Stock-Market Margin Debt Plummets Most Since Q4 2008

Wow, that was fast. Margin calls.

By Wolf Richter of WOLF STREET

During the ugly stock-market December, whose ugliness bottomed out on Christmas Eve, a nasty November, and the ugliest October anyone can remember, margin debt plunged by a combined $93.8 billion, the most since Q4 2008, after Lehman Brothers filed for bankruptcy.

In December alone, margin debt plunged by $38.3 billion, to $554.3 billion, FINRA (Financial Industry Regulatory Authority) reported this morning. This was just a hair less than October’s plunge of $40.5 billion, and both had been the steepest drops since late 2008:

The only form of stock market leverage that is reported monthly is “margin debt” – the amount individual and institutional investors borrow from their brokers against their portfolios. But no one knows the amount of total stock-market leverage from all forms of leverage, but we know it’s a lot higher than margin debt by itself.

Stock market leverage takes many forms. It includes “securities-based loans” (SBLs) that brokers extend to their clients, and that some of them report annually, though they don’t have to. And occasionally, we get a tidbit about an individual fiasco such as when a $1.6 billion SBL to just one guy blows up. And there are other ways to use leverage to fund stock holdings, including loans at the institutional level, loans by companies to their executives to buy the company’s shares, etc. But reported margin debt gives us a feel for which direction overall stock-market leverage is going.

Stock market leverage is the big accelerator on the way up, when people and institutions borrow money to buy stocks. And it’s the big accelerator on the way down when margin calls and other financial pressures turn these investors into forced sellers

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