Margin Debt, Backed by Enron-Déjà-Vu Steinhoff Shares, Hits BofA, Citi, HSBC, Goldman, BNP

“Shadow margin” is a hot business for brokers. Now they’re licking their wounds.

When the bankers of Christo Wiese, the former chairman and largest shareholder of Steinhoff International Holdings – a global retail empire that includes the Mattress Firm and Sleepy’s in the US – went to work on December 6 in the epic nothing-can-go-wrong calm of the rising stock markets, they suddenly discovered that much of their collateral for a €1.6-billion margin loan they’d made to Wiese had just evaporated.

Citigroup, HSBC, Goldman Sachs, and Nomura had extended Wiese this “securities-based loan” in September 2016. His investment vehicles pledged 628 million of his Steinhoff shares as collateral, at the time worth €3.2 billion. He wanted this money so he could participate in a Steinhoff share sale in conjunction with the acquisition of Mattress Firm and Poundland, essentially borrowing against his Steinhoff shares to buy more Steinhoff shares.

This loan forms part of the $21 billion of debt associated with Steinhoff that global banks are exposed to.

But that December 6, the shares of Steinhoff plunged 64% to €1.07 on the Frankfurt stock exchange after the company announced the departure of the CEO and unspecified “accounting irregularities requiring further investigation.”

Shares had been trading in the €5-range in June. In August, German prosecutors said they were probing if Steinhoff had booked inflated revenues at its subsidiaries, and shares started spiraling down. By December 5, the day before the plunge, they were at €2.95.

On December 7, Moody’s hit the company with a four-notch downgrade, well into junk. On Friday, December 8, Steinhoff cancelled its “private” annual meeting the next Monday with bankers in London and rescheduled it for December 19. Shares plunged to €0.47. Wiese stepped down as chairman.

Today, at that meeting with its bankers, Steinhoff said that it could provide neither details on the magnitude of the accounting problems nor updates on when audited financial statements could be published. In the presentation to the banks, Steinhoff begged for “continuing support” from its “creditors and other stakeholders” in order to get through this, adding that credit facilities were “increasingly being suspended or withdrawn by lenders.” The noose is tightening.

Its shares, after a dead-cat bounce in recent days, plunged 28% on Tuesday, to €0.46. And these shares have been pledged as collateral by Wiese.

This €1.6 billion loan formed part of the super-hot category of “securities-based loans,” or SBLs. These are margin loans and form part of stock market leverage, but they’re not reported, unlike the margin loans reported by the New York Stock Exchange. They’re also called “shadow margin,” because no one really knows how much there is.

They’re considered low risk by banks and regulators because stocks can apparently only go up, and because the collateral consists of publicly traded stocks, and thus is liquid. And this business has been booming in the shadows.

The original lenders of Wiese’s loan – Citi, Goldman Sachs, HSBC, and Nomura – have since sold pieces of the loan to several other banks, the Wall Street Journal reported, including BNP Paribas and BofA Merrill Lynch, which has the largest exposure. The Journal figured that for some of the lenders the losses on this one loan “could wipe out all revenue from stock-based lending this year.”

The losses these lenders face are so large because the downfall came so suddenly. Normally banks can make margin calls, asking for cash or more stock, to protect their position. With Steinhoff, the shares were worth 120% of the loan on Dec. 5 and less than 24% 48 hours later.

Today, these pledged shares would be worth €288 million or 18% of the €1.6-billion loan. But last week after the melee, lenders liquidated 98 million of the shares, or around 15% of the collateral. And now they’re trying to figure out what to do next. Any further selling is going to push the price down even more, but hanging on to them and waiting for better days might be even more costly, if those better days don’t materialize.

However this is going to wash out, it’s going to be costly for the banks. And it made the selloff worse, which is precisely what margin debt does. Margin debt is the great accelerator on the way up, and on the way down.

Margin debt in the US stock market, as reported by the NYSE, hit a record $561 billion at the end of October, up 16% from a year ago. But this is only the reported stock-market leverage, accounting for only a fraction of the total leverage in the stock market.

Securities-based loans – such as Wiese’s loan or myriad smaller loans made by brokers to run-of-the-mill clients – make up another large part of stock market leverage. These loans can be used to buy anything, including a vacation.

They’re called “shadow margin” because no one knows the overall magnitude because brokers are not required to report them. They’re low-risk loans if share prices continue to rise. And they’re still low-risk if share prices decline slowly to where brokers can liquidate the collateral and come out whole. But when share prices plunge, these loans can produce sizable losses, as the Wiese mess shows.

And there’s a broader context: Margin debt gets liquidated when shares decline past a certain level. When overall margin debt – including the shadow margin – is very high, as it is right now, these margin loans and the forced selling they trigger can turn a garden variety selloff into a major financial event.

$21 billion of debt. Off-balance-sheet entities. Moody’s wakes up, downgrades it four notches, with more to come. Read… Enron Déjà Vu? Citi, BofA, HSBC, Goldman, BNP on the Hook as Steinhoff Spirals Down

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  57 comments for “Margin Debt, Backed by Enron-Déjà-Vu Steinhoff Shares, Hits BofA, Citi, HSBC, Goldman, BNP

  1. Gershon says:

    Ante up, taxpayer scum.

    • Ignim Brites says:

      Seems unlikely there will be another explicit tax payer bailout. Much more likely that these loans will be puchased by the central banks.

      • Wolf Richter says:

        Margin debt was allowed to go its way during the last crashes, with entire portfolios being force-liquidated into a crashing market and with investors getting wiped out. There were no bailouts per se in this arena. Margin debt balances plunged during that time. What finally happened was that the Fed was able to use QE and ZIRP to inflate the stock market, which stopped the forced selling and soon, margin debt ballooned again. Rinse and repeat.

      • A taxpayer bailout on the heels of the greatest tax cut in history? I QuEstion that logic.

        • Old Engineer says:

          Are there many taxpayers left? If 50% of individuals don’t make enough to pay income tax, and the tax laws exempt the very wealthy and corporations from all but the most nominal taxes, it seems worrying about the diminishing number of taxpayers is moot.

        • Thunderstruck says:

          “A taxpayer bailout on the heels of the greatest tax cut in history?”

          I am constantly surprised by the power wielded by our Executive and Legislative branches. I never realized that a tax cut written and passed in the U.S. House of Representatives, then approved by the U.S. Senate and finally signed by the President of the United States could also alter European Union tax code.

          I learn something new every day!

  2. JungleJim says:

    “This loan forms part of the $21 billion of debt associated with Steinhoff that global banks are exposed to”.

    I think you meant that taxpayers are exposed to. The banks WILL find a way to sleaze their way out of this.

    • William Smith says:

      Tranche the losses up into CLO’s (collateralized loss obligations) and market ’em as the hot new “crypto” “investment vehicle” to the mums and dads. (“crypto” because nobody knows the full extent of the losses). Anything with “crypto” in the name is guaranteed to sell: even the insto’s will get in on the action then.

    • George McDuffee says:


    • Raymond Rogers says:

      Your a bit late with that. If the ECB buys corporate debt, the bailout occurred before the Shenanigans were uncovered.

      • d says:

        It would be interesting to know if the purchase of Steinhoff paper by the ECB, was done through draggis Private purchase program.

        • Wolf Richter says:

          The Steinhoff bond issue amounted to €800 million. That’s a pretty big issuance, and it was handled via the normal public procedure, not a private placement. So I think we can assume that the ECB acquired its slice of it either when it was issued or in the secondary market, rather than via a private placement.

        • Maximus Minimus says:

          The question is, why did Steinhoff get the loan when it could issue bonds at super low interests, and hand them to the ECB.

        • Raymond Rogers says:

          Maybe they were afraid the investigators and ECB officials share information. Too much, too fast would bring unwanted attention.

  3. BoyfromTottenham says:

    Is this the start of 2007 redux? Wolf, how many more companies leveraged like this are out there, and what is the total exposure? Merry Christmas, everyone.

    • d says:

      Also smells of right on the holiday season planned. Which means nobody will do anything serious about it, until mid 01/2018.

      When its all A fait accompli.

  4. OutLookingIn says:

    This sounds familiar.
    Will you lend me the price of a hamburger today, for which I will gladly repay you Tuesday? Looks like “Wimpy” Wiese gets to eat his hamburger for free, since the meeting with bankers was the 19th (today) Tuesday and there’s no value left in the corporate kitty!

  5. interesting says:

    I’m starting to think that all this next coming bailout/crash/correction is going to achieve is more public support to make sure that no matter how much free shit wall-street gets the surfs think that the bailout will make them whole too.

    It did the last time…….record RE/STOCK prices once again. I have some boomer friends who keep saying “it always comes back, it always has”…….and they are banking on that and have won that lottery every single time.

    • Bobber says:

      I just spoke with a guy near retirement who is 80% in stocks. He says you can’t lose in the stock market over a 10-year period. A lot of retirees are thinking that way.

      • Realist says:

        That was the old and tried wisdom. The problem with that tried and proved to be working wisdom is does it still hold true ? I have a nasty suspicion that the CBs have managed to derail some fundamental rules that might cause quite some surprises. What if a drawn out decline like in the 80’s Japan, for example ?

      • Old Engineer says:

        Well, 10 years is about one half the life expectancy of the average male retiree. Wonder what he plans to do for the last 10?

        • Bobber says:

          Old Engineer. I agree. If stock lose 30% next year and his dividends get cut in half, he’ll be eating crow while waiting for his stocks and income to recover.

      • Jim Graham says:

        Tell him that the end of the 10 year period is ending SOON.

        Time to take the money and run. (tho I have no idea of where to run to.)

      • d says:

        “He says you can’t lose in the stock market over a 10-year period.”

        1929-1946 Effectively Sideways.

        Actually still down in 46 when you consider the shrinkage of purchasing power, in that period (and many of the other 10 Year periods as well.).

      • Derek says:

        My parents think this way. Hopefully they aren’t as in stocks as they were. I remember my dad saying they probably lost a million bucks with 2007-2009.

        Their parents were in the Depression. I can’t understand why they are so blase.

      • Maximus Minimus says:

        Does he have a financial advisor, or did he figure it out himself? That would answer the puzzle.

      • Matt P says:

        This has never been true. 30 year period, yes.

  6. Marco says:

    The tip of the ice berg?

    The fraudulent government-protected War Party Rich start to see the Ponzi crumbling……

  7. cdr says:

    Wolf, you’re making me drool. There’s a puddle on the desk I’m sitting at. Lordy, this will by a dip for the ages to remember. I’m going to buy me into that when it happens. Dear Santa, I want a liquidity crisis so I can buy lots of low priced debt earning mega-rates due to the dip. Then I want to use my little Roth to range trade for the next few years as a hobby. Good times.

  8. Drango says:

    The fact that there have been so few companies defaulting despite these kinds of financial shell games taking place around the world (especially China) is scary. Central banks have set us up for one hell of a crash. Thank you wealth effect.

    • James Levy says:

      I’m mostly convinced (I could always be wrong) that the next crash will do enough damage that the kinds of massive, complex, international systems we have today will not survive. I’m not even sure if a huge polity like the United States can keep functioning on a continental scale. If powerful elites see advantage in grabbing a piece of the disintegrating system rather than throwing in everything they’ve got left to prop it up, it’s going to look something like Europe circa 500 AD again.

      • Alistair McLaughlin says:

        Don’t have to go back that far. Europe 1939 was bad enough.

      • Derek says:

        I agree. It wouldn’t be all bad. One positive would be the red taker states would have to fend for themselves, instead of be subsidized by everyone else. Also, ridiculous projects like expanding airports and freeways would stop.

        There are more advantages to becoming more local than disadvantages as the climate falls apart.

        • Beard681 says:

          I thought the old red states are “subsidized” canard went out with the bailouts to the coastal big banks and Wall Street. Or did Goldman Sachs move to Kansas all of a sudden? None of the old “subsidy” analysis included debt interest payments, social security, medicare or the three of the four biggest tax loopholes – mortgage, employer healthcare and SALT deductions.

  9. Ppp says:

    Gee, sounds like…you guessed it, 1929!

    Will the Fed step in and buy stocks, or these loans, when the time comes?

    No, because it would be an endless bailout, and so, a coup.

  10. Paulo says:

    These Tranches remind me of two things from my past. At work, we used to have ‘Secret Santas’ and we would sign up to participate. If you got a lemon santa it was a real rip off, but one thing we all shared in common was that we never knew what was in our gifts, or who gave them? The other event was when my kids would ask me for some coins in order to play the vending machine that dispensed plastic eggs.

    From Investopedia: Investors run the risk, however, of investing in the wrong tranche and missing their investment goals. Tranches add to the complexity of debt investing and it sometimes poses a problem to uninformed investors. Further, tranches are sometimes given a higher rating than deserved, causing investors to invest in riskier assets than they expect.

    Yep, just like a plastic egg machine, with borrowed money. Bigger kids, bigger debts, bigger losses; some things never change. Just say, NO, already. Snooze, you lose.

  11. Someone was questioning a Fed remark about the desirability of NIRP, and from an investors vantage buying a negative yielding bond at a discount to par raises some interesting possibilities. I put up $9 on a $10 bond, USG pays the other dollar up front, and I collateralize the entire amount, then rinse and repeat.

    • cdr says:

      “a negative yielding bond at a discount to par” is an oxymoron at best and a freak of finance otherwise. A negative yield bond at par pays back less than the original investment. You pay the borrower to take your money. Europe is crazy with these now. Germany is about 7 years out negative at this time.

      Negative yields can not exist without massive central bank QE and rate management. Impossible. Simply Impossible. The central bank is a thug enforcer in this role. When negative rates end, the bond repricing will be terrifying. Godzilla with the rambunctious kids in tow. Followed by the rest of the family.

      Therefore, guess what happens to the Eurozone when ECB QE ends. Hint: nothing good.

    • Wolf Richter says:

      But in a NIRP environment, you’d buy that bond at a premium over face value. In other words, if the bond has a tiny coupon or even zero coupon, you would have to pay over face value to buy that bond in a NIRP environment. When it matures, all you get is face value. The premium you paid becomes a capital loss.

      • cdr says:

        “The premium you paid becomes a capital loss.”

        Interesting concept. If your bond matures for less than you paid for it, can you claim a taxable loss? It’s still a gain for govt, and essentially a tax on savings, but even more bizarre. (Not going to look it up … too weird.)

        • Wolf Richter says:

          When a bond matures it is always redeemed at face value. So if you buy that bond at a premium and intent to hold it to maturity, you know upfront what you’re getting, which is a capital loss.

          Institutional investors (bond funds, insurers, pension funds, etc.) buy bonds because they HAVE to buy bonds as part of their required allocations. If ECB buying pushes yields into the negative, these funds cannot just sit there and boycott the market.

          Taxable entities can deduct that capital loss from other capital gains, no problem.

          And yes, this is a great deal for governments/taxpayers. It’s free money at the expense of investors.

        • cdr says:

          “When a bond matures it is always redeemed at face value. ”

          Agree in the normal world. I know how to price a bond. Accounting 102. But negative rate bonds … what’s the mechanics there and can you claim a loss when you would redeem for less than you paid? Again …. just plain weird especially if purchased on the secondary market.

        • cdr says:

          “When a bond matures it is always redeemed at face value. ”

          Assuming true even with negative bonds …. you pay a premium over face value because the rate is negative, and redeem at face. I give you $1100 and get back $1000. By agreement. I bet you can’t claim a loss either … unless rates go positive and you get maybe $900. Should be a crime, not modern economic theory.

      • You might be right, widows and orphans can buy cash, but institutions have to buy bonds. In a free market a zero rate bond should sell at a discount.

        • cdr says:

          A zero rate bond would sell at face value.

          A bond at a premium sells for over face value, lowering the effective interest rate on it. For example: stated rate 4% effective yield 3.5%

          A bond at a discount sells for less than face value, increasing the effective yield: Example – stated rate 4%, effective yield 4.5%

          A NEGATIVE YIELD BOND would have to sell at a premium, provide no income, and be redeemed at face value. Example: you pay $1100, earn no interest and receive no cash flow, and get back $1000 at maturity. (Europe seems to love these) And, you could not claim a loss on taxes unless rates rose and you sold it at a loss. If rates went even more negative and you sold it, you would make a gain. All praise modern economics and, especially, the ECB, for this economic innovation. Somehow this scheme is supposed to cause inflation while sucking income out of the economy. (I personally think they are fibbing about how it causes inflation. The probably have an alternate agenda and people are dumb enough to believe this story.)

  12. Petunia says:

    Mattress Firm is selling mattresses at 0% for up to 72 months. Free delivery before Xmas. I may take a look.

  13. In a free market a zero rate bond will never sell at a premium.

    • cdr says:

      “a zero rate bond” at a premium …

      That’s the alternate definition of a negative rate bond, quite popular in the Eurozone at this time. Of course, you are correct about the free market aspect. The Eurozone uses the ECB to monetize debt as a kick the can measure in order to continue to exist. It’s an evil beast that pretends to be community oriented. All it wants is your savings and your support.

  14. The turtle says:

    Securities based lending : hi can I get some wrong way Risk collateral please ?

    No serious: don’t feel sorry for the banks that took that as collateral. D u m b.

  15. chris Hauser says:

    looking at steinhoff’s individual businesses, it is a story you have to, well, suspend disbelief completely to enjoy the entertainment value to its fullest.


  16. Rik dri says:

    The banks no longer have to bail out the debt. They have been given the right in law to take money from customer accounts, to use instead of there own funds. Quite honestly, there is no place to hide, from the results of the incompetence and thievery perpetrated by the dark state.

  17. Michael Gorback says:

    The sign of the peak will be gambling-debt-based securities denominated in bitcoin.

  18. Kiers says:

    OMG! Wolf Richter, you’re scratching the surface of a Deeeeeep iceberg. Remember, You yourself ran a story on “margin debt” fueling the record stock market rise:

    Who knew this “margin debt” is largely CEOs/Insiders/Hedge funds speculating on their own private projects, using the capital markets and their own company shares like piggybanks?!

    This WSJ article is mindblowing (Similar to the Steinhoff case) but about Swift Trucking co.:

    How much “margin debt” is insider big-cat debt? Both the steinhoff and Swift Trucking cases above are “margin debt”, both feature Citigroup in prominence. However, the WSJ article points out the conflict of interest when “margin debt” coincide with CEO decision to buy back shares!

    Worse: Both cases of margin debt go against the VOLCKER RULE! WHat ever happened to the volcker rule? How could Citigroup get away with extending money for shares? That’s an EQUITY STAKE!

  19. Kiers says:

    Sorry for the follow-on commenting: but i can’t resist the afterthought and synthesis:

    Your chart showed ~$600bn in margin debt outstanding in a year. How **interesting** this is just about the same level of BUYBACKS in US Equity markets every year!

    Note, the Steinhoff margin loan was for buybacks of Steinhoff shares issued to acquire the two mattress companies! In effect, Corporate America has found a way to SHORT the market while telling shareholders it’s for their own good! Don’t u love it! No wonder they’re called Brahmins. They can justify anything as gospel goodness!

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