Sunday, March 30, 2008

Living on the margin...or, what's happening to the rich people today?

Volatility in Australia’s financial markets continues with the collapse of stock-broking firm Opes Prime. This comes two months after margin lender Tricom Equities ran into trouble and got the big ticking off from its bankers.

These companies represent the parasitic face of finance capitalism. They participate in the division of the surplus value (profit) that is created by the labour power of the working class, but add nothing of value to the process of production themselves.

Their goal is capital accumulation for its own sake and their method of pursuing capital accumulation is margin lending.

The Australian Securities and Investment Commission defines margin lending as the borrowing of money to invest in financial products such as shares, fixed interest securities and units in managed funds with interest paid on the loan. It points out that while borrowing to invest can result in higher returns, it can also magnify the losses.

Both the lender and the borrower are linked through vulnerabilities that arise from the parasitic nature of capital accumulation and distribution this far removed from the process of the production of surplus value.

Borrowers can be caught out if the share market falls, thus eroding the value of their investments. Let’s say that a parasite, P, has $100,000 appropriated from the workers whose labour power has created it, and wants to borrow another $100,000 in a margin loan. So he/she now has $200,000 to invest. In other words, our parasite can get twice the return on investments made by the purchase of shares etc by doing nothing other than signing on the dotted line. And you don’t get blistered hands from writing your own name.

In a margin loan, the borrower must maintain the value of financial products purchased by the loan at a minimum ratio to the value of the loan as set by the creditor. This largely reflects the creditor’s view of the risk attached to the purchased financial product. So-called “blue chip” stock carries little risk, has a higher loan-to- valuation (LVR) and enables a borrower to access more loan money.

Let’s say our investor, P, has a medium ranged 50 per cent LVR. And let’s say the interest rate is 10%. The lending institution will commonly allow a 5-10% buffer on the LVR. We’ll set it at 5 per cent.

As soon as the loan is signed, P is up for $10,000 in interest payments per annum. If the investments (of the combined $200,000) return him/her 10% per annum (ie $20,000) then he is $10,000 ahead (less any transaction fees). If P had only invested his/her original amount, he would still be where he is now, $10,000 up. So to do any better than P would have been without the loan, the market must provide returns greater than 10 per cent.

Over the last decade, P and all the other parasites have been relatively secure in this form of borrowing. The stock market has been bullish and the value of shares and other financial products has generally been on the rise. According to the Weekend Financial Review March 29-30, 2008), “appetite for margin loans escalated from $5.2 billion in September 1999 to $35.9 billion by September 2007 – almost a 600 per cent increase”.

However, the advent of the US sub-prime crisis has caused a massive turnaround in the value of shares in Australia and world-wide. The global over-production of what one writer has called “computer-screen money” (parasitic finance capital) has led to a 25% decline in the value of Australian shares since last November.

Not only has there been what stock market apologists like to call “natural corrections”, but the sharks of the finance pool – international hedge funds – are credited with spreading destructive rumours that trigger panic selling of a company’s stock so that the hedge fund can profit from short selling (selling when the price is high and buying back again when the price is low).

Between the corrections and the corrupt (short-selling) falls the shadow of margin lending.

For whatever reasons the value of P’s investments fall, they cannot fall below the 5 per cent buffer he is allowed on the LVR or he will get the dreaded “margin call”.

In other words, the bank or broker that advanced the margin loan will say “time’s up” and demand within 24 or 48 hours extra cash or shares to back the value of the loan. And that's on top of the interest on the original value of the loan, which still has to be paid.

In other words, a downturn in the price of shares can result in the financial rug being pulled out from under P's feet.

Big time. Just ask Eddie Groves!

ABC Learning is a classic case of a margin call. But ABC Learning was just one company. In the cases of Tricom and Opes Prime, the lenders themselves have gone down the gurgler because the margin calls that they triggered on borrowers who couldn’t pay back the value of their loans has left these companies at the mercy of the banks that loaned them the money to advance as margin loans.

The two banks that have gambled on returns from capital loaned to stock brokers who then made margin loans to investors are the Australian and New Zealand Banking Group (ANZ) and Merril Lynch. Opes Prime owes the ANZ $650 million and Merril Lynch $350 million. They can probably get their money back by selling off the shares held by Opes Prime as collateral against the margin loans it issued, but those who took out the loans will end up being unsecured creditors in an insolvent company. They will take the brunt of the losses. (The ANZ has a sanitized version of margin loans directed at “mum and dad” investors (right) here: . This is how they try and suck people in: “Borrowing to invest with a margin loan can be a simple, tax-effective way to build wealth no matter what your stage of life. It can significantly enhance your ability to create wealth through greater participation in the share market.”)

Whilst the current crisis will probably not cause capitalism to collapse any more than the recent crises of 1987 and 1989-91, it is indicative of the instability of international imperialism and the so-called free market of globalised capitalism.

The surplus value created by the labour power of workers engaged in socialized (interlocking, interdependent) production, appropriated by the few (the owners of the means of production), distributed as profit, rent, interest among the different sections of the capitalist class, and finally speculated on through its purchase and sale as a commodity designed to recreate its own value many times over, leading to its own overproduction and a consequent redefinition through crisis of the value of credit –such is the wasteful, destructive and parasitic cycle of imperialist finance capital.

Our task as the industrial working class and as agricultural and service industry working people is to shake ourselves free in the breeze of revolt, to discard the parasites of capitalism, and to use a state apparatus under our control and direction to deploy surplus value in socially useful purposes, in government endeavours that return commodities and services to those whose labour power has made their purchase possible.

We call that socialism.

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