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Archegos: Wall Street Was Effectively Giving 85 Percent Margin Loans on Concentrated Stock Positions – Thwarting the Fed’s Reg T and Its Own Margin Rules

Courtesy of Pam Martens

BubblesThe short version on what the collapse of the Archegos Capital Management hedge fund signifies is that it was one more in a long series of Wall Street’s maniacal wealth extraction schemes for the one percent that blew up in its face.

Let’s start with press reports that major Wall Street firms were making 85 percent margin loans to purchase stocks against 15 percent cash collateral put up by Archegos. The Federal Reserve’s Regulation T (Reg T) is codified in 12 CFR § 220.12 and spells out margin requirements on stock trades as follows:

“50 percent of the current market value of the security or the percentage set by the regulatory authority where the trade occurs, whichever is greater.”

Under the seeming law of the land, broker dealers on Wall Street could not have loaned Archegos more than 50 percent to make its stock purchases. But to get around this, the banks did not open a margin account for Archegos. According to the press reports, the banks instead structured derivative contracts where they loaned 85 percent of the money to Archegos to make the trades while, technically, retaining ownership of the stock themselves.

By not following federal regulatory rules for margin accounts and stock trading, the Wall Street firms fell into a number of traps.

Every prudent brokerage firm on Wall Street has far stiffer requirements than 50 percent margin if the customer is loading up on the same stock. That’s because the customer is concentrating his risk in one name (that could receive a negative credit rating or other negative news) as well as concentrating his risk that he will be able to exit that position without driving down the share price.


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