http://www.subramoney.com/2018/11/leveraging-and-risk/?frame-nonce=26418ec50a

We all know what is leverage – anyway if you read the above link you will know.

Now look at what is happening in the equity markets around the world. Of course they will tell you this is unprecedented. Yes of course it is.

If you have a leveraged position – Let us say you have a portfolio of Rs. 2 crores and you have a Rs. 55L loan. Well, it does not sound too bad, right? Well your portfolio got decimated in the Corona Virus, YesBank massacre and your portfolio fell say 50%. Nos suddenly your portfolio is Rs. 1 crore and your loan is Rs. 55L. Not bad, but you are a little worried about your job as a pilot in an International Airline. They have not called you for duty in the past 2 weeks. They “seem” to have suspended flights to Asia.

Now look at leverage. Your “cash on hand” is close to nothing. Of course the 55L of debt does not have to be repaid today, but your lender (banker and his subsidiary broker) called. They want more security. Your salary account is with them and they have been told that the salary for the month of March may happen in June, if at all.

Ha, welcome to leverage. Welcome to Futures and Options. Yes there is blood on the street. Mine too. My friends too, my clients too – but the blood flood is not ours. We have lost a bottle or two – nobody could have escaped this carnage. However, those with leveraged positions are likely to get wiped out.

The ruthless banker (he who sold the leverage to you) will be not available on phone (Corona for the phone?) and his legal team will be evaluating your portfolio. Let’s assume you have Tata Motors, Gillette, Tata Steel, Vedanta, Tata Power, Reliance, …and now that portfolio is half the value..you are NOT SO BADLY OFF.

Suppose you had Shanthi gears, Motherson sumi, Piramal Enterprises, Idfc bank, Edelweiss finance, IIFL, Yesbank, Indusind bank – your banker is worried that he will NOT BE ABLE TO SELL YOUR portfolio worth Rs. 1 crore for even Rs. 55L, he will panic. HE WILL SELL TODAY. This is called “being taken to the cleaners”.

What about your esop? yes the same one which you got at Rs. 50 per share. Your boss told you that in 4 years it will become Rs. 250 per share. Well it is Rs. 19. You open your phone and see 4 messages, one Wassap and 4 missed calls. It was your banker…who didn’t know where to reach you. So he sold off your Icici Prudential Life – after all the other shares was more difficult to sell. Oops how did he do that?

Well you did not read the fine print I presume? You had given him POA ….

Now take an even worse case. Your networth was Rs. 2 crores and it has fallen to Rs. 1 crore – and of this 90% is your bank ESOP. And today (23rd March, 2020) it is on a lower circuit. Your friendly banker will come home – for cash, or your home. Oops that is all you have is it? What about your “Emergency fund”? oops you used it on the vacation to Goa last month?

Like I said “welcome to the world of Leverage” – its lovely to blog about the criminals in the Indian BFSI. Yup Banksters as my friend Ravi calls them.

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  1. For the last few days, am seeing with 30% markets down, articles flooding with the message of :

    Correction is overdone and over
    V Shape recovery on cards
    People are queuing up to open dmat and brokerage accounts
    DIIs are matching with FII outflows
    Leverages are in control
    Partial salary reductions

    I am seeing everywhere people are still excited about market opportunities.

    The problem is no one is prepared for blood bath of 66 or 75% correction – SENSEX at10K. No one is prepared for crisis.

  2. Krish if you are so sure of Sensex reaching 10K why don’t you buy Nifty Put options? Or you only comment and never invest? or do you invest 20% in equity? Many of us who come here do invest 90% in equity and can stay calm during this turmoil. Relax, we will not come to you for our retirement needs

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