NEW YORK – With the stock market going through some ups and downs, it can be difficult to see the big picture when it comes to investing. Gus Lambropoulos, entrepreneur and an Executive Board member of the Hellenic Medical Society of New York, spoke with The National Herald about margin accounts and real estate. He shared his concerns about the future especially for investors who may not be aware of the risks involved with margin accounts.
“I have been in the financial industry for over 20 years,” Lambropoulos told TNH. “I believe the industry, specifically in the stock exchanges, such as NYSE, AMEX, and NASDAQ, just to a name a few, will face many economic challenges in the very near future that could become catastrophic. The reason being ‘easy access to capital’ through margin accounts.
“What are margin accounts? A margin account is a brokerage account in which the broker lends the customer cash to purchase securities. The securities and cash collateralize the loan in the statement. Because the customer is investing with broker’s money rather than his or her own, the customer is using leverage to magnify both gains and losses. The investments are actually funded by stock brokerages rather than investors themselves,” Lambropoulos pointed out.
“A recent review, Charles Schwab Corporation’s 2017 Annual Report, revealed margin loans outstanding of $18.3 billion compared to the following prior years: Year End [YE] 2016 – $15.3 billion; YE 2015 – $15.8 billion; YE 2014 – $14.3 billion and YE 2013 – $12.6 billion. In just five short years margin loans have significantly increased by 45.23%.
“Please note this is from only one brokerage house although one of the largest – out of 3,867 brokerages houses listed by the Securities and Exchange Commission (SEC). As per the Financial Industry Regulatory Authority (FINRA), the overall margin debt soared to $642 billion at year-end in 2017. These debts are continuing to rake in with significant risks.
“Financial Analysts have closed their eyes to the potential for losses as a result of the increased level of margin account purchases.
“Just as a decade ago, the American economic bubble burst due to subprime mortgages, yet today’s marketplaces continues its link to millions of investors utilizing margin accounts. Today’s potential risks include multiple Federal Reserve rate hikes, high-security valuations, geopolitical risks, and cyber security attacks,” Lambropoulos observed.
He continued, “Establishing a margin account has become the norm and more so than ever before in these past ten bullish years.
“Brokerage houses are exposed to a lot of risks when it comes extending margins to its investors, in return, investors, too, are put at personal risk on margin calls. These so-called margins risks, if the stock exchange markets take a nose dive, it could trigger a new trend – a bear market.
“A bear market for stock exchange markets could potentially become a recipe for disaster for the brokerage houses because it will set off margin calls. These margin calls can continue to a point where all investors may not have sufficient balances to cover the calls and become personally liable for the investors,” Lambropoulos said, adding that brokers will sell off stocks arbitrarily from investors’ portfolios to cover the costs whether the stocks are valuable or not.
“Brokerage houses’ collection calls may not come so easy, if we continue to be in a bear market for years to come. They will likely attempt to place liens against the already leveraged real property and report to the three credit repository for unpaid debt by these investors.
“The multiple attempts to collect payment for margin calls by brokerage houses will begin to pinch painfully to their bottom line. The brokerage houses will add another column on their balance sheet ‘margin loan defaults.’”
“With these unpaid toxic margin debts, brokerage houses could potentially become insolvent. Banks who lent to the brokerage houses will also begin to see a default payment on their side,” Lambropoulos noted.
He is also involved in the real estate industry, managing properties in New York, New Jersey, and Florida, and is creating a new niche, helping small businesses and property owners with mergers and acquisitions, especially in the restaurant business. Lambropoulos pointed out that the focus is on a smaller scale and offers growth opportunities. He added that a private lending company is also being set up with the funding currently being secured.
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