Invested by Charles Schwab

Author:Charles Schwab
Language: eng
Format: epub
Publisher: The Crown Publishing Group
Published: 2019-10-07T16:00:00+00:00

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ONE IMPORTANT RISK EVERY brokerage was watching intensely was margin balances. Borrowing on margin is a tool used by sophisticated investors to increase their buying power by borrowing against the market value of their investments to buy additional stock. When stock prices fall, the borrower may be forced to deposit more money or face a margin call, which is an order to sell shares to boost collateral against the rest of your margined holdings. An isolated margin call is one thing, bad for that single client. But when falling prices trigger widespread margin calls, and those in turn trigger more selling, that can lead to a run on the market. It was one of the big threats we saw developing across the industry.

Tom Seip, then in charge of our international branches, was sufficiently concerned after conversations with his team that he came into the office that weekend to catch up on the latest news from our far-flung outposts and make sure we had done all we could to prepare for the coming week. Others were checking the databases to look for any accounts that might pose a risk.

That was when Tom first learned about Teddy Wang, a billionaire client in Hong Kong who was facing a multimillion-dollar margin call on Monday morning. Tom was shocked. Wang’s margin call was the biggest he’d ever seen. He called Hong Kong immediately and roused the local branch manager, Larry Yu, from his bed to find out who this client was.

Wang was a very wealthy client in Hong Kong and his account had taken a big hit on Friday, Yu explained. Worth $50 million before the market opened that Friday, it finished the day between $8 million and $12 million in the hole. Wang had been using an options strategy to make a little extra income on his considerable holdings. It was a strategy that hums along in a normal market, but this market had turned on him. Yu said he had called Wang on Friday to tell him that unless he replenished his account immediately to meet the margin call, we would have to begin liquidating his assets to make up for the shortfall. Wang was eager to save his existing investments, believing they would bounce back. Selling now would lock in huge losses. Wang was one of the wealthiest of the wealthy in Hong Kong, a billionaire who together with his wife owned a number of high-rises in Hong Kong that made him one of the largest real estate holders in the region. He had plenty of assets to protect his positions, we were confident of that. He had collateral, but in this market and this situation, he needed liquidity. He met with Yu in person on Saturday morning and brought with him bank statements from two very large accounts to show he could cover what he owed without selling his holdings at Schwab. He gave Yu his word that the assets were under his control. And we were confident his banks could make money available to him upon his signature.

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