Why did margin calls cause Wall Street billionaires to lose 20 billion in 2 days? A comprehensive analysis of leverage risks

The Warning of $20 Billion Vanishing into Thin Air

The financial storm of March 2021 saw Bill Hwang’s $20 billion in assets, accumulated over 10 years, wiped out in just 48 hours. The story of this top Wall Street fund manager is essentially the ultimate lesson in margin calls.

His investment logic was simple and brutal: find promising companies, then amplify returns with massive leverage. This approach worked in a bull market—assets skyrocketed from $2.2 million to $20 billion. But when a black swan arrived, high leverage became a countdown bomb.

His story reveals a harsh truth: how risky financing to buy stocks really is.

What is a margin call? Why does it lead to liquidation?

A margin call, in plain terms, is a forced liquidation. You borrow money from a broker to buy stocks, and if the stock price drops to a certain level, the broker demands you to add more collateral. If you can’t, the broker will sell your stocks directly to cover the margin—this is called a margin call.

For example: you are bullish on a stock but lack sufficient funds, so you use margin to buy. In the Taiwan stock market, typically you put up 40% of the purchase price, and the broker covers 60%. When the initial stock price is 100 NT dollars, the maintenance margin rate is 167% (100 ÷ 60).

When the stock price falls to about 78 NT dollars, and the maintenance margin drops below the warning line of 130%, the broker will notify you: it’s time to add margin. This process is called “margin追繳” (margin追繳). If you can’t add funds, the broker won’t wait—they will forcibly liquidate your position at the current market price, selling your stocks.

From your perspective, this is a margin call; from the broker’s, it’s risk control.

How do margin calls trigger a stock price plunge?

What happens when many investors face margin calls simultaneously?

Chain reaction decline. Ordinary investors tend to hesitate when losing money, but brokers won’t—they just want to recover their lent money. They sell at market price without regard for investor sentiment. As a result, a stock can be hammered down far below its fair value.

This oversold condition then triggers another wave of margin calls, causing the stock to continue free-falling. Bill Hwang fell into this vortex. His holdings were enormous; once he started selling, there weren’t enough buyers to absorb the sell-off. His liquidation not only crushed his own stocks but also affected other related holdings facing margin calls, leading to a domino effect.

Even some stocks that were initially fine had to be sold to maintain margin ratios. Ultimately, all his investments plummeted sharply within a short period.

Why are stocks after a margin call often avoided?

Margin calls not only depress stock prices but also alter the shareholding structure.

Stable shareholders (management, pension funds, insurance companies) are displaced. Stocks sold off by brokers flood into retail investors’ hands. Retail investors tend to be short-sighted—they sell at small gains or losses, further increasing volatility. Large funds tend to stay away, and the stock enters a long-term weak phase unless major positive news attracts institutional capital again.

Therefore, stocks after a margin call are usually neglected by the market for a while, with deep short-term declines being common.

How can smart investors use margin without踩雷?

Despite the high risks, leverage isn’t entirely useless. The key is how to use it.

First tip: Use margin to implement staggered positioning. If you like a stock but have limited funds, buy part of it on margin first. If the price drops, you still have room to buy more on dips, lowering your average cost. If the price rises, you enjoy amplified gains.

Second lesson: Only buy large-cap stocks. Bill Hwang’s story proves that when big players face margin calls, stocks with poor liquidity get hammered especially hard. Choose stocks with sufficient liquidity; the larger the market cap, the safer.

Third point: Calculate the cost of margin. You pay interest to the broker. If a stock’s annual dividend yield is roughly equal to the interest cost of margin, it’s pointless. You must ensure the potential return far exceeds the borrowing cost.

Fourth: Discipline around resistance and support zones. When a stock can’t break through a resistance zone, using margin to hold on can be painful—you keep paying interest while watching the stock consolidate. At this point, it’s better to take profits. Conversely, if a stock breaks below a support zone, the short-term rebound probability is low, and you should cut losses immediately.

Disciplined operation is the long-term key to winning in the stock market.

Conclusion: Leverage is a double-edged sword

Stories of margin calls happen every day. Leverage can accelerate wealth accumulation but also speed up losses. Bill Hwang’s two-day lesson taught Wall Street this—playing with margin without proper preparation can cost far more than you imagine.

Always do thorough homework before investing, especially when using high-risk strategies like leverage. This way, you can avoid exposing yourself to the black swan risks of the unknown.