Admission Board

Finance allah shmoop what is wreg tea or regulation T

so you probably remember all those horror stories of clueless

investors borrowing more than usual fifty percent maximum margin to

either buy more securities or just you know to buy

stuff Well not shockingly This was a big problem in

the unregulated world before the various securities acts went into

power in the nineteen thirties in nineteen forties will rig

he basically covers the foreman manner in which brokers or

brokerages can extend credit to their customers Credit that's where

the tea's coming from or how you remember it That

is in most cases for normal retail investors the maximum

amount they can borrow courtesy of the kindly loving caretaking

people at wreg tea and think of that t is

you know training wheels How about that to remember Well

that maximum margin fifty percent So who hates this law

Who loves this law Well if you think about the

dynamics of a brokerage they are the casino the house

the matron They don't like to take a lot of

risk and they don't like having clients go bankrupt playing

in their casino but undoubtedly they have clients who dio

so think about situation where joe roles big dice borrows

right up to the limit of fifty percent margin And

things go well any borrows more And then he borrows

more continuing his practice of being right up to the

limit of fifty per cent limit all the time Things

were good for a while from a margin account Joe's

allowed to buy anything legal that he can buy like

mohr securities are taken by that shiny new convertible portia

Well let's look at his account here Shows in his

margin County has three hundred grand He's borrowed one hundred

grand to buy more stocks And since his margin limit

at fifty percent leaves him head room for well only

fifty grand mohr Who Well he just had to have

that portia But unfortunately with only fifty grand to spend

he was limited to buying the nine year old one

with a dent in it And that you know that

fish smell that will never go away But it was

fifty grand Joe bought it So joe is all in

now Just kissing his maximum margin Borrowing capacity of one

hundred fifty grand against three hundred thousand dollars in equity

Value in his account Well guess what As things tend

to do in shmoop video one day north korea gets

moody And while nuclear things happen and the market takes

a huge dr strangelove ending kind of dive So now

joe are beedies broker with whom he has become friends

ish over the last few years Well has tohave the

unpleasant phone call that joe must present money to make

his fifty percent margin maximum work Because he's over that

fifty percent number Why Because the three hundred grand is

now i'll say two hundred grand was only allowed to

borrow one hundred grand Fifty spent two hundred That would

be the hundred yet He's borrowed one hundred fifty So

he needs fifty thousand bucks right now to make himself

hole or else And the else's that the brokerage just

goes and sells stocks at whatever price they're trading at

until his margin max is hit So joe or the

brokerage has to sell shares producing that cash and it's

tough to do in a market that's down big Thank

you kim jeong eun So this is bad enough it's

an unpleasant conversation Joe will probably blame the broker for

not preventing him from making whatever stupid bets he made

and joe might switch and move on to e trade

or somewhere else His friendships probably over so yes that's

bad but in the era before the fifty percent wreg

team margin limits there were essentially no training wheels on

retail investors Uneducated investors could borrow whatever they were allowed

to borrow by the brokerage So then instead of having

a fifty percent cab well investors would not have toe

on ly cell essentially all of their stock portfolio to

pay for their margin when things went down But they

might suffer incremental debts beyond it where sadly the brokerage

has to bring the sheriff kicked the wife and kids

out of the home repossess the icebox there horse named

betsy and their brand new state of the art electric

toaster What it was like back then and now instead

of being less wealthy well joe and his entire family

are flat broke and living on a horse down by

the river So while wreg t drew a lot of

mumbling about overly active government intervention at the time that

it was released it in fact made for a dramatically

Smoother transition When times got tough as they always do

in the stock market and as retail investors seemed always

forget What goes up usually comes down and you know 00:04:29.314 --> [endTime] tough maybe maybe that's What the t stands for