Margin Calls Ignite Billionaire Fire Sale
Andrew Farrell and Tatiana Serafin 10.23.08, 12:00 PM ET
On Wednesday Oct. 8, Aubrey McClendon owned more than 32 million shares in America's largest natural gas producer. Two days later, most of it was gone.
An outspoken bull on his company, Chesapeake Energy (nyse: CHK - news - people ), and the future of natural gas, the Oklahoman personally appeared in television commercials to tout gas as a solution to the U.S.'s economic, environmental and national security problems. At the same time, he was aggressively buying Chesapeake Energy shares on margin--using borrowed money for the purchases. It backfired. (See "America's Energy Billionaires.")
Why would a man who had a $3 billion fortune in August buy on margin? "You can just buy more," says Alan Lancz, a wealth manager who manages money for about 70 wealthy families. "It's the most efficient, quickest and least costly way to buy a lot more shares."
"As long as they don't go down," he adds.
Overleveraged financial institutions and home borrowers are at the heart of the financial crisis. Now count overleveraged billionaires among those tangled in the mess. McClendon, like a pack of other super-wealthy businessmen and women the past month, was forced to sell because of margin calls.
When shares fall sharply, like they are now, it gets nasty quickly. "It's a downward spiral," says Lancz. "They have to sell to bring up their equity. And these guys have such big stakes that when they sell they can push down the stock price. Then people find out about it so there's more sellers. They have to sell even more."
That's what happened to McClendon. By the morning of Oct. 8, McClendon owned 32.5 million shares of Chesapeake. At that point, the stock had lost nearly two-thirds of its value in just three months. To meet margin calls, McClendon rapidly unloaded his Chesapeake stake, much of it at a notable discount to what he paid.
According to regulatory filings, McClendon sold 1.8 million shares of Chesapeake for $12.65 per share in one of his Oct. 10 transactions. Just four months earlier, those shares traded as high as $74 each.
Fellow American billionaire Sumner Redstone was also selling heavily this month. The 85-year-old media tycoon unloaded approximately $400 million in Viacom (nyse: VIA - news - people ) and CBS (nyse: CBS - news - people ) shares to keep his creditors at bay (see "Sumner Sales For Viacom And CBS").
Billionaires in Russia and Ukraine have been particularly hard hit by lenders seeking repayment on balloon loans in order to shore up their own balance sheets. One of the first to get hit by the global downturn was once Russia's richest man. Oleg Deripaska, whose net worth was $28 billion in March, has twice sold holdings to satisfy banks calling in loans.
First, French bank BNP Paribas (other-otc: BNPQY.PK - news - people ) requested repayment on a $1.2 billion loan against which his 20% stake in Canadian auto parts company Magna International (nyse: MGA - news - people ) was pledged. Then, Germany's Commerzbank bought back his 10% stake in German construction company Hochtief. Deripaska is also dealing with margin calls at his mining company, Rusal, as metal prices plunge.
A 70% decline in the gas producer Gazprom has two other Russian billionaires feeling the pinch. Alisher Usmanov is facing a margin call from Dresdner Bank (other-otc: DRSDY.PK - news - people ). Unless he can refinance the loan, he may be forced to hand over his 1.5% stake in Gazprom.
Suleiman Kerimov's 4.5% stake in Gazprom has lost over $7 billion since March. He reportedly faces several margin calls, which may put his other buyout plans on hold. In early October, his company GNK (renamed from Nafta Moskva) made a play for a 35% stake in gold miner Polyus Gold.
Ukrainian Kostyantin Zhevago needed to sell his 21% stake in iron ore producer Ferrexpo after JPMorgan Chase (nyse: JPM - news - people ) canceled an existing loan when Ferrexpo's share price plummeted.
Because of the murky nature of oligarch holdings, who's next is anybody's guess. Russian billionaires Petr Aven and Mikhail Friedman are hoping their Alfa Group can get out of repayment pressure from Deutsche Bank (nyse: DB - news - people ), which provided multibillion-dollar loans to purchase shares in mobile operator VimpelCom. Ukraine's Rinat Akhmetov is reportedly looking for loan relief for his coal and steel empire.
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