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« Housing and Recessions: A Proposed Relationship | Main | Thinking about Relationships: A Good Example »

February 22, 2007



Can I borrow money from a sub-prime lender to buy stocks? Haaaa.

Tom L

"When a short loan is made, the dividend payments paid back become non-qualified per the regulations." Heh, this is one reason why I specifically obtained a non-margin long-only brokerage account. The other is that I just don't need that temptation... options are bad enough.


"Furthermore, leveraged borrowings in the form of swaps are not recorded as margin transactions."

This would indicate that margin debt levels as recently posted would have a lower component of short selling compared to total short selling. This helps the theory that the currently high margin debt is mostly equity (long) purchases.

The actual breakdown still isn't being revealed however. Oh to know this...


I'm not sure how the margin debt number breaks down. The fact that no one knows:

a) sort of makes everyone, whether they're saying it's bullish or bearish look foolish.

b) sort of tells me yesterday's (2/22) conclusion that everything's fine in hedge fund land was done without really knowing the structure / make up of margin debt, and is scary... or at the very least the poo-bahs are not letting that info out which is... typical.

c) also supports my main gripe about short-selling. I do know this. When a short loan is made, the dividend payments paid back become non-qualified per the regulations. That makes loaning client's holdings very tax inefficient for the clients, in most cases reclassifying the income from 15% tax rate to the 35% rate. Ouch! (but DIYers and day traders don't know this. Booyah!)

The regs are also quite clear on this for mutual funds and ETFs who loan stock to short sellers, but interestingly brokers won't discuss it, they just give their suckers er... a... clients a 1099 with the aggregated figures. Check your brokerage 1099 if you don't believe me.

Scott Rothbort

Jeff - I spent many years at Merrill Lynch while heading up the Equity Swap Business reporting to and working closely with the head of Global Prime Brokerage and Stock Lending. The answer you seek is not quick and simple. However, whenever a client borrows money to purchase a security the broker records this as a margin loan with the stock held in a margin account. When a client shorts sells stock, the sale takes place in a margin account. However, the accounting for this transaction is not as simplistic. The key for a short sale has to do with the source of the stock loan. This will all depend on whether the broker has to secure a third party stock loan or lends the stock free under a margin loan hypothecation. Furthermore, leveraged borrowings in the form of swaps are not recorded as margin transactions. - Scott

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