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I was reading a variety of different articles last night and was brought to a link (included below) which shows all of the outstanding margin debt in the US stock market.  As of March, margin debt hit an all time high of $476 Billion.  Another statistic that isn’t reported is all of the pledged loans that occur at the large brokerage firms.  This is regulated under a different section called Reg U (Reg T is for margin) and isn’t reported the same way so we can’t see the amount of credit that’s been extended under these accounts.  In my experience at Morgan Stanley, Credit Suisse and UBS, they “pushed” advisors to having clients establish pledged loans because the rates were lower than margin rates the firms were offering (on purpose I imagine) and according to various studies they were citing, allowed firms and advisors greater “wallet share” as they called it.  Meaning, clients gave you more assets and advisors/firms thus would make more money.  The only thing these loans can’t be used for is to buy securities.  You can buy real estate, invest in private companies, startups, fund your own company, etc.  It’s still leverage and the effect is still the same if there’s a decrease in your account past a certain point and you’ll have to deposit more money or have a forced liquidation similar to a margin call.

Given the high level of margin and unknown amount of pledged accounts, we could see further downward pressure on markets due to forced selling if we see a significant market correction.

http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=tables&key=50&category=8

Author: Jared Toren

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