Stock Market Borrowing at All Time High, Increasing Risk of Downdrafts

One implication is obvious: highly levered equity markets are subject to more violent downdrafts as margin calls lead to forced sales.

But Lamensdorf makes a second point: the 1% (and I would assume not the 0.1%) are borrowing against stocks: “Among those with the most at stake are the top one percenters, who’ve borrowed to buy stocks and used their portfolios as collateral for other lines of credit…”

The propensity to borrow is a big difference between the affluent classes of yore and their modern-day counterparts. A colleague, after making a nine-figure fortune in real estate, went on to establish what became one of two largest lenders against art. The idea that a rich person would have personal property in hock would have been unthinkable in say, the 1960s. The widespread financialization of the economy has completely destigmatized the use of credit….as long as you don’t get into the crosshairs of debt collectors….as did Annie Liebowitz, who had pledged her entire photography portfolio plus several houses as collateral for a loan from Art Capital. She allegedly refused to sell her back catalogue as promised to retire the borrowings. Art Capital sued, threatening to put her into bankruptcy and seize the pledged assets. A new lender came in, paying off Art Capital, in return for becoming Liebowitz’s sole creditor (as in presumably getting the rights to the collateral) and as I read Liebowitz’s comment to the Guardian, for an interest in her new work.2

That’s a long-winded way of saying that a lot of people at the top are more fragile financially than they appear. And the tendency for the well off to leverage themselves appears if anything to have become more acute since the crisis, when you’d think that a meltdown of that magnitude would instill some lasting caution. But I guess I am just an old fogey.