Capital Management (LTCM), 16 M Madoff Investment Securities, 109 Malthus, Ricardo, xvii malus schemes, 50, 52, 153 margin call, 6 market abuse, 107, 113, 181 Markets in Financial Instruments Directive (MiFID), 136 Merrill Lynch, 4, 77, 87 MMFs. See Money Market Mutual Funds (MMFs) money laundering activity, 119, 151, 185–86 money market fund, 7–9, 11, 92 Money Market Mutual Funds (MMFs), 180 Moody’s, xi, 84, 86, 88–89, 94, 98 moral hazard AAA ratings of riskiest assets, 26 about, xxiv, 24–25 of businesses associated with the irresponsible firms, 28 clawback of previous compensation, 29 conclusion, 30 creditors as the other, 28–30 creditors should not be made whole, 30 as deciding factor in risk decisions, 26 emergency pool of funds trigger clawback in compensation and civil liability, 28 emergency pool of funds trigger government to dismiss any or all senior management or Board, 27 failures, provisions for, 29–30 federally insured deposits of individuals, 24 firms extending credit to irresponsible firms stand to lose their investment, 28 government bailout of AIG and Bear Stearns, 25 government bailout of financial institutions, 24 government can create, 27 government-sponsored enterprises (GSEs), 25 government support of failing banks prevents uncertainty, 28 government support of important institutions, 30 as life insurance, 26 moral suasion alone will not carry the day, 29 Plan B, 30 practice of, 26 punish or reward firm vs. the individual, 27 ‘‘punish the leaders, not the organization,’’ 27–28 regulatory debate on, 30 ‘‘risks are fully understood to be risky,’’ 26 risky behavior by firms too big to fail, 26 salary and incentive compensation, forfeiture of, 29 sanctions against senior management, 29–30 sanctions for individuals making risktaking decisions, 27 self-interest, 30 short-term funding contracts and exemption from haircuts, 28–29 systemic risk, need for new rules for, 25 theory of, 25–26 third-party, 28, 30 Morgan Stanley, 17, 78, 92, 104, 160, 175 N NASDAQ stock market, 113, 160, 168 National Bank Supervisor (NBS), 179 Nationally Recognized Statistical Rating Organization (NRSRO), 84–89, 94–97, 154 NBS.

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See Self-Regulatory Organizations (SROs) Standard & Poor (S&P), 84, 88, 94 structured finance products, 32, 34–36, 73, 84, 88 Stuart, John, xvii–xviii subprime mortgages AAA rating for, 33–34 interest rates, rising, 86 investment bankers, xxi mortgage payments and, 34 pooled risk, 33 ratings, downgrading, xvii–xix, 88, 93 structured investments backed by, 37 as toxic assets, 32–34, 37 systemic risk and market meltdown about, 1 AIG and credit default swaps, 5 Bear Stearns, 2–6, 10, 13–14 borrowed money, short vs. long-term, 2 ‘‘breaking the buck,’’ 8 collateral damage, 6–7 conclusion, 12 economy is about connections, 1 economy is not the sum of its parts, 1 funding, day-to-day, 2–3 government intervention, 9–10, 12 hedge fund redemption, 6 investment practice, legal covenants governing, 4 Lehman repos, 8 leverage, 6 Long Term Capital hedge fund collapse, 11 loss of confidence, 3 margin call, 6 money market fund, 7–9, 11, 92 regulation to focus on firms vs. system as a whole, 12 regulatory reform proposals, 2, 12 repurchase agreement (repo), 3, 6–8, 13 risk of fluctuation in the overnight price of an asset, 3 rumor control and market psychology, 4 rumors, at the mercy of, 4–6 rumors, self-fulfilling nature of, 9 rumors and bank runs, 4 rumors cause a crisis, 4 run on the bank, institutional, 6 SEC regulations restricting what money market fund for investment, 7 six degrees of separation, 11 speculative (junk) bond status, 4 system collapse, why not before?

Frequently Asked Questions in Quantitative Finance
by Paul Wilmott
Published 3 Jan 2007

If it ever falls below this level then more money (or equivalent in bonds, stocks, etc.) must be deposited. The amount of margin that must be deposited depends on the particular contract. A dramatic market move could result in a sudden large margin call that may be difficult to meet. To prevent this situation it is possible to margin hedge. That is, set up a portfolio such that margin calls on one part of the portfolio are balanced by refunds from other parts. Usually over-the-counter contracts have no associated margin requirements and so won’t appear in the calculation. Crash (Platinum) hedging The final variety of hedging is specific to extreme markets.

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Unfortunately, as you can probably imagine, and certainly as in this example, superhedging might give you prices that differ vastly from the market. Margin hedging Often what causes banks, and other institutions, to suffer during volatile markets is not the change in the paper value of their assets but the requirement to suddenly come up with a large amount of cash to cover an unexpected margin call. Examples where margin has caused significant damage are Metallgesellschaft and Long Term Capital Management. Writing options is very risky. The downside of buying an option is just the initial premium, the upside may be unlimited. The upside of writing an option is limited, but the downside could be huge.

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Crash or Platinum hedging exploits the latter effect in such a way as to minimize the worst possible outcome for the portfolio. The method, called CrashMetrics, does not rely on parameters such as volatilities and so is a very robust hedge. Platinum hedging comes in two types: hedging the paper value of the portfolio and hedging the margin calls. References and Further Reading Taleb, NN 1997 Dynamic Hedging. John Wiley & Sons Wilmott, P 2006 Paul Wilmott On Quantitative Finance, second edition. John Wiley & Sons What is Marking to Market and How Does it Affect Risk Management in Derivatives Trading? Short Answer Marking to market means valuing an instrument at the price at which it is currently trading in the market.

Keeping Up With the Quants: Your Guide to Understanding and Using Analytics
by Thomas H. Davenport and Jinho Kim
Published 10 Jun 2013

Gary Loveman, “Foreword,” in Thomas H. Davenport and Jeanne G. Harris, Competing on Analytics: The New Science of Winning (Boston: Harvard Business School Press, 2007), x. 6. More context on the movie and the characters can be found at http://business-ethics.com/2011/11/23/0953-margin-call-a-small-movie-unveils-big-truths-about-wall-street/. 7. Margin Call, film with direction and screenplay by J. C. Chandor, 2011. 8. Liam Fahey, “Exploring ‘Analytics’ to Make Better Decisions: The Questions Executives Need to Ask,” Strategy and Leadership 37, no. 5 (2009): 12–18. 9. Information for this example came from several interviews with Anne Robinson; and Blake Johnson, “Leveraging Enterprise Data and Advanced Analytics in Core Operational Processes: Demand Forecasting at Cisco,” case study, Stanford University Management Science and Engineering Department. 10.

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If enough people around an organization constantly ask questions of this type, the culture will change quickly and dramatically. Quantitative people will often attempt to describe models and problems in highly technical terms. That doesn’t mean you have to listen or converse in the same terms. As a good illustration, the movie Margin Call dramatizes some of the events that led to the financial crisis of 2008–2009. The movie is based on an investment bank that resembles Lehman Brothers. The quant character in the plot, who has a PhD in propulsion engineering, comes up with a new algorithm for calculating the bank’s exposure to risk.

How to DeFi
by Coingecko , Darren Lau , Sze Jin Teh , Kristian Kho , Erina Azmi , Tm Lee and Bobby Ong
Published 22 Mar 2020

For simplicity’s sake, we will separate the degrees of decentralization into three categories: centralized, semi-decentralized and completely decentralized. Centralized Characteristics: Custodial, uses centralized price feeds, centrally-determined interest rates, centrally-provided liquidity for margin calls Examples: Salt, BlockFi, Nexo and Celsius Semi-Decentralized (has one or more of these characteristics but not all) Characteristics: Non-custodial, decentralized price feeds, permissionless initiation of margin calls, permissionless margin liquidity, decentralized interest rate determination, decentralized platform development/updates Examples: Compound, MakerDAO, dYdX, bZx Completely Decentralized Characteristics: Every component is decentralized Examples: No DeFi protocol is completely decentralized yet.

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase
by Duff McDonald
Published 5 Oct 2009

At that level, a drop of 1 percent wipes out all the equity. When the housing market stalled, as it did in late 2006 and early 2007, that’s exactly what happened. Housing prices were not yet in free fall, but some securities had slipped to about 95 percent of their value by the spring. Cioffi took a huge paper loss and was unable to meet margin calls from his overnight lenders. (This is the lesson of leverage. If you pay only $1 for $100 worth of securities while borrowing the other $99, and those securities lose $5 in value, you’re not only out your original $1. You now owe $4 just to get back to breakeven. Multiply those numbers by several hundred million, and you can appreciate the pickle Cioffi found himself in.)

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(The name of the company—“Everquest”—was classic Wall Street, both portentous and meaningless.) Unfortunately for Cioffi, a number of reporters at both the Wall Street Journal and Business Week sniffed out the scheme by early June, and he was forced to abort it. A total of $4 billion in securities had to be liquidated to satisfy redemptions and margin calls by the funds’ creditors. By this point, those creditors, including Merrill Lynch and JPMorgan Chase, were threatening to pull the plug and send both funds into default. In an attempt to head off the crisis, the copresident of Bear Stearns, Warren Spector, convened a meeting of the firm’s lenders, including Merrill Lynch, JPMorgan Chase, Goldman Sachs, and Bank of America, at the company’s offices at 383 Madison Avenue.

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The gist of his message was that everything would be OK; Cioffi was an expert in such things, and just needed some breathing room to put the funds back on a solid footing. John Hogan, chief risk officer for JPMorgan Chase’s investment bank, attended. Hogan asked a question. Was Bear Stearns prepared to provide a capital infusion to help the funds meet their margin calls? When he was told the answer was no, he left the meeting and returned to the JPMorgan Chase headquarters. After being debriefed by Hogan, Steve Black picked up the phone and called Spector. “You guys are out of your mind if you think we’re not going to put you into default,” Black told him. Spector replied that Black and Hogan did not understand the business, and that JPMorgan Chase was the only bank that was giving Bear Stearns a hard time about the loans.

The Death of Money: The Coming Collapse of the International Monetary System
by James Rickards
Published 7 Apr 2014

They also involve margin calls designed to cover mark-to-market losses and give the brokers a cushion against customers who default. Those mitigation techniques do not stop the financial warrior, because he is not looking for bargains or profits. The attacker can use the time-out to pile on additional sell orders in a second wave of attacks. Also, these safety techniques rely heavily on actual performance by the affected parties. When a margin call is made, it applies the brakes to a legitimate trader due to the need to provide cash. But the malicious trader would ignore the margin call and continue trading.

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Panics are neither prevented nor caused by gold. Panics are caused by credit overexpansion and overconfidence, followed by a sudden loss of confidence and a mad scramble for liquidity. Panics are characterized by rapid declines in asset values, margin calls by creditors, dumping of assets to obtain cash, and a positive feedback loop in which more asset sales cause further valuation declines, which are followed by more and more margin calls and asset sales. This process eventually exhausts itself through bankruptcy, a rescue by solvent parties, government intervention, or a convergence of all three. Panics are a product of human nature, and the pendulum swings between fear and greed and back to fear.

Mathematics for Finance: An Introduction to Financial Engineering
by Marek Capinski and Tomasz Zastawniak
Published 6 Jul 2003

On the other hand, if the deposit drops below a certain level, called the maintenance margin, the clearing house will issue a margin call , requesting the investor to make a payment and restore the deposit to the level of the initial margin. A futures position can be closed at any time, in which case the deposit will be returned to the investor. In particular, the futures position will be closed immediately by the clearing house if the investor fails to respond to a margin call. As a result, the risk of default is eliminated. Example 6.1 Suppose that the initial margin is set at 10% and the maintenance margin at 5% of the futures price.

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The ‘payment’ column contains the amounts paid to top up the deposit (negative numbers) or withdrawn 136 Mathematics for Finance (positive numbers). n 0 1 2 3 4 f (n, T ) 140 138 130 140 150 cash flow opening: − 2 − 8 +10 +10 closing: margin 1 0 12 4 23 24 15 total: payment −14 0 − 9 + 9 + 9 +15 10 margin 2 14 12 13 14 15 0 On day 0 a futures position is opened and a 10% deposit paid. On day 1 the futures price drops by $2, which is subtracted from the deposit. On day 2 the futures price drops further by $8, triggering a margin call because the deposit falls below 5%. The investor has to pay $9 to restore the deposit to the 10% level. On day 3 the forward price increases and $9 is withdrawn, leaving a 10% margin. On day 4 the forward price goes up again, allowing the investor to withdraw another $9. At the end of the day the investor decides to close the position, collecting the balance of the deposit.

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Glossary of Symbols A B β c C C CA CE CE Cov delta div div0 D D DA E E∗ f F gamma Φ k K i m fixed income (risk free) security price; money market account bond price beta factor covariance call price; coupon value covariance matrix American call price European call price discounted European call price covariance Greek parameter delta dividend present value of dividends derivative security price; duration discounted derivative security price price of an American type derivative security expectation risk-neutral expectation futures price; payoff of an option; forward rate forward price; future value; face value Greek parameter gamma cumulative binomial distribution logarithmic return return coupon rate compounding frequency; expected logarithmic return 305 306 Mathematics for Finance M m µ  N N k ω Ω p p∗ P PA PE PE PA r rdiv re rF rho ρ S S σ t T τ theta u V Var VaR vega w w W x X y z market portfolio expected returns as a row matrix expected return cumulative normal distribution the number of k-element combinations out of N elements scenario probability space branching probability in a binomial tree risk-neutral probability put price; principal American put price European put price discounted European put price present value factor of an annuity interest rate dividend yield effective rate risk-free return Greek parameter rho correlation risky security (stock) price discounted risky security (stock) price standard deviation; risk; volatility current time maturity time; expiry time; exercise time; delivery time time step Greek parameter theta row matrix with all entries 1 portfolio value; forward contract value, futures contract value variance value at risk Greek parameter vega symmetric random walk; weights in a portfolio weights in a portfolio as a row matrix Wiener process, Brownian motion position in a risky security strike price position in a fixed income (risk free) security; yield of a bond position in a derivative security Index admissible – portfolio 5 – strategy 79, 88 American – call option 147 – derivative security – put option 147 amortised loan 30 annuity 29 arbitrage 7 at the money 169 attainable – portfolio 107 – set 107 183 basis – of a forward contract 128 – of a futures contract 140 basis point 218 bear spread 208 beta factor 121 binomial – distribution 57, 180 – tree model 7, 55, 81, 174, 238 Black–Derman–Toy model 260 Black–Scholes – equation 198 – formula 188 bond – at par 42, 249 – callable 255 – face value 39 – fixed-coupon 255 – floating-coupon 255 – maturity date 39 – stripped 230 – unit 39 – with coupons 41 – zero-coupon 39 Brownian motion 69 bull spread 208 butterfly 208 – reversed 209 call option 13, 181 – American 147 – European 147, 188 callable bond 255 cap 258 Capital Asset Pricing Model 118 capital market line 118 caplet 258 CAPM 118 Central Limit Theorem 70 characteristic line 120 compounding – continuous 32 – discrete 25 – equivalent 36 – periodic 25 – preferable 36 conditional expectation 62 contingent claim 18, 85, 148 – American 183 – European 173 continuous compounding 32 continuous time limit 66 correlation coefficient 99 coupon bond 41 coupon rate 249 307 308 covariance matrix 107 Cox–Ingersoll–Ross model 260 Cox–Ross–Rubinstein formula 181 cum-dividend price 292 delta 174, 192, 193, 197 delta hedging 192 delta neutral portfolio 192 delta-gamma hedging 199 delta-gamma neutral portfolio 198 delta-vega hedging 200 delta-vega neutral portfolio 198 derivative security 18, 85, 253 – American 183 – European 173 discount factor 24, 27, 33 discounted stock price 63 discounted value 24, 27 discrete compounding 25 distribution – binomial 57, 180 – log normal 71, 186 – normal 70, 186 diversifiable risk 122 dividend yield 131 divisibility 4, 74, 76, 87 duration 222 dynamic hedging 226 effective rate 36 efficient – frontier 115 – portfolio 115 equivalent compounding 36 European – call option 147, 181, 188 – derivative security 173 – put option 147, 181, 189 ex-coupon price 248 ex-dividend price 292 exercise – price 13, 147 – time 13, 147 expected return 10, 53, 97, 108 expiry time 147 face value 39 fixed interest 255 fixed-coupon bond 255 flat term structure 229 floating interest 255 floating-coupon bond 255 floor 259 floorlet 259 Mathematics for Finance forward – contract 11, 125 – price 11, 125 – rate 233 fundamental theorem of asset pricing 83, 88 future value 22, 25 futures – contract 134 – price 134 gamma 197 Girsanov theorem 187 Greek parameters 197 growth factor 22, 25, 32 Heath–Jarrow–Morton model hedging – delta 192 – delta-gamma 199 – delta-vega 200 – dynamic 226 in the money 169 initial – forward rate 232 – margin 135 – term structure 229 instantaneous forward rate interest – compounded 25, 32 – fixed 255 – floating 255 – simple 22 – variable 255 interest rate 22 interest rate option 254 interest rate swap 255 261 233 LIBID 232 LIBOR 232 line of best fit 120 liquidity 4, 74, 77, 87 log normal distribution 71, 186 logarithmic return 34, 52 long forward position 11, 125 maintenance margin 135 margin call 135 market portfolio 119 market price of risk 212 marking to market 134 Markowitz bullet 113 martingale 63, 83 Index 309 martingale probability 63, 250 maturity date 39 minimum variance – line 109 – portfolio 108 money market 43, 235 no-arbitrage principle 7, 79, 88 normal distribution 70, 186 option – American 183 – at the money 169 – call 13, 147, 181, 188 – European 173, 181 – in the money 169 – interest rate 254 – intrinsic value 169 – out of the money 169 – payoff 173 – put 18, 147, 181, 189 – time value 170 out of the money 169 par, bond trading at 42, 249 payoff 148, 173 periodic compounding 25 perpetuity 24, 30 portfolio 76, 87 – admissible 5 – attainable 107 – delta neutral 192 – delta-gamma neutral 198 – delta-vega neutral 198 – expected return 108 – market 119 – variance 108 – vega neutral 197 positive part 148 predictable strategy 77, 88 preferable compounding 36 present value 24, 27 principal 22 put option 18, 181 – American 147 – European 147, 189 put-call parity 150 – estimates 153 random interest rates random walk 67 rate – coupon 249 – effective 36 237 – forward 233 – – initial 232 – – instantaneous 233 – of interest 22 – of return 1, 49 – spot 229 regression line 120 residual random variable 121 residual variance 122 return 1, 49 – expected 53 – including dividends 50 – logarithmic 34, 52 reversed butterfly 209 rho 197 risk 10, 91 – diversifiable 122 – market price of 212 – systematic 122 – undiversifiable 122 risk premium 119, 123 risk-neutral – expectation 60, 83 – market 60 – probability 60, 83, 250 scenario 47 security market line 123 self-financing strategy 76, 88 short forward position 11, 125 short rate 235 short selling 5, 74, 77, 87 simple interest 22 spot rate 229 Standard and Poor Index 141 state 238 stochastic calculus 71, 185 stochastic differential equation 71 stock index 141 stock price 47 strategy 76, 87 – admissible 79, 88 – predictable 77, 88 – self-financing 76, 88 – value of 76, 87 strike price 13, 147 stripped bond 230 swap 256 swaption 258 systematic risk 122 term structure 229 theta 197 time value of money 21 310 trinomial tree model Mathematics for Finance 64 underlying 85, 147 undiversifiable risk 122 unit bond 39 value at risk 202 value of a portfolio 2 value of a strategy 76, 87 VaR 202 variable interest 255 Vasiček model 260 vega 197 vega neutral portfolio volatility 71 weights in a portfolio Wiener process 69 yield 216 yield to maturity 229 zero-coupon bond 39 197 94 

Money and Power: How Goldman Sachs Came to Rule the World
by William D. Cohan
Published 11 Apr 2011

“Sorry to bother you on vacation,” Davilman wrote. “Margin call coming your way. Want to give you a heads up.” “On what?” Frost wrote back, eighteen minutes later. “[$]20bb of supersenior,” Davilman replied, just over a minute later. Frost never replied to Davilman’s e-mail. Instead, AIGFP decided that Forster, not Frost, would deal with Goldman’s requests for collateral payments. Goldman’s marks—and the subsequent collateral call to AIGFP based on them—were, understandably, not welcome news at AIGFP. But the marks were also the subject of some controversy within Goldman itself. “The $2bn margin call is driven by a massive remarking by Goldman Sachs of the underlying [mortgage] securities (down from −6 pts to −20 to −25 pts in some cases), ahead of all other dealers in the [S]treet,” Goldman’s Nicholas Friedman wrote in an internal e-mail the day before the AIGFP collateral call.

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He urged caution and offered to make sure clients and others understood Goldman’s valuation methodology. At the same time, AIOI Insurance, a Goldman client in Tokyo, let the Goldman traders know how upset the company was about Goldman’s marks and the margin call that resulted. According to Shigeru Akamatsu, a Goldman vice president, “Suzuki-san,” at AIOI, believed Goldman’s marks were “more than twice as bad as others,” that the margin call was “totally unaccepted,” and “warned that he will strongly protest against us.” Goldman’s opening salvo against AIG had been fired. The next day, Goldman asked AIGFP for $1.81 billion in collateral; Goldman also purchased $100 million of insurance—by buying CDS—against the possibility that AIG would default on its obligations.

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“Sparks and the [mortgage] group are in the process of considering making significant downward adjustments to the marks on their mortgage portfolio esp[ecially] CDOs and CDO squared,” Craig Broderick, Goldman’s chief risk officer, wrote in a May 11, 2007, e-mail, referring to the lower values Sparks was placing on complex mortgage-related securities. “This will potentially have a big P&L impact on us, but also to our clients due to the marks and associated margin calls on repos, derivatives, and other products. We need to survey our clients and take a shot at determining the most vulnerable clients, knock on implications, etc. This is getting lots of 30th floor”—the executive floor at Goldman’s former headquarters at 85 Broad Street—“attention right now.” Broderick’s e-mail may turn out to be the unofficial “shot heard round the world” of the financial crisis.

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader
by Colin Lancaster
Published 3 May 2021

In February 1907, I cleaned up. Great Northern preferred had gone down sixty or seventy points, and other stocks in proportion.” You have to be patient. When bubbles burst, it’s complete insanity: Prices plunge, liquidity disappears, markets break, and regulators step in with crazy rules. Then, margin calls, bankruptcies, suicides…. * The markets are still plummeting. We have now had the fastest sell-off since Black Monday in 1987. Black Monday was the largest one-day percentage drop in history. The Dow fell 508 points, which was over 22%. Back in ‘87, I was still in Detroit, just getting out of high school.

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Bid/ask spreads are gapping wider in every product. People are starting to sell anything that’s liquid. That’s why gold is down when it should be rallying. The big guys are starting to unwind. Anything with any basis risk is losing money. Longs are going down faster than shorts. Rumors are starting that some hedge funds are not meeting margin calls and getting positions blown out by the prime brokers. We have an ECB meeting today. Let’s see if those bankers have any magic beans to help stabilize the markets. They have already bought $223 billion of corporate debt in less than four years of QE. They’re now suffering huge losses on those bonds.

…

“With BoJo in the intensive care unit, let’s wait for that to play out. We don’t need that type of risk in the book. Hey, you guys see the story on Oyo?” “No,” the Rabbi says. “An indefinite furlough of employees.” “Oh, wow. That means the banks will ask for more collateral on those loans the CEO took that Masa Son guaranteed. That will be a monster margin call. What a disaster. They will end up selling shares at a massive discount. This will turn into a death spiral.” We end the call, and I start to unroll my yoga mat in a little studio next to my office. My daily routine is all fucked up now. No office, no gym, no restaurants. I’m going stir-crazy

Toward Rational Exuberance: The Evolution of the Modern Stock Market
by B. Mark Smith
Published 1 Jan 2001

The bank’s governor, George Harrison, responding to criticism that he had exceeded his powers, said, “It is not at all unlikely that had we not bought governments so freely, thus supplementing the reserves built up by large additional discounts, the stock exchange might have had to yield to the tremendous pressure brought to bear on it to close on some of those very bad days in the last part of October.”15 During the next two weeks, tens of thousands of margin calls went out to investors whose stockholdings had declined in value to the point where they no longer provided sufficient collateral to cover the investors’ margin loans. Nonbank lenders cut their broker’s loans by $1.4 billion in the last two weeks of October, and non-New York banks recalled $800 million during this same period.

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It was generally assumed that the Fed was specifically targeting the Hunts; whatever the case, the effect of the new policy on the brothers was devastating. They could expect to borrow no more money from U.S. banks to meet future margin requirements. The price of silver continued to slide, and the Hunts, for the first time, found themselves unable to meet their margin calls. Bache, Halsey, Stuart, Shields put up some of the money for them, but even this additional margin was quickly consumed by falling prices. Worse still, Bache itself was now placed in a precarious financial position. Even though the Hunt brothers still possessed substantial assets that were not encumbered by loans, those assets were illiquid and could not be sold easily to raise cash.

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Some observers expressed concern about the potential impact of these insurance strategies in a down market, in that the strategies called for selling more futures contracts as prices fell. This might exacerbate market weakness by creating even more selling pressure at the worst possible time, in much the same sense that margin-call selling accelerated the 1929 collapse. But little attention was paid to this possibility. Most portfolio insurance clients were quite happy with the protection they believed they had purchased. From the August 1982 lows, the stock market roared ahead over the next several years, propelled by a rapid economic recovery, declining interest rates, and rising corporate profits.

Conspiracy of Fools: A True Story
by Kurt Eichenwald
Published 14 Mar 2005

The fax from Bank of America arrived that same day. Lay’s decision in September to use his ten-million-dollar bonus to pay down debt had held off margin calls for a while. Now, with Enron’s share price collapsing, the banks were nipping at his heels again, demanding cash. In the fax, the bank said he had two days to meet the demands or it would take action. Lay and his advisers decided to pay back the Enron loan he had been carrying with company stock, then borrow from the line again, and use the cash to meet the margin call. Ray Bowen headed up to Whalley’s office to discuss the warning about Fastow he had given his boss in a voice mail the previous week.

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Still, that wasn’t something Enron wanted Vinson & Elkins to worry about. The firm was told not to bother retaining another accounting firm. There was no need to second-guess everybody on this. Just a fact-finding mission. The day after his meeting with Sherron Watkins, Ken Lay was hit with another margin call from his lenders. Enron’s stock price had fallen again with the announcement of Skilling’s departure, and the banks wanted more money. Beau Herrold took care of it. He borrowed from Enron for the cash, and then repaid it with company stock, just as they had arranged. Every penny went to pay down debt.

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The company was sound, its balance sheet strong, its liquidity never better. When asked why more senior executives weren’t buying stock, Lay assured the questioner that plenty were, including himself. He mentioned nothing of his tens of millions of dollars in stock sales to the company to help meet his margin calls. Lay’s soothing words were exactly what the troops needed to hear. Everything would be fine. September 28, 2001, the day that would forever change Nancy Temple’s life, began normally enough for her. Temple was a young lawyer in Arthur Andersen’s Chicago office, having joined the previous year from the law firm Sidley & Austin.

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry
by William K. Black
Published 31 Mar 2005

When interest rates increase, those bonds lose value and the REPO contract imposes a “margin call” that requires the borrower to immediately post enough new high-quality bonds to protect the lender against any loss. This means that American Savings faced a double whammy: the increase in interest rates both reduced the value of its huge bond portfolio by over $2 billion and produced repetitive margin calls that created a severe liquidity problem. This same dynamic later caused Orange County’s bankruptcy. Wall and his top advisors met one weekend that fall. American Savings would collapse on Monday when it could not meet its margin calls. That was inevitable.

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I was leading an emergency effort to prepare the legal and factual grounds for a takeover. Wall faced imminent disgrace. Then Monday came—“Black Monday,” October 19, 1987. The largest stock market loss in American history occurred that day. Frightened investors sold stocks and bought bonds, which caused interest rates to fall. American Savings did not have to meet any margin calls, and over half the losses on its interest-rate-risk gamble were made good. Black Monday brought gloom worldwide, except in a tiny pocket at the Bank Board’s headquarters, which found renewed faith in God. It was the miracle on 1700 G Street. Proposed as a movie plot, the story would be rejected as too contrived.7 WRIGHT ATTEMPTS TO GET WALL TO FIRE ME After the February 10, 1987, meeting, and after my criticisms of the Speaker began appearing in the press, he added me to his “to fire” list.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

Given the near impossibility of predicting the future, investing based on the calculation of cash flows and other economic fundamentals “is so difficult to-day as to be scarcely practicable.” Furthermore, many professional investors operate on borrowed money. When the market takes a tumble, as it invariably does from time to time, investors who hold on to their positions in the belief that they are fundamentally sound face the prospect of margin calls from their lenders. If they can’t raise the cash to meet these demands, their positions are liquidated. Finally, and perhaps most important, there is peer pressure. The genuine long-term investor who eschews fads and tries to seek out real value will run into criticism from his colleagues and bosses, Keynes said: “For it is the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion.

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You could maintain your short position until Amazon’s price finally tumbles, which it did in 2000. Patient hedge fund managers, or even mutual fund managers, are a rarity. Most of them get judged every three months. If they have a bad quarter, they can face a slew of investor redemptions. Moreover, most hedge funds operate on leverage, which makes them subject to margin calls if their trades go wrong. As Keynes pointed out, the difficulty of financing a losing position is a significant disincentive to speculating on the basis of fundamentals. Shleifer elucidated this point: “This risk comes from the unpredictability of the future resale price or, put differently, from the possibility that the mispricing gets worse before it disappears,” he wrote.

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With trading in many mortgage securities halted, banks, investment banks, hedge funds, mutual funds, university endowments, pension funds, and other financial institutions were holding countless pieces of paper that previously had been immensely valuable but that were now of indeterminate worth. There simply weren’t any buyers. This shock to the system caused all sorts of problems. Some highly leveraged investors faced demands for more collateral and were forced to reduce their positions. Margin calls and forced selling is the classic recipe for a market blow-up, but this wasn’t a 1987-style crash. Instead of spiraling down, the mortgage securities market had simply frozen up. Banks and other lenders had no way to estimate how exposed to it other financial institutions might be. Rather than extending credit to a rival firm that could turn out to be insolvent, they had opted to hoard their capital, forcing the European Central Bank and the Fed to step in as the lenders of last resort.

Market Sense and Nonsense
by Jack D. Schwager
Published 5 Oct 2012

When the market is in backwardation, producers will be less inclined to hedge their anticipated forward output, because they would be locking in a price below the current price. Even more critical, if cash price levels remain unchanged or go higher, forward short hedge positions will generate large margin calls as their prices rise to meet the cash level with the approach of the contract expiration date. The combination of reduced hedge selling and especially producer short covering, as it becomes too expensive to meet margin calls, can cause a price advance to become near vertical. In this sense, besides merely acting as a barometer of supply tightness, widening spreads between nearby and forward prices can exert a direct bullish market impact.

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Lowenstein, Roger Luck Mad Money Madoff scandal Managed accounts advantages of vs. funds in hedge funds individual vs. indirect management objections to Managed futures Management fees Manager performance Managers hedge funds vs. CTA risk taking vs. skill MAR. See Minimum acceptable return (MAR) ratio Marcus, Michael Margin Margin calls Marginal production loss Market bubbles Market direction Market neutral fund Market overvaluation Market panics Market price delays and inventory model of Market price response Market pricing theory Market psychology Market risk Market sector convertible arbitrage hedge funds and CTA funds hidden risk long-only funds market dependency past and future correlation performance impact by strategy Market timing skill Market-based risk Maximum drawdown (MDD) Mean reversion Mean-reversion strategy Merger arbitrage funds Mergers, cyclical tendency Metrics Minimum acceptable return (MAR) ratio and Calmar ratio Mispricing Mocking Monetary policy Mortgage standards Mortgage-backed securities (MBSs) Mortgages Multifund portfolio, diversified Mutual fund managers, vs. hedge fund managers Mutual funds National Futures Association (NFA) Negative returns Negative Sharpe ratio, and volatility Net asset valuation (NAV) Net exposure New York Stock Exchange (NYSE) Newsletter recommendation NINJA loans Normal distribution Normally distributed returns Notional funding October 1987 market crash Offsetting positions Option ARM Option delta Option premium Option price, underlying market price Option timing Optionality Out-of-the-money options Outperformance Pairs trading Palm Palm IPO Palm/3 Com Past high-return strategies Past performance back-adjusted return measures evaluation of going forward with incomplete information visual performance evaluation Past returns about and causes of future performance hedge funds high and low return periods implications of investment insights market sector past highest return strategy relevance of sector selection select funds and sources of Past track records Performance-based fees Portfolio construction principles Portfolio fund risk Portfolio insurance Portfolio optimization past returns volatility as risk measure Portfolio optimization software Portfolio rebalancing about clarification effect of reason for test for Portfolio risks Portfolio volatility Price aberrations Price adjustment timing Price bubble Price change distribution The price in not always right dot-com mania Pets.com subprime investment Pricing models Prime broker Producer short covering Professional management Profit incentives Pro-forma statistics Pro-forma vs. actual results Program sales Prospect theory Puts Quantitative measures beta correlation monthly average return Ramp-up period underperformance Random selection Random trading Random walk process Randomness risk Rare events Rating agencies Rational behavior Redemption frequency notice penalties Redemption liquidity Relative velocity Renaissance Medallion fund Return periods, high and low long term investment S&P performance Return retracement ratio (RRR) Return/risk performance Return/risk ratios vs. return Returns comparison measures relative vs. absolute objective Reverse merger arbitrage Risk assessment of for best strategy and leverage measurement vs. failure to measure measures of perception of vs. volatility Risk assessment Risk aversion Risk evaluation Risk management Risk management discipline Risk measurement vs. no risk measurement Risk mismeasurement asset risk vs. failure to measure hidden risk hidden risk evaluation investment insights problem source value at risk (VaR) volatility as risk measure volatility vs. risk Risk reduction Risk types Risk-adjusted allocation Risk-adjusted return Risk/return metrics Risk/return ratios Rolling window return charts Rubin, Paul Rubinstein, Mark Rukeyser, Louis S&P 500, vs. financial newsletters S&P 500 index S&P returns study of Sasseville, Caroline Schwager Analytics Module SDR Sharpe ratio Sector approach Sector funds Sector past performance Securities and Exchange Commission (SEC) Select funds, past returns and Selection bias Semistrong efficiency Shakespearian monkey argument Sharpe ratio back-adjusted return measures vs.

Underwater: How Our American Dream of Homeownership Became a Nightmare
by Ryan Dezember
Published 13 Jul 2020

Selling assets to repay the banks meant dumping these complex mortgage-backed securities into the market and pushing prices even lower. Representatives from the troubled funds’ lenders were given an eleven-page handout when they arrived for the meeting with Bear Stearns executives. The handout detailed the funds’ troubles and listed the margin calls it faced from lenders. Bear wasn’t going to bail out the funds. Instead, the investment bank asked creditors to impose a sixty-day moratorium on margin calls while the situation was straightened out. Attendees were stunned. They wanted their money back before there wasn’t any left. A risk management executive from JPMorgan Chase & Co. raised his hand. “With all due respect,” he told the men from Bear, “I think you’re underestimating the severity of the situation.”

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Icahn, Carl income, wealth ratios to Industrial Revolution insurance costs interest-only mortgages Interstate Land Sales Full Disclosure Act inventory control investments first-lien mortgages and foreclosures and home density for in homeownership private-equity properties for in real estate second-lien mortgage bonds in in toll roads Invitation Homes Island Tower It’s a Wonderful Life (film) Jacobs, Geoff James, Fob James, Tim condo deposits taken by Foley Beach toll bridge and sentencing speech of Joe Raley Builders JPMorgan Chase & Co Kavana, Jordan Kay, Martin Kennon, Tony Kinloch Partners KKR (corporate buyout firm) Kleros Real Estate CDO III Kuhn, Moritz land purchase landlords Leatherbury, Greg Lehman Brothers Holdings Levin’s Bend Levitt, William Lewis, Michael Lighthouse condominiums loans Alt-A home NINA piggyback refinance lower-income households Macquarie Group Mandalay Beach Marchetti Constant margin calls Martinez, Ruben Marx, Karl material costs Mattei, Jim McAleer, Mac McCarron, Joe McLaughlin, Jeff McLaughlin, Shannon McNeilage, Bruce houses sold by Mr. Bruce Needs His Money made by neighbors as leads to promotional borrowing rates to rental properties of tenants of mega-developments Merrill Lynch middle-class Million Dollar Club Mobile Bay Mobile Register money borrowing easy The Money Game (Goodman) Moon, Jeff Moore, Roy Morgan Stanley Mortgage Forgiveness Debt Relief Act (2007) mortgage-backed securities mortgage-interest tax deduction mortgages.

Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo
Published 3 Apr 2017

This default caused a global “flight to quality”—investors dumped risky investments by the billions in favor of safety and liquidity, which widened credit spreads in markets around the world. Unfortunately, it was precisely those widening spreads that LTCM’s analysts had predicted would narrow. September 1998 saw an escalating cycle of margin calls at LTCM. Its ability to secure financing dried up, while its large size now proved an obstacle to get out of its positions. By September 21, 1998, LTCM had virtually no capital left to meet its obligations.29 Unlike smaller collapses at smaller funds, the unwinding of LTCM’s gargantuan portfolio threatened the safety of the global financial system.

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It must have been large to have registered such a big impact on our simulated portfolio, and it must have been liquidated quickly given that the losses lasted only through Thursday. This was most likely a forced liquidation, made under great duress, perhaps by a large commercial bank that needed to raise cash quickly in response to margin calls on its losing mortgage- and credit-related positions (recall that the summer of 2007 was when subprime mortgages and mortgage-related securities began their downward spiral). The reason for this guess is that even after the significant loss on Tuesday, our simulated strategy continued to lose even more on Wednesday.

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Second, few commercial banks were involved in statarb in 1998, but because of the relatively low-risk/high-return performance of Shaw, Renaissance, and other statarb managers, and the growing need for higher yielding assets in the declining-yield environment of the early 2000s, these banks started to take an interest. By 2007, all of the major banks were running statarb portfolios of their own, which meant that sufficiently severe losses to their subprime mortgage holdings could force them to liquidate their statarb portfolios to raise cash for margin calls. This link between fixed-income credit markets and statarb strategies didn’t exist in 1998, as our simulations showed, but clearly existed in 2007. Finally, an additional channel linking the mortgage crisis and statarb was the growing popularity of funds of hedge funds (funds that invest in a broadly diversified portfolio of other hedge funds) and multistrategy funds (funds that employ many different types of strategies).

The Little Book of Hedge Funds
by Anthony Scaramucci
Published 30 Apr 2012

Yet something unexplained happened along the way to the forum. In August of 1998, the Russian government decided that it could not meet its debt obligations and started to devalue the Russian ruble. As Russian bond prices cratered, traders around the world began to scramble and sold the bonds and other securities to create liquidity and to meet margin calls. Despite the mathematical purity of their assumptions and their analysis, the überconfident LTCMers were caught off guard. They were in an untenable position. When the Russian government defaulted in 1998, LTCM blew up, losing millions and millions of dollars a day. As Warren Buffett says, “You only find out who is swimming naked when the tide goes out.”

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This overly simplistic description also neglects to account for external market forces that may dampen the short seller’s quest for alpha. What often happens is that others discover what a manager is shorting, and they start buying the stock aggressively in an effort to make the price go up. Effectively, they “squeeze” the manager out of the position. If he is not able to meet his collateral margin call, he will be forced out by his prime broker and suffer a big loss. (Remember, as the price of the stock goes up the manager has to post higher collateral at the prime broker so this will increase buying pressure on the manager if momentum takes over.) Let’s face it, no one grows up (or mostly no one) learning the game from the short side.

Currency Wars: The Making of the Next Gobal Crisis
by James Rickards
Published 10 Nov 2011

Interdependence is also characteristic of markets. When the subprime mortgage crisis struck in early August 2007, stocks in Tokyo fell sharply. Some Japanese analysts were initially baffled about why a U.S. mortgage crisis should impact Japanese stocks. The reason was that Japanese stocks were liquid and could be sold to raise cash for margin calls on the U.S. mortgage positions. This kind of financial contagion is interdependence with a vengeance. Finally, traders and investors are nothing if not adaptive. They observe trading flows and group reactions; learn on a continuous basis through information services, television, market prices, chat rooms, social media and face-to-face; and respond accordingly.

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The dollar quickly moves outside its previous trading range and begins to hit new lows relative to the leading indices. Traders with preassigned stop-loss limits are forced to sell as those limits are hit, and this stop-loss trading just adds to the general momentum forcing the dollar down. As losses accumulate, hedge funds caught on the wrong side of the market begin to sell U.S. stocks to raise cash to cover margin calls. Gold, silver, platinum and oil all begin to surge upward. Brazilian, Australian and Chinese stocks start to look like safe havens. As bank and hedge fund traders perceive that a generalized dollar collapse has begun, another thought occurs to them. If an underlying security is priced in dollars and the dollar is collapsing, then the value of that security is collapsing too.

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But the effect is the opposite of the one intended. Investors conclude that exchanges may never reopen and that their stock holdings have effectively been converted into illiquid private equity. Certain banks close their doors and some large hedge funds suspend redemptions. Many accounts cannot meet margin calls and are closed out by their brokers, but this merely shifts the bad assets to the brokers’ accounts and some now face their own insolvencies. As the panic courses through Europe for the second day, all eyes slowly turn to the White House. A dollar collapse is tantamount to a loss of faith in the United States itself.

Risk Management in Trading
by Davis Edwards
Published 10 Jul 2014

Price movements can trigger a large number of actions that can exacerbate market crashes or other panics. These actions may be mandated by regulators or firm management giving traders no ability to override these actions. Some of the items that can create risk when combined with mark to market accounting are: ■ ■ ■ ■ Margin Calls. Margin is a good faith deposit. Large price movements can force market participants to margin calls. This can trigger panic selling to raise the necessary cash. Risk Limits. Traders often have risk limits that constrain the size of their portfolios. If these limits are exceeded, trading firms may have a policy of forced liquidations. Hedging Requirements.

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As a result, because of mark‐to‐market accounting, the final price of the day will be used for everyone in the market. Even investors who were not transacting on that day will be required to use the mark‐to‐market price to value their books. This can have a cascading effect on the market. For example, a large loss in value of an asset might trigger a margin call for other traders holding that asset. Needing to raise money, those traders would then be required to sell assets or reduce their positions. As more assets start being sold to cover losses, the sell‐off could cross several markets and snowball into a market crash. MARKET PRICE Two of the most important risks facing investors, market risk and credit risk, depend on being able to price securities.

Advances in Financial Machine Learning
by Marcos Lopez de Prado
Published 2 Feb 2018

Second, use volume or dollar bars, as their volatilities are much closer to constant (homoscedasticity). But even these two improvements miss a key flaw of the fixed-time horizon method: the path followed by prices. Every investment strategy has stop-loss limits, whether they are self-imposed by the portfolio manager, enforced by the risk department, or triggered by a margin call. It is simply unrealistic to build a strategy that profits from positions that would have been stopped-out by the exchange. That virtually no publication accounts for that when labeling observations tells you something about the current state of the investment literature. 3.3 Computing Dynamic Thresholds As argued in the previous section, in practice we want to set profit taking and stop-loss limits that are a function of the risks involved in a bet.

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Other common errors include computing performance using a non-standard method (Chapter 14); ignoring hidden risks; focusing only on returns while ignoring other metrics; confusing correlation with causation; selecting an unrepresentative time period; failing to expect the unexpected; ignoring the existence of stop-out limits or margin calls; ignoring funding costs; and forgetting practical aspects (Sarfati [2015]). There are many more, but really, there is no point in listing them, because of the title of the next section. 11.3 Even If Your Backtest Is Flawless, It Is Probably Wrong Congratulations! Your backtest is flawless in the sense that everyone can reproduce your results, and your assumptions are so conservative that not even your boss could object to them.

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CHAPTER 15 Understanding Strategy Risk 15.1 Motivation As we saw in Chapters 3 and 13, investment strategies are often implemented in terms of positions held until one of two conditions are met: (1) a condition to exit the position with profits (profit-taking), or (2) a condition to exit the position with losses (stop-loss). Even when a strategy does not explicitly declare a stop-loss, there is always an implicit stop-loss limit, at which the investor can no longer finance her position (margin call) or bear the pain caused by an increasing unrealized loss. Because most strategies have (implicitly or explicitly) these two exit conditions, it makes sense to model the distribution of outcomes through a binomial process. This in turn will help us understand what combinations of betting frequency, odds, and payouts are uneconomic.

Britannia Unchained: Global Lessons for Growth and Prosperity
by Kwasi Kwarteng , Priti Patel , Dominic Raab , Chris Skidmore and Elizabeth Truss
Published 12 Sep 2012

The spirit of Yes Minister, where everyone in the room can discuss the Greek Aorist but are clueless about chemistry, is still strong in British boardrooms. In the recent financial crisis, problems were caused by owners not understanding managers and managers not understanding the rocket scientists working for them. The film Margin Call portrays the chaos in an investment bank where a mistake in an equation threatens to wipe out the firm’s market capitalisation. When the analysts try to bring the impending disaster to the attention of the banks CEO, his response is one of incomprehension. ‘Speak to me in plain English or as you would to a young child or golden retriever.

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(1967) 9 favelas (Brazilian shantytowns) 101–4 drug lords 102–3 entrepreneurial spirit 103–4 feed-in tariffs 85 Ferguson, Niall 21, 66, 91 First Care Products 79 fiscal rules 25, 27, 29, 30, 31, 33 see also Golden Rule Flaherty, Jim 35 Flikr 95 Frankel, Jeffrey 29 fuel prices 62 Furedi, Frank 87 139 geek culture 48–51 General Motors 92 Germany birth rate 107 economic growth 8 educational reform 41 high-tech industry 52 and PISA results 40–1, 57 welfare reform 4 Giffords, Gabrielle 78, 79–80 Gladwell, Malcolm 86 Global Competitiveness Report 2011/12 88 global financial crisis (2007–08) 2–3, 4, 9–10, 31–2 responses to 13–14 globalisation 4, 54 Golden Rule 28, 29 Google 60, 81, 93 Gou, Terry 105 Gove, Michael 38 Greece 3 Griffin, John 62 Haddock, Richard 64 Harford, Tim 92 Hari, Johann 19 Harper, Stephen 35, 36 Harvard University Harvard Institute of Economic Research 68, 69 and New Keynesianism 25, 26 Hasan, Medhi 19 Hawke, Bob 32 Heath, Edward 8, 9, 114 Henderson, Sir Nicholas 7, 8 Heritage Foundation 36 Hernández, Daniel, Jr 78 Hewlett Packard 81, 93 Higher Education Policy Institute 57 Hinduja brothers 72–3 Hodge, Margaret 43 Hoffman, Reid 97 Hong Kong 5, 36, 66, 113 Howard, John 33 Human Rights Act 74 140 Britannia Unchained Hutton, Will 26 hyperinflation 21, 83, 104, 105 IBM 81 ICQ (instant messaging programme) 81 Imperial College 58 India 4–5, 100, 113, 115 attitudes to science and technology 44, 46, 49–51 Institutes of Technology 51, 53 work ethic 57, 72–3 innovation 5, 93–4, 97, 98–9, 105, 114 and informal economy 88–9 and necessity 86, 91 patent applications 81, 82, 95–7 and risk 91–2 see also entrepreneurship; Israeli entrepreneurial culture; venture capital instant messaging 81 Intel 68, 81 intellectual capital 52, 53, 112 intellectual property law 55, 89 International Indicators of Educational Systems (INES) project (OECD) 39 International Monetary Fund (IMF) 34, 114 internet 55, 81, 88, 99, 108–9 Intuit 92 Iraq War (2003) 10 Isagba, Beau 1 Isenberg, Daniel 83, 94, 95–6 ‘Israeli bandage’ 78–80 Israeli entrepreneurial culture 78–86 government support for 83–6 and Jewish immigrants from Soviet Union 86 technology sector 80–1, 86 and venture capital 5, 80, 84–5, 94 Italy 3, 52 Ive, Jonathan 91 Jackson, Tim 10 Jain, Nitin 50 Japan aging population 106–7 education 40, 43, 55 work ethic 106 Jebel Ali Free Zone (Dubai) 88 Jefferson, Thomas 90 Jobs, Steve 89 Jobseeker’s Allowance 74 John-Baptiste, Ashley 45–6 Johnson, Samuel 98 Jones, Peter 97 Katz, Lawrence 25 Katzir , Ephraim 83 Keating, Paul 32 Keegan, William 26, 28 Kennedy, John F. 23–4 Keynes, John Maynard 20 Keynesian economics 14–15, 20, 24, 28 Kinnock, Neil 28 Kissinger, Henry 9 Krugman, Paul 19 Kumar, Manmohan S. 22 Laski, Harold 14 Last.fm 55, 98 Le Dang Doanh 89 Leavis, F.R. 46 Lehman Brothers 92 leverage 35 Li, David 47–8 Liberal Party (Canada) 16–18, 35 The Limits to Growth 9 LinkedIn 95, 97, 98 London tube-drivers 63 Lopes, Antonio Francisco Bonfim (‘Nem’) 103 Loughner, Jared Lee 78 Lula da Silva, Luiz Inácio 100–1 M-Systems Ltd 81 Macaulay, Thomas 19, 21 Macmillan, Harold 114 Major, John 28 Malaysia, women and tech careers 50 Index Mandelson, Peter 94, 115 Manpower Talent Shortage Survey 73 Margin Call (film) 47 Marland, Jonathan, Baron 85 Marshall, Alfred 52 marshmallow test 71–2 Martin, Paul 16–18, 35, 36 Massé, Marcel 18 Mayer, Marissa 48 meritocracy, in emerging economies 49 Merkel, Angela 46 Mexico debt default 22 education 44, 55 Peso Crisis (1994) 16 women and tech careers 50 Michau, Jean-Baptiste 70 Michel, Harald 107 Microsoft 68, 81 miners’ strike (1983–84) 114–15 Mirabilis 81 Mischel, Walter 71 Mittal, Lakshmi 73 mobile phones, dual-sim-card 89 Moo.com 55 Moody’s 47 Mossbourne Academy (Hackney) 59 Motorola 81 Mulroney, Brian 15–16, 36 NAFTA (North American Free Trade Agreement) 15 NASDAQ 80, 94 A Nation at Risk, report on US education system 39, 40 National Commission on Excellence in Education 38–9 National Employment Savings Trust Scheme (UK) 87 National Health Service (NHS) 28, 29, 31 Netanyahu, Binyamin 86 Neuwirth, Robert 89 New Keynesianism 25, 26 New Labour 24, 25 and growing deficit 29–33 141 inaccuracy of budget forecasts 29 investment in public services 12, 28–9 macroeconomic framework 27–30 tax increases 28–9 North Korea 36 North Sea oil 9, 37 Obama, Barack 100 ‘Occupy London’ protests 10 O’Donnell, Gus 27, 30 OECD, comparing school systems 31, 38–41 Ofsted 59, 71, 73 Old Age Pensions Act (1908) 69 Oliveira, Silvinha 103 Olympic Games in Brazil 101–2, 103 London tube drivers pay 63 Paypal 93, 95 Pedro II, Emperor of Brazil 104 pensions 3, 32, 63, 69–70, 110 pension age 69 Peston, Robert 28 PISA tests see Programme for International Student Assessment (PISA) ‘The Poles are Coming’ 63–4 poll tax riots (1990) 69, 115 The Population Bomb, (1968) 9 Postlethwaite, T.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

The forward IMM swap is a great speculative vehicle—an ideal trading instrument. There is no cost of carry on an IMM swap provided the trader 10 The risk in variation margin calls is not one that a trader should treat lightly. Often, a trader will do an arb using one or more positions in futures in which he reasons: “Rates are out of whack; A exceeds B; but, as time passes, A must come to equal B.” That this is true is no protection against A and B getting further out of whack in the short run and the trader having, consequently, to meet huge variation margin calls. Should this occur, the risk to the trader is that he will exhaust his funds before A and B move into line.

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In particular, both the Treasury and the SEC imposed complex capital charges on repos and reverses. One purpose of these requirements was to create incentives to encourage dealers doing repos and reverses to operate as follows: collateral is to be reasonably priced; the amount of money that changes hands is to be a reasonable percentage of the collateral’s market value; and, finally, margin calls are to be made if significant changes occur in that market value. Also, the new regulations required that a dealer, before doing repo with a customer, send to the customer a written agreement that includes a specifically worded disclosure regarding the dealer’s right to substitute collateral.

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Second, if bill rates rise sharply over the holding period, variation margin in the form of investable dollars will be paid into the trader’s margin account, which—assuming he invests these dollars—will raise his return on the trade. Our trader’s 26-bp profit spread would conversely be threatened by a rally in bills, which would result in margin calls that he would have to meet in cash. How much of a threat do potential margin TABLE 15.5 Calculating the profit on a $10 million cash-and-carry trade if rates were those shown in Table 15.4 and the term repo rate were 8.25 calls pose to our trader? Relatively little. Even in the unlikely event that bills rallied by 100 bp on the day the trade settled (October 28, 1982), the extra margin he would have to put up over 56 days would, assuming a 8.25 financing rate, cost him only 2¼ bp of his profit spread.

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis
by James Rickards
Published 15 Nov 2016

Why throw a lifeline to a drowning man when you can wait for him to drown and collect the life insurance? Soros could afford to wait; desperate sellers only get more desperate. By August 31, losses at LTCM were $2 billion, 50 percent of our original capital. It seemed surreal that we were still standing, still meeting margin calls, and still operating every day. The reason was our contracts did not give counterparties a way out. LTCM consistently refused to sign termination clauses with subjective criteria such as “material adverse change.” We insisted on a numeric trigger of $500 million of remaining capital for an early termination of contract.

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PWG’s purpose was to put banking, securities, and commodities regulators in one place to deal with crises. The 1987 crash involved complex interactions between the stock market, regulated by the SEC, and Chicago futures markets, regulated by the CFTC. The crisis then spread to the bank payments system because billion-dollar margin calls were required between the New York and Chicago markets. Banks were hesitant to initiate wire transfers to Chicago futures brokers for fear that they would not receive incoming wires from New York stockbrokers. The system started to freeze up. Noncoordination among securities, futures, and bank regulators made crisis resolution difficult.

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To the extent two instruments in an arbitrage trade have low volatility and credit risk, the trade may be regarded as relatively risk-free and amplified with leverage to synthesize S&P volatility with a higher expected return. The flaw in this neat theory of risk-free arbitrage is that in a panic, price spreads can widen before they converge. A leveraged player will be bled dry with margin calls on mark-to-market losses before reaching the promised land of convergence. Success at arbitrage also derives from market timing. In fact, all alpha results from market timing, and the only consistent source of successful market timing is inside information. This was demonstrated by the Nobelist Robert C.

Oil: Money, Politics, and Power in the 21st Century
by Tom Bower
Published 1 Jan 2009

Hall’s argument, carefully based on Hubbert and his disciples, won Rubin’s support. “No one paid any attention to the economist,” said Hall on his return to Connecticut. “I hate going to New York.” Hall had mastered the commodity and the market, read the literature, spoken to the right people, and was ready to stake about $1 billion in margin calls. He would buy oil two to five years in advance. Since the market was in backwardation, oil was cheaper in the future than on the instant “spot” market. Holding 90 percent of Phibro’s “book,” or positions, he wanted to bet against the world, particularly the banks, rather than the oil majors. Speculating about oil prices had been transformed by the major players.

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The final price would be calculated against Nymex’s. In 1990, traders demanded that regulatory authorities acknowledge that the trade was legitimate and their agreements were enforceable. Responding to those demands for unhindered growth, the CFTC agreed in 1991 that complex derivatives could be bought and sold using borrowed money or on margin calls. Under pressure from the traders and bankers, in 1993 Wendy Gramm, the head of the CFTC, announced that the regulator would not exercise its authority over the “spot” trade or over swaps or “forwards” on the OTC market, the equivalent of Nymex’s “futures.” As the trade expanded, the OTC traders speculated on the price of oil, natural gas and electricity free of any controls, and simultaneously expressed dissatisfaction with Nymex.

…

Authorized by the Commodity Exchange Act, ICE’s traders were required to keep records, but were exempt from the CFTC’s supervision. To guarantee payment and cover any losses, traders deposited funds in a clearinghouse. Every day the clearinghouse collected the “margin” or losses on each contract from the exposed traders. If necessary, the “losing” trader was then required to deposit more money, or to increase the margin call to cover any future loss, protecting both parties from default. Haphazardly, the unregulated OTC market using ICE and the futures trade on Nymex converged, and, unseen, was exploited by Enron’s traders, harming the integrity of the whole market. The rising price of oil and the ease of investing in it through swaps and ICE attracted the managers of savings and hedge funds, who after 2000 became disenchanted with shares.

Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen
Published 4 Apr 2011

Despite this caveat, to me the insight that people or institutions become more risk averse when they become poorer captures something essential in investor behavior. In an institutional setting, breaching a subsistence level might have an analogue in the institution’s bankruptcy, a trader reaching his or her terminal stop-loss limit or the point of an unaffordable margin call, a pension fund’s minimum acceptable funding ratio, or a financial intermediary’s binding capital constraint. The presence of a broadly defined subsistence level makes investors’ relative risk aversion vary with their wealth level and prompts them to act like someone trading a portfolio insurance strategy.

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The agency relation means that end-customers are more likely to withdraw capital just when mispricing trades have moved maximally against the arbitrageur. End-customers assess an arbitrageur’s ability by studying performance track records; and widening mispricing normally implies deteriorating performance for the arbitrageur. To compound the arbitrageurs’ problems when they are facing losses, creditors may make margin calls if leverage is employed, stop-loss rules or risk managers can require position reductions, and vanishing liquidity may reinforce the downward spiral. All these considerations push arbitrageurs toward short time horizons and constrain their position sizes. There are also transaction costs and model uncertainty to consider.

…

I review the four most prominent models:• DeLong et al. (1990) developed the first formal model that predicted both short-term momentum and long-term reversal. The model focused on the interaction of noise traders and arbitrageurs. The study simply posits that noise traders follow positive-feedback strategies (buying recent winners and selling recent losers), which could reflect extrapolative expectations, stop-loss orders, margin calls, portfolio insurance, or wealth-dependent risk aversion or sentiment. Arbitrage need not always be stabilizing; it may be rational for arbitrageurs to jump on the bandwagon and push prices further away from fundamental values. Positive-feedback trading clearly creates short-term momentum and price overreaction.

Panderer to Power
by Frederick Sheehan
Published 21 Oct 2009

On January 31, 1994, before the Joint Economic Committee, he stated “Short-term interest rates are abnormally low in real terms”30 It was no secret that the borrow short and lend long strategy had refinanced the banking system. By early 1994, banks were liquid and lending. The Fed raised the funds rate from 3.0 percent to 3.25 percent on February 4. This was the first of several increases, the consequence of which was the most traumatic financial convulsion since the 1987 crash. Margin calls drove prices lower, prompting more margin calls and more selling. Longterm Treasury yields rose from 6.3 percent in January to 8.0 percent in December 1994. Greenspan may not have anticipated how derivatives had leveraged the financial system. Still, he could not have been completely surprised by the deleveraging. At the December 1993 FOMC meeting, Federal Reserve Governor Lawrence Lindsey warned: “[W]e all agree that the 3 percent [funds] rate is unsustainable.

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Land blog,” 347 Lucent, 207 Luckman, Charles, 23 M Madrick, Jeff, 59–60 Maestro (Bob Woodward), 171, 236 Mahar, Maggie, 210 Mailer, Norman, 74 Maisel, Sherman, 40 Malle, Louis, 75 Major, John, 323 Mankiw, Greg, 147–148 Manufacturing: 1980s decline in, 78 from 1998 to 2003, 291 from 2000 to 2004, 307–308 in mid-century, 23 overseas plants for, 44 profits from, 2–3 Margin calls, 128 Margin requirements, 104, 105, 161, 175, 219–220, 223, 230 Maricopa, Arizona, 357 Markey, Ed, 223 Martin, Justin, 17, 195–196 Martin, Steve, 353 Martin, William McChesney, Jr., 4, 20–21, 23–24, 26, 27, 32 n.6, 33–34, 39–41, 44, 65, 66, 115, 126, 201, 287, 300, 305, 350, 351, 362 Mayer, Martin, 4, 21, 88, 90 McCabe, Thomas B., 20n.5 McCain, John, 85, 215 McCulley, Paul, 245 McDonough, William, 186, 187, 247 McNamara, Robert, 29, 75 McTeer, Robert, 206, 247 Meany, George, 43–44 Measuring Business Cycles (Arthur Burns), 12 Media, stock market and, 248–249 Meeker, Mary, 233, 244 Mercury Finance Corporation, 165 Meriwether, John, 183, 187 Merrill, Dina, 74 Merrill Lynch, 116, 131, 144, 232–233, 272, 332, 333, 347n.48, 358 Merton, Robert, 183, 187 Mexico, bailout of, 135–136 Meyer, Laurence, 138, 139 Miami, Florida, 89, 295 Michaelcheck, William, 125 Micron Technology, 207 Microsoft Corporation, 177, 207, 216 Middle class, 252–253, 355 Milken, Michael, 7, 80, 81, 86, 87, 89, 90, 117 Miller, G.

Hedgehogging
by Barton Biggs
Published 3 Jan 2005

The new twist was that he had invested $5 billion buying oil futures in the month leading up to the election with the objective of souring the stock market, the economy, and general voter sentiment prior to the election. If he also believed oil was going higher, it was not inconceivable that he would take a gigantic position. Soros has never been reluctant to use his wealth to throw his weight around.The chatter was that with this sharp break he was getting margin calls and was liquidating his position. I didn’t believe the rumor. Soros is far too smart and dispassionate to mix business with politics.While recognizing that it takes courage to be a pig, we decided that, after all the travail we had suffered, it was the better part of valor to cover about a third of our short.We bought it in at a little over 42.The trade had been unsuccessful, but at least we had a measure of redemption.

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Why does he travel endlessly to places like Japan, Russia, and India, which are not exactly luxury locations? He has no partner with whom to share the anxiety, and his performance swings are so immense it must be nervewracking even for an impervious persona. From time to time, one hears wild stories that Tim is facing huge margin calls and is about to be carried out. Of course it is never true. The only answer I can come up with is that he loves high-octane investing, and I know that he thinks it’s the right way to manage money. He must like to travel. This quiet, austere, gentle man must thrill to the adrenaline rush of spectacular successes and be able to live with the big downs.

…

By the late 1920s he had been speculating for a number of years quite successfully in commodities and had become a reasonably rich man. In early 1929, he was long rubber, corn, cotton, and tin when suddenly prices collapsed. His commodity losses forced him initially to sell stocks into a falling market to meet margin calls.Then commodities fell further, and he suffered grievous wounds. By the end of 1929 he had nothing left but some tag ends and a massive position in the Austin Motor Company, which had collapsed to 5s from 21s earlier in the year. His net worth had plunged 75% from its high and fell even more in 1930.

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
by David Carey
Published 7 Feb 2012

Blackstone was now worth as much as Lehman Brothers, where Peterson and Schwarzman had launched their banking careers, and a third as much as Goldman Sachs. Blackstone had arrived. Eleven days later, on July 3, KKR filed to go public, but Kravis’s firm was too late. The very day that Blackstone units began trading, Bear Stearns announced that it would lend $3.2 billion to a hedge fund it managed that was facing margin calls as the value of its mortgage-backed securities tumbled, and the bank said it might have to bail out a second, larger hedge fund. It was an omen. By mid-July, the credit markets were in full retreat and it was hard to muster financing for big LBOs. The growing losses on mortgage securities were unnerving hedge funds and other investors, and buyout debt looked a little too similar, so banks could no longer raise money through CLOs to make buyout loans.

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In the cascade of unforeseen consequences, the jump in defaults in turn threatened to bring down the bond insurers that had sold protection on the senior layers, figuring there was a one-in-a-million chance that the damage would ever penetrate that far. As each month went by, more mortgage companies failed, and several steps down the financial chain, more margin calls were issued to investors who had borrowed to buy mortgage-backed securities that were no longer worth enough to suffice as collateral for the loans. Eventually the elaborately engineered mortgage securities that Wall Street had invented came home to roost, inflicting losses at the source—the banks.

…

The push by some firms like Apollo, KKR, and Carlyle to diversify away from LBOs into other asset classes by launching business development companies and publicly traded debt funds also proved calamitous. A $900 million mortgage debt fund that Carlyle raised on the Amsterdam exchange, shortly after KKR launched its $5 billion equity fund, was leveraged with more than $22 billion of debt and capsized in 2008 when its lenders issued margin calls and seized all its assets. It was a complete wipeout. KKR Financial, a leveraged mortgage and corporate debt vehicle in the United States, had to be propped up by KKR and barely survived. Its shares sank from more than $29 in late 2007 to less than 50 cents in early 2009. Apollo Investment Corporation, the business development company that Apollo created in 2004, beating Blackstone and others to the punch, took huge write-downs.

The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series)
by Robert P. Baker
Published 4 Oct 2015

Whatever happens to the price of aluminium, there is no additional payment 77 Liquidity, Price and Leverage TABLE 6.1 Leverage on various trades Trade type Buyer Seller Spot Future No leverage Leverage partially offset by margin call Leveraged No leverage on trade but leveraged counterparty risk No leverage on trade but leveraged counterparty risk No leverage Leverage partially offset by margin call Leveraged Leveraged Forward Option Insurance such as credit derivative Leveraged required to meet his obligations arising from the trade. We say that spot trades are not leveraged. When a bank sells a put option, it receives the premium and pays nothing.

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The diary may consist of events, the trades and underlyings they relate to and the action to be taken. Each day the diary is opened and all events for that day are processed. Table 8.3 shows example actions common to both middle office and back office, but in reality there would be separate reports for each business function. When events occur every day (such as margin calls or the possibility of a credit event) they can be given their own process. When there is no predicted date such as for a trade amendment, a process will need to be undertaken on demand and cannot be diarised. 110 THE TRADE LIFECYCLE TABLE 8.3 Example diary entries for one day Trade(s) Event Underlying Action T110 T304, T30 T737,T373 T167 T35, T36, T37 T22 T772 Coupon payment date Averaging date Swap fixing Settlement date Ex-dividend date Maturity date Close to knock-out Bond: BRD2020 Nymex WTexas Oil LIBOR CHF Fix/Float GBP Segro PLC Expect receipt Fix Fix Settle Record Process expiry Check market EUR/JPY Risks Changes to a trade or its assets cause risks to the institution holding the trade.

A Man for All Markets
by Edward O. Thorp
Published 15 Nov 2016

A purchase of $100 on no borrowing grew to $293, and our 10 percent down investor who pyramided might have doubled his money more than ten times, gaining more than a thousand times his original investment. However, as prices eased in September and October 1929, the equity of the most highly leveraged investors vanished. When they were unable to meet margin calls, their brokers sold their stock. These sales drove prices down, wiping out investors who hadn’t been quite as leveraged, triggering a new round of margin calls and sales, driving prices down further. As the equity bubble burst, the greatest stock market decline in history began. Large-company stocks eventually dropped by 89 percent, to one-ninth of their earlier peak prices.

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After ten steps up of 10 percent, during which the investor’s stake undergoes ten doublings, the stock will be at $259 and from the original purchase of $10,000 worth of stocks using only $1,000, the investor now has $10,240,000 of the same security. His equity is 10 percent of this. He’s a millionaire. Such is the hypnotically enticing power of leverage. But what happens if the stock price then drops 10 percent? Our giddy investor loses his entire equity and his broker issues a margin call: Pay off the loan—which is now more than $9 million—or be sold out. As stock prices rose in 1929, investors leveraged themselves in this way to buy more, driving prices higher. The positive feedback loop led to an average total return on large-company stocks of 193 percent from the end of 1925 to the end of August 1929.

The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources
by Javier Blas and Jack Farchy
Published 25 Feb 2021

That meant that the trading house had paid a deposit to its banks and brokers, and they had bought the contracts on its behalf. As long as the price went up, everyone was happy. But each time the price went down the banks and brokers asked Marc Rich + Co to top up its deposits – a procedure known as a ‘margin call’. That was how Zak and the other finance specialists found themselves running out of money. Each day the banks would demand millions of dollars in margin calls, and Zak would have to come up with the cash. ‘We said: look, guys, we can’t run the business like this. We’re basically running out of cash here,’ Zak recalls. 15 The traders eventually persuaded Rich to sell the massive zinc position – a task that took several months.

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Morgan, 130 J&S, 208 –9 , 210 –11 Jaeggi, Daniel, 211 , 216 Jamaica, 72 –84 , 86 , 98 , 142 , 154 , 204 , 310 Jamalco, 80 James, Greg, 186 , 191 Jamison, David, 155 , 164 Jankilevitsch, Gregory, 208 –9 , 210 –11 , 216 Japan, 13 , 18 , 24 , 28 aluminium trade, 82 atomic bombings (1945), 223 coal consumption, 177 , 183 , 187 , 273 grain consumption, 39 G7 summit (1979), 70 Gulf War (1990–91), 100 oil consumption, 44 reconstruction, 179 , 180 , 223 rice futures, 102 sogo shosha , 13 Sumitomo, 250 supercycles and, 180 Jesselson, Ludwig, 8 , 24 , 25 , 27 , 28 , 35 , 37 , 41 , 326 Iran oil deal (1973), 52 –3 Rich’s resignation (1974), 58 –9 , 121 jets, 184 JOC Oil, 65 –6 Johnson, Lyndon Baines, 43 Jugometal, 29 Kabila, Joseph, 223 –4 , 225 , 227 , 229 Kabila, Laurent-Désiré, 223 Kalmin, Steve, 270 Kardashian, Kim, 152 Kashagan, 297 Katanga, Congo, 219 , 223 , 224 , 226 –9 Katumba Mwanke, Augustin, 224 , 225 , 227 Kazakhstan, 131 , 153 , 165 , 168 , 185 , 199 , 258 , 302 aluminium production, 140 , 141 , 145 , 146 , 147 oil production, 65 , 168 , 206 , 296 –9 Vitol, trade with, 296 –9 wheat production, 245 KazMunaiGas (KMG), 297 Kazzinc, 184 Kelm, Erwin, 38 Kenya, 93 , 232 KGB (Komitet Gosudarstvennoy Bezopasnosti ), 23 Khodorkovsky, Mikhail, 213 –15 , 299 Khomeini, Ruhollah, 67 , 94 , 96 Khrushchev, Nikita, 34 Kingston, Jamaica, 72 –3 , 77 Kinshasa, Democratic Republic of Congo, 33 Kirkuk, Iraq, 280 , 283 –5 , 287 , 289 Klebnikov, Paul, 149 Kleinwort Benson, 277 Klöckner & Co, 114 Klomp, Ton, 206 Knoechel, Eberhard, 258 Koch, Charles and David, 64 , 290 Kolwezi, Congo, 218 , 226 , 227 Krasnoyarsk, Russia, 141 –2 , 145 –6 , 148 Kulibayev, Timur, 298 –9 Kurdistan, 198 , 280 –91 , 295 , 298 , 299 , 302 , 328 Kuwait Gulf War (1990–91), 100 –101 , 106 , 108 –10 , 157 oil crisis, first (1973–4), 54 –5 Rotterdam market trade, 62 Kyrgyzstan, 158 Lada, 86 Lage, Carlos, 152 Lagos, Nigeria, 236 Lakhani, Murtaza, 197 –9 , 202 –3 , 284 Larocca, José, 238 Lay, Kenneth, 173 lead, 35 , 85 , 129 Lebanon, 226 Lehman Brothers, 243 , 265 Leiman, Ricardo, 244 Leopoldville, Belgian Congo, 33 letters of credit, 61 Lew, Jack, 312 Liberia, 308 Libya, 1 –8 , 64 , 92 , 166 , 247 , 283 , 285 Liechtenstein, 46 light-touch regulation, 19 Lilley, David, 195 Linetskiy, Vadim, 211 lithium, 319 Lithuania, 161 , 181 London, England, 3 , 5 , 11 , 20 , 55 , 199 Glencore–Xstrata merger (2012), 272 –3 International Petroleum Exchange, 115 property market, 147 Rotterdam market and, 63 Stock Exchange, 203 telegraph in, 26 Vitol in, 163 London Metal Exchange (LME), 79 –82 , 102 , 123 , 145 , 195 , 251 Louis Dreyfus, 10 , 19 , 39 , 241 , 244 , 248 , 262 , 277 , 320 Loya, Mike, 115 Lualaba river, 218 Lubumbashi, Congo, 33 Luckock, Ben, 285 , 286 Lutter, Gerd, 64 Lvov, Felix, 145 Mabanaft, 31 –4 , 35 –6 , 37 , 56 , 68 , 261 Oiltanking, 63 –4 Soviet deal (1954), 22 –4 , 32 , 33 –4 , 44 , 51 , 135 , 261 , 302 MacLennan, David, 17 , 31 , 231 MacMillan family, 249 , 277 , 278 MacMillan, Harold, 87 MacMillan, John, 25 , 27 , 29 –31 , 38 , 41 , 242 Madrid, Spain, 48 , 58 , 59 , 60 , 123 , 126 Mahoney, Chris, 259 malachite, 226 Mali, 294 Malta, 66 , 286 , 308 Manafort, Paul, 284 Manhattan Project (1942–6), 223 Manley, Michael, 76 –7 , 83 Mao Zedong, 177 Maradona, Diego, 152 Marathon Petroleum, 53 Marc Rich + Co, 14 , 16 , 19 , 20 , 37 , 47 , 59 –61 , 86 –7 , 117 –27 , 143 aluminium trade, 77 –84 , 122 , 125 , 144 , 165 Angola, trade with, 282 , 300 bribery, use of, 310 Cobuco, 91 –4 coup (1993–4), 125 –7 , 184 , 190 Cuba, trade with, 157 –8 Dauphin resignation (1992), 122 foundation of (1974), 59 –61 Glasenberg joins (1984), 182 Granaria acquisition (1981), 245 Hall job offer (1982), 106 indictments (1983), 96 –7 , 130 , 155 Iran, trade with, 68 –9 , 94 –7 Jamaica, trade with, 72 –4 , 77 –84 , 86 , 98 , 142 Nigeria, trade with, 61 oil team resignation (1993), 125 Philipp Bros. collapse (1990), 113 profits, 69 Russia, trade with, 122 South Africa, trade with, 88 , 89 , 90 , 94 , 98 , 122 Soviet Union, trade with, 136 –7 Strothotte resignation (1992), 121 –2 Südelektra stake (1990), 189 Tajikistan, trade with, 162 volume of trade, 293 Weiss resignation (1992), 122 zinc play (1991–2), 122 –4 , 128 , 170 , 251 margin calls, 124 Marimpex, 64 , 89 Marquard & Bahls, 32 Marsa al-Brega, Libya, 5 –6 Marshall Islands, 308 Mashkevich, Alexander, 185 Maté, Daniel, 259 Mayfair, London, 84 , 147 , 199 , 281 , 297 Mayuf, Abdeljalil, 7 McCarthy, Joseph, 22 McIntosh, Ian, 248 Meier, Henri, 127 Menatep, 213 Mercuria, 206 , 207 –9 , 210 –12 , 216 , 261 , 262 , 318 , 324 mercury, 48 Merrill Lynch, 138 Metallgesellschaft, 25 , 114 , 123 , 172 , 195 metals, 9 , 14 , 25 , 26 , 57 aluminium, see aluminium cobalt, 9 , 223 , 224 , 226 , 273 , 314 , 318 , 319 copper, see copper futures, 102 iron ore, 175 –6 , 181 , 261 , 264 lead, 35 , 85 , 129 lithium, 319 mercury, 48 nickel, 137 , 176 , 181 , 265 , 319 zinc, see zinc Mexico, 129 , 130 , 157 , 167 , 180 , 234 , 240 , 273 , 312 MG, 172 , 195 Milosevic, Slobodan, 167 Minerals & Chemicals Corporation, 276 mining, 85 , 171 , 186 –94 , 326 in Australia, 175 –6 , 186 –7 in Congo, 218 –29 Mistakidis, Telis, 194 , 259 , 270 , 272 Mitterrand, François, 161 Mobil, 170 Mobutu Sese Seko, 223 Model T car, 253 Mohammad Reza Pahlavi, Shah of Iran, 46 , 50 , 67 , 88 , 67 Mombasa, Kenya, 93 Monaco, 63 Mongolia, 140 Monte Carlo, 144 Morgan Stanley, 13 , 102 , 111 , 155 Morocco, 33 , 47 Morrison, James, 68 Mosaic, 278 Mosul, Iraq, 283 Mount Holly, South Carolina, 81 Mount Isa, Queensland, 193 –4 Mountstar Metals, 138 Mozambique, 161 Murray, Simon, 269 Muscat, Oman, 153 Mutanda, Congo, 219 , 223 , 224 , 226 –9 Namibia, 232 , 233 do Nascimento, Leopoldino Fragoso, 229 Nasmyth, Jan, 55 Nasser, Gamal Abdel, 45 –6 National Iranian Oil Company, 52 , 68 –9 Nazarbayev, Nursultan, 297 –8 Nazi Germany (1933–45), 22 , 24 , 26 , 47 , 87 Nebuchadnezzar, King of Babylon, 284 Netherlands, 48 , 65 , 120 , 163 , 164 , 236 , 237 , 243 Neverland , 286 New Comfort , 323 New Mexico, United States, 323 New York, United States Aluminum for Defense, 75 Great Grain Robbery (1972), 38 –42 Jesselson in, 24 , 28 Rich in, 37 , 47 , 58 Rotterdam market and, 63 telegraph in, 26 Weisser in, 35 New York Mercantile Exchange (Nymex), 104 Newfoundland, Canada, 170 Nicaragua, 77 , 85 , 87 , 161 nickel, 137 , 176 , 181 , 265 , 319 Nigeria, 85 , 181 , 220 , 232 , 325 Alison-Madueke corruption (2011–15), 221 Elf, trade with, 61 Glencore, trade with, 12 , 168 , 314 jihadis in, 294 Probo Koala affair (2006), 236 rice consumption, 232 Rotterdam market trade, 62 Trafigura, trade with, 130 Vitol, trade with, 166 Nixon, Richard, 51 , 254 Noble Group, 196 , 244 , 262 , 276 –7 Non-Aligned Movement, 92 North Dakota, United States, 261 , 323 North Korea, 138 , 162 North Sea oil, 114 –16 , 122 , 123 , 204 , 316 NRC Handelsblatt, 65 O’Malley, Tom, 53 , 61 , 113 Obama, Barack, 311 , 320 Och-Ziff Capital Management, 228 October War (1973), 53 Ognev, Yury, 246 Ohio, United States, 285 oil Brent oilfield, 114 –16 , 122 , 123 , 204 , 316 Chad trade, 294 –6 Chinese trade, 179 –80 , 201 coronavirus pandemic (2019–), 15 , 321 –5 crisis, first (1973–4), 53 –7 , 62 , 67 , 69 , 88 , 104 , 105 , 163 crisis, second (1979), 18 , 67 –9 , 92 , 104 Cuban trade, 151 –3 , 156 –61 Gulf War (1990–91), 100 –101 , 106 , 108 –10 Iraq trade, 197 –203 , 207 , 210 , 280 –91 Israel pipeline, 43 , 45 , 46 –7 , 49 –51 , 94 , 285 –6 Kazakhstan trade, 296 –9 Kurdistan trade, 280 –91 optionality, 205 –6 Romanian trade, 167 –9 Rotterdam market, 62 –6 Russian trade, 9 , 65 , 199 , 206 –17 , 287 , 300 –303 , 313 , 319 Seven Sisters, see Seven Sisters South African trade, 87 –91 , 94 , 98 Soviet trade, 22 –4 , 32 , 33 –4 , 44 , 51 , 66 , 156 –7 , 165 United States trade, 317 ‘Oil Crisis, The’ (Akins), 52 Oilflow SPV I DAC, 281 –2 , 287 –90 , 292 oilseeds, 9 , 39 Oiltanking, 64 Old Testament, 284 Olympic Games, 78 , 87 –8 , 182 Oman, 64 , 116 , 153 , 166 , 199 onions, 252 Onsan, South Korea, 324 Operation Desert Storm (1991), 110 optionality, 205 –6 options, 101 –2 , 103 , 110 , 116 , 123 Organisation for Economic Co-operation and Development (OECD), 106 , 275 Organization of the Petroleum Exporting Countries (OPEC), 44 –5 , 53 , 62 –3 , 67 , 114 Cobuco and, 92 , 93 coronavirus pandemic (2019–), 322 Iraq surcharges and, 200 –201 oil crisis, first (1973–4), 53 –7 , 62 , 67 , 69 , 88 , 105 , 163 oil crisis, second (1979), 68 South Africa embargo (1973), 88 World OPEC project (1988), 116 Ortega, Daniel, 87 Otto, Nikolaus, 253 Oxfam, 250 Oxford University, 105 , 147 , 154 Page, Gregory, 278 Palm Jumeirah, Dubai, 288 Panama, 46 , 201 , 308 paper barrels, 102 , 103 Paribas, 60 –61 , 95 Parque Central hotel, Havana, 151 –3 , 160 –61 Pauli, Heinz, 127 Pax Americana, 24 , 180 Peakville Limited, 201 Pechiney, 171 Pelosi, Nancy, 249 Pemex, 234 –5 Pennsylvania, United States, 280 , 281 , 290 pension funds, 102 , 131 , 269 , 271 , 278 , 280 –82 , 288 , 290 , 295 PepsiCo, 137 perestroika , 135 Perkins, Ian, 187 Permian basin, 323 Peru, 85 , 130 , 226 , 264 Peshmerga, 283 Pestalozzi, 19 Pestalozzi, Peter, 19 Peterson, Tor, 259 Petra, 64 Petraco, 287 Petrobras, 313 petrodollars, 56 , 57 , 67 , 70 , 200 , 288 Phibro Energy, 100 –101 , 106 –10 , 111 , 113 , 194 Phibro-Salomon, 112 –13 Philipp, Julius, 25 , 26 , 37 Philipp Brothers, 14 , 24 , 25 , 26 , 28 –9 , 34 –5 , 56 , 57 , 61 , 98 , 186 apprenticeships, 37 copper trade, 195 East Germany, trade with, 29 Gulf War (1990–91), 100 –101 , 107 –10 Hall joins (1982), 106 Hong Kong office, 196 Iran oil deal (1973), 52 –3 , 55 Israel pipeline trade, 49 –51 , 94 , 285 metals trade, 28 –9 , 34 –5 , 49 , 57 , 76 , 113 Mineral & Chemicals merger (1960), 276 Phibro Energy, 100 –101 , 106 –10 , 111 , 113 Phibro-Salomon merger (1981), 112 , 316 profits, 38 , 69 , 163 Rich’s resignation (1974), 57 –9 , 121 secrecy, 276 Socar’s acquisition (2015), 319 Soviet Union, trade with, 29 , 135 , 137 Yugoslavia, trade with, 28 , 29 Philippines, 86 , 241 Piercy, George, 54 Pinochet, Augusto, 87 Pittsburgh, Pennsylvania, 36 Pojdl, Pavel, 211 Poland, 208 pollution, 21 , 318 Posen, Danny, 48 , 120 , 128 , 162 Posen, Felix, 37 , 47 , 135 , 137 , 183 , 274 potatoes, 104 Probo Koala , 236 , 238 Public Employees’ Retirement Systems, 280 , 290 , 295 public relations (PR), 278 Puerto Rico, 91 Puma Energy, 230 put options, 188 Putin, Vladimir, 9 , 147 , 208 , 212 –15 , 299 –303 , 313 , 328 PVM, 65 Q book, 171 Qaboos bin Said, Sultan of Oman, 64 , 153 , 166 al-Qaeda, 294 Qatar, 2 , 5 , 6 , 7 , 272 –3 , 301 –2 Querub, Isaac, 123 , 126 Ramadi, Iraq, 283 Ramaphosa, Cyril, 185 Ras Lanuf, Libya, 5 –6 Raznoimport, 135 , 137 , 139 , 162 Reagan, Ronald, 77 Red Kite, 195 Red Scare (1947–57), 22 Reid, Trevor, 191 Republic of the Congo, 314 Reuben College, Oxford, 147 Reuben, David, 133 –5 , 137 –47 , 207 –8 Reuben, Simon, 147 Reynolds, 80 Rhodesia (1965–79), 309 rice, 102 , 177 , 232 Rice, Condoleezza, 224 Rich, Denise, 98 , 120 Rich, Marc, 14 , 20 , 45 , 46 –53 , 68 , 70 , 86 –7 , 117 –27 , 305 , 327 bribery, use of, 310 Cobuco, 91 –4 coup (1993–4), 125 –7 , 184 , 190 Dauphin resignation (1992), 122 death (2013), 325 divorce (1996), 120 early rising, 185 FBI Most Wanted status, 95 Glasenberg, relationship with, 183 indictment (1983), 96 –7 , 130 , 155 Iran, trade with, 52 –3 , 55 , 68 –9 , 94 –7 Israel pipeline trade, 49 –51 , 94 , 285 Jamaica, trade with, 72 –4 , 77 –84 , 86 , 98 knife analogy, 60 , 98 , 156 , 309 , 327 Marc Rich + Co, foundation of (1974), 59 –61 oil team resignation (1993), 125 pardoning (2001), 97 –8 politics, views on, 290 resignation from Philipp Bros. (1974), 57 –9 , 121 South Africa, trade with, 88 , 89 , 90 , 94 , 98 Strothotte resignation (1992), 121 –2 Weiss resignation (1992), 122 zinc play (1991–2), 122 –4 Rio Tinto, 273 , 274 Roche, 127 , 188 –92 , 267 Rockefeller, John, 32 Rolling Stones, The, 127 Roman Empire (27 BCE – CE 476), 252 Romania, 129 , 153 , 167 –9 Rommel, Erwin, 5 Rosenberg, David, 122 –4 Rosneft, 9 , 214 –16 , 287 , 300 –303 , 313 , 319 Rotterdam market, 62 –6 , 70 , 164 Rotterdam, Netherlands, 62 , 63 , 64 , 70 , 82 , 145 Roundhead, 201 Royal Dutch Shell, 13 , 32 , 54 , 64 , 115 , 154 , 165 , 171 –2 Rubin, Robert, 194 Rusal, 148 Russian Federation, 9 , 14 , 17 , 122 , 131 , 273 , 299 –302 aluminium trade, 133 –5 , 139 –50 animal feed trade, 261 coronavirus pandemic (2019–), 322 Crimea annexation (2014), 300 food price crisis (2007–8), 239 emerging market status, 17 , 180 Iraq, trade with, 200 , 287 oil trade, 9 , 65 , 199 , 206 , 207 –17 , 287 , 299 –302 , 303 Rosneft, 9 , 214 –16 , 287 , 300 –303 , 313 , 319 sanctions on, 300 –303 , 312 sovereign debt default (1998), 169 wheat production, 245 –7 Salomon, 113 Salomon Brothers, 69 , 108 , 112 , 316 Salvador, El, 161 Samoa, 144 sanctions, 86 , 309 , 311 –13 , 320 BNP Paribas and, 304 –8 on Cuba, 9 , 152 , 305 –8 on Deripaska, 312 on Gertler, 225 , 312 –13 on Iran, 305 , 309 , 312 , 320 –21 on Iraq, 197 –203 , 207 , 210 , 310 on Russia, 300 –303 , 312 secondary sanctions, 311 –12 on South Africa, 64 , 87 –90 , 93 , 182 , 183 , 308 , 309 on Sudan, 305 on Venezuela, 312 on Yugoslavia, 167 on Zhuhai Zhenrong, 320 dos Santos, José Eduardo, 229 Sarir–Tobruk pipeline, 6 Saudi Arabia, 36 , 181 Aramco, 51 –2 , 319 barley consumption, 241 Gulf War (1990–91), 109 oil crisis, first (1973–4), 54 –5 oil crisis, second (1979), 68 OPEC established (1960), 44 Rotterdam market trade, 62 South Africa, trade with, 88 World OPEC project (1988), 116 Saunders, Walter ‘Barney’, 38 Sayanogorsk, Russia, 148 Schönenberg club, Switzerland, 184 Schwab, Muriel, 326 Scotland, 291 Seaga, Edward, 77 Sechin, Igor, 9 , 300 –302 secondary sanctions, 311 –12 Semlitz, Stephen, 111 Senegal, 33 , 222 , 240 September 11 attacks (2001), 190 –91 Serbia, 167 Seven Sisters, 17 , 32 –3 , 44 , 49 , 51 –2 , 66 , 70 , 101 , 105 , 170 , 319 oil crisis, first (1973–4), 56 , 61 –3 , 134 Shapiro, John, 111 Sharp, Graham, 125 , 128 , 129 , 170 Shear, Neal, 111 Sheffield, Scott, 323 Shell, see Royal Dutch Shell Shetland Islands, 114 Shipping Research Bureau, 89 Siberia, Russia, 79 , 131 , 140 , 141 , 208 , 210 , 214 Singapore, 19 , 91 , 154 , 322 Sirte, Libya, 6 Skilling, Jeffrey, 173 Small, Hugh, 83 Smith, Adam, 16 Smolokowski, Wiaczeslaw, 208 –9 , 210 –11 , 216 Socar, 319 Société Générale, 95 Somalia, 309 Soros, George, 262 South Africa, 14 , 48 , 181 –2 apartheid, 64 , 87 –90 , 93 , 182 , 183 , 308 , 309 coal trade, 186 , 187 , 191 , 192 ferrochrome trade, 190 gold trade, 232 oil trade, 64 , 87 –91 , 93 , 94 , 98 , 122 , 182 –3 , 220 , 308 South Carolina, United States, 281 South Korea, 183 , 321 , 324 South Sudan, 284 , 289 Soviet Union (1922–91), 9 , 133 –50 Cargill, trade with, 31 , 38 –42 , 135 collapse (1991–2), 17 , 133 –5 , 139 –50 , 151 –3 , 161 , 165 , 207 , 208 Cuba, trade with, 151 , 152 , 153 , 156 Deuss deal (1976), 66 Exportkhleb, 38 , 135 Great Grain Robbery (1972), 38 –42 , 57 , 69 , 135 , 310 Jamaica, relations with, 77 , 86 Mabanaft, trade with, 22 –4 , 32 , 33 –4 , 44 , 51 , 135 , 261 , 302 Marc Rich + Co, trade with, 136 –7 Marimpex, trade with, 64 nuclear weapons, 141 perestroika (1985–91), 135 Philipp Brothers, trade with, 29 , 135 , 137 Raznoimport, 135 , 137 , 139 , 162 Soyuznefteexport, 23 , 34 , 35 , 65 , 135 Vitol, trade with, 165 soybeans, 114 , 181 , 240 , 318 Soyuznefteexport, 23 , 34 , 35 , 65 , 135 Spain, 97 , 98 spot markets, 68 , 70 , 84 , 93 , 94 , 109 , 251 St Moritz Hotel, New York, 35 stagflation, 56 Staley, Warren, 231 , 253 Standard Oil, 32 steamships, 25 Strait of Malacca, 323 Strategic Fuel Fund, 89 Strothotte, Willy, 98 , 120 , 131 –2 , 274 IPO (2011), 258 Jamaica, trade with, 72 –4 , 78 , 80 , 83 , 142 jet, 184 Marc Rich coup (1993), 124 –7 , 184 Marc Rich resignation (1992), 121 –2 Mount Isa Mines deal (2002), 193 –4 Roche, relations with, 188 Russia, trade with, 146 step back (2002), 185 , 187 Xstrata and, 191 –2 Sucres et Denrées, 114 , 159 Sudan, 206 , 284 , 289 , 305 Südelektra, 189 –91 Suez Canal, 36 , 43 , 45 –6 , 53 , 168 sugar, 9 , 57 , 114 , 156 –60 sulphur, 104 , 168 , 232 , 234 , 235 Sumitomo, 250 Sun, 116 Sunday Times, The , 50 , 271 supercycle, 180 –81 , 185 , 196 , 216 Africa and, 219 , 232 China and, 193 , 240 , 245 food prices and, 240 , 248 optionality and, 206 Suriname, 154 Sweden, 209 Switzerland, 7 , 8 , 11 , 12 , 14 , 55 corruption in, 20 , 69 , 310 Glencore in, 170 , 185 , 257 Iran, trade with, 95 light-touch regulation, 19 Marc Rich in, 20 , 58 –60 , 63 , 73 , 95 , 96 , 117 , 124 Trans-Asiatic Company, 46 Vitol in, 160 , 163 , 164 syphilis, 48 Syria, 8 , 45 , 53 , 248 , 283 Tajikistan, 162 Tangier, Morocco, 33 tantalum, 223 Tanzania, 232 Tarasov, Artem, 136 –7 , 139 Tashkent, Uzbekistan, 140 –41 taxation, 21 avoidance, 149 , 201 , 213 –14 , 281 bribes and, 69 , 310 ethanol industry and, 253 , 254 spinning, 115 Rich and, 20 , 95 –7 Switzerland and, 117 Vitol and, 21 Taylor, Cristina, 154 Taylor, Ian, 10 , 14 , 153 –6 , 164 , 165 –6 , 291 , 293 , 321 Conservative Party donations, 290 Cuba, trade with, 151 –3 , 156 –61 death (2020), 325 Enron bid (2001), 173 Kurdistan, trade with, 291 Libya, trade with, 1 –8 , 166 Nigeria, trade with, 166 oil peak prediction, 318 Russia, trade with, 165 , 300 telegraph, 25 Templeton, Franklin, 282 , 290 Tendler, David, 28 , 112 , 113 , 277 , 316 Texaco, 170 Texas, United States, 36 , 104 , 261 , 323 , 325 Thailand, 232 Thomajan, Robert ‘Bob’, 120 –21 Tiku, Arvind, 298 –9 Timchenko, Gennady, 209 , 212 , 214 , 216 , 300 , 313 tin, 102 Titan Oil Trading, 299 Tito, Josip Broz, 29 Titusville, Pennsylvania, 32 TNK-BP, 300 , 301 Tobruk, Libya, 3 , 6 Törnqvist, Torbjörn, 20 , 209 , 212 , 214 –16 , 230 , 313 , 327 Total, 61 , 170 toxic waste, 233 –8 , 304 Tradax International, 30 , 41 , 242 Trafford, John, 60 , 61 Trafigura, 11 , 14 , 59 , 87 , 119 , 129 –30 , 170 , 174 , 318 Angola, trade with, 229 –30 BNP Paribas, relations with, 304 –8 , 312 bonds, 261 bribery, use of, 314 , 315 coronavirus pandemic (2019–), 324 Cuba, trade with, 159 , 306 –8 foundation (1993), 129 –30 IPO, views on, 277 Iraq, trade with, 201 , 203 , 285 –6 , 287 Jamaica, trade with, 310 Kurdistan, trade with, 285 –6 , 287 profits, 249 public relations (PR), 278 Texas terminal, 261 toxic waste scandal (2006), 233 –8 , 304 volume of trade, 293 women in, 15 Trans-Asiatic Company, 46 Trans-World Group, 134 , 137 –49 , 165 , 208 Transamine, 35 Transol, 63 Transworld Oil, 66 , 89 , 95 , 114 –16 Trump, Donald, 97 , 284 , 317 Tselentis Mining, 186 Tunisia, 247 de Turckheim, Eric, 87 , 125 , 128 , 129 , 306 Turkey, 66 , 180 , 285 Turkmenistan, 161 , 165 twelve apostles, 131 20th Century Fox, 96 Ukraine, 136 , 140 , 162 , 300 , 310 –11 Unipec, 320 United Arab Emirates (UAE), 46 , 116 , 199 , 262 , 281 , 288 , 319 United Kingdom Brent oilfield, 114 –16 , 122 , 123 , 204 , 316 Cargill in, 243 corruption in, 20 , 311 Financial Services Authority (FSA), 250 FTSE 100 index, 15 , 269 , 276 , 278 , 282 Glencore-Xstrata merger (2012), 271 –3 G7 summit (1979), 70 Libyan Civil War (2011), 1 –8 pension funds, 269 , 278 Scottish independence referendum (2014), 291 shareholder spring (2012), 271 Suez Crisis (1956), 36 Tarasov in, 136 –7 United Nations Convention against Corruption, 275 Iraq sanctions, 101 , 198 , 200 , 201 , 202 sanctions, use of, 309 South Africa sanctions, 88 , 183 , 309 World Food Programme, 240 Yugoslavia sanctions, 167 United States Afghanistan War (2001–14), 311 BNP Paribas prosecution (2014), 304 –8 , 312 , 314 Central Intelligence Agency (CIA), 43 , 76 , 316 China trade war (2017–), 317 –18 Cuba sanctions, 152 , 305 –8 dollar, 311 ethanol production, 254 –5 Foreign Corrupt Practices Act (1977), 310 gold standard abandonment (1971), 51 G7 summit (1979), 70 Helms–Burton Act (1996), 160 Iran hostage crisis (1979–81), 20 , 94 , 96 Iraq War (2003–11), 201 , 283 , 311 Manhattan Project (1942–6), 223 oil production, 317 , 323 Operation Desert Storm (1991), 110 Pax Americana, 24 , 180 pension funds, 131 , 280 –82 , 288 , 290 potato futures default (1976), 104 Red Scare (1947–57), 22 Rich indictment (1983), 96 –7 , 130 Russia sanctions, 300 –303 sanctions, use of see sanctions, secondary sanctions, 311 –12 September 11 attacks (2001), 190 –91 supercycles and, 180 Watergate scandal (1972–4), 254 , 309 Zhuhai Zhenrong sanctions, 320 University of Southern California, 182 University of Witwatersrand, 182 Urals, Russia, 168 uranium, 223 Uzbekistan, 140 –41 , 162 Vale, 264 –5 , 269 Valium, 127 value-at-risk, 195 Vanol, 63 Varsano, Serge, 159 Venezuela, 20 , 34 , 44 , 73 , 154 , 157 , 199 , 312 , 314 very large crude carriers (VLCCs), 107 –8 Vidal, Edmundo, 129 Vienna, Austria, 53 , 54 , 200 Vietnam, 43 , 241 , 261 Viëtor, Henk, 163 Vishnevskiy, Igor, 148 , 149 –50 , 162 Viterra, 273 –4 Vitol, 14 , 162 –6 , 174 , 262 , 318 African petrol stations investment (2011), 261 bribery, use of, 314 Cuba, trade with, 151 –3 , 156 –61 , 306 Enron bid (2001), 173 Euromin, 143 , 165 IPO, views on, 277 Iran, trade with, 166 , 309 Iraq, trade with, 201 , 203 , 285 , 286 –7 , 291 , 310 Jamaica, trade with, 154 Kazakhstan, trade with, 296 –9 Kurdistan, trade with, 285 , 286 –7 , 291 Libya, trade with, 1 –8 , 166 , 283 , 285 Newfoundland refinery loss (1997), 170 Nigeria, trade with, 166 profits, 163 , 248 , 249 Russia, trade with, 143 , 165 , 300 , 301 shareholders, 19 Singapore, trade with, 155 South Africa, trade with, 88 Soviet Union, trade with, 165 tax avoidance, 21 women in, 15 Viëtor split (1976), 163 –4 volume of trade, 293 Vonk’s retirement (1995), 166 Yugoslavia, trade with, 167 Vodafone, 278 Voest-Alpine, 114 Volcker, Paul, 201 Volga-Urals basin, 34 Vonk, Ton, 165 , 166 Wall Street, 13 , 15 , 24 , 47 , 84 , 119 , 130 , 274 financialisation, 102 oil trade, 111 –12 , 114 supercycles and, 196 Wall Street (1987 film), 65 Watergate scandal (1972–4), 254 , 309 Waxman, Henry, 98 Weinberg, Morris ‘Sandy’, 97 Weinstein, Harvey, 20 Weir, Jeremy, 277 , 301 , 315 Weiss, Manny, 77 , 80 –82 , 120 , 121 , 125 , 142 , 145 Weisser, Alberto, 241 Weisser, Theodor, 25 , 27 , 31 –2 , 33 , 37 , 41 , 42 , 63 , 261 Soviet deal (1954), 22 –4 , 32 , 33 –4 , 44 , 51 , 135 , 261 , 302 Wen Jiabao, 239 –41 West Germany (1949–90), 22 –4 , 70 West Virginia, United States, 281 , 295 West, Kanye, 152 Weyer, Christian, 60 –61 wheat, 30 , 31 , 39 –41 , 56 , 232 , 239 –41 , 245 –7 Williams, Edward Bennett, 97 Wimar, 299 Woertz, Patricia, 254 –5 women, 15 World Bank, 80 , 85 , 294 , 303 World Food Programme, 240 World Trade Organization (WTO), 178 , 196 , 317 World War II (1939–45), 5 , 16 , 17 , 22 , 27 , 28 , 31 –2 , 47 , 87 Wyatt, Oscar, 64 , 110 , 200 , 203 Wyler, Paul, 187 , 275 , 311 Xstrata, 175 –6 , 178 , 181 , 189 –94 , 263 –73 , 276 , 301 Glencore coal mines deal (2001–2), 191 –2 Glencore merger, 264 –5 , 267 , 269 –73 Vale bid (2007), 264 –5 , 269 Yamani, Ahmed Zaki, 36 , 54 –5 Yang Qinglong, 320 Yeltsin, Boris, 147 , 213 Yemen, 168 , 206 , 247 Yom Kippur War (1973), 53 Yugoslavia (1945–92), 28 , 29 , 167 , 309 Yukos, 213 –15 , 299 Zak, Zbynek, 117 –18 , 124 , 130 , 278 –9 Zambia, 85 , 226 , 232 Zhuhai Zhenrong, 320 , 327 Zimbabwe, 220 , 230 –32 zinc, 35 , 81 , 85 , 129 Asturiana de Zinc, 123 , 191 Glencore, 258 , 273 Marc Rich play (1991–2), 122 –4 , 128 , 170 , 251 Russian production, 135 , 165 Zug, Switzerland, 58 , 59 , 60 , 63 , 73 , 95 , 96 , 117 , 124 , 182 , 183 THIS IS JUST THE BEGINNING Find us online and join the conversation Follow us on Twitter twitter.com/penguinukbooks Like us on Facebook facebook.com/penguinbooks Share the love on Instagram 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Corporate Finance: Theory and Practice
by Pierre Vernimmen , Pascal Quiry , Maurizio Dallocchio , Yann le Fur and Antonio Salvi
Published 16 Oct 2017

When it is a loss, the clearing house makes a margin call – i.e. it demands an additional payment from the operator. Hence, the operator’s account is always in the black at least by the amount of the initial deposit. If the operator does not meet a margin call, the clearing house closes out his position and uses the deposit to cover the loss. For potential gains, the clearing house pays out a margin. When the contract has exceeded the clearing house’s maximum regulatory amount, price quotation is stopped and the clearing house makes further margin calls before quotation resumes. 4. Important leverage effect Margin calls are an integral component of derivatives markets.

…

Derivatives market authorities may, at any time, demand that all buyers and sellers prove they are financially able to assume the risks they have taken on (i.e. they can bear the losses already incurred and even those that are possible the next day). They do so through the mechanism of the clearing, deposits and margin calls. The clearing house is, in fact, the sole counterparty of all market operators. The buyer is not buying from the seller, but from the clearing house. The seller is not selling to the buyer, but to the clearing house. All operators are dealing with an organisation whose financial weight, reputation and functioning rules guarantee that all contracts will be honoured.

…

The return is considerable: 113/75 = 151%, whereas cocoa has gone up just (2600 - 2487)/2487 = 4.54%. Here is an example of the steep leverage of futures, but leverage can also work in reverse. Such steep leverage explains why counterparty risk is never totally eliminated, despite precautions that are normally quite effective. Margin calls limit the extent of potential defaults to the losses that are incurred in one day, while the initial deposit is meant to cover unexpected events. However, the amounts at stake can, in a few hours, reach sums so high that all operators are shaken. Even if this happens only once in a while, no clearing house has ever gone bust, even in the 2008 financial crisis.

How to Kick Ass on Wall Street
by Andy Kessler
Published 4 Jun 2012

By sensing what those on the other side of the trade are thinking. Are they building a huge position so a stock is going to keep going up or just tweaking around the edges? Are they dumping a stock because they know something is wrong? Are they panic selling, puking out a position at all costs because of a margin call which means the stock is about to bottom. Traders are often facilitating a trade for clients. That’s their job. But even with the Volker Rule being implemented, firms trade for their own account. They call it something else, hedging global risk, but you can make money for the firm. Great way to generate good will and cash bonuses.

A Primer for the Mathematics of Financial Engineering
by Dan Stefanica
Published 4 Apr 2008

Selling short one share of stock is done by borrowing the share (through a broker), and then selling the share on the market. Part of the cash is deposited with the broker in a margin account as collateral (usually, 50% of the sale price), while the rest is deposited in a brokerage account. The margin account must be settled when a margin call is issued, which happens when the price of the shorted asset appreciates beyond a certain level. Cash must then be added to the margin account to reach the level of 50% of the amount needed to close the short, i.e., to buy one share of stock at the current price of the asset, or the short is closed by the broker on your behalf.

…

The cash from the brokerage account can be invested freely, while the cash from the margin account earns interest at a fixed rate, but cannot be invested otherwise. The short is closed by buying the share (at a later time) on the market and returning it to the original owner (via the broker; the owner rarely knows that the asset was borrowed and sold short). We will not consider here these or other issues, such as margin calls, the liquidity of the market and the availability of shares for short selling, transaction costs, and the impossibility of taking the exact position required for the "correct" hedge. 106 CHAPTER 3. PROBABILITY. BLACK-SCHOLES FORMULA. By letting dS -+ 0, we find that the appropriate position .6. in the underlying asset in order to hedge a call option is ac .6

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything
by Jason Kelly
Published 10 Sep 2012

The lawsuit said the actual leverage was more than 30 times.8 In such situations, such a bet goes wrong if the price of the underlying assets fall so much that lenders can make margin calls, and that’s just what happened. Carlyle pressed the lenders, which included huge banks like Citigroup and Deutsche Bank, to refinance the debt. Those negotiations, which Carlyle described at the time as “exhaustive,” failed. And so did Carlyle Capital, which had to be liquidated to meet those margin calls. The Carlyle Capital collapse in March foretold a coming storm far beyond the firm, predicted ominously in coverage at the time. “Carlyle won’t be the end of it,” Greg Bundy, executive chairman of Sydney-based merger advisory firm InterFinancial Ltd. told Bloomberg News at the time.

Jared Bibler
by Iceland's Secret The Untold Story of the World's Biggest Con-Harriman House (2021)

And then it really did get moving—but in the wrong direction! The Icelanders couldn’t believe it. Day by day it got worse: despite the big outflow of cash to offer up insurance on themselves, the market price of insurance showed an ever-riskier bank. Things continued to worsen. And then, in early September, Deutsche made its first margin call: to keep the deal active, Kaupþing had to wire another €100m in cash, again funneled via Luxembourg. And then just days later, another €100m. Deutsche was bleeding the Icelandic bank dry to keep this deal open. The internal emails of Kaupþing show a combination of panic and hope as bank executives command their docile staff to set up gigantic money wires.

…

On 6 October 2008, the same day as Glitnir went down, the Icelandic central bank turned over the full amount, exactly €500m, in cash, to Kaupþing. This was substantially all the foreign currency that the nation of Iceland possessed—a few thousand bucks from every man, woman, and child in the Land. And that day, Kaupþing made good the last €50m margin call. Within three days Kaupþing was out of business. Kaupþing executives say they had the assurance of Deutsche Bank that the new CDS insurance flowing from the €510m deal would be sold on the open market. But instead of issuing new CDS protection, the Deutsche Bank guys kept at least some of that insurance for themselves.

Trend Following: How Great Traders Make Millions in Up or Down Markets
by Michael W. Covel
Published 19 Mar 2007

Daily % Returns 1.23% Largest Winning Trade 480,563 Average Expectation Value 20.33 Largest Losing Trade 141,900 Expectation 32.79% DU Area / DD Area 1.21 Percent New Highs 6.61% Average Winning Trade 56,223 Average Losing Trade 26,497 Max Consecutive Wins Max Consecutive Losses Trades Trades Rejected 576 85 Wins 245 Losses 331 Percent Wins Avg $Win to Avg $Loss 42.53% 2.12 8 15 Days Winning 1,350 Days Losing 1,176 Number of Margin Calls 0 $ Largest Margin Call 0 391 Appendix F • Trading System Example from Mechanica Average Days in Winning Trade 37 Size Adjustments 0 Average Days in Losing Trade 15 Size Adjusted Items 0 Total Slippage + Commission 0 Start Date 19910102 End Date 20001231 Max Items Held Total Items Traded 588 PSR run time (H:M:S) 18,879 To see how our equity curve looked in relationship to our drawdown, we can chart the logarithmic equity curve (see Chart F.4).

…

He condemns the common strategy of trend following, which helped make his buddy George Soros super-rich. “A delusion,’’ he declares.60 “In my dream, I am long IBM, or priceline.com, or worst of all, Krung Thai Bank, the state owned bank in Thailand that fell from $200 to pennies while I held in 1997. The rest of the dream is always the same. My stock plunges. Massive margin calls are being issued. Related stocks jump off cliffs in sympathy. Delta hedges are selling more stocks short to rebalance their positions. The naked options I am short are going through the roof. Millions of investors are blindly following the headlines. Listless as zombies, they are liquidating their stocks at any price and piling into money market funds with an after tax yield of –1 percent.

Money: 5,000 Years of Debt and Power
by Michel Aglietta
Published 23 Oct 2018

Methodical confidence emerges within market practices on account of the repeated realisation of business relations between the same partners. It operates in various different ways: in the mutual respect of agreements, in the group mentality that facilitates loss-sharing and collective support in situations of vulnerability, and in the acceptance of regulation that limits risk exposure (position limits and margin calls on the markets). In short, in all of the practices that go against the liberal doxa of transparency and maximum competition. Such practices are based on the same logic: that of confidence in the objectivated rule, which conceals the authority that enunciates this rule. The objectivation of the rule puts it out of reach, creating the perception that it is a natural reality.

…

In stock market crises, the contagion results from worries over market liquidity after an initial fall in prices. Thus, on 19 October 1987, the Wall Street market fell 22.6 percent under the weight of sales orders concerning some 600 million securities. The collapse rebounded on the Chicago futures market, producing a mass of margin calls. For the stock market to continue to function, arbitrageurs – securities firms – had to advance enormous credits to their clients to enable them to maintain their positions. Thus, as the market opened on 20 October, there was extreme tension over liquidity. Kidder Peabody and Goldman Sachs had to advance $1.5 billion in two hours!

…

Since short-term loans were the debt levers that financed the acquisition of long-term securities, there was a massive exposure to rate risks, owing to the discordant maturity dates on the US bond markets. When the Fed raised its policy rate, investors hurried to close their positions in order not to have to renew their debts at higher rates, and to avoid extra margin calls. The result was a massive sale of bonds that raised long rates by 300 base points in a few weeks. Once again, this phenomenon resulted from a deterioration of market liquidity on account of the capital losses that followed the price rebound. The markets’ international interconnections played an essential role in propagating the crisis.

Market Wizards: Interviews With Top Traders
by Jack D. Schwager
Published 7 Feb 2012

In an all-or-nothing play, he bought twenty soybean contracts, an extremely high-leverage position given his $10,000 account size. A mere 10-cent price decline would have completely wiped out his account, while a considerably smaller decline would have been sufficient to generate a forced-liquidation margin call. Initially, prices did move lower, and Bielfeldt came perilously close to that damaging margin call. But he held on, and prices eventually reversed to the upside. By the time he liquidated the position, he had more than doubled his equity on that single trade. That trade launched Bielfeldt toward his much sought after goal of becoming a full-time trader.

…

Did you make any effort to learn anything about the markets in the interim? Yes. I studied the gold market, learned how to chart, and became familiar with the concept of overbought and oversold markets. I figured that if I bought a severely oversold market and left myself enough money for two margin calls, I couldn’t lose unless something drastic happened in the economy. That was my method. But if you use that approach in a trending market, you are going to get killed. It worked in that market. I guess ignorance was bliss. What were your trading results the second time around? I did well for several years after that and managed to build a small fortune.

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America
by Matt Taibbi
Published 15 Feb 2010

… I am trying to get to this very issue of was a first domino pushed over? Or did someone light a fuse here? Another FCIC commissioner put it to Cassano this way: “Was Goldman out to get you?” Angelides during the testimony referred to Goldman’s aggressiveness in making collateral calls to AIG. At one point he quotes an AIGFP official who says that a July 30 margin call from Goldman “hit out of the blue, and a fucking number that’s well bigger than we ever planned for.” He called Goldman’s numbers “ridiculous.” Cassano that day refused to point a finger at Goldman, and Goldman itself, through documents released to the FCIC later in the summer of 2010 and via comments by Chief Operating Officer Gary Cohn (“We are not pushing markets down through marks”), denied that it had intentionally hastened AIG’s demise by being overaggressive with its collateral demands.

…

Most notably, it reported that Goldman had very nearly gone out of business in the wake of the AIG disaster: As the market continued to plunge and Goldman’s stock price nosedived, people inside the firm “were freaking out,” says a former Goldman executive who maintains close ties to the company. Many of the partners had borrowed against their Goldman stock in order to afford Park Avenue apartments, Hamptons vacation homes, and other accoutrements of the Goldman lifestyle. Margin calls were hitting staffers up and down the offices. The panic was so intense that when the stock dipped to $47 in intraday trading, Blankfein and Gary Cohn, the chief operating officer, came out of the executive suite to hover over traders on the floor, shocking people who’d rarely seen them there.

High-Frequency Trading
by David Easley , Marcos López de Prado and Maureen O'Hara
Published 28 Sep 2013

March 2011 yen appreciation Early in the morning of March 17, 2011, in the days following the Fukushima Daiichi earthquake, the USD/JPY declined by 300 pips, from around 79.50 to below 76.50 in just 25 minutes, between 05h55 and 06h20 Tokyo time (16h55–17h20 New York time on March 16, 2011). This price movement was triggered by stop-loss trades of retail FX margin traders (Bank for International Settlements 2011). The margin calls that the retail aggregators executed on behalf of their traders set off a wave of USD selling in a thin market. Many banks withdrew from market making and others widened their spreads so much that their bids were far below the last prevailing market price. This created a positive feedback loop of USD/JPY falling and leading to even more stop-losses until the pair hit 76.25 at around 06h20. 78 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 79 — #99 i i HIGH-FREQUENCY TRADING IN FX MARKETS The exchange rate recovered in the next 30 minutes to 78.23 as hedge funds and new retail investors began to build up fresh long positions.

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In the next section, we shall discuss how organised exchanges can improve price discovery and reduce the likelihood of a “flash crash”. ALTERNATIVE LIMIT ORDER BOOK Price action in financial markets is at times erratic, because secondby-second transaction volume is a mere trickle, and minor market orders can trigger a price spike that can set off a large price move due to margin calls. Price movements are spurious and respond in a nonlinear fashion to imbalances of demand and supply. A temporary reduction in liquidity can easily result in significant price moves, triggering stop losses and cascades of position liquidations. Highfrequency traders now account for a large share of total transaction volume; if these traders are taken by surprise and close out their positions in one go, then this can trigger a massive sell-off, akin to the May 6, 2010, Flash Crash. 80 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 81 — #101 i i HIGH-FREQUENCY TRADING IN FX MARKETS In response to the Flash Crash and other similar events, regulators have introduced several rules to ensure orderly functioning of capital markets.

Deep Value
by Tobias E. Carlisle
Published 19 Aug 2014

When it did so, an investor who had bought the units of the fund and sold short the underlying portfolio endured short-term, unrealized losses until the market closed the gap. In the worst-case scenario, the investor could be forced to realize those losses if the gap continued to widen and he or she couldn’t hold the positions, which could occur if he or she failed to meet a margin call or was required to cover the short position. Unwilling to rely on the market to close the gap, Icahn and Kingsley would often take matters into their own hands. Once they had established their position, they contacted the manager and lobbied to have the fund liquidated. The manager either acquiesced, and Icahn and Kingsley closed out the position for a gain, or the mere prospect of the manager liquidating caused the gap to wholly or partially close.

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At some stage he figured out that he could trick the inspectors into believing he owned more soybean oil than he actually did, and so began to substitute seawater for soybean oil. De Angelis got so good at fooling the inspectors that he eventually controlled more soybean oil than there was in existence.14 The ruse was discovered when the market moved violently against him, and he was unable to meet margin calls from his broker. De Angelis was immediately wiped out. The position was so big that it also sent his broker into bankruptcy. Facing a fraudulent De Angelis and his bankrupt broker, De Angelis’s lenders naturally went looking for some deep pockets to sue. They found American Express, the company that had actually issued the warehouse receipts certifying the soybean oil existed.

Trade Your Way to Financial Freedom
by van K. Tharp
Published 1 Jan 1998

Most people just don’t have the backup protection they should have. More importantly, they trade at way too high a level. If you have $50,000 and are trading five or more different futures contracts simultaneously, then you are probably trading at too high a risk level. If you are a day trader and you get margin calls, then your risk level is way too high. That risk level may get you high rates of return, but it will eventually bankrupt your account. Think about the protection bias. Paying attention to this bias alone could preserve much of the equity that you currently have in your account. BIASES THAT AFFECT HOW YOU TRADE YOUR SYSTEM Let’s assume that you have gone through a system, thoroughly tested it, and determined it to be something you can trade.

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John Sweeney, Campaign Trading: Tactics and Strategies to Exploit the Markets (New York: Wiley, 1996). 2. This kind of trading is difficult due to the very large commissions charged even by discount stockbrokers. However, discount Internet trading has changed that. 3. The stock exchange promotes this by having margin calls at only 50 percent and teaching people that they could lose it all. Furthermore, they are justified in doing so because most people don’t have a plan to trade and are psychologically wired to lose money. 4. Suggested by J. Welles Wilder in New Concepts in Technical Trading Systems (Greensboro, N.C.: Trend Research, 1978). 5.

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Comparison of Models Table 14.4 shows the same 55-/21-day breakout system with a position-sizing algorithm based upon risk as a percentage of equity. The starting equity is again $1 million. Notice that the best reward-to-risk ratio occurs at about 25 percent risk per position, but you would have to tolerate an 84 percent drawdown in order to achieve it. In addition, margin calls (which are set at current rates and are not historically accurate) start entering the picture at 10 percent risk. If you traded this system with $1 million and used a 1 percent risk criterion, your bet sizes would be equivalent to trading the $100,000 account with 10 percent risk. Thus, Table 14.4 suggests that you probably should not trade this system unless you have at least $100,000, and then you probably should not risk more than about 0.5 percent per trade.

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history
by Gregory Zuckerman
Published 3 Nov 2009

Some of them balked at forking all that cash over to Paulson before the CDS contracts were ended. Pellegrini and his team insisted, though, citing terms of their agreements, and the money was handed over. One bank dared Paulson to cause a default but ultimately backed down and posted the required collateral, a huge reverse margin call. The amateurs were putting the screws to the pros. Paulson sold a bit of his CDS protection, to lock in some profits, but he clung to most of it, convinced that much worse was ahead for housing. The trade had become much riskier, however. When the cost of mortgage insurance was dirt cheap, Paulson was able to pay very little for protection, limiting his risk.

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Indeed, Greene had committed to pay $14 million a year to buy CDS protection on $1 billion of subprime mortgages. And he put up about $60 million with the brokers to allow him to do the trade. Greene owned so much protection, and put so little down, that when subprime-mortgage prices rose just slightly in late 2006, he received margin calls from Merrill Lynch, forcing him to fork over several million dollars from other accounts just to keep his brokerage firm from closing out his trade. Greene had bragged to friends and business associates about his moves and how they would pay off. His very reputation and sense of self-worth seemed tied up with the trade.

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues
by Alain Ruttiens
Published 24 Apr 2013

There is no maturity on such a contract, even for the (short) seller. This is probably the most prominent feature of CFDs, with respect to traditional forwards and futures. CFDs contracts involve a kind of future margining system (cf. Chapter 7, Section 7.1), settled on a daily basis, that is: the counterparty must open an account with an initial margin, called a deposit; the size of the deposit depends on the underlying, that is, its volatility and liquidity, plus a commission for the market maker (or broker); the daily profit or loss due to the underlying daily price change is charged on the margin account; the counterparty must maintain a minimum margin level.

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For a nominal of; say, €4 million, the trader sells The initial deposit margin is or $82 656, @ 1.2300 (initial spot rate), that is, a leverage of about 60: 125 000 / 2100. At inception, the (mid) spot is $1.2300 and the (mid) future is quoted $1.2385. By next 1st of March, the trader is unwinding his position, buying back the futures @ 1.2011, with a corresponding spot of 1.1950. The trading profit is Without taking account of possible margin call costs, the trading profit is or, relative to the underlying nominal of $4 290 000 (@ 1.2300): 7.7 FUTURES ON (NON-FINANCIAL) COMMODITIES 7.7.1 Introduction Commodities futures, the most ancient future contracts, significantly differ by many aspects from financial futures. Historically, they were physically settled, given the nature of the underlying, but today, to facilitate the speculative trading, most of the contracts allow for a cash settlement.

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud
by Ben McKenzie and Jacob Silverman
Published 17 Jul 2023

The upside is large, but so is the downside: At 125-to-1, for every 1 percent move, your one-hundred-dollar bet could net you a fortune, or wipe you out instantaneously. Kim was trading with 30-to-1 leverage. In mainstream financial markets, offering extreme amounts of leverage to retail traders—not accredited investors who must prove they have the funds to withstand a margin call—is not allowed, a rule meant primarily to protect inexperienced traders from themselves. (The popular online brokerage Robinhood, for instance, offers loans to customers to buy stock, but nowhere near the amount that Binance once offered.) So why would Binance, along with some competing exchanges, allow such sky-high leverage?

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Like Kim, Ahmed expected some volatility along the way, but it was only on May 19, when Ethereum plunged dramatically alongside Bitcoin and other currencies, that Ahmed realized the gravity of his situation. He needed to close his position, and fast. For an hour he frantically tried to get out, but just as for Kim, the app wouldn’t work. “I saw my position get liquidated,” said Ahmed. Rather than allowing Ahmed time to rectify the situation by providing more funds, in what’s referred to as a margin call, Binance’s liquidation engine was triggered and Ahmed’s money disappeared instantaneously. “It was right in front of my eyes.” Just like that, Ahmed’s eight-figure crypto fortune was gone. By the time the Binance app was back up and running some hours later, it was too late for both Kim and Ahmed.

Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies
by Nik Bhatia
Published 18 Jan 2021

They were bank liabilities in a new form, one that was difficult for financial regulators or even the banking system as a whole to fully comprehend. Most illustratively though, derivatives existed as a tangled web of financial obligations within the banking system, concentrating risk in the relationships between a handful of banks in the United States and Europe. An enormous margin call from the investment bank and major LTCM counterparty Bear Stearns in September 1998 triggered a collective realization that derivatives held by the hedge fund had the power to bring down the entire house of flimsy interbank risk. At the time of the LTCM bailout, the total market value of all the world’s derivatives including interest rate swaps, credit default swaps, and foreign exchange currency swaps was $3 trillion.

Higher: A Historic Race to the Sky and the Making of a City
by Neal Bascomb
Published 2 Jan 2003

The New York Times financial editor Alexander Noyes compared the present market circumstances to those of the panic in 1907 and warned of catastrophic consequences. The market had continued a slow downward spiral until September 24, when another serious break in share prices further darkened the mood. Investors by the thousands were selling off their portfolios. Gangsters in Chicago threatened their brokers if they dared make a margin call. The president of the New York Yankees, Ed Barrow, even held a special meeting to tell his players to abandon the market. Raskob understood the danger of this mood. He stared into the eyes of each of his lunch guests as he slowly walked around the table. One of his guests grumbled that bankers were becoming too cautious.

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Down on Wall Street, the ticker tape revealed that Raskob’s call to his friends to support the market hadn’t worked. Trading was heavy, and despite a few rallies over the previous two weeks, many of the market’s leading stocks were trending downward. A few investors had already lost everything, and rather than face their margin calls, they took their own lives. The unease that hung over Wall Street’s brokers continued, despite statements from Charles Mitchell, a director of the Federal Reserve Bank in New York, that recent declines were a healthy correction that had played itself out. Nonetheless, the Empire State, Inc., board pressed ahead with their business.

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile
by Alexander Davidson
Published 1 Apr 2008

The credit exposure and return are synthetically created by the issuer executing a credit default swap with a counterparty, which pays a monthly fee equivalent to an interest margin on the loans. If the portfolio suffers a credit event, the issuer must pay losses, which, beyond a given level, are passed to investors. If the buyer of CDOs fails to meet margin calls on funds it borrowed to invest in them, the lender may seek to sell the collateral for the loan, which consists of the CDOs. Higher margin requirements could lead to forced selling of CDOs or investor redemptions. By mid-2007, investment banks that lend money to hedge funds to buy CDOs had been raising the margin requirements.

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By mid-2007, investment banks that lend money to hedge funds to buy CDOs had been raising the margin requirements. At about this time Floridabased United Capital Asset Management suspended redemption in its Horizon funds, which were significantly invested in US sub-prime mortgage assets. Two hedge funds owned by US bank Bear Stearns came close to collapse because they failed to meet margin calls on CDOs made up of risky US subprime mortgages. Some banks that were their creditors threatened to sell off at auction the underlying sub-prime mortgages that they had held as collateral but it became clear that a quick sale would fetch poor returns. In June 2007, it was announced that Bear Stearns had agreed an emergency $3.2 billion (£1.6 billion) loan for one of the funds.

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham
by Joe Carlen
Published 14 Apr 2012

Graham, who enjoyed a close relationship with his brothers and was always eager to help them out, invested his profits in an Upper West Side phonograph store to be run and co-owned by his audiophile brother Leon. When overall security prices took a steady drop throughout 1917, Graham's Tassin account was “called in for margin”48 (when the price of a particular security, or group thereof, declines below a certain point, a margin call is made, at which point the account holder must either deposit additional funds or sell off assets). The problem was that Graham, who had anticipated better results for both the Tassin account and what proved to be a difficult (and ultimately short-lived) music retail enterprise, did not have the funds to meet the shortfall.

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See Graham, Marjorie Jazz Age, 155 Jevons, William, 207 Jewish Encyclopedia, 19 Jewish Guild for the Blind, 235 Johns Hopkins University, 185 Johnson, Alvin, 206 Kahn, Irving, 53, 109, 244, 254 Kahn, Judd, 242 Kahn, Thomas, 81, 244 Kahn Brothers, 81, 254 Keppel, Frederick F., 70, 73, 76, 109 Keynes, John Maynard, 185, 204, 216, 293–94 Kidder Peabody, 248 Kilpatrick, Andrew, 227 Knapp, Tom, 244, 249 Kreeger, David, 285 Krugman, Paul, 216 Lehman Brothers, 290 leverage, and the market, 52, 141 Levy, Gus, 156 Levy, Guy, 181–82 Lewine, Jerome, 148 Li Lu/Himalaya Capital Partners, 257 liquidity, defined, 209 Longleaf Partners, 257 losses, avoidance and minimization of, 50 Lowe, Janet, 198, 230 Lowenstein, Roger, 159, 267 Lynch, Peter, 138 Madoff, Bernard “Bernie,” 290 Mailer, Norman, 65 management integrity, 54 margin call, 114 margin of safety, 34–56 Marie Louise “Malou” Amigues, 237, 270–79, 301 marketable securities, 131 market analysts, 40 “market basket” or “commodity-unit” currency, 203–19 market corrections, 56, 156 market fluctuations, 167 buffer against, 39 market index, 94 market price, 40 “market psychology,” 174 market timing, 45 market volatility, 45, 174 Marks, Howard, 52, 54, 167–68 Marony, Bob, 143 Martin, William McChesney, 184, 207 Marx, Harpo, 131, 138 Maslow, Abraham, 65 Maxwell examinations, 59 Mead, Joseph, 207 mean reversion, 130 Menger, Carl, 210 Merck & Company, Ltd., 44 Meredith, Spencer B., 82, 96, 189 Messing, Estelle “Etsey” (Graham), 196 Michael Price/Franklin Templeton/MFP Investors, 257 micromovement of stock quotes, 128 microprofit trades, 128 Miki, Junkichi, 113 Miller, Alda, 75 Millman, Gregory, 127–28 Milne, Robert, 53, 109 minority stockholder, 131 “Mr.

Madoff Talks: Uncovering the Untold Story Behind the Most Notorious Ponzi Scheme in History
by Jim Campbell
Published 26 Apr 2021

According to Madoff, that was precisely what the Big Four ended up doing. Madoff’s predicted bullish trajectory evaporated in the face of a sudden market dive, and the Big Four panicked as they watched their unrealized gains vaporize. They claimed investments they had at other Wall Street firms were hit by margin calls as the market tanked, which, in turn, caused them to suddenly liquidate their BLMIS positions to cover the margin calls. Madoff told me he later found their story to be a lie, at least in the case of Jeffry Picower, who, he heard from partners at Goldman Sachs, still had a ton of money left at the firm. Madoff, who’d made his name intricately designing hedges to limit risk, claimed he was suddenly holding a massive “naked short,” meaning unlimited downside losses.

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster
by Nick Timiraos
Published 1 Mar 2022

The trade exploited tiny pricing differences in the interest-rate market, and firms used lots of borrowed money in the overnight “repo” markets to make these trades profitable. It was normally very low-risk. But the unusual market volatility had turned the trades into big money losers, leading hedge funds to liquidate their positions. Hedge funds faced margin calls, which meant they had to post more collateral, and this triggered even more selling of Treasury securities at the worst possible time. Federal Reserve economists later pinned these trades as responsible for nearly $173 billion in Treasury sales in March.4 Investors who might normally have taken advantage of the arbitrage opportunities created by such extreme dislocations couldn’t do so because they were unable to borrow money to place new trades.

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By funneling dollars overseas, the massive commitment was becoming one of the Fed’s most significant and least-noticed expansions of power. Stabilizing foreign dollar markets would be critical to avoiding even greater disruptions to global markets that were spilling back to the US economy. In South Korea, for example, big brokerages were trying to raise dollars to meet margin calls. They had previously borrowed money to buy billions of dollars of derivatives tied to stocks in the US, Europe, and Hong Kong. As stocks plunged, however, lenders were demanding that the brokerages put up more cash. The scramble for dollars pushed the Korean won to its lowest level in a decade against the dollar on March 19.

Why Wall Street Matters
by William D. Cohan
Published 27 Feb 2017

What happened next, Tarullo explained, was that the Wall Street banks, “lacking enough liquidity to repay all the counterparties who declined to roll over their investments,” were forced “into fire sales that further depressed asset prices, thereby reducing the values of assets held by many other intermediaries, raising margin calls, and leading to still more asset sales.” Better-capitalized firms, he continued, tended “to hoard” their financial resources “in light of their uncertainty as to whether their balance sheets might come under greater stress and their reluctance to catch the proverbial falling knife by purchasing assets whose prices were plummeting with no obvious floor.”

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
Published 5 Apr 2007

To a large extent, the losses at Salomon were the result of inexperience and faintheartedness on the part of the new Travelers-based management. The financial markets were not in ruin; there was no reason for the incredible drop in prices. It was a classic liquidity-driven market crisis. LTCM was cash-strapped; Meriwether had daily margin calls and needed to sell off his portfolio to come up with the cash; Salomon Smith Barney did not. With its deep pockets, Salomon/Citigroup could have weathered the storm, but a sense of panic pushed senior management to reduce positions almost in lockstep with LTCM. Still, for all of its losses, Salomon came out relatively unscathed.

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In the aggregate, by supplying capital to hold risky securities, traders and hedge funds serve to reduce market volatility and improve prices for both buyers and sellers. 219 ccc_demon_207-242_ch10.qxd 2/13/07 A DEMON 1:47 PM OF Page 220 OUR OWN DESIGN For the investor who must liquidate because of a margin call, or the bank that finds itself hitting risk limits that force it to sell in a declining market, the cumulative impact of the hedge funds and speculators can be the difference between staying in business and facing default. And, as can be appreciated against the backdrop of the crises discussed earlier, this impact can extend to the overall market: The liquidity supply afforded by hedge funds and speculators will often make the difference between a market closing down only a few percentage points on the day and the market sliding abruptly into a crisis.

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

As well as lending more to one another and to retail clients, over the past three decades banks began to target their loans at riskier prospects offering higher rates of return. This is the part of the story that most people now understand, having been well covered in the media and popular culture, in books and films such as Inside Job, Margin Call and The Big Short. Banks felt they needed to take more risks because, with governments trying to balance budgets and reduce public borrowing requirements, the yields on low-risk assets (such as US and European government debt) had fallen very low. Banks also believed that they had become much better at handling risk: by configuring the right portfolio, insuring themselves against it (especially through credit default swaps -CDSs - that would pay out if a borrower didn't pay back), or selling it on to other investors with a greater risk appetite.

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The former might include ‘public goods' like basic research, which the government needs to fund when the private sector doesn't (because it's hard to make profits), while the latter could involve the costs of pollution which companies do not include in their regular cost-accounting, so government might have to add that cost through a carbon tax.43 So while Public Choice theorists worry more about government failures and neo- Keynesians more about market failures, in the end their debates about policy intervention have not seriously challenged the primacy of marginal utility theory. Taken to its extreme, Public Choice theory, which derives from marginalism, calls for government to intervene as little as possible in the economy in order to minimize the risk of government failure. The public sector should be insulated from the private sector, for example to avoid agency capture - when a regulatory body grows too close to the industry it is meant to regulate.

Den of Thieves
by James B. Stewart
Published 14 Oct 1991

Then an announcement came clattering over the ticker, confirming the worst: Gulf was pulling out! All buying interest evaporated. Boesky was stuck with a huge stake that had just plummeted in value. Worse, margin calls were already pouring in, demanding full repayment of the money borrowed to buy the shares. Boesky Corporation was in dire straits. It had nowhere near the cash to meet the margin calls, even if it liquidated all its other stock holdings. Worse, Boesky had $20 million in unsecured loans from banks: $5 million each from Chase Manhattan and Chemical banks, and $10 million from two European banks.

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Cities Service stock didn't open for trading because of an "order imbalance"; there were too many sellers and no buyers. The New York Stock Exchange specialists, who make markets in the listed stocks, weren't going to open trading until they knew they had a price that would attract buyers. That price depended, in large part, on what Boesky would do. Would margin calls force a massive liquidation of his position, driving the ultimate price even lower? At Boesky's offices, the suspense was palpable. Every position except for Cities Service was liquidated. Then everyone hovered around the ticker and watched their computer screens waiting for an opening price. Opening price "indications" dropped steadily, from $50 to $45, then even lower.

DeFi and the Future of Finance
by Campbell R. Harvey , Ashwin Ramachandran , Joey Santoro , Vitalik Buterin and Fred Ehrsam
Published 23 Aug 2021

In addition, for the DAI token to be credibly pegged to the USD, the system needs to avoid the risk that the collateral is worth less than $1 = 1 DAI. Given the collateralization ratio of 1.5, it would be unwise to mint the 667 DAI because if the ETH ever dropped below $200 the contract would be undercollateralized – the equivalent of a margin call. We are using traditional finance parlance, but in DeFi there is no communication from your broker about the need to post additional margin or to liquidate the position and also no grace period. Liquidation can happen immediately. As such, most investors choose to mint less than 667 DAI to give themselves a buffer.

Red-Blooded Risk: The Secret History of Wall Street
by Aaron Brown and Eric Kim
Published 10 Oct 2011

Accurate, transparent prices and smooth price changes are both features of liquidity. Futures markets often have daily price change limits; the price is not allowed to move more than a certain amount in a day. That doesn’t solve the problem of large price movements, however; it only gives participants some extra time to meet large margin calls. Using derivatives, in principle, individuals can contract to exchange future goods and services directly, with no intermediation of paper money. Some people might choose portfolios that involve current or future inflows or outflows of cash, but in that respect cash is just like any other asset.

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Lehman’s Treasury desk would look at the entire net position of the firm in Treasuries, the billions of bonds owned (but lent out) and owed, as well as all the other complex Treasury-related products. If it decided it had a net exposure it didn’t want, it would offset it using a financial derivative. Second, Lehman’s margin operations department looked at all the customer accounts. If any had too little equity given the riskiness of the positions, the firm issued a margin call to either increase the equity or cut the risk of positions. Note that cash had nothing to do with this—all that mattered was the total value of all the positions in the account and the total risk of all those positions. Derivative Money Lehman’s Treasury business was not entirely virtual.

Limitless: The Federal Reserve Takes on a New Age of Crisis
by Jeanna Smialek
Published 27 Feb 2023

That difference was called the basis. If the basis was bigger than the cost of buying the Treasury and financing the purchase with short-term debt (repo), the trade was profitable. But if things went wrong in the repo market, if traders suddenly and surprisingly had to come up with money to meet margin calls on the futures contracts, or if the ability to quickly trade Treasuries dried up, they could run into major short-term problems. *4 As a reminder, emergency lending programs are the ones carried out under the Fed Act section 13(3), the privileges created in response to the Great Depression and expanded in the decades since

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BACK TO NOTE REFERENCE 33 Baier 2020. Baier notes that on March 17, UBS Group AG closed two exchange-traded notes tied to mortgage real estate investment trusts, and that a few days later, a mortgage trust run by a hedge fund had warned its lenders that it wouldn’t be able to meet future margin calls. BACK TO NOTE REFERENCE 34 Novick 2020. Please see Exhibit 2. Municipal bond issuance ground to a standstill midway through March. BACK TO NOTE REFERENCE 35 “Financial Services Forum Statement on Share Buybacks” 2020. BACK TO NOTE REFERENCE 36 JPMorgan Chase 2020.

Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts
by David Gerard
Published 23 Jul 2017

Key: a number which works like the PIN of a Bitcoin address. This is the one secret thing you must control if you “have” a bitcoin. KYC/AML: Know Your Customer/Anti-Money Laundering rules, which any crypto exchange wanting to deal in hard currencies, particularly US dollars, needs to follow. Margin call: when you need to pay back your margin trading loan. Margin trading: taking a loan from your brokerage to buy a security; lets you buy more than the value of the assets you have to hand. Could be hoping for the security to go up or down. Can pay off hugely, but is risky (especially with cryptos).

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
by Morgan Housel
Published 7 Sep 2020

Mohnish recalled: [Warren said] “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.” What happened was that in the 1973–1974 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, so he got margin calls. He sold his Berkshire stock to Warren—Warren actually said “I bought Rick’s Berkshire stock”—at under $40 a piece. Rick was forced to sell because he was levered.¹⁸ Charlie, Warren, and Rick were equally skilled at getting wealthy. But Warren and Charlie had the added skill of staying wealthy.

An Empire of Wealth: Rise of American Economy Power 1607-2000
by John Steele Gordon
Published 12 Oct 2009

Over the next six weeks the market trended downward, with occasional plunges followed by more modest recoveries. Then, on October 23, a wave of selling swept the market on the second highest volume on record. A mountain of margin calls went out that night, and sell orders by the thousands piled up at brokerage houses across the country. The next day, Thursday, October 24, soon known as Black Thursday, was the most frantic in the history of the New York Stock Exchange up to that time, as stocks plunged, generating more margin calls, which caused more stock to be sold at any price, as the averages spiraled downward. Meanwhile, short sellers added to the downward pressure on stocks in bear raids.

Wealth and Poverty: A New Edition for the Twenty-First Century
by George Gilder
Published 30 Apr 1981

They looked and they were appalled. In the great banks meanwhile, any actual knowledge of the details of the securities they held and the risks they ran was entirely divorced from the administrative and bureaucratic power at the top. The most poignant, revealing, and realistic moment in the film Margin Call, about the collapse of a Lehman-like bank, is the belated descent from on high of the bank’s CEO. Unable to grasp what his quant advisors were telling him about the crucial algorithms governing his portfolio, he implores, “Speak as you would to a young child or a golden retriever.” The great divorce of knowledge and power, information and finance, entrepreneurial realities on the ground and cantilevered paper towers in the sky was complete and cataclysmic.

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Arthur liberals and liberalism, attitudes toward poor and blacks moral hazards of licensing Light, Ivan Likud Party Limits to Growth (Club of Rome) Lincoln, Abraham linear or homogeneous time Lippman, Greg Lippmann, Walter liquidity liquidity preference Lithuania loan guarantees Loeb Award London School of Economics Long, Russell longbow Los Angeles (California) Lovell, Arnold Macaulay, Thomas Babinton Maccoby, Eleanor macroeconomics Madoff, Bernie Making It (Norman Podhoretz) Malpass, David Mandelbaum, Michael marginal efficiency of capital Margin Call market sector marriage Marsden, Keith Marshall, Alfred Marx, Karl Marxism Massachusetts mass retailing materialist fallacy material progress material resources durable wealth vs. Mauss, Marcel McCarthy, Cormac McClelland, David McGovern, George McGraw Hill McKinney, Stuart McKinley, Vern McTigue, Maurice Mead, Margaret means tests media medicaid medical science medicare melting pot men, group leadership aptitude of provider, role of mercantilism meritocracy Merrill, Charles Merrill Lynch Mexico Miami (Florida) Michigan microbiology microcomputers microeconomics microprocessors Microsoft Midas middle-class values Midland, Archer Daniels Milken, Michael Mill, John Stuart millionaires Minard, Lawrence Minarek, Joseph minimum wage minority workers Mises, Ludwig von Mississippi MIT monetarism money, social pressures of supply of taboo money illusion Money (John Kenneth Galbraith) money market funds monopolies monopoly capitalism Moore, Gordon Moore, Stephen The Moral Basis of a Backward Society (Edward Banfield) moral hazards definition of of liberalism More Equality (Herbert J.

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton
by Colin Read
Published 16 Jul 2012

As such, this value is much more than the actual investment, which was in the range of $15 trillion at the cusp of the global credit crisis in 2007–2008 and the Great Recession that became most obvious by 2008–2009. These highly leveraged speculations generate great profits when things go well. However, highly leveraged derivatives trading also implies that an unexpected systemic shock of only a few percentage points can wipe out one’s investment and force margin calls that require speculators to cover even greater losses. It was the inability of a few large insurance companies, most notably American International Group (AIG), Citibank, the Bank of America, Wells Fargo, and a few others, to cover a decline that was greater than expected that plunged the world into the worst recession since the Great Depression.

Hedge Fund Market Wizards
by Jack D. Schwager
Published 24 Apr 2012

Yes, and a lot of times before the market cracks, the lower-quality stocks zoom. I remember being on the tennis courts with my friends in the summer of 1987 [he begins a tremulous laugh that betrays an undertone of pain], and I was losing so much money that I had to call my mother to get a loan to meet the margin call. She was the only one I could call. There is no way my dad would have loaned me the money. Did you stay short all the way through until the crash? I did. So even though the market kept moving against you, you just . . . I just hung in there. You never second-guessed yourself? Sure I did. In fact, when I was playing tennis that day, I told my buddies that I was a failure, and that I was going to lose all my money.

…

I think there were only two stocks that were up on October 19, 1987, and I was short one of them. It eventually cratered. I have always tried to be long and short in things that I really believed in for the longer term—situations in which I felt that the fundamental underpinnings of the company were completely different from the way it was being priced. In 1987, you went from margin calls to windfall profits. Did the 1987 experience influence you in any way? 1987 was the first year I made more money in the market than I did in my job. That was an eye-opener for me. And every year after that, I made more money in the market than in my job. How did you go from a career as a chemical engineer and the manager of European operations for a chemical company to being a portfolio manager?

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino
by Jim McTague
Published 1 Mar 2011

The limit-order calculator was used more than 20 million times in its first six months on the Internet. Tradeworx had dozens of similarly unique and innovative tools. The SEC purchased some of them for its Web site for a few years, including a margin-risk calculator that would compute the odds of a portfolio receiving a margin call and recommending specific trades to reduce the odds by 10% to 20%. As was the case with most dot-com startups, Tradeworx’s expenses outstripped its revenues in the early years. When the 9/11 attacks occurred and the capital markets shut down, Tradeworx could not find additional sources of venture capital.

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis
by Kevin Mellyn
Published 30 Sep 2009

During the bull market of the twenties, it was possible to buy $1000 of stock for ten or twenty dollars. When stocks keep going up, this is a great way to turn a little money into a lot of money. If stocks plunge, the borrower is asked to put up more ‘‘margin,’’ cash to cover the difference between the loan and the value of the stock. If customers can meet these margin calls, fine. If they can’t, banks could find themselves with a $1000 loan the borrower cannot possibly pay by selling stock. Borrowers walk away, leaving the bank with trash stocks. With their paper wealth wiped out, these same borrowers began defaulting on mortgages and other loans. Banks began to call in loans to raise cash, sending more customers into the tank.

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better
by Andrew Palmer
Published 13 Apr 2015

Harry DeAngelo and René Stulz, “Why High Leverage Is Optimal for Banks” (NBER Working Paper 19139, August 2013). NOTES TO CHAPTER 8 1. Victor Stango, “Are Payday Lending Markets Competitive?” Regulation (Fall 2012); “National Survey of Unbanked and Underbanked Households” (Federal Deposit Insurance Corporation, 2011). 2. “Margin Calls,” Economist, February 16, 2013. 3. Meta Brown et al., “The Financial Crisis at the Kitchen Table: Trends in Household Debt and Credit,” Current Issues in Economics and Finance 19 (2013). 4. Atif Mian and Amir Sufi, “The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis” (NBER Working Paper 13936, April 2008). 5.

What Every Body Is Saying: An Ex-FBI Agent's Guide to Speed-Reading People
by Joe Navarro and Marvin Karlins
Published 22 Feb 2011

When we are truly 170 W H A T E V E R Y B O D Y I S S A Y I N G BOX 46: THE FACE AND FEET SHOW LIFE IS SWEET Not long ago I was waiting for a flight out of Baltimore when the man next to me at the ticket counter received the good news that he was being upgraded to first class. As he sat down he tried to suppress a smile, since to gloat over his good fortune would be seen as rude by other passengers waiting for an upgrade. Based on his facial expression alone, to declare he was happy would have been a marginal call. Then, however, I overheard him call his wife to tell her the good news, and although he spoke quietly so those seated nearby couldn’t hear the conversation, his feet were bouncing up and down like those of a young child waiting to open his birthday gifts. His happy feet provided collaborative evidence of his joyful state.

Mastering Blockchain: Unlocking the Power of Cryptocurrencies and Smart Contracts
by Lorne Lantz and Daniel Cawrey
Published 8 Dec 2020

Margin/leveraged products Many exchanges allow traders to trade on margin, where credit is provided to an investor for putting up some amount of value, known as collateral. On regulated exchanges, this is usually between 5 and 10 times a trader’s balance. However, some exchanges allow for up to 100 times margin. This can be dangerous, as very small price swings can result in autoliquidation. Similar to a margin call, an autoliquidation will quickly wipe out a trader’s balance. Note Be very careful using margin. It may not provide much leverage in trades, and it can prove a quick way to get totally liquidated in the crypto market. Cryptocurrency Market Structure As a whole, the cryptocurrency market lacks the market depth, or the ability to absorb large orders, that is seen in traditional markets.

The Snowball: Warren Buffett and the Business of Life
by Alice Schroeder
Published 1 Sep 2008

Almost without exception, they, too, had traded on borrowed money. At first the clients came up with the cash to repay their loans. Market seers and government officials kept saying stocks would quickly rebound. They got the velocity right but the direction all wrong. With each succeeding wave of “margin” calls, half of Davidson’s remaining clients were wiped out, unable to pay their debts, forfeiting their accounts. Davidson, who had been pocketing an incredible $100,000 a year in commissions before the crash,23 was soon making about $100 a week selling bonds—and considering himself well off. “It was a pretty sorry sight,” he recalled of those Depression years, “to see an old friend, married with children, very successful, and now he has to work to get a nickel for an apple” selling fruit at the corner of Wall and Broad.

…

Now they agreed that Larry Hilibrand—the superrationalist whose sobriquet on Wall Street was still “the $23 million man,” for the outsize bonus that had set Mozer off on his tear—would make a pilgrimage to Omaha and reveal what Long-Term owned. The next day the Dow dropped four percent in what the Wall Street Journal referred to as a “global margin call,” with investors panicking and selling. Buffett picked up Hilibrand at the airport and drove him back to Kiewit Plaza. The modesty of Buffett’s smaller office, staffed by a handful of people and piled with Coca-Cola memorabilia, contrasted markedly with Long-Term’s enormous digs in Greenwich, which featured two pool tables and a three-thousand-square-foot gym staffed by a full-time trainer.

…

“It’s not who we’re sleeping with, it’s who they’re sleeping with that’s the problem.” As Buffett headed to Seattle that Friday to meet the Gateses and embark on a thirteen-day “Gold Rush” trip from Alaska to California, he called a manager and told him, “Accept no excuses from anyone who doesn’t post collateral or make a margin call. Accept no excuses.”30 He meant that if the Howie-equivalents out there paid the rent one day late, then seize their farms. The next morning he, Susie, the Gateses, and three other couples flew to Juneau to helicopter over the ice fields. They cruised up the fjords to view huge blue icebergs and waterfalls cascading over three-thousand-foot cliffs.

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments
by Charles Goyette
Published 29 Oct 2009

Now challenges to American global economic hegemony, bailouts, stimulus packages, and the recession and its accompanying deficits are driving the trend to a climax. The development of ETFs has made these commodity investments accessible in a way that they have not been before. We are using ETFs so that we can invest in these markets without the leverage, margin calls, or emotional toll of second-to-second price changes. You do not have to be mesmerized by price fluctuations on a screen. You do not have to give up your real job to become a day trader the way so many did in the dot-com bubble. You do not have to have perfect timing to enter and exit the market.

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover
by Katrina Vanden Heuvel and William Greider
Published 9 Jan 2009

When they crashed—for example, in the savings-and-loan and junk-bond debacles of the 1980s, the Long-Term Capital Management collapse of 1998 and the Enron and dot-com crashes of the early 2000s—the government cleaned up the mess with taxpayers’ money and let them go back to the bar. So here we go again. When subprime homeowners stopped paying, the prices of the mortgage-backed securities used as collateral fell. Banks demanded that their borrowers pay up or cover their margins. Panicked selling by borrowers further lowered the securities’ prices, triggering more margin calls and more defaults. Massive losses piled up at places like Citigroup, Coun-trywide, Merrill Lynch and Morgan Stanley, and cascaded back into the insurance companies. At the end of February, the huge insurer American International Group reported the largest quarterly loss, $5 billion, since the company started in 1919.

Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History
by Liam Vaughan
Published 11 May 2020

It was the kind of bold, outside-the-box play that had catapulted Corzine from the family farm in Illinois to the Bilderberg Group. Unfortunately, this time the former high school quarterback had badly misjudged his Hail Mary pass. As the crisis deepened and the value of sovereign debt fell, the counterparties on the repo trades began issuing what are known as margin calls, forcing MF Global to hand over additional cash to cover potential losses. In October 2011, rating agencies downgraded the firm’s credit rating to “junk,” sparking the equivalent of a bank run, with customers calling up and demanding to withdraw their funds and lenders closing credit lines. In the frenzied final hours, a middle-ranking executive dipped into what should have been sacrosanct, segregated client funds to plug the gaps.

Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies
by Reid Hoffman and Chris Yeh
Published 14 Apr 2018

McClendon acted as though his blitzscaling strategy was guaranteed to succeed, and Chesapeake was hit hard by the global recession of 2008. After peaking at $62.40 in June 2008, its stock price has declined sharply, falling as low as $2.61 in early 2016 (in 2017, it traded between $4 and $8 per share). McClendon had taken on a lot of risk in his personal finances as well, borrowing money to buy Chesapeake stock. A margin call in 2008 forced him to sell 94 percent of his Chesapeake stock at a massive loss. McClendon was eventually forced to step down from his position as CEO of Chesapeake in 2013, but remained a resolute blitzscaler. At the time of his death in 2016, McClendon was running American Energy Partners, a company he founded after his departure from Chesapeake, and for which he had raised $15 billion from investors.

More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded)
by Michael J. Mauboussin
Published 1 Jan 2006

EXHIBIT 34.1 Top 30 S&P 500 Index Moves, 1941-1987 DatePercent ChangeExplanation 10/19/1987 —20.47 Worry over dollar decline and trade deficit; fear of U.S. not supporting dollar 10/21/1987 9.10 Interest rates continue to fall; deficit talks in Washington; bargain hunting 10/26/1987 —8.28 Fear of budget deficits; margin calls; reaction to falling foreign stocks 9/3/1946 —6.73 “No basic reason for the assault on prices” 5/28/1962 —6.68 Kennedy forces rollback of steel price hike 9/26/1955 —6.62 Eisenhower suffers heart attack 6/26/1950 —5.38 Outbreak of Korean War 10/20/1987 5.33 Investors looking for “quality stocks” 9/9/1946 —5.24 Labor unrest in maritime and trucking industries 10/16/1987 —5.16 Fear of trade deficit; fear of higher interest rates; tension with Iran 5/27/1970 5.02 Rumors of change in economic policy.

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

Clear that one hurdle, and the rest is easy. What's that? You want an investment system where you don't have to save and can get rich quickly? Dream on. Sure, you can buy stocks on margin by putting as little as 20 percent down. But what if their value goes down? Are you prepared to come up with the cash to cover a margin call? In 1929 a lot of investors ran into that very problem. The consequences ushered in the historic stock market crash and the Great Depression. To our way of thinking, buying on margin isn't a prudent risk. Bogleheads are investors, not speculators. Investing is about buying assets, holding them for long periods of time, and reaping the harvest years later.

Digital Bank: Strategies for Launching or Becoming a Digital Bank
by Chris Skinner
Published 27 Aug 2013

The mobile internet world squeezes and exposes the legacy on the one hand – this is why many banks have struggled to incorporate mobile services with their internet banking services – whilst the global, European and national regulatory requirements are placing further pressures on the core processes as well. Just look at the erosion of processing fees thanks to the Payment Services Directive in Europe or the Durbin amendment to Dodd-Frank in the USA, or the intraday and soon real-time margin calls for collateralisation under the European Market Infrastructure Regulation and Dodd-Frank, if you want to see how that changes things (not to even mention Basel III). Finally, assuming you managed a successful migration to the new world, there are still massive exposures to risk. We live in a world where technology drives our markets and yet the fear of changing technology is killing us.

Running Money
by Andy Kessler
Published 4 Jun 2007

You can find some cement company in Indonesia whose stock is under pressure for months at a time, but we hold off. A cheap stock is not the time to buy, because it will always get cheaper. We just wait for the puke.” “Which is what, exactly?” Jim prodded. “It’s when there are no bids. Some guy at Fidelity has fund redemptions or maybe some leveraged-up hedge fund has a margin call. These guys not only want to sell, but they have to sell. An involuntary impulse. They puke it up. You can take it off their hands at almost any price. They are just glad to get rid of it.” “I get it,” Jim said. “Yeah, it’s hard to sit around and wait for these things, but you know it when you see it.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril
by Satyajit Das
Published 9 Feb 2016

The US Fed suffered losses of around US$190 billion, reversing its cumulative gains. Higher mortgage rates slowed the refinancing of existing mortgages and the recovery of the housing market. Stock and asset prices also fell sharply. Price falls reduced the value of financial assets used as collateral for loans, triggering margin calls and leading to a withdrawal of liquidity from markets. Higher US rates drove a rise in rates across the world, with the exception of Japan, which had launched a new QE program. In emerging markets, there were large outflows, exposing their reliance on foreign capital, and currencies fell, resulting in losses on foreign currency debt.

Insane Mode: How Elon Musk's Tesla Sparked an Electric Revolution to End the Age of Oil
by Hamish McKenzie
Published 30 Sep 2017

Leshi explained the practice to the Journal by saying Jia preferred to pledge shares rather than bring in outside investors because he wanted Leshi to focus on long-term growth. The risky maneuvers left the company vulnerable to any sudden shifts in the stock market. For instance, any drop in Leshi’s share price could potentially trigger a margin call, which a brokerage issues when it needs an investor to put up more cash to meet the minimum requirement to keep holding a stock. In such an event, Jia would have to sell his shares or find more funds to repay his loan, jeopardizing his entire financing structure—and therefore every company he touched—if his bets continued to go badly.

Concentrated Investing
by Allen C. Benello
Published 7 Dec 2016

He later commented about the trade, “Situations that simple and clear are few and far between, but we made a large part of our living off scenarios just like that.”34 Those situations were about as close to riskless as any investment can get. If the stock, which Thorp was short, rallied, he was protected by his long position in the convertible bond, which would rally in sympathy with the stock. If it failed to do so, and the spread between the two widened to the point that Thorp would get a margin call on the short, he could simply convert the bonds into stock and close out the position. If the price of his long bond position fell, he would be protected by the short in the equity, which would fall along with the bond. If it didn’t, and the gap widened, he could simply close out the position for no loss, or continue to collect the coupon.

Python for Algorithmic Trading: From Idea to Cloud Deployment
by Yves Hilpisch
Published 8 Dec 2020

Although these are specific results only, they illustrate that it is risky in such a context to jump to conclusions too early and to not take into account limits for piling up debt: Running SMA strategy | SMA1=42 & SMA2=252 fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 45631.83 Net Performance [%] 356.32 ======================================================= Running momentum strategy | 60 days fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 105236.62 Net Performance [%] 952.37 ======================================================= Running mean reversion strategy | SMA=50 & thr=5 fixed costs 0.0 | proportional costs 0.0 ======================================================= Final balance [$] 17279.15 Net Performance [%] 72.79 ======================================================= Running SMA strategy | SMA1=42 & SMA2=252 fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 38369.65 Net Performance [%] 283.70 ======================================================= Running momentum strategy | 60 days fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] 6883.45 Net Performance [%] -31.17 ======================================================= Running mean reversion strategy | SMA=50 & thr=5 fixed costs 10.0 | proportional costs 0.01 ======================================================= Final balance [$] -5110.97 Net Performance [%] -151.11 ======================================================= Situations where trading might eat up all the initial equity and might even lead to a position of debt arise, for example, in the context of trading contracts-for-difference (CFDs). These are highly leveraged products for which the trader only needs to put down, say, 5% of the position value as the initial margin (when the leverage is 20). If the position value changes by, say, 10%, the trader might be required to meet a corresponding margin call. For a long position of 100,000 USD, equity of 5,000 USD is required. If the position drops to 90,000 USD, the equity is wiped out and the trader must put down 5,000 USD more to cover the losses. This assumes that no margin stop outs are in place that would close the position as soon as the remaining equity drops to 0 USD.

The Globalization Paradox: Democracy and the Future of the World Economy
by Dani Rodrik
Published 23 Dec 2010

Free capital mobility ensured that investors in Europe and elsewhere ended up sitting on a pile of toxic mortgage assets exported from the United States. Whole countries such as Iceland turned into hedge funds, leveraging themselves to the hilt in international financial markets in order to exploit small differentials in margins. Calls for increased regulation of finance were rebuffed by pointing out that banks would simply get up and move to less regulated jurisdictions.23 The immediate causes of the financial crisis of 2008 are easy to identify in hindsight: mortgage lenders (and borrowers) who assumed housing prices would keep rising, a housing bubble stoked by a global saving glut and the reluctance of Alan Greenspan’s Federal Reserve to deflate it, financial institutions addicted to excessive leverage, credit rating agencies that fell asleep on the job, and of course policy makers who failed to get their act together in time as the first signs of the crisis began to appear.

Liar's Poker
by Michael Lewis
Published 1 Jan 1989

The conventional safe haven for money is gold, but this was not a conventional moment. The price of gold was falling fast. Two creative theories made their happy way around the trading floor, both explaining the fall in gold. The first was that investors were being forced to sell their gold to meet margin calls in the stock market. The second was that in the depression that followed the crash, investors would have no need to fear inflation, and since for many gold was protection against inflation, it was less in demand. Whatever the case, money was pouring not into gold but into the money markets-i.e., short-term deposits.

The Rapture of the Nerds
by Cory Doctorow and Charles Stross
Published 3 Sep 2012

The three new instances diff-and-merge back into the djinni with a trio of comic pops and the djinni rubs his hands together. “Had to raid the pension fund to do it, but I think I’ve done for little what’s-her-number. An insult to one is an insult to all, so I just brought in the rest of my instance-sibs and margin-called that bitch so hard, she’ll be begging for spare cycles for the next hundred in realtime.” He shakes his head. “Noobs are all the same; think that once they’ve been around the block a few times, they can do whatever they want.” “What happened to my debt?” “Oh.” The djinni shrugs. “She flogged that as soon as I started my counterattack.

Keeping at It: The Quest for Sound Money and Good Government
by Paul Volcker and Christine Harper
Published 30 Oct 2018

Plan includes increase in discount rate to 12 percent, new reserve requirements, and a new focus on controlling the money supply instead of short-term interest rates. March 14, 1980 Carter unveils Anti-Inflation Program, including plans to submit a smaller 1981 budget (reduced by $13 billion) and to impose credit controls. March 27, 1980 Silver price decline sets off margin calls against Hunt brothers’ massive holdings, threatening Bache Group and other financial institutions. April 28, 1980 First Pennsylvania Bank announces it has received a $1.5 billion rescue, sponsored by the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve. May 22, 1980 In midst of sudden recession, Fed rolls back most of the credit controls implemented in March.

Systematic Trading: A Unique New Method for Designing Trading and Investing Systems
by Robert Carver
Published 13 Sep 2015

Using a different SR won’t affect these numbers much, although the annual loss figures will be slightly better (worse) if the true Sharpe is higher (lower). 139 Systematic Trading skew strategies large losses are much less likely, as you can see in table 22. However the typical cumulative loss is higher. With negative skew it’s vital to have sufficient capital to cope with the very bad days, weeks and months you will occasionally see. This is especially true with high leverage and the risk your broker will make a margin call at the worst possible time. With positive skew the difficulty is psychological; committing to a system when you spend most of your time suffering cumulative losses. TABLE 21: HOW DO TYPICAL LOSSES LOOK WITH NEGATIVE SKEW? INDIVIDUAL LOSSES ARE HIGHER THAN IN TABLE 20, BUT CUMULATIVE LOSSES ARE SMALLER Percentage volatility target Expected 25% 50% Worst daily loss each month $3,100 $6,100 Worst weekly loss each year $8,500 $17,000 Worst monthly loss every ten years $18,100 $36,000 Worst daily loss every 30 years $11,500 $23,000 10% of the time, the cumulative loss will be at least $3,700 $7,400 1% of the time, the cumulative loss will be at least $7,100 $14,000 The table shows various expected losses (rows) and different percentage volatility targets (columns), for a negative skew option selling strategy given trading capital of $100,000.101 The strategy has a Sharpe ratio of 0.5 and skew of around -2. 101.

Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork
by Reeves Wiedeman
Published 19 Oct 2020

By late December, SoftBank stock itself was down more than a third since the summer, when Fortitude was just a vision in Masa’s and Adam’s heads. On Christmas Eve, Masa called Adam from Maui, three islands to the east, where he was spending his holiday. Fortitude was dead, Masa said. The market crash had scared off potential investment partners and a deal of this size was simply too risky. Several financial institutions had placed margin calls on Masa’s personal holdings after the dip in SoftBank’s stock. His hands were tied. Adam was stunned. His advisers had tried, at various points, to temper his expectations and warn him that Masa could be trusted only as far as WeWork was useful to him. But Masa had always seemed to be the only person who occupied the same reality distortion field as Adam.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them
by Nouriel Roubini
Published 17 Oct 2022

Shrewd calls can generate fat gains, but when large, highly leveraged positions unravel abruptly they can rattle the market. Overexposure to tumbling tech stocks in Asia sent Archegos scrambling for cash in April 2021. An attempt to liquidate a leveraged position in ViacomCBS clashed with a stock offering. Shares flooding the market caused the price to drop. News traveled fast. Wall Street lenders issued margin calls, demanding repayment of large loans. Archegos could not comply. Goldman Sachs reportedly seized capital and others soon followed. “This so-called forced liquidation set off a bloodbath,” CNN reported.2 Caught in the downdraft as the boom deflated, Archegos went bust. Lenders recorded losses in the billions.

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
by William Poundstone
Published 18 Sep 2006

The difference had been made up by melting down and reclaiming old jewelry and other silverware. Stores of reclaimable silver were running low. Using his savings, Thorp bought some silver at about $1.30 an ounce. It went up to about $2. He bought more silver on margin (with borrowed money). The price fell. Thorp couldn’t meet the margin calls and lost about $6,000, a crushing sum at the time. “I learned an expensive lesson,” he said. The lesson was: You are unlikely to get an edge out of what you see in the news. A couple of Texas investors contacted Thorp. They had heard of him through the blackjack publicity. They identified themselves as experts in picking life insurance stocks and wanted to know if Thorp might be able to help them.

The Permanent Portfolio
by Craig Rowland and J. M. Lawson
Published 27 Aug 2012

You will need to buy the shares back at a much higher price in order to return them to the broker to cover your short sale. The losses can add up quickly because although a price can drop to zero (which is good if you are shorting the stock), the price can also continue going up indefinitely (very bad for a short sale). The potential for loss is therefore unlimited with shorting (in reality the broker will issue a margin call and clean out your account to cover the losses before that happens). Since shorting stocks can result in larger losses than the initial investment, this activity should be avoided in the Variable Portfolio. Likewise, there are some private business investments that can leave you on the hook for more than you invested.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
by Gregory Zuckerman
Published 5 Nov 2019

On Wednesday, things got scary. Simons, Brown, Mercer, and about six others hustled into a central conference room, grabbing seats around a table. They immediately focused on a series of charts affixed to a wall detailing the magnitude of the firm’s losses and at what point Medallion’s bank lenders would make margin calls, demanding additional collateral to avoid selling the fund’s equity positions. One basket of stocks had already plunged so far that Renaissance had to come up with additional collateral to forestall a sale. If its positions suffered much deeper losses, Medallion would have to provide its lenders with even more collateral to prevent massive stock sales and losses that were even more dramatic.

file:///C:/Documents%20and%...
by vpavan

If the shares fall to $40, your equity has dropped from $2,500 (the amount of your original investment) to $1,500 (100 shares x $40 minus your $2,500 loan = $1,500). That $1,500 in equity meets the broker's 30 percent maintenance margin requirement (30 percent of $4,000 = $1,200). But if the value of your shares falls to $25, your equity has evaporated altogether (100 shares x $25 minus your $2,500 loan = 0). Your broker will make what is known as a margin call, demanding additional payment of cash or other securities into your account within two or three days. If you are unable to pay, the firm will sell your shares. You may have to take heavy losses, even if you wanted to stick with your investment in the hope that the share price rebounds. Profits and Professionalism In the 1970s, when I oversaw the retail business of our firm, after numerous acquisitions now called Shearson Hayden Stone, part of my job was to hire and train new brokers.

Why Startups Fail: A New Roadmap for Entrepreneurial Success
by Tom Eisenmann
Published 29 Mar 2021

For instance, during the dot-com boom, as consumers embraced online stock trading, Internet brokerages like E*Trade and Ameritrade couldn’t recruit and train customer service reps quickly enough to keep up with exploding transaction volumes. Call center reps had to be trained to respond to customers’ questions about a wide variety of complex transactions, including “stop loss” instructions, options trades, and margin calls. As a result of staffing and training shortfalls, irate customers with service problems and queries watched trading gains slip away while they waited for a response. What can a startup do if it cannot hire enough competent employees to handle rapidly expanding demand? Of course, putting the brakes on growth is always an option—but one that is rarely considered, for the reasons described above.

Number Go Up: Inside Crypto's Wild Rise and Staggering Fall
by Zeke Faux
Published 11 Sep 2023

If FTX had liquidated Alameda’s position, the fund would’ve gone bankrupt, and even if the exchange didn’t take direct losses, customers would’ve lost confidence in it. Bankman-Fried pointed out that the companies that lent money to Alameda might have failed too, causing a hard-to-predict cascade of events. “Now let’s say you don’t margin-call Alameda,” I posited. “Maybe you think there’s like a seventy percent chance everything will be okay, it’ll all work out?” “Yes, but also in the cases where it didn’t work out, I thought the downside was not nearly as high as it was,” he said. “I thought that there was the risk of a much smaller hole.

Crashed: How a Decade of Financial Crises Changed the World
by Adam Tooze
Published 31 Jul 2018

The first credit default event on which AIG had to pay out did not occur until December 2008. The problem was the anticipatory reaction of financial markets and the fast-moving revaluation of securitized mortgages and the derivatives based on them. In the case of AIG, as it lost its top-tier credit rating, this triggered immediate margin calls from the counterparties to AIG’s insurance contracts. They wanted collateral to prove that AIG could meet its obligations if the mortgages did go bad. It was these collateral calls, running into tens of billions, that threatened to tip AIG over the edge. AIG’s troubles did not end there. It had made life much harder for itself by engaging in the securities lending business.

…

One of the plays that would see Goldman through the crisis was the big short position it had built, betting against mortgage-backed securities. A big piece of that bet was placed by buying CDS from AIG. Already by June 30, 2008, Goldman had called $7.5 billion in collateral. When AIG was downgraded on September 15, there was a new surge in margin calls. Of the total claim against AIG, which now topped $32 billion, Goldman Sachs and its partner Société Générale accounted for $19.8 billion.24 For AIG the consequences were drastic. It was scrambling for cash at the worst possible moment. With its rating on the downgrade it could not borrow tens of billions through ordinary channels.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

Professor Irving Fisher of Yale, one of the progenitors of the intrinsic-value theory, offered his soon-to-be-immortal opinion that stocks had reached what looked like a “permanently high plateau.” By Monday, October 21, the stage was set for a classic stock-market break. The declines in stock prices had led to calls for more collateral from margin customers. Unable or unwilling to meet the calls, these customers were forced to sell their holdings. This depressed prices and led to more margin calls and finally to a self-sustaining selling wave. The volume of sales on October 21 zoomed to more than 6 million shares. The ticker fell way behind, to the dismay of the tens of thousands of individuals watching the tape from brokerage houses around the country. Nearly an hour and forty minutes had elapsed after the close of the market before the last transaction was actually recorded on the stock ticker.

With a Little Help
by Cory Efram Doctorow , Jonathan Coulton and Russell Galen
Published 7 Dec 2010

He armored himself for the inevitable shock, disbelief and protestation, but she just hung her head, resigned. 440 "Figures," she said. 441 He ran his fingers down the spines until he found a cheaper one -- bound with floppy felt screened with a remixed Victorian woodcut of a woman with tentacles for arms. "This one's got mostly the same text, but I can let you have it for, erm," he looked at the sheet again, thinking about the wholesale price, about his margin. "Call it twenty-five pounds." 442 She shook her head again, gave him a wry smile. "Still too much. I should have known. It's mostly the posh kids who've got 'em, the kind who turn up at school with a tenner just for lunch money." 443 "You could just read it online, you know." 444 "Oh, I do," she said.

The Boom: How Fracking Ignited the American Energy Revolution and Changed the World
by Russell Gold
Published 7 Apr 2014

Baihly, Jason, Raphael Altman, Raj Malpani, and Fang Luo. “Shale Gas Production Decline Trend Comparison over Time and Basins.” Paper presented at SPE Annual Technical Conference and Exhibition, September 19–22, 2010, Florence, Italy. Birol, Fatih. World Energy Outlook 2012. Paris: IEA Publications, 2012. Casselman, Ben. “Margin Calls Hitting More Executive Suites.” Wall Street Journal, October 13, 2008. Gold, R. “Costly Liabilities Lurk for Gas Giant.” Wall Street Journal, May 11, 2012. Gold, R., and Daniel Gilbert. “The Many Hats of Aubrey McClendon.” Wall Street Journal, May 8, 2012. Schneyer, Joshua, Jeanine Prezioso, and David Sheppard.

The Global Money Markets
by Frank J. Fabozzi , Steven V. Mann and Moorad Choudhry
Published 14 Jul 2002

The additional margin deposited is called variation margin and it is an amount necessary to bring the margin in the account balance back to its initial margin level. Unlike initial margin, variation margin must be in cash, not interest-bearing instruments. If a party to a 1 Individual brokerage firms are free to set margin requirements above the minimum established by the exchange. 212 THE GLOBAL MONEY MARKETS futures contract receives a margin call and is required to deposit variation margin fails to do so within 24 hours, the futures position is closed out. Conversely, any excess margin may be withdrawn by the user. Although there are initial and maintenance margin requirements for buying securities on margin, the concept of margin differs for securities and futures.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by Danielle Dimartino Booth
Published 14 Feb 2017

But by early 2008, it was clear that the cocky Cassano’s imagination had been woefully inadequate, even delusional. As earnings collapsed, Cassano was forced into retirement in March. AIGFP had issued more policies on derivatives than it had cash to cover. The “black swan” event of Lehman’s collapse triggered the largest margin call of all time. AIG faced paying billions of dollars to banks all around the world. The failure of parent company AIG could have triggered a global banking cataclysm. No wonder Paulson couldn’t sleep and was throwing up during this period, as he later said in his memoir. I can only imagine his anxiety.

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street
by Sheelah Kolhatkar
Published 7 Feb 2017

Sahni and his colleagues wanted to talk about settling the case against SAC. Not much had happened during the month of August, after the indictment. The prosecutors noticed, though, that business at SAC had gone on as if nothing unusual had occurred. There were no visible crises in the market, no layoffs or margin calls. Wall Street had absorbed criminal charges against one of the largest hedge funds in the world with barely any disruption. Settling the case was the only resolution that made sense; a trial was a risky proposition for both sides. For the government, losing the SAC case would have led to humiliation, a heavy blow to morale at the office.

The End of Wall Street
by Roger Lowenstein
Published 15 Jan 2010

“We are confident in our marks and the reasonableness of our valuation methods,” Sullivan said. AIG’s mathematical models gave him “a very high level of comfort.”16 The executives went into elaborate detail, yet managed to sidestep AIG’s biggest concern: regardless of what its models said the CDOs were worth, as long as prices kept falling AIG would be hit with continuing margin calls. As investors had no idea that AIG had received any collateral calls, and certainly had no independent means of assessing its CDO contracts, once again they were reassured. Not for the first time, there was a feeling on Wall Street that the crisis was, if not quite over with, then at least past its worst.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

Professor Irving Fisher of Yale, one of the progenitors of the intrinsic-value theory, offered his soon-to-be-immortal opinion that stocks had reached what looked like a “permanently high plateau.” By Monday, October 21, the stage was set for a classic stock-market break. The declines in stock prices had led to calls for more collateral from margin customers. Unable or unwilling to meet the calls, these customers were forced to sell their holdings. This depressed prices and led to more margin calls and finally to a self-sustaining selling wave. The volume of sales on October 21 zoomed to more than 6 million shares. The ticker fell way behind, to the dismay of the tens of thousands of individuals watching the tape from brokerage houses around the country. Nearly an hour and forty minutes had elapsed after the close of the market before the last transaction was actually recorded on the stock ticker.

Unknown Market Wizards: The Best Traders You've Never Heard Of
by Jack D. Schwager
Published 2 Nov 2020

Because this convergence trade seemed like such a sure thing, all the smart guys on Wall Street, including Long-Term Capital Management (LTCM) and Salomon Brothers, put the trade on in as much size as they possibly could. Another trade that LTCM and other hedge funds had sizable positions in at the time was long Russian bonds because of their extremely high interest rates. In August 1998 Russia defaulted on its bonds. To help cover the margin calls on this trade gone very wrong, the holders of these positions had to sell other positions they held, which were primarily their European interest rate convergence trades. When they all tried to liquidate this trade at the same time, they found there were no buyers because anyone who wanted the position already had it on.

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers
by Lawrence G. Mcdonald and Patrick Robinson
Published 21 Jul 2009

When the bill came back before the House, in an acrimonious few hours, two days later, it was voted into law 263–171. This was just as well, because the markets were suffering a complete crisis of confidence. With the credit lines still frozen and no one sure what House Speaker Nancy Pelosi and her merry men were going to do next, the Dow had caved in another 500 points before that vote went through. Margin calls were raining in, hedge funds were going bust, and God knows what else. The question was, would Hank Paulson’s bailout bill save the world? Answer: not quite. On Monday, October 6, the first full trading day since the bill was passed, the Dow crashed down through 10,000, with an intraday low of 9,525.

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low Risk Investing
by Vijay Singal
Published 15 Jun 2004

Further, conditions relating to borrowed shares change on a daily basis: the shares may be put on “special,” meaning that the short seller has to pay greater compensation to the lender, and the collateral is revised daily to ensure that the lender holds at least 102 percent of the value of shares lent. Besides satisfying the lenders’ conditions, short sellers are also subject to margin calls from the broker. Recall that S has short-sold 100 shares at $50 each. If the stock price rises to $105, then S’s loss is 100 × ($105—$50) = $5,500, which is more than the initial money in the short seller’s account. Brokers cannot allow this situation to occur. Therefore, if the stock price rises, the brokers will call S to put up more margin money.

How I Became a Quant: Insights From 25 of Wall Street's Elite
by Richard R. Lindsey and Barry Schachter
Published 30 Jun 2007

We undertook the investigation of Bankers Trust ordered by U.S. financial regulators after the derivatives losses experienced by P&G and Gibson Greetings. I consulted to the Fed after the LTCM crisis. I was called by Orange County a month to the day before its bankruptcy and asked “to review their portfolio and analyze what the impact of the margin calls they were starting to get would have on their yield.” We were the ones to have to explain to them (and the SEC) that they had more serious problems than a decrease in their yield! We arranged four bailout plans during their final weekend meltdown, but they were not able to enter into any of them.

Shutdown: How COVID Shook the World's Economy
by Adam Tooze
Published 15 Nov 2021

To multiply their profits, they refinanced their stockpiles of Treasuries in the repo market, swapping the Treasuries for cash with which to buy more Treasuries. Each of those swaps was backed by a bare minimum of capital. As it became apparent that their trades were loss making, the hedge funds faced margin calls, requiring them to post more capital. March 2020 was not a moment to find new investors. So they were forced to unwind their positions, suddenly off-loading over $100 billion of Treasuries into a market already unsettled by sales by emerging market reserve managers and mutual funds. With a lot of desperate sellers, there should have been profits to be made on the buy side.

Power Play: Tesla, Elon Musk, and the Bet of the Century
by Tim Higgins
Published 2 Aug 2021

The stakes of all the volatility in SolarCity’s stock could be felt by Musk and his family that fall; it threatened their whole house of cards. Tesla board member Kimbal Musk was operating his finances not unlike his older brother. In late October, as shares of SolarCity fell to half their value from the start of the year, Kimbal faced a margin call from his bank, a request that he deposit more money to cover the losses he’d accumulated. “I was nervous watching today,” his financial adviser, Karen Winkelman, wrote him about SolarCity’s stock. Kimbal was in a pinch, as he wanted to expand a restaurant business that he had invested in, but he was low on funds.

The Controlled Demolition of the American Empire
by Jeff Berwick and Charlie Robinson
Published 14 Apr 2020

There are over seven billion people living on the planet, so guns and bombs cannot control everyone, and at some point, it is going to become clear that the game is over. The only real question will be how many people have to die before everyone comes to understand this? Once the dollar is exposed as being unstable, it will have a cascading effect. Wall Street will disintegrate as people rush to try and dump their holdings onto a market missing any buyers. Margin calls will automatically kick in, forcing a tidal wave of losses. Without a way to accurately place valuations on their financial instruments, the bond market will fail. As the dollar continues to fall, the real estate market will implode and drag the rest of the country down as equity vanishes literally overnight, and pension funds that hold trillions of dollars of Americans’ life savings will be wiped out over the course of a week.

Seven Crashes: The Economic Crises That Shaped Globalization
by Harold James
Published 15 Jan 2023

On January 21, 1980, the New York Commodity Exchange prohibited traders from taking new positions in future markets and raised margin requirements: the price briefly surged to $49 and then fell back to $37.35 That was a record single-day drop. The Hunts then offered to buy 5 million ounces at $40, and William Herbert Hunt blasted the “unrealistic margin requirements,” which had created an “illiquid market.”36 The Hunts were broken, and in late March failed to meet a $100 million margin call. They had accumulated debts of some $1 billion. Volcker was exultant, and explained how he would “look forward to the liquidation” of the Hunts’ silver. He now declared that “the best defense against that type of behavior [excessive speculation] must be the discipline of the market itself.”37 The market might be a defense mechanism against extortion by powerful interest groups.

New York
by Edward Rutherfurd
Published 10 Nov 2009

“That’s Winston Churchill, the British politician,” one of the traders remarked. “He’s chosen a hell of a day to call.” He certainly had. As trading began, Master was aghast. The market wasn’t just falling, it was in headlong panic. By the end of the first hour, there were cries of pain, then howls. Men with margin calls were being wiped out. A couple of times, sellers were shouting out prices and finding not a single buyer in the market. As noon approached, he reckoned the market would soon have fallen nearly ten percent. The anguished hubbub from the floor was so loud that, unable to bear it any longer, he walked outside.

…

I lost a bit of money last week, but I just made half of it back again.” The following week, however, the market slumped again. Five percent on Monday; nine percent on Wednesday. And it just kept sliding, day by day. By November 13, the Dow was at 198, only just over half its September high. Investors, small and large, with big margin calls were being wiped out. Brokerage houses that’d lent money that couldn’t be repaid were failing. “Plenty of the weaker banks may fail, too,” William told Charlie. But each morning the street witnessed William Master arriving at his office in his silver Rolls-Royce, as he calmly carried on with business as usual.

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance
by Ron Chernow
Published 1 Jan 1990

As GM shares broke below 20, Durant kept trying to hold back the tide by buying up more shares on margin. He continued to deny that there might be a problem. As the stock dropped as low as 12, his losses steadily mounted. By the night of November 18, 1920, Durant needed close to $1 million to meet margin calls before the market opened the next morning. Like Henry Ford, Durant despised bankers, viewing them as complacent men with tunnel vision who plundered the inventions of more original minds. Now he had to phone the House of Morgan and ask whether they would buy his GM stock at the closing price of $12 a share.

…

The Morgan partners saw a possible repeat of the 1907 panic, with Durant defaults shutting down a string of brokers. In a frenetic, all-night rescue session, the Morgan men bought up Durant’s shares at $9.50 per share—a steep discount from the closing price. The du Ponts put up $7 million, and the House of Morgan raised another $20 million to save Durant from margin calls. By dawn, a new company had been formed to buy Durant’s stock. Durant’s share of the new company was only 40 percent, while the du Ponts held 40 percent, and the Morgan-led bankers took 20 percent as their commission. Pierre du Pont was ready to deal leniently with Durant, but the pitiless Morgan partners insisted that he resign from GM.

Debt of Honor
by Tom Clancy
Published 2 Jan 1994

Buzz here wrote a book about that back when I was working for Merrill Lynch." Perhaps a friendly reference would steady the man down some, he thought. "Thank you, Jack." Fiedler sat down and sipped a glass of water. "Use the 1929 crash as an example. What was really lost? The answer in monetary terms is, nothing. A lot of investors lost their shirts, and margin calls made it all worse, but what people don't often grasp is that the money they lost was money already given to others." "I don't understand," Arnie said. "Nobody really does. It's one of those things that's too simple. In the market people expect complexity, and they forget the forest is made up of individual trees.

…

"It goes from one place to another place. It doesn't just go away. The Federal Reserve Bank controls that." It was clear, however, that van Damm didn't understand. "But then, why the hell did the Great Depression happen?" "Confidence," Fiedler replied. "A huge number of people really got slammed in '29 because of margin calls. They bought stock while putting up an amount less than the value of the transaction. Today we call that sort of thing leveraging. Then they were unable to cover their exposure when they had to sell off. The banks and other institutions took a huge beating because they had to cover the margins.

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
by Henry M. Paulson
Published 15 Sep 2010

As much as I wanted to cancel the speech, I felt that if I did, the market would have smelled blood. I hurried through my brief remarks, preoccupied and impatient to get back to the office. It had been a rough week. The markets had taken a sharp turn for the worse, as sinking home prices continued to pull down the value of mortgage securities, triggering more losses and widespread margin calls. Financial stocks were staggering, while CDS spreads—the cost to insure the investment banks’ bonds against default or downgrade—hit new highs. Banks were reluctant to lend to one another. The previous weekend there had been a banking conference in Basel, and Tim Geithner had told me that European officials were worried that the crisis was worsening.

Principles: Life and Work
by Ray Dalio
Published 18 Sep 2017

While I won’t delve too much into my family life in this book, I pursued it with the same sort of intensity with which I pursued my career, and I linked them. To give you an idea about how interwoven they were in my mind, Devon was named after one of the oldest breeds of cattle known to man, among the first breeds imported into the U.S. and renowned for its high fertility. * * * 2 His inability to meet his obligations, especially his margin calls at brokerage houses, could have led to cascading defaults. CHAPTER 3 MY ABYSS: 1979–1982 From 1950 until 1980, debt, inflation, and growth moved up and down together in steadily larger waves, with each bigger than the one before, especially after the dollar’s link to gold was broken in 1971.

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right
by Philippe Legrain
Published 22 Apr 2014

Likewise, central-bank counterparty rules should not take account of ratings. And the Basel rules should be reformed (again). They have had a noxious effect during the boom (when they encouraged banks to buy lots of sovereign bonds because these were zero risk-weighted) and again during the bust (when sovereign downgrades have exacerbated a vicious circle of margin calls and selling). More fundamentally, we need to get away from the idea that there is a single correct assessment of creditworthiness: a multiplicity of views and methodologies is welcome. And to overcome the conflict of interest at the heart of rating agencies, investors, rather than (private) issuers, should pay for ratings, as they did prior to the 1970s.

Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market
by Daniel Reingold and Jennifer Reingold
Published 1 Jan 2006

The investigators also asked a lot of questions about an enormous loan of nearly $400 million that the company had made to Bernie Ebbers. By this point, we all believed that Bernie hadn’t sold any shares of WorldCom stock, instead opting to use it as collateral to buy other assets ranging from a timber company to one of the largest ranches in Canada. As WorldCom’s stock declined in 2000 and 2001, Bernie had faced margin calls from Bank of America, which had loaned him money against his then-valuable stock and now, as the stock declined even further, required more collateral. Basically, Bernie was a very rich man—but only on paper. He’d bet every last chip on WorldCom, unlike Gary Winnick, Phil Anschutz, Joe Nacchio, and many other telecom executives, who sold when times were good.

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis
by Martin Wolf
Published 24 Nov 2015

See Roubini and Mihm, Crisis Economics, p. 19. Investors who bought ‘on margin’ – that is, by borrowing from their brokers – have to put up more of their own money as the price of the assets they bought falls. This forces them to sell assets, causing a downward movement in prices that triggers yet more ‘margin calls’. 30. See Guillermo A. Calvo, ‘Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops’, Journal of Applied Economics, vol. 1, no. 1 (November 1998), pp. 35–54. 31. While the European Central Bank did stand behind the banks of these countries as a lender of last resort, it definitely did not stand behind their public debt. 32.

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge
by Faisal Islam
Published 28 Aug 2013

The FSA injected staff on to the office floors of both major Icelandic banks in London for daily monitoring of liquidity. The FSA demanded that over £1 billion in funding be transferred from Kaupthing’s head office to its UK subsidiary by the end of the following week. On Friday, 3 October 2008, the European Central Bank issued a margin call for €400 million to Landsbanki. Over the following weekend £318 million had been withdrawn over the internet from Icesave. The FSA demanded £253 million from Landsbanki HQ to cover liquidity shortfalls following the withdrawals. On the Monday, Icesave’s website closed down due to ‘technical difficulties’.

Investment: A History
by Norton Reamer and Jesse Downing
Published 19 Feb 2016

Because Leeson was given both functions in a single role, absent this independent supervision he was able to hide the enormous losses for an extended period of time. Further, Leeson continued to convince Barings headquarters that ever greater amounts of funds were needed for the normal course of business as the margin calls from the SIMEX exchange mounted. The fact that Barings believed that Leeson needed more funds as a normal course of business suggests that his superiors simply did not genuinely understand the mechanics of market arbitrage between Japan and Singapore. Last, the lack of robust and consistent auditing of Leeson’s activities suggests an environment that was far too careless in managing its risk.

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society
by Will Hutton
Published 30 Sep 2010

The following year, the Long Term Capital Management (LTCM) hedge fund very nearly collapsed when an investment strategy built on the mathematical models of Myron Scholes and Robert Merton (who had won the Nobel Prize for economics for his theories on how to price options) went spectacularly wrong. LTCM had anticipated the crisis in the Russian bond market as part of the fallout from the Asian crisis; but it had been unable to predict the behaviour of other assets. To meet their margin calls on Russian debt, investors had sold bonds in more liquid markets, including Danish mortgage bonds, despite their excellent value – something which the LTCM’s model had overlooked.32 The Federal Reserve required Wall Street’s finest to stump up some $3.6 billion to save the hedge fund, which had almost $125 billion in borrowings.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

Bogle and Ellis remind us that these mistakes may include paying higher fees than needed, experiencing high (and potentially costly) turnover in your portfolio, needlessly incurring taxes, and investing with active managers based solely on trust and friendly connections. That guy, Bernie, may be charming on the golf course, but be careful giving him your money. If you decide to take on a lot of additional risk by borrowing to invest, make sure you’ve got the cash reserves for margin calls. Shiller reminds us that we don’t always act rationally. We may think of ourselves as Star Trek’s Mr. Spock, but often act more like Homer Simpson. If this checklist of principles seems complex, well, it is. And this is why our ten experts ended up with ten different Perfect Portfolios. None will be exactly right all the time for all investors, but they’re all based on the seven principles we just described, and in the context of the AMH, they all make sense because they represent distinct adaptations to different environments and investor types.

Bleeding Edge: A Novel
by Thomas Pynchon
Published 16 Sep 2013

“We can show you how to get into the bonus boats right away. There’s a police boat with a cannon on it, Armed Response, that ought to be your kind of thing.” “And you get to sit on a subwoofer.” “My brother’s a little strange.” “Hey, forget you, Gridley.” “You guys are brothers? Us too.” So Horst, returning from the bar after covering a margin call, arranging a July-November soybean spread, social-engineering an update on Kansas City hard red winter wheat, and putting away an indeterminate number of Berghoff longnecks, finds his sons screaming with, you would have to say, unaccustomed abandon, blasting souped-up powerboats through a postapocalyptic New York half underwater here, suffocating in mist, underlit, familiar landmarks picturesquely distressed.

The Unwinding: An Inner History of the New America
by George Packer
Published 4 Mar 2014

Go ahead, here’s the prices—you can have five million of everything you want up to a hundred million, I’ll sell you everything.” The guy said he’d get back to him, but Kevin never heard a thing—so who was the pussy? That month brought the second wobble. The Bear Stearns hedge fund got another margin call, and this time the shit was so worthless that Bear had to step in and shut the fund down. Instead of eating the loss, the bank decided to assume the financing, which meant that Bear now had the virus and led directly to the third wobble, in March 2008, when Bear went down and Kevin’s desk was one of the first to pull the wire.

Why Stock Markets Crash: Critical Events in Complex Financial Systems
by Didier Sornette
Published 18 Nov 2002

Larry Nothing matters Any gains lost in next day rally Ralph Bad breadth Wealth effect Abby Earnings slowdown Big volume Futures up Greenspan silent Rally!!! Bears bail Phew! MSFT breakup e-broker TV ads P/E’s of 2000 Weird yield curve Buy and hold forever “Bottom is in” Mergers Soros out Gold auctions Margin call W$W elves 401k inflows 16 year olds beat market vets Flight to safety Hot market Dollar goes every which way Old Economy New Economy Oil up DOW 36,000 IPO billionaires 30yr bond extinct Fig. 4.1. Cartoon illustrating the many factors influencing traders, as well as the psychological and social nature of the investment universe (source: anonymous).

New Market Wizards: Conversations With America's Top Traders
by Jack D. Schwager
Published 28 Jan 1994

My fourth trade was another winner. On my fifth trade, I gave it all back. Then on my sixth trade, I lost more money than I had made in all my previous winning trades put together. The market had turned, and I lost a considerable amount of money—much more than the account-starting equity. In other words, you were meeting margin calls along the way. Exactly. I kept putting more and more money into the account. I kept on thinking, “The market is going to turn. The market is going to turn.” Of course, it never turned. When did you finally give up the ship? I had a specific cutoff point. I was a 50 percent shareholder in a garment business, and I wanted to be absolutely certain that my losses would not endanger the business.

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It
by Anat Admati and Martin Hellwig
Published 15 Feb 2013

For example, the counterparties of a distressed bank may try to transfer their exposures to others if they become concerned about the bank’s failure. The FCIC (2011, 287–288) describes the behavior of Bear Stearns counterparties. For example, “On Wednesday, March 12, the SEC noted that Bear paid another $1.1 billion for margin calls from 142 nervous derivatives counterparties” (288). And later, “Bear experienced runs by repo lenders, hedge fund customers, and derivatives counterparties” (291). A run on derivatives also played a role preceding the Lehman failure (343). See also Bryan Burrough, “Bringing Down Bear Stearns,” Vanity Fair, August 1, 2008. 18.

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order
by Benn Steil
Published 14 May 2013

“I still think the race has shown itself, not merely for accidental reasons,” he wrote to a polite American critic of his views, “more than normally interested in the accumulation of usury.”56 Keynes himself was “more than normally” partial to speculation, which would cost him dearly that year. Long on commodities such as rubber, corn, cotton, and tin, he was forced to sell securities to cover margin calls when the market turned against him. His net worth plummeted from £44,000 at the end of 1927 (about $3.5 million in current dollars) to £7,815 at the end of 1929, following the Wall Street crash in October, in spite of his having no holdings of U.S. stocks.57 Keynes would in 1930 insist that falling commodity prices were the result of policy-induced insufficient demand rather than overinvestment—a perhaps not altogether surprising view from one whose commodities punts had turned out so disastrously.58 October of that year would see the publication of his first, and second-to-last, major tome: the two-volume Treatise on Money.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition
by Kindleberger, Charles P. and Robert Z., Aliber
Published 9 Aug 2011

If the speculator bought a share at 100 francs, again with 10 francs down and 90 francs in reports, and the share price fell to 90 francs, the speculator had to produce 9 more francs to comply with the 10 percent margin requirement. If the speculator had been fully leveraged earlier and did not meet the margin call, the broker sold the speculator’s stocks. If the price dropped below 90 francs, the broker, bank, or individual that had made the loan lost money. The stock of the Union Générale went from 1250 francs in March 1881 to a peak of 3040 on 14 December as the mania gathered speed. Thereafter a period of distress followed with quotations at 2950 francs on 10 January 1882, and 2800 francs on 16 January.

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated
by Gautam Baid
Published 1 Jun 2020

Seth Klarman has spoken in the past about the benefit of this source of information: From our experience, much long-oriented analysis is simplistic, highly optimistic, and sloppy. Short-sellers, by going against the long-term tide of economic growth and the short-term swells of public opinion and margins calls, are forced to be crackerjack analysts. Their work product is usually top-notch and needs to be. Short-sellers shouldn’t be reviled or banned; most should be celebrated and encouraged. They are the policemen of the financial markets, identifying frauds and cautioning against bubbles. In effect, they protect the unsophisticated from predatory schemes that regulators and enforcement agencies don’t seem able to prevent.16 Simplicity as a Way of Life It is very simple to be happy, but it is very difficult to be simple.

Alpha Trader
by Brent Donnelly
Published 11 May 2021

Then three days later Jerry’s yelling across the floor: “Oh boy! I’m short a lot of this one! This is not good!” A stock went from $2 to $4, and he got short 14,000 shares. A few minutes later it was $6, then $8. His $50,000 account was suddenly worth minus $6,000. The manager of the trading floor issued a margin call and forced Jerry to buy back all the shares at an average of $8.20. The stock closed the day at $3.45. Jerry was such an obviously talented kid that even after that incident, a different trader seeded him another $50,000. Four months later, guess what… The same thing happened. Jerry had amazing natural skill as a trader but it didn’t matter.

Circle of Greed: The Spectacular Rise and Fall of the Lawyer Who Brought Corporate America to Its Knees
by Patrick Dillon and Carl M. Cannon
Published 2 Mar 2010

.* In any event, the Justice Department’s blocking of a merger with Sprint caused trauma at both Sprint and WorldCom headquarters. In the case of WorldCom, the damage was permanent. WorldCom’s stock price began a steady decline from its $60-per-share range in 1997 to $30-something per share by the summer of 2000. In September of that year Ebbers borrowed $50 million from the company to cover his own margin calls on debts he owed to purchase shares of his company’s now-depressed stock. On October 26, 2000, WorldCom announced that it was writing off $685 million, sending its stock plummeting below $8 per share. That $685 million, it turns out, was the least of the company’s problems. Under pressure from Ebbers to “hit the numbers,” WorldCom CFO Scott Sullivan directed three midlevel accounting managers to cover up a projected first-quarter 2001 shortfall of $771 million by shifting operating expenses to capital expenditure accounts.

The Price of Time: The Real Story of Interest
by Edward Chancellor
Published 15 Aug 2022

Spreads on corporate debt cracked wide open. Municipal bonds experienced ‘their worst day in modern history’.3 Bond funds were priced at large discounts to their underlying value. Emerging market currencies and bonds dived. A number of hedge funds (‘vol shops’) that had bet on volatility remaining low couldn’t meet their margin calls and went bust. When financial markets fall apart investors normally seek safety in government bonds. At such moments, bond yields decline and Treasury prices climb. But now the yield on 10-year Treasuries started to rise. Brokers gazed at blank screens that showed no trades in what was, supposedly, the world’s deepest and most liquid financial market.

Barbarians at the Gate: The Fall of RJR Nabisco
by Bryan Burrough and John Helyar
Published 1 Jan 1990

His father, Raymond Kravis, was the son of an English tailor who emigrated to Atlantic City at the turn of the century. After working in a Pennsylvania coal mine, Ray Kravis moved to the Southwest, where he became wealthy in the roaring stock market of the 1920s. He lost everything in the crash of 1929, and, having borrowed heavily on margin, worked for years afterward to pay off his margin calls. After the war, he began a second career as a petroleum engineer, estimating oil reserves for Wall Street firms such as Goldman Sachs and managing to amass a second fortune. When Henry was thirteen Ray and Bessie Kravis sent him off to follow his older brother, George, to a boarding school named Eaglebrook in the hills of northwest Massachusetts.

Lords of Finance: The Bankers Who Broke the World
by Liaquat Ahamed
Published 22 Jan 2009

Rumors circulated that the bankers felt sufficiently confident to begin disposing of the stocks they had acquired on Thursday at a small profit. But late on Saturday, the market began to fall again. The “second hurricane of liquidation” roared in on Monday, October 28—Black Monday. It came from every direction: demoralized individual investors, pool operators liquidating, Europeans throwing in the towel, speculators forced to sell by margin calls, banks dumping collateral. Investors, who had originally bought stocks only because they saw prices rising, now sold them because they saw prices falling. By the end of the day, 9 million shares had changed hands and the Dow was down 40 points, roughly 14 percent, the largest percentage fall in a single day in the market’s history—$14 billion wiped off the value of U.S. stocks.

Reminiscences of a Stock Operator
by Edwin Lefèvre and William J. O'Neil
Published 14 May 1923

Wheeler, said to have a “genial disposition,” preferred trading on his own to dealing on behalf of customers, primarily on the short side of the market. He got in trouble in 1895 when he shorted a declining market heavily and then saw stocks rebound rapidly before he could cover. His resources “became practically exhausted,” according to the Times, so he had to borrow money from another dealer and a relative. When he couldn’t pay a margin call, the fragility of his position was exposed to his clients—and they shunned his firm. He was forced to close the broker age in April 1896. Wheeler was one of the early corporate backers of the New York Giants, the baseball team that later moved to San Francisco. The Times reported that “it was his habit to take his office force and enough others to make a good party to every game at the Polo Grounds.”

Building Secure and Reliable Systems: Best Practices for Designing, Implementing, and Maintaining Systems
by Heather Adkins , Betsy Beyer , Paul Blankinship , Ana Oprea , Piotr Lewandowski and Adam Stubblefield
Published 29 Mar 2020

By adding load shedding and throttling, you further increase the quality of output from the experiment. Oversubscribe but prevent complacency Quota assigned to customers but not consumed is a waste of resources. Therefore, in the interest of maximizing resource utilization, many services oversubscribe resources by some sane margin. A margin call on resources may happen at any time. A resilient system tracks priorities so it can release lower-priority resources to fulfill demand for higher-priority resources. However, you should validate whether the system can actually release those resources reliably, and in an acceptable amount of time.

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned?
by Steve Keen
Published 21 Sep 2011

Shares had doubled in value since 1926, and any investor who had ‘followed the herd’ and bought and sold shares simply on the basis of their popularity would have increased his wealth tenfold in those three years. Stock prices had risen so much that dividend yields were below bond yields. Brokers’ loans – effectively margin call lending – were at their highest level in history. All these observations supported the notion that the market ‘seems too high and to warrant a major bear movement’ (Fisher 1929). However, he then gave four reasons why the 1929 valuations were sensible: changed expectations of future earnings, reinvestment of dividends, a change in risk premiums, and a change in the way in which future income is discounted.

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves
by Andrew Ross Sorkin
Published 15 Oct 2009

Rules in the United Kingdom and Japan forced Lehman’s brokerage units there to shut down completely, freezing billions of dollars of assets held by investors not just abroad, but perhaps more important, here in the United States. Many hedge funds were suddenly left short of cash, forcing them to sell assets to meet margin calls. That pushed down asset prices, which only sparked more selling as the cycle fed on itself. Washington was totally unprepared for these secondary effects, as policy makers had seemingly neglected to consider the international impact of their actions—an oversight that offers a strong argument for more effective global coordination of financial regulations.

The Bin Ladens: An Arabian Family in the American Century
by Steve Coll
Published 29 Mar 2009

Shafiq remained a quirky character; his hair sometimes grew out in long tufts and his hotel rooms, according to one visitor, could be as messy as a teenager’s. Yet he had earned a bachelor’s degree in business from the University of San Francisco in 1981, and he was one of the few Bin Laden brothers who could hold his own in the technical vernacular of finance and investing, a sometimes mysterious realm of puts and calls, options and warrants, margin calls and vesting dates. In time, according to a business partner, Bakr chaired an investment committee consisting of five Bin Laden brothers, and Shafiq became the committee’s chief manager.10 For years the Bin Ladens had invested on the obscure margins of the United States—the odd strip mall or apartment complex, or blue chip stocks that were very widely held.

The Power Makers
by Maury Klein
Published 26 May 2008

When the smoke cleared, Middle West emerged with no debt and hardly any fixed charges.60 Corp made its debut on October 5,1929, eighteen days before the opening of the horror show that became known as the Great Crash. Not even the market’s fall shook Insull’s strength and standing. Amid the debris of the next few weeks he rescued employees burned by margin calls on their stocks, presided over the opening of Chicago’s magnificent new Civic Opera House, and participated in the construction of a new natural gas pipeline from the Texas panhandle to Chicago. As the new year opened, he helped Chicago avoid bankruptcy and bailed out its floundering transportation system.

The First Tycoon
by T.J. Stiles
Published 14 Aug 2009

Most likely he lacked a clear majority of the stock without the support of friends and allies, including Augustus Schell and John Morrissey At his urging, they had purchased large quantities; as the price fell, one of them was called “as terrified as a man can be.” In a rare move, Vanderbilt put up a reported $2.5 million to meet their margin calls. Still more remarkably, he went in person to Wall Street to soothe the markets and sustain the price of Central.55 “I knew it, I knew it,” an old broker said on the floor of the stock exchange, “the old rat (Vanderbilt) never forgets his friends.” The Commodore very visibly set himself up at the Bank of New York at the corner of Wall and William streets, where his lieutenant James Banker provided him with “comfortable offices, upholstered as a Fifth Avenue drawing room,” according to the New York Sun.