Professor Elam

Weekend Nov 7, 2015

Michael Pearson Valeant CEO got a $100 M margin call from Goldman Sachs this past week.  Friday Oct 30 GS told him to pay the loan or face foreclosure by Tuesday Nov 3. Sure enough GS sold 1.3M shares that Thursday Nov 5. We study equity in ACCT 3302 and 3304.  So here is a teachable moment. 

What is a margin call?  Stock purchased with borrowed money from the border is said to be bought on margin, that being the borrowed money. Ione can borrow 50% of the purchase price. If however the stock falls enough that the 50% equity of the buyer is wiped out, the broker 'calls' the margin and sells the stock. 

VRX.TO has been in free fall.That is the reason for the margin call. It is falling so much there is barely equity to pay the loan. 

On this two hour chart one can readily see the GS forced sale Nov 5. And it looks like there have been at least two other previous instances where no doubt the same thing happened. Dumping such a stock into a market with few buyers, well I am amazed the stock has not gapped down much further.