In our previous post, we discussed margin. How the pros use it to maximize their returns, and losses. How did all of the banks and investment funds lose their shirts in ’08? The housing bubble burst. That was easy, right? Wrong!
Investment firms lost their shirts because they leveraged themselves to the hilt with the housing market. They had giant sized margin accounts. Most individuals who use margin have an account that is maybe worth three times what they own at the absolute most. That is for an elite trader. Investment firms were giving each other 30x, 40x, even 50x margin accounts that they call leverage. They used those margin account to leverage themselves in some cases upwards of 50x what they actually owned.
So what does that mean? That means for every $50 they were spending on investments in the housing market, they only had $1 in hand. Now obviously when the market collapsed, the couldn’t pay back all that money they owed. That is why all those companies went under.
Today, those investment firms still have margin/leverage accounts worth 15x or 20x what they actually own. It’s absurd! Yet, when they fail you the taxpayer are being forced to bail them out. If you were to default on your margin account, trust me when I say no one will bail you out. You want an unfair advantage Wall Street has over you? They can make 50x the profits your 401k could with the exact same assets because of their leverage. Yet, if they lose its your responsibility to pay them back their losses.