Moderate margin calls spare stock market worse fate
By Mark Weinraub
NEW YORK, Sept 21 (Reuters) - It could have been worse.
Fewer investors have been buying stocks with borrowed money, so
fewer are getting squeezed now that Wall Street is going
through wrenching declines.
The amount of money that brokerages are willing to lend to
investors to buy stocks, a practice known as margin trading,
has been decreasing for the past 18 months as stock prices have
slumped. As a result, broker demands for repayment of the loans
-- margin calls -- are few.
"We're seeing a higher number of maintenance calls since
the events of Sept. 11 but it doesn't approach what we've seen
in history, such as during the heights of the tech bubble or
other market storms," said Steven Gomer, spokesman at the No. 1
U.S. discount and online brokerage Charles Schwab Corp.
<SCH.N>.
This lightened load of margin debt should help mitigate the
damage of investors forced to sell off stocks to pay back loans
if the market keeps falling at its torrid pace. Often margin
calls snowball into more selling, worsening losses. The Dow
Jones industrial average <.DJI> on Friday afternoon was poised
to rack up its biggest weekly drop -- down almost 15 percent --
since the Great Depression.
"Given all the factors that are at play right now," said
Anthony Chan, managing director and chief economist at Banc One
Investment Advisors, which oversees $134 billion, "I do not
believe that margin debt selling is as much of a problem as it
could be because we went into this unfortunate set of events
with a fairly lean level of margin debt."
The level of margin debt at New York Stock Exchange member
firms, some of the biggest on Wall Street, extended to
investors dropped 2.8 percent to $165.3 billion in July, the
latest month for which data was available. The level of these
loans is off nearly 41 percent from March 2000, the height of
the tech-fueled bull market.
Overall, firms lent out $175 billion for margin trading,
encompassing both stocks and bonds, according to an official at
the National Association of Securities Dealers.
"We've had pretty good margin controls over the last, not
just months, but several years actually," said Tony Cecin, head
of equity trading at U.S. Bancorp Piper Jaffray. "We're a
little stringent in terms of who we extend it to."
Brokerage firms demand payment of their margin loans when
the value of a customer's account drops below a certain level.
This week's precipitous drops in the major stock indices,
spurred by forecasts of shrinking profits following attacks on
the World Trade Center and Pentagon, have wiped out about more
than $1.2 trillion of U.S. investors' wealth.
The types of loans the brokerage firms make have been
changing as the market has fallen, said Hugh Johnson, chief
investment officer at First Albany Corp.
"There's no question about it," he said "As the markets go
down, brokers tend to take a look at their margin accounts very
carefully to make sure that they're diversified.
Fears about margin calls were stoked on Friday following
media reports that brothers Sid and Lee Bass and their father,
Perry Bass, sold 135 million shares of Walt Disney Co. <DIS.N>
to help meet a margin call.
Margin calls at Schwab are up since the Sept. 11 attack
compared with the summer, but remain lower than they have been
during prior periods of market turmoil.
San Francisco-based Schwab had $11.5 billion in total
outstanding margin loans as of the end of the second quarter
this year, compared with $21.8 billion at the end of the first
quarter last year. The firm did not comment on what type of
investors were receiving margin calls.
At U.S. Bancorp, Cecin said he had seen an "uptick" in
margin calls this week but said the amount of calls was not a
problem.
The New York Stock Exchange recently put into place new
rules that make it harder for a day trader to trade on margin
but no new curbs have been placed on larger investors. The new
rules, which will also be implemented by the Nasdaq Stock
Market, require that a day trader deposit $25,000 in an account
before being allowed to start margin trading on stocks. The
previous minimum for margin trading was $2,000.
-- Additional reporting by Mary Kelleher
((--Mark Weinraub, New York Equities desk 646-223-6000))
REUTERS
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