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Finance allah shmoop what is wreg tea or regulation T

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so you probably remember all those horror stories of clueless

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investors borrowing more than usual fifty percent maximum margin to

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either buy more securities or just you know to buy

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stuff Well not shockingly This was a big problem in

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the unregulated world before the various securities acts went into

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power in the nineteen thirties in nineteen forties will rig

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he basically covers the foreman manner in which brokers or

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

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

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is in most cases for normal retail investors the maximum

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amount they can borrow courtesy of the kindly loving caretaking

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people at wreg tea and think of that t is

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you know training wheels How about that to remember Well

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that maximum margin fifty percent So who hates this law

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Who loves this law Well if you think about the

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dynamics of a brokerage they are the casino the house

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

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

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in their casino but undoubtedly they have clients who dio

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so think about situation where joe roles big dice borrows

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right up to the limit of fifty percent margin And

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things go well any borrows more And then he borrows

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more continuing his practice of being right up to the

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limit of fifty per cent limit all the time Things

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

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allowed to buy anything legal that he can buy like

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mohr securities are taken by that shiny new convertible portia

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

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

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grand to buy more stocks And since his margin limit

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at fifty percent leaves him head room for well only

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fifty grand mohr Who Well he just had to have

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that portia But unfortunately with only fifty grand to spend

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he was limited to buying the nine year old one

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with a dent in it And that you know that

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fish smell that will never go away But it was

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fifty grand Joe bought it So joe is all in

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now Just kissing his maximum margin Borrowing capacity of one

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hundred fifty grand against three hundred thousand dollars in equity

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Value in his account Well guess what As things tend

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to do in shmoop video one day north korea gets

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moody And while nuclear things happen and the market takes

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a huge dr strangelove ending kind of dive So now

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joe are beedies broker with whom he has become friends

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ish over the last few years Well has tohave the

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unpleasant phone call that joe must present money to make

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

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fifty percent number Why Because the three hundred grand is

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

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borrow one hundred grand Fifty spent two hundred That would

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

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he needs fifty thousand bucks right now to make himself

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

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

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until his margin max is hit So joe or the

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

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

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

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an unpleasant conversation Joe will probably blame the broker for

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not preventing him from making whatever stupid bets he made

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and joe might switch and move on to e trade

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

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bad but in the era before the fifty percent wreg

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team margin limits there were essentially no training wheels on

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retail investors Uneducated investors could borrow whatever they were allowed

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to borrow by the brokerage So then instead of having

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a fifty percent cab well investors would not have toe

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on ly cell essentially all of their stock portfolio to

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pay for their margin when things went down But they

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might suffer incremental debts beyond it where sadly the brokerage

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has to bring the sheriff kicked the wife and kids

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out of the home repossess the icebox there horse named

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betsy and their brand new state of the art electric

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toaster What it was like back then and now instead

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of being less wealthy well joe and his entire family

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are flat broke and living on a horse down by

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the river So while wreg t drew a lot of

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mumbling about overly active government intervention at the time that

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it was released it in fact made for a dramatically

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Smoother transition When times got tough as they always do

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in the stock market and as retail investors seemed always

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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

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