Markets Relax Merrily on a Powerful Time Bomb

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Magnitude unknown but huge. Brokerages push it to new heights.

Stock and bond market leverage is everywhere. Some of it is transparent, such as NYSE margin debt which was $539 billion as of the June report. But the hottest form of stock and bond market leverage is opaque, offered by financial firms that usually don’t disclose the totals: securities-based loans (SBLs) — or “shadow margin” because no one knows how much of it there is. But it’s a lot. And it’s booming.

These loans can be used for anything – pay for tuition, fix up that kitchen, or fund a vacation. The money is spent, the loan remains. When security prices fall, the problems begin.

Finra, the regulator for brokerages, doesn’t track this shadow margin, nor does the SEC. Both, however, have been warning about the risks. No one knows the overall amount of this shadow margin, but some details have been reported:

  • Morgan Stanley had $36 billion of these loans on its balance sheet as of the end of 2016, up 26% from 2016, and more than twice the amount in 2013.
  • Bank of America Merrill Lynch had $40 billion in SBLs on the balance sheet at the end of 2016, up 140% from 2010;
  • UBS and Wells Fargo “also have made billions in such loans, people familiar with those banks” told the Wall Street Journal. Raymond James, Stifel Nicolaus… they’re all doing it.
  • Fidelity used to fund its own SBLs for its clients, but three years ago partnered with US Bancorp.
  • Even the little ones are trying to get their slice of the pie: In April, robo-advisory startup Wealthfront, with less than $6 billion, announced that it would offer SBLs to its clients.

And now Goldman Sachs, which has been offering SBLs to its 12,000 super-wealthy clients through its Private Banking unit — accounting “for more than half of the unit’s $29 billion in loans outstanding,” according to the Wall Street Journal — announced on Thursday that this wasn’t enough and that it is partnering with Fidelity Investments to spread these loans far and wide.




This effort to lever up investors’ portfolios occurs after an eight-year bull run, with stock indices hopping from one all-time high to the next even as the economy has been growing at a dreadfully slow pace and even as corporate earnings have mostly gone nowhere for years.

Since July 2012, the trailing 12-month “adjusted” earnings-per-share of the companies in the S&P 500 rose just 12% in total. Over the same period, the S&P 500 Index itself soared 80%.

These adjusted earnings are now back where they’d been on March 2014. Three years of earnings stagnation. However, over the same three-plus years, the S&P 500 index has soared 33%.

As earnings have stagnated while stock prices have jumped, the P/E ratio for the S&P 500 companies has soared from 14.8 at the beginning of 2012 to 24.8 now. And bonds have seen an enormous bull run too.

It is at these precariously high levels of the markets that brokerages go into hyper-drive to push “shadow margin” on their clients, using inflated securities as collateral. If markets decline, brokerages start making margin calls, and investors will be forced to sell securities into a falling market at the worst possible time, or else the brokerage will liquidate their portfolios. Investors could lose every dime in their accounts and might be personally responsible for the remainder of the debt.

After eight years of bull market, no one is thinking about risk anymore.

Goldman Sachs will offer these SBLs to about six million accounts managed by 3,850 brokers and wealth managers that use Fidelity’s technology, though they will not be available to Fidelity’s own retail brokerage or wealth-management clients. The Journal:

The centerpiece of the action is a new online platform, called GS Select, that will offer loans of between $75,000 and $25 million, with borrowers’ portfolios of stocks and bonds serving as collateral, the companies said Thursday. Goldman’s software can analyze the holdings and make a decision within a day about how much to lend and on what terms.

Andrew Kaiser, head of Goldman Sachs Private Banking, told The Journal that this partnership with Fidelity is just the first of several:

Small wealth advisers and independent broker-dealers are good fits because they aren’t already connected to a bank, he said.

What’s in it for brokerages?

SBLs are a source of revenue that replaces some of the revenue brokerages lost as they’re moving away from charging commission on trades to charging fees on assets under management. When clients need money, they’d normally sell some securities and withdraw the proceeds from the account. This would lower the asset balance of the account, and therefore the fees for the broker. So brokerages encourage clients to leave their assets intact and add a big loan to the account. This keeps the asset-based fee intact, and the brokerage also earns interest income on the loans.

Everyone at the brokerage benefits from the deal. The Wall Street Journal:

Several Merrill Lynch brokers said they have asked longstanding clients to open securities-backed lines of credit to help them hit bonus hurdles, assuring that clients wouldn’t need to use it or pay any fees for opening it. Merrill brokers receive ongoing payments for getting clients to tap credit lines, and those loan balances contribute to year-end bonus calculations, people familiar with matter said.

Brokerage executives have said the longer a client has one of these loans tied to their account, the more likely they are to use it.

“We were dramatically pushed to put these on all of our client accounts,” said Steven Dudash, a former Merrill Lynch broker who has been managing his own investment-advisory firm since 2014. “Whenever you’re product-pushing, it’s not in the client’s best interest.”

What’s in it for their clients?

Clients get to pile on low-interest-rate debt and huge risks, including the chance of losing more than all the assets in the account if push comes to shove in the markets and their collateral value gets crushed. They will have to sell into a crash at the worst possible time, and even after they sold all their assets, they might still owe the broker, and the broker will go after them for the remaining debt. The Journal explains:

These arrangements are structured to benefit the brokerage, with the client shouldering virtually all the risk, critics say. And these loan products are often pushed without regard to whether clients even need them, they add.

There is another side effect to this margin debt, whether it is out in the open, like NYSE margin debt, or the shadow margin of those SBLs: When markets decline and forced selling kicks in, it causes a further decline in the market, which causes even more forced selling. Leverage has been the great accelerator on the way up over the past eight years. And it’s also the great accelerator on the way down.

“Covenant-lite” loans – risky instruments issued by junk-rated borrowers, with few protections for creditors – set an all-time record at the end of the second quarter. Read…  Risk has been Abolished, According to Institutional Investors




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  59 comments for “Markets Relax Merrily on a Powerful Time Bomb

  1. Dan
    Jul 27, 2017 at 2:26 pm

    C,mon Wolf.

    It’s only excessive printed paper.

    Lighten up a bit….sarc.

  2. Gregg Armstrong
    Jul 27, 2017 at 2:26 pm

    None of the traditional asset indices mean anything anymore. The only thing that matters is central bank money printing given to the monied classes. That’s all that matters when considering the price of any asset. Better look out below if and when the money printing stops.

  3. IdahoPotato
    Jul 27, 2017 at 2:43 pm

    So how does this work? Fidelity will offer me a loan through Goldman to use my securities as collateral for trades?

    My Indian brokerage firm has been on my case, pushing “Margin Plus” accounts (they even give you extra free trades for doing that). I have no idea what that entails. But I do know that the contagion is worldwide and so are the repercussions.

    • Jul 27, 2017 at 4:48 pm

      This Goldman SBL will not be available to you if you’re a Fidelity client. It will be available only to clients of wealth managers and brokers that use the Fidelity system.

      However, my understanding is that Fidelity offers its own version of SBLs to its own clients via US Bancorp.

  4. beadblonde
    Jul 27, 2017 at 2:45 pm

    Fed’s secret sauce. There’s no political penalty, just a few party poopers in Congress. So any 2% decline and Bullard pops up to reaffirm the put.

  5. IdahoPotato
    Jul 27, 2017 at 2:45 pm

    I think I get it. Goldman will lend me money to use my securities through Fidelity as a collateral to buy my cat a gold-plated diamond encrusted collar.

    • TJ Martin
      Jul 27, 2017 at 3:47 pm

      Bingo ! You hit the nail right on the head ! Rob Peter – to pay Paul – to pay off Stephen’s loans that he borrowed from James – to buy a hamburger today – repaying Mark on Tuesday for the money he lent them all last week .

      Ahhh the joys when the inmates are running the asylum .

  6. Boiled Coffee
    Jul 27, 2017 at 2:47 pm

    Just searching “NYSE margin debt” and “NYSE investor credit” on Twitter reveals a wealth of charts that are rather shocking, tracking margin debt against SPX. The only truly convincing one that I have seen though is one that looks at YoY margin debt “acceleration” that is published on SeekingAlpha. What that shows is that there is a lot of room left for real euphoria to set in before there is any substantial correction. The bears haven’t fully capitulated yet. I have a feeling that we are going to be seeing James Glassman back out there claiming he’s been proved right all along before this thing takes a turn.

  7. Dan Romig
    Jul 27, 2017 at 2:50 pm

    “So the brokerages encourage clients to leave their assets intact and add a big loan to their account.”

    What could go wrong? Howard Marks has a few things to say to people who may do this:
    https://www.oaktreecapital.com/insights/howard-marks-memos

    To my simple view, if you’re worth a few million bucks, and want some cash, it would be wise to sell some stocks and/or bonds to get the money. Granted, loans are at low interest, but it seems pretty greedy (some may opine smart) to leverage your portfolio in this manner.

    • beadblonde
      Jul 27, 2017 at 3:12 pm

      At one time you could get in trouble if there were no fools to buy. But Bernanke solved that technical hurdle (and Draghi and others are applying the technique). I believe he even said that it was merely a matter of will, not method. So just choose the threshold: how rich do you have to be to merit a bailout? The unwashed are swept away, the politicians step aside, and everything goes on as before, nothing to see here. What has surprised me is that there is no political downside to print-and-buy. A few squawks from Wall Street and Congress simply folds.

    • JB
      Jul 27, 2017 at 9:24 pm

      It may lessen your tax liability if you borrow against your portfolio versus selling (capital gains) .

  8. cdr
    Jul 27, 2017 at 3:01 pm

    Securities based loans – loans collateralized by brokerage account balances – but still charging interest for the use of one’s own money — brilliant!

    As I wrote in an earlier post – The Fed used QE to boost asset values. The Fed assumed the wealth effect would cause inflation via spending because people made some money. The reality is that asset managers are loathe to allow customers to cash out anything because this reduces their fee based income, which is based on the value of assets under management. Rising asset prices increases the income of asset managers who just sit there and do nothing except convince you to never sell anything. Those who churn make additional fees. The financial media assists by never encouraging the use of profits for spending. Taking profits is rarely mentioned and never encouraged. It’s more of a curiosity.

    Asset managers have a bazillion excuses to chase you away from selling anything, no matter how much your balance is up to due Fed QE. If the value falls, a different set of excuses kicks in. Any sale reduces the income of fee based asset managers so the goal is to make you never sell anything.

    Hence, QE never works and never will because the Fed is at 100% odds with those who make money managing the investments of others. The Fed wants investor to spend profits. Money managers prevent it extremely well. Doing so would cost them money.

    Selling someone to borrow against their own assets for spending on whatever — brilliant. Incomes for asset managers are preserved and increased by a cut on the vig on THE INVESTOR’S OWN MONEY.

    Well, margin is margin. Eventually, someone will sell to pay off the loan.

    Kudos to the sales force for the asset managers. Amazing work.

    • cdr
      Jul 27, 2017 at 3:10 pm

      “Oh No”, says the asset manager. “You can’t default on a loan where you borrowed your own money. Think of your credit rating!! Don’t sell whatever you do. Pay it back under these new terms. If you sell anything the rating agencies might see it as default and then you’ll be sorry”

      Suckertown, USA.

    • cdr
      Jul 27, 2017 at 3:21 pm

      Note to Fed: Normalized interest rates – where people spend interest income and companies borrow for real investment, not paper flipping, –
      prevent what I just described AND create spending based inflation. Bank CDs and fixed income mutual funds prevent obstructions to the economy caused by fee oriented asset managers. Interest income earned = interest income spent. Investment not based on paper flipping creates real jobs.

      Food for thought.

    • IdahoPotato
      Jul 27, 2017 at 5:05 pm

      Fortunately, there are an increasing number of smart investors who bypass money managers entirely by managing their own accounts through individual stocks or low-cost ETFs. Every day we see these panicked hedge fund managers and investment professionals railing against “passive investing”.

    • Felix_47
      Jul 27, 2017 at 11:52 pm

      Here in Cali you have to see a market drop of 30% or so before it would have been worth selling. I am guessing 30%. This was pointed out by the commenter above. So it really is not a decision about whether the market goes up or down but whether the market will drop 30% or more. Long term reversion to the mean tells us that gains in the next decade might not be so good as the last…….however many said that before the last bull market. The big change in the last 15 years has been the Fed. Who would have thought that the Fed would end up controlling and driving the market 20 years ago? This is a whole new paradigm and we are going to have to see how it ends to learn anything from it.

  9. night-train
    Jul 27, 2017 at 3:06 pm

    I just saw a realtor commercial that pushes the idea that the buyer of the house is the lucky lottery winner and the other interested parties are pitiful losers. Almost a decade since the last reckoning. Memories are short.

    Eight year bull market run. “There is no where to go but up from here” he said as he stepped out into the abyss.

    • TJ Martin
      Jul 27, 2017 at 3:54 pm

      Well here in the Metro Denver area over the last three weeks there’s been several ads from mortgage and refinancing companies suddenly popping up offering Zero Down ,100% of the appraised value ( up to 120% on a refinance ) of the home , at competitive interest rates , no credit check required . With at least two of them specifically targeting Vets .

      As for ” …. nowhere to go but up … ” Seems to me thats been the precursor for every previous financial crisis .. ahhh .. the misguided air of invincibility .

    • polecat
      Jul 27, 2017 at 5:53 pm

      Is there another universe that I can hitch a ride on … as this one (so far) appears to defy the laws of entropy !

      • GSH
        Jul 27, 2017 at 11:25 pm

        Printing money increases entropy. No problem with the laws of entropy.

  10. raxadian
    Jul 27, 2017 at 3:14 pm

    It may be eight years of bull market but the bull is about to be killed by the Torero/Matador and then eaten at any moment before next year. Because let’s face it, when the even the FED starts with warnings, things are going to go from bull to you know that word.

    Why before next year? Because raised interest rates will affect the whole economy. The interest rates should never ever had fallen down from 1% but the damage is done already. Now the party is about to end and you are going to find out it turned way expensier than expected because a lot of “dishes” were broken.

    • Ant Naples
      Jul 27, 2017 at 6:55 pm

      Do you think it’ll be worse than 2008?

      • raxadian
        Jul 27, 2017 at 10:38 pm

        If they do the whole “Too big to fall” stuff again? Probably. Not to mention that the FED can’t do negative interest rates, even if they wanted to, and more than one bubble will crash this time. The Housing Bubble 2, plus Carmagedon, plus Retail Sinking plus… you get the idea… is not gonna be a perfect storm but if you pile the effects of three to four broken bubbles together is gonna be quite a nightmare.

        Of course the government could do a plan to deal with Carmagedon even if it just means more debt. Yet another cash for chunkers plans will give the car bubble a year or two more at most.

        They really can’t do much about the housing bubble because a lot of people will call foul if they do not let prices finally fall.

        And the retail war means consumers get lower prices, although they will probably go after Amazon for having a monopoly.

        What’s an ecomic liberal? A guy that cries to have a free market yet begs for government help when things go wrong.

        Do you guys remember when taxes were used to provide public services and give a good quality public education and health,instead of saving multimillion dollar corporations?

        To make things worse it seems the more money you have the less taxes you pay in the US.

      • economicminor
        Jul 28, 2017 at 9:54 am

        I wouldn’t guarantee that Congress would pass a bail out this time around. The Senate I don’t think would go along with another bail out. House might but even that is a big question with the Freedom Caucus’ leader as Speaker. But who knows when the SHTF what they’ll do.

        I still think there is a possibility that they will fight over raising the debt ceiling. The Repub leadership and the Administration’s plans for their big tax cuts for their friends just went up in smoke with the failure to repeal OC.

  11. Petunia
    Jul 27, 2017 at 3:18 pm

    This reminds me, when I worked on Wall St. I had access to the list of the credit lines of VIP clients, some recognizable film stars were on it. More interesting to me were the names of the managing directors of the firm. Most of these guys took home a base pay of around 200K, but they all had minimum credit lines of 500K. These were the golden handcuffs you hear about.

  12. Anon
    Jul 27, 2017 at 4:17 pm

    Once upon a time, one could borrow a modest amount of money on margin at a rate close to the Fed funds rate. Since the onset of the Great Recession, the spread has widened out a lot and it no longer makes sense to buy long term bonds on margin. The interest on the margin loan would far exceed the interest on the long term bond at most brokerage firms.

    If you are thinking of moving your account to another firm, shop around for new account bonuses. Check the commission rates, not just on stocks, but also on options and option exercises and ask about sweep vehicles. Some firms may pay you next to nothing on credit balances; others will sweep the money into a higher yielding money market fund.

    Stay away from margin and securities backed loans, from “wealth advisers” and from anything that comes with a prospectus (unless you have had lots of practice reading such documents).

  13. mean chicken
    Jul 27, 2017 at 4:49 pm

    VIX tested 8, that’s definitely going to produce a response.

  14. Karl
    Jul 27, 2017 at 5:59 pm

    My old friend Schwab offers a PAL (Pledged Asset Line) through its bank. Wonder if I can hook up an ApplePay account to it? Shopping anyone?

  15. Garland
    Jul 27, 2017 at 10:17 pm

    There is no risk, and the low vix proves it. Even if stocks crash, all you need do is wait a bit until the FED pumps in enough money to jack them back up. Hasn’t anyone noticed that the dot com crash and 2009 were great opportunities because the FED was there?

    I doubt we’ll ever be given such gains again, and the markets will likely grind higher for several more years.

    I don’t understand all the doubt here, inflated assets were the FED’s goal, so it stands to reason that any weakness will be met with more QE or cuts to negative.

    This notion that we’ll be fortunate to have another crash to profit from is fantasy.

    • Jul 27, 2017 at 11:08 pm

      The Fed is very much worried about inflated asset prices. It shows up in a lot of their communications. They don’t want any more asset price inflation. They’re worried about “financial stability.” That’s what the unwind of QE is all about. Unless there’s a huge problem, the unwind starts this year. Within 12 months of kick-off, they’ll shed $50 billion a month (=$600 billion a year from the balance sheet).

      I agree, there may not be another huge crash for a while. But given the QE unwind, there could very well be slow bumpy grind lower that will last for many years as the wealth effect gets unwound.

      • Alessio
        Jul 28, 2017 at 11:35 am

        Ahahah
        Slow bumpy grind
        You don’t believe your own words
        It’s gonna be hell
        It’s gonna be fast
        They are going to shout down stock exchanges around the globe

      • cdr
        Jul 29, 2017 at 9:48 am

        “there could very well be slow bumpy grind lower that will last for many years as the wealth effect gets unwound.”

        Somewhat disagree. I used to believe in the wealth effect. The concept makes intuitive sense. It feels right.

        Today, I believe it is bogus and just another sales pitch used to motivate central banks to print money and lower rates. It’s sold as a transmission mechanism to take printed money and put in into the real economy.

        It’s a fake theory. My long post above explains why in more detail.

        While feeling wealthy might make someone more likely to spend more out of regular savings, and some people manage their on brokerage accounts, the entire financial services industry is geared toward letting profits run and not taking profits unless to reinvest in something new. Lip service is the most made toward cashing profits out for spending purposes. It’s a curiosity.

        Actually wanting to cash some funds out is the surest way to see a modern day equivalent of Fred Sanford clutching his heart and telling his departed wife he’ll be right there in a moment – acting display courtesy of your financial advisor.

        Don’t believe me? Here’s a project: Find a couple of popular sites that tell you how to take profits wisely for the purpose of living a better life with your profits. Not a boilerplate “4% a year out for retirement” or some other canned pearl. Preferably, it must be associated with a major financial house as a customer service, not a posting or two on a fringe WordPress site or an obscure corner on a major site that is there only for disclaimer purposes.

        The bumpy ride will be from the screams of financial advisors who detest the idea of their incomes falling because the market is going down a little and fees are falling in tandem.

        Seriously – show me, courtesy of a major web site or two, how to live a good life courtesy of my profits from the wealth effect. What kind of withdrawal strategies do the brokerages promote for profits, not retirement.

        • Jul 29, 2017 at 10:16 am

          “Wealth effect” as a result of QE, according to Bernanke, in two steps: 1. assets holders get wealthier, and those who hold the most assets get wealthiest. 2. Some of them will spend a little of this money in the real economy (buy yachts, for example), and thus stimulate the economy.

          Step 1 worked great. Step 2 failed.

          The unwind of QE would therefore only unwind Step 1.

        • cdr
          Jul 29, 2017 at 10:41 am

          wolf,

          You say ‘thee’ I say ‘thou’. We’re basically on the same page. I’m just a little more cynical. Maybe a lot more.

  16. Bob Gustavson
    Jul 27, 2017 at 10:47 pm

    There must be some extremely rich people out there that made a lot of money off leverage. If you leveraged out to the max to buy stocks in 2009, then kept increasing the leverage each year as the gains accrued, you’d have many millions by now. You’d be the luckiest and richest moron in town.

    • Jul 27, 2017 at 11:00 pm

      That’s exactly what leverage does on the way up. There is an enormous amount of leverage in the system precisely for that reason. But leverage gets to be a very dangerous thing at a certain level – see the Financial Crisis.

      • Alessio
        Jul 28, 2017 at 11:36 am

        Margin calls in 1929

      • Niko
        Jul 28, 2017 at 9:34 pm

        Wolf,

        You are correct but the smart money on Wall Street has already left the building, you mentioned it a few months ago when you addressed the new residential real estate landlords. They bought for pennies on the dollar and sold it as REIT to some (a bunch) poor unsuspecting sap.

    • Off The Street
      Jul 28, 2017 at 10:08 am

      In a prior era, there were the old reliable bank trust departments to pile in at the top and carry your bags all the way down. They and their clients had the bag holder blues. Now levered folk can have the same opportunities to dance to that tune.

      Who are the leading indicator investors that may be followed to see when the bags are set to decline? Or are all of those hidden from public view?

  17. Coaster Noster
    Jul 27, 2017 at 11:41 pm

    So, say your account has $10million in bonds and equities inside.

    What is the APR of the loan you take out?

    If it is less hassle to buy real estate with “all cash” provided by the GS and Fidelity type-loans, I see a housing market where the average guy is price out by the “all cash” buyers. Traditional mortgages are a nightmare of regulations and paperwork. And then, your loan may be sold to Wells Fargo, regardless of where you shopped for a mortgage. Just happened to me.

  18. Wilbur58
    Jul 28, 2017 at 9:13 am

    I noticed something ironic about this era of worthless ceo’s who damage their companies for short-term personal benefit:

    Jeff Bezos has become the world’s richest guy.

    Yes, I’m aware of Amazon’s questionable profitability. However, their cloud storage service is highly profitable. And putting Amazon’s financials aside, he’s the one guy who’s always thinking longterm.

    You’d think these other ceo’s might pause and think about that for a moment. But, nah.

    • Wilbur58
      Jul 28, 2017 at 9:15 am

      Other other tangent:

      I’m not a fan of Amazon’s monopolistic behavior and treatment of labor at all. I’d like to see the company fail. The only point I was making was about short-term vs. long-term.

  19. economicminor
    Jul 28, 2017 at 10:11 am

    Leverage, leverage, leverage… every where, every thing is leveraged… And leverage is just a fancy name for debt… and debt has this thing about having to be repaid.. All the while average revenues are not going up.

    Anyone who actually uses their brain should be able to see where this is heading. YET it appears that the primitive lizard part is the only part that functions in those in charge of the asylum.

    Slow melt down? Not a chance! When this turns, the same lizard part will run like hell is chasing them and it probably will be.

    This is going to be one hell of a train wreck! And only those who aren’t on the train will survive..

  20. chris Hauser
    Jul 28, 2017 at 11:26 am

    i am curious as to how much margin is bet on the fangs, or the shares with highest daily volume…….

  21. ttrrrrrdd
    Jul 28, 2017 at 12:43 pm

    Is USB safe to bank with, how much SBL they have?

    • Jul 28, 2017 at 12:53 pm

      If your accounts with USB are in the US and are FDIC insured, and if you follow the FDIC rules, you’re deposits are fine.

    • Jul 28, 2017 at 12:54 pm

      Oh, and it’s not the banks that are at risk with these SBLs. It’s their clients.

      • Trrrd
        Jul 28, 2017 at 11:00 pm

        Wolf, do you trust FDIC

        • Jul 28, 2017 at 11:49 pm

          Yes.

        • Jul 29, 2017 at 12:09 am

          I had deposits at three banks that collapsed, including MBank in Texas during the oil bust of the 1980s and a WaMu CD during the Financial Crisis. Never missed a beat. The FDIC took over the bank on Friday evening. Monday morning, the bank’s name on the account had changed. And that was it.

          Even during the big bad Financial Crisis, no FDIC insured depositor lost a dime.

        • Trd
          Jul 29, 2017 at 10:33 am

          If you research more, you will find out that FDIC doesn’t have that much funds if big banks goes under. That is IF it happens.

        • Jul 29, 2017 at 12:30 pm

          FDIC has a credit line with the Treasury that it can use if it runs out of funds. And the biggest banks are going to get bailed out by the Fed if they collapse, as we have seen. So in that respect, the FDIC’s insurance is as good as US Treasuries.

        • Hg
          Jul 29, 2017 at 12:23 pm

          FDIC handled the Financial Crisis with aplomb. 50,000,000,000 a month for 5 years was all it took and everything was back to normal, no one hardly noticed.

        • Trd
          Jul 29, 2017 at 1:33 pm

          I guess More info is needed on fdic

        • Jul 29, 2017 at 2:09 pm

          To stay above the scaremongering, if you need info on how the FDIC works, what its rules are, what is covered, what is not covered, and to what extent accounts are covered, go to the FDIC website:

          https://www.fdic.gov/deposit/deposits/

  22. J Bank
    Jul 28, 2017 at 4:17 pm

    Everyone here is a doom and gloomer, and NO ONE knows what these are. As someone who writes these and other loans for a living, these aren’t anything to worry about.

    The vast majority of these are lines of credit with very low balances, most are at 0. It’s just in case an great opportunity comes up.

    Interest rates are tied to Prime or LIBOR or any other index, and they start between 1%-5%. This is perfect for real estate investors waiting for their next deal but don’t want their money to make zero in the interim. Why make 0% when you can make 4-5% in fixed income and borrow at 2%?

    There are some closed end loans out there, but the bank doesn’t like a fixed product against a portfolio like this. Since the asset value is fairly volatile if secured against equities, the bank would rather have a line of credit they can margin call if needed.

    But it’s okay everyone. Go back to screaming about how the sky is falling while the rich get richer with another tool you don’t understand.

    • Wilbur58
      Jul 28, 2017 at 4:40 pm

      J Bank,

      Every single significant financial institution in America was insolvent in 2007.

      Next time you make a comment like that, you ought to show some humility and be grateful we’re not living in an era with a guillotine.

    • Jul 28, 2017 at 5:12 pm

      That was very entertaining – hilarious actually. Thank you for the Friday humor.

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