A number of Goldman Sachs partners have been slapped with margin calls after they levered their Goldman stock to acquire stakes in alternative investments, reports CNBC’s Charlie Gasparino. Those alternative investments and Goldman shares have been hammered, putting the bank in the awkward spot of placing margin calls on their own employees. Since the partners can’t come up with the cash on their own, the bank has arranged loans for those employees.
Take a moment to consider the multiple layers of leverage in this story. First, you have Goldman’s stock which was inflated by the bank’s huge leverage. Then you’re using that as collateral for margin loans, so more leverage. And then with that money, you’re buying hedge fund and private equity stakes, which are levered still. Three layers of leverage. It doesn’t take much to get wiped out when you’re squeezing things that far.