Today, i want to talk about who exactly is going to pay for the amc. Squeeze tons of people have been asking in the comments saying tom who actually is going to pay for the squeeze if all of these hedge funds are being liquidated during the market crash. So stay tuned and let's make some money now. This is obviously another one of my quickfire q, a videos and if you have any amt, squeeze related questions be sure to leave them down in the comments below and i'll answer them in an upcoming video, and i want to dive straight in with the q information.

So i think to explain who actually is going to pay for the squeeze? I think i really need to explain how a liquidation process actually works and where all of the money goes and how the money is lost during a liquidation. So, to start from the very top hedge funds get liquidated when their assets go to zero, but if this hedge fund is using leverage, they get liquidated when their overall fund size dips below a certain level aka when their personal equity in that overall fund hits zero. So, to give you an explanation of how exactly that works, we know that citadel are famous for using a leverage ratio of seven to one that means for their overall 280 billion dollar fund. I think it may be slightly lower or slightly higher than this by now, but let's use 280 billion as it's an easy number to use of that 280 billion dollars.

Only 40 billion dollars of that relates to citadel's money and its investors money. The other 240 billion dollars is the leverage that citadel is using aka loans, they've taken from other major institutions, other major banks and prime brokers like bank of america. So this fund here is in the ratio of seven to one for every single dollar of citadel's personal money, aka the money from citadel and its investors. It borrows an additional seven dollars from external sources, exactly the same way that you and i can use leverage on trading platforms like weeble, robin hood and many other platforms.

We can borrow money from the trading platform itself to leverage our investments now. Obviously, leveraging has its upsides and its downsides. You do have to pay interest on the money that you borrow and it does compound and exponentially increase your gains, but it does exponentially increase your losses as well. Now, obviously, i'm not here to talk about the advantages and disadvantages of using leverage in your trading.

I'm just here to say that citadel uses a leverage ratio of seven to one aka, 40 billion dollars of their own money and 240 billion dollars of borrowed money. Now again for another example of their 280 billion dollar fund, let's say: they've used 20 billion dollars of that for their amc short position, the other 260 billion dollars in their fund has just been invested long into stocks. Now these numbers are purely speculative numbers, for example, purposes only. We know they're shorting other stocks, not just amc, and i don't know the exact value of their amc short position.

It may be 20 billion dollars, it may be more, it may be less, but again just to make the numbers really easy. Let's split their fund of 280 billion into 20 billion into their amc, shorts and 260 billion into long stocks. Now, for citadel to be margin called their fund obviously has to drop below the certain amount their fund has to drop down to 240 billion dollars, because at that point their 40 billion dollars of personal money that they have invested goes to zero. If you imagine this 280 billion dollar fund the same as a 280 000 house, you've put forty thousand dollars of your own money into the property and you've borrowed two hundred and forty thousand dollars from the bank to purchase that two hundred and eighty thousand dollar house.

Now, let's say the property market crashes and your two hundred and eighty thousand dollar house falls by 40 000 and it's only worth 240 000. The bank obviously doesn't suffer any of that loss. You effectively just lose your deposit that you put into the property. If the house is only worth and forty thousand dollars, you've still got the 240 000 loan to pay.

You effectively just lose the money that you've put in. If you were to sell the house now, if citadel's portfolio declines, aka their stocks lose value during the current market, crash and amc starts to rise and their short position moves against them. Two things are going to happen. Let's say: amc doubles in price and their 20 billion dollar amc short position becomes a 40 billion dollar amc short position that they still have to buy back aka, taking on a 20 billion dollar loss and, let's say their 260 billion dollars worth of stocks, falls to Only 240 billion dollars worth during the market crash therefore suffering an additional 20 billion dollar loss during the market crash now, i said today would take a 20 billion dollar loss on their stocks and a 20 billion dollar loss on their amc short position.

That in total is a 40 billion dollar loss. That means citadel's overall fund size has decreased from 280 billion dollars down to 240 billion, but they've still got that 240 billion dollars worth of loans that they borrowed from institutions like bank of america and therefore their personal equity of the citadel money and their investor money Goes to zero now, even though there's still 240 billion dollars left in the fund, their personal money that they put into the fund, aka citadel's money and their investors, money has gone to zero and therefore they experience the dreaded margin call and the dreaded liquidation. Now, at this point, the entire citadel fund does get liquidated because they need to pay back the money that they've borrowed. Therefore, they need to sell off all their stocks, cover all the shorts and return that 240 billion dollars worth of loans back to the original underlying lender.

Obviously, the lender isn't going to let them fly or isn't really going to. Let them fly too long, because these lenders can't take on massive losses. Bank of america can't just write off a 240 billion dollar loss onto their books for letting cetadel off the chain. Maybe these banks, like bank of america and other institutions, will give citadel some extra leeway and allow them to lose an extra 10 billion 20 billion or 30 billion dollars.

I don't know what the number is, but at some point they will get margin called now at that point. Citadel still has these 240 billion dollars worth of stocks that they can sell and obviously use that money to close out of their amc, short positions and then with any remaining money. They pay it back to the lenders. Aka bank of america now obviously closing out their entire short position will cause amc to squeeze and therefore they're gon na have to dig deeper into their pockets to buy back.

All of those amc shares, as the price starts, to run during the squeeze. Even if citadel get liquidated at the exact point, when their fund touches 240 billion dollars at the exact point when their citadel owned equity or the citadel personal investment into that fund hit zero, they still have to use that money to buy back. All of the amc shares and there may not be 240 billion dollars left when they've covered all the shorts. Obviously, when amc squeezes, amc will run up past 100 per share past 200, past 500, past 1000, so on and so forth.

Until citadel have brought back every single share, they need to to close out of their position. Citadel may actually have to use the entire 240 billion dollars to close out of that position, and that's just one individual institution you're also going to have all of the other hedge funds that are currently shorting amc, potentially using their entire fund. To close out of the amc shorts, if citadel do spend the entire 240 billion dollars buying back their amc shares closing out of their amc short position. It will just be tough luck for bank of america and they will have to recognize this giant giant loss.

Potentially bank of america could share this loss with the remaining members of the dtcc because, as the dtcc goes, all of the members of the dtcc have to share the losses of any defaulting member. That's exactly what this 60 trillion dollar insurance policy is all about. When a member of the dtcc defaults, this specific loss will be shared among all of the other members. That way at least bank of america doesn't have to write off the entire 240 billion dollars worth of losses on their own individual books.

They can spread it between all of the members of the dtcc. Now, if citadel, don't use the entire 240 billion dollars to close out of their amc short position, any remaining money goes back to those lenders and other creditors of citadel in a certain liquidation order. When there's leftover money, the first creditor to get some of that money - is any secured creditors with a fixed charge, aka any banks lending money to citadel with a fixed charge. The second kind of company that gets money during a liquidation is the insolvency practitioners they have their fees and expenses paid for during the liquidation.

Any remaining money then goes to preferential creditors after that secondary preferential creditors. After that prescribed part, creditors secured creditors with a floating charge, non-preferential creditors like citadel's customers and then finally, the individual shareholders or the specific individual or the wider investors. After all of those amc shares have been brought back and after all of these creditors have been paid off any remaining money. If there is any, remaining money goes back to ken griffin and his investors and therefore we can see that when these hedge funds and institutions do go bankrupt and they do get liquidated, they're not being liquidated at a point when their entire hedge fund hits zero dollars.

They're only being liquidated when their personal investment into that fund hit zero. All of these hedge funds are using leverage. All of these hedge funds are borrowing money from other institutions and other major banks, and therefore, when their personal investment and their investors, investments hit zero. That's when these hedge funds will be margin called we're, not waiting for the entire 280 billion dollars.

That citadel holds to hit zero we're just waiting until they lose their personal investment and they end up getting margin called, and that also goes the same for all of the other short hedge funds that are currently shorting. Amc we're not waiting for their entire overall fund to hit zero, we're just waiting for their personal investment and their investors, investments into the funds to hit zero, and when these investments do hit zero. The fund overall still has tons and tons of money and tons and tons of stocks. It just owes that money to other institutions.

Therefore, the stocks have to be sold, the shorts have to be covered and any remaining money returned to the institutions. For example, if you're leveraged trading on robin hood, you've got a thousand dollars but you're using ten times leverage. Therefore, you've got an investment into a stock of ten thousand dollars. You don't get liquidated when you lose the full ten thousand dollars.

You get liquidated when you lose that first thousand, because that's the only thousand dollars that you put into the stock. You obviously still need to use that remaining nine thousand dollars to pay back the margin or to pay back the leverage, all that money that you borrowed and it works the exact same way for these large hedge funds. They've borrowed tons and tons of money from external lenders and therefore, even when they're being liquidated, they're liquidated before all of the cash is drained to the point when they still have enough money theoretically to pay back those lenders. But it may so happen.

They have to use the full money that they have borrowed from these lenders to fully close out of their amc shorts during the amc short squeeze. So hopefully now you can see that, even though these hedge funds are being liquidated, even though they're going bankrupt during the current stock market crash, they still have money to buy back their amc shorts because they still have to theoretically return cash to the lenders that they Borrowed the money from in the first place, but guys be sure to let me know what you think down in the comments below and, as always guys be sure to ding that notification bell, because that way, you'll be alerted. When i upload a new video cheers.