Investing

Here’s Why Wall Street Is Worried About More Forced Selloffs After Friday’s $30 Billion Fire Sale

Topline

After a frantic stock sale helped wipe nearly $50 billion off the market capitalizations of ViacomCBS and Discovery, investors are worried that big banks and Washington could rein in margin debt, the risky leverage that sparked the Friday selloff after soaring to a meteoric high during the pandemic.

Key Facts

Stocks are falling Monday, as investors worry about the fallout from the block trading that pushed mega-cap firms Viacom and Discovery down by about 27% each on Friday.

“The big worry on Wall Street” is that the volatility could lead banks to rein in margin debt, Vital Knowledge Media founder Adam Crisafulli said Monday, warning that such a development could spur further forced selling as investors offload their risky leverage to meet tighter margin requirements. 

Crisafulli also notes that Congress could get involved by holding “a slew of hearings” about margin debt and anonymous positions in an effort to usher in “permanent industry changes” targeting the highly leveraged trades.

Boosted by booming online brokerages like Robinhood, margin debt has surged to a record $814 billion in the United States—nearly 50% more than a year ago, according to the latest data from the Financial Industry Regulation Authority.

Investors on average hold roughly 76% more debt in their accounts than cash—a staggering level that’s eerily close to the 79% figure at the peak of the dot-com bubble, after which stocks plunged 40% over two years (a sign that speculation is at a similar high, but not that stocks will crash).

Though none have yet said they’re making changes to margin requirements, big banks have warned of massive losses as a result of risky overleveraging, and the Securities and Exchange Commission said in a Monday statement that it’s been “monitoring the situation and communicating with market participants since last week.”

Key Background

Founded by former Tiger Management trader Bill Hwang, Archegos Capital Management has been at the center of the scrutiny facing overleveraged hedge funds. The firm sold nearly $30 billion in shares of Viacom, Discovery and several Chinese tech stocks on Friday after the falling shares triggered a margin call, or the forced sale of securities when equity in a leveraged position falls below a certain threshold. Investors can use margin debt to double down on a stock bet without ponying over more cash, which is why margin debt is sometimes used to measure stock market euphoria. Though neither specifically named Archegos, banking heavyweights Credit Suisse and Nomura warned they would face “highly significant” losses as a result of a U.S. hedge fund client that defaulted on margin calls. Credit Suisse said it was too early to quantify losses, but Nomura estimated Archegos’ losses at $2 billion. 

Crucial Quote 

“The block trading and bank fallout story is dominating the market narrative Monday as investors worry about more forced selling with possibly systemic implications to the extent Wall Street pulls back margin lending,” Crisafulli said Monday.

Chief Critic

Not everyone’s convinced the Friday selloff will have material repercussions for stocks beyond this week. Oanda senior market analyst Edward Moya called “the Friday beatdown” for ViacomCBS, Discovery and many Chinese tech stocks a “one-off event” in a Monday note, though he also says Archegos’ overleveraging will “undoubtedly . . . force every prime brokerage to review their books.”

Surprising Fact

ViacomCBS and Discovery plunged 50% and 46%, respectively, last week, wiping out nearly $48 billion in market value. Those losses are holding on Monday, with ViacomCBS sinking another 3% while Discovery adds back just 3%. “When you look at the stocks that were incorrectly bet on, Wall Street must ponder if the V-shaped stock market recovery got out of hand,” Moya said of the sustained losses. 

Further Reading

Nomura And Credit Suisse Warn Of ‘Significant’ Losses Following Archegos Fire Sale, Banking Stocks Tumble (Forbes)

The Firm Behind The $30 Billion Yardsale Shaking Financial Markets Disclosed Almost Nothing (Forbes)

Is The Stock Market About To Crash? (Forbes)

Dow Falls 100 Points As Big Banks Plunge Amid Firesale Concerns (Forbes)

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