MOU HAHAHHA, you're next mini mo:"Margin Calls Increase Sharply Following Tech-Stock Sell-Off
By RUTH SIMON and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
Margin calls increased across Wall Street Tuesday as individual investors
were required to put more money in their brokerage accounts in response
to Monday's sell-off in Internet stocks.
At Citigroup Inc.'s Salomon Smith Barney brokerage unit, roughly 1,700
of the more than 130,000 customers investing with borrowed money
received margin calls based on Monday's market close, according to
Horace Derrick, senior vice president. That's an increase of 60% to 70%
over Friday's levels.
Kurt Halvorson, president of
Advanced Clearing Inc., said that
based on Monday's prices, "it looks
like margin calls could be up around
300% or so" from normal levels.
Advanced Clearing, a wholly owned
subsidiary of Ameritrade Holding
Corp., clears trades for about 65
brokerage concerns, including its
sister firms Ameritrade Inc.,
Accutrade Inc. and Amerivest Inc.
The rise in calls comes at a time
when many brokerage firms have made it tougher for investors to buy
volatile Internet stocks with borrowed funds. With a margin loan, investors
borrow cash against the value of stocks or bonds in their portfolios, either
to buy more securities or for other purposes.
A margin call occurs if the value of those securities falls below the
maintenance level set by the investor's brokerage firm. In that case, the
investor must deposit additional cash or securities in his or her account.
Investors who can't meet a margin call must sell stocks to raise the needed
funds. In a falling market, margin-related selling can drive stock prices
even lower. But there's no evidence that that's currently the case.
Some investors who faced margin calls benefited from Tuesday's upturn.
"The rebound in the technology and the communications sectors may help
mitigate some of those calls," said Mr. Halvorson. "Some may disappear.
Some of those customers may not have to respond with 100%" of the
money the call asks for.
Investors facing margin calls will be notified by mail and in some cases by
telephone and express mail as well, Mr. Halvorson said. They generally
have "a couple of days" to meet the call by depositing additional funds in
their account.
Charles Schwab Corp., the largest online broker, estimated that margin
calls were running twice normal levels, a spokesman said. At Quick &
Reilly Inc., a unit of Fleet Financial Group, margin calls were 50% above
normal levels, according to a spokesman.
Not every brokerage firm saw significant increases in margin calls. At
Fidelity Investments, margin calls were up less than 10%. "It was
reasonably typical of what we'd see on a volatile day," said Robert
Mazzarella, president of the firm's Fidelity Brokerage Services Inc. unit. A
Merrill Lynch & Co. spokeswoman said that the firm had "not seen any
unusual activity."
Online broker E*Trade Group saw a 5% to 10% increase in accounts
battered enough to receive a margin call. But after some big Internet
stocks had rebounded by midday Tuesday, "it would look like most of
them are probably going to be solved -- with market appreciation," said
E*Trade's president, Kathy Levinson.
In some cases, margin calls were triggered by stiffer requirements recently
imposed by brokerage firms in the wake of Internet volatility.
Generally, investors can borrow as much as 50% of the value of stocks
they own, under requirements set by the Federal Reserve Board. Investors
must then maintain a "minimum equity percentage" known as the
maintenance requirement. The New York Stock Exchange sets that level
at 25% of the value of the stocks in the account, but most firms have
higher maintenance requirements.
Concerned about the potent mixture of high-priced Internet stocks, novice
investors and buying on credit, many firms recently have imposed even
tougher house rules for selected securities. At Charles Schwab, for
instance, 106 stocks are now subject to tighter margin levels, up from just
22 last fall.
Salomon Smith Barney has set higher margin requirements for 85
Internet-related stocks. "We are currently reviewing the list and may
possibly add more stocks," Mr. Derrick added. Roughly 1,400 of the
margin calls issued by Salomon Smith Barney in response to Monday's
plunge were to meet the brokerage firm's own tougher margin
requirements, said Mr. Derrick.
Word of possible margin calls quietly spread across Internet message
boards devoted to technology stocks on Monday. Instead of overflowing
with lively chatter, some discussion forums for Web stocks were strangely
subdued, with investors presumably licking their wounds -- instead of
bragging about their latest trading exploits.
On the Silicon Investor message board devoted to Network Solutions
Inc., the company that registers Web addresses, one New York
short-seller wrote: "Surprising how quiet the thread can get. Can you say
'margin call?' " The investor, who goes by the name "Cmon" on the Silicon
Investor site (www.techstocks.com), said later in an interview that he
didn't want to be named.
By Tuesday, at least some investors were breathing easier. Glenn Rudolph
of Meadville, Pa., who describes himself as a full-time trader, said he
received a margin call from his broker, DLJ Direct, after the value of the
stocks in his portfolio slipped below the minimum requirements set by the
firm, a subsidiary of Donaldson, Lufkin & Jenrette Inc.
But he said that his margin account, which includes such stocks as Intel,
Cisco Systems and America Online, had sufficiently recovered Tuesday
that he expected his portfolio to meet the brokerage firm's requirements.
"I was nervous a bit there, but things are looking better now," he said.
Others were still worried. Lynn Badler, a public-school teacher in Alpine,
Calif., said she expected to hear from her broker "anytime now." She said
she had bought shares of Dell Computer on margin at $50. But with the
stock down sharply, she was expecting that she would have to come up
with as much as $40,000 or face having her account liquidated. Dell
closed Tuesday at $38.1875, up $2.75, in Nasdaq Stock Market trading.
She added that she wasn't terribly familiar with margin trading when she
started doing it, but figures she will now get a thorough tutorial. "I have to
feel the pain before I know what I'm doing," she said.
--Aaron Elstein of The Wall Street Journal Interactive Edition
contributed to this article.
By RUTH SIMON and REBECCA BUCKMAN
Staff Reporters of THE WALL STREET JOURNAL
Margin calls increased across Wall Street Tuesday as individual investors
were required to put more money in their brokerage accounts in response
to Monday's sell-off in Internet stocks.
At Citigroup Inc.'s Salomon Smith Barney brokerage unit, roughly 1,700
of the more than 130,000 customers investing with borrowed money
received margin calls based on Monday's market close, according to
Horace Derrick, senior vice president. That's an increase of 60% to 70%
over Friday's levels.
Kurt Halvorson, president of
Advanced Clearing Inc., said that
based on Monday's prices, "it looks
like margin calls could be up around
300% or so" from normal levels.
Advanced Clearing, a wholly owned
subsidiary of Ameritrade Holding
Corp., clears trades for about 65
brokerage concerns, including its
sister firms Ameritrade Inc.,
Accutrade Inc. and Amerivest Inc.
The rise in calls comes at a time
when many brokerage firms have made it tougher for investors to buy
volatile Internet stocks with borrowed funds. With a margin loan, investors
borrow cash against the value of stocks or bonds in their portfolios, either
to buy more securities or for other purposes.
A margin call occurs if the value of those securities falls below the
maintenance level set by the investor's brokerage firm. In that case, the
investor must deposit additional cash or securities in his or her account.
Investors who can't meet a margin call must sell stocks to raise the needed
funds. In a falling market, margin-related selling can drive stock prices
even lower. But there's no evidence that that's currently the case.
Some investors who faced margin calls benefited from Tuesday's upturn.
"The rebound in the technology and the communications sectors may help
mitigate some of those calls," said Mr. Halvorson. "Some may disappear.
Some of those customers may not have to respond with 100%" of the
money the call asks for.
Investors facing margin calls will be notified by mail and in some cases by
telephone and express mail as well, Mr. Halvorson said. They generally
have "a couple of days" to meet the call by depositing additional funds in
their account.
Charles Schwab Corp., the largest online broker, estimated that margin
calls were running twice normal levels, a spokesman said. At Quick &
Reilly Inc., a unit of Fleet Financial Group, margin calls were 50% above
normal levels, according to a spokesman.
Not every brokerage firm saw significant increases in margin calls. At
Fidelity Investments, margin calls were up less than 10%. "It was
reasonably typical of what we'd see on a volatile day," said Robert
Mazzarella, president of the firm's Fidelity Brokerage Services Inc. unit. A
Merrill Lynch & Co. spokeswoman said that the firm had "not seen any
unusual activity."
Online broker E*Trade Group saw a 5% to 10% increase in accounts
battered enough to receive a margin call. But after some big Internet
stocks had rebounded by midday Tuesday, "it would look like most of
them are probably going to be solved -- with market appreciation," said
E*Trade's president, Kathy Levinson.
In some cases, margin calls were triggered by stiffer requirements recently
imposed by brokerage firms in the wake of Internet volatility.
Generally, investors can borrow as much as 50% of the value of stocks
they own, under requirements set by the Federal Reserve Board. Investors
must then maintain a "minimum equity percentage" known as the
maintenance requirement. The New York Stock Exchange sets that level
at 25% of the value of the stocks in the account, but most firms have
higher maintenance requirements.
Concerned about the potent mixture of high-priced Internet stocks, novice
investors and buying on credit, many firms recently have imposed even
tougher house rules for selected securities. At Charles Schwab, for
instance, 106 stocks are now subject to tighter margin levels, up from just
22 last fall.
Salomon Smith Barney has set higher margin requirements for 85
Internet-related stocks. "We are currently reviewing the list and may
possibly add more stocks," Mr. Derrick added. Roughly 1,400 of the
margin calls issued by Salomon Smith Barney in response to Monday's
plunge were to meet the brokerage firm's own tougher margin
requirements, said Mr. Derrick.
Word of possible margin calls quietly spread across Internet message
boards devoted to technology stocks on Monday. Instead of overflowing
with lively chatter, some discussion forums for Web stocks were strangely
subdued, with investors presumably licking their wounds -- instead of
bragging about their latest trading exploits.
On the Silicon Investor message board devoted to Network Solutions
Inc., the company that registers Web addresses, one New York
short-seller wrote: "Surprising how quiet the thread can get. Can you say
'margin call?' " The investor, who goes by the name "Cmon" on the Silicon
Investor site (www.techstocks.com), said later in an interview that he
didn't want to be named.
By Tuesday, at least some investors were breathing easier. Glenn Rudolph
of Meadville, Pa., who describes himself as a full-time trader, said he
received a margin call from his broker, DLJ Direct, after the value of the
stocks in his portfolio slipped below the minimum requirements set by the
firm, a subsidiary of Donaldson, Lufkin & Jenrette Inc.
But he said that his margin account, which includes such stocks as Intel,
Cisco Systems and America Online, had sufficiently recovered Tuesday
that he expected his portfolio to meet the brokerage firm's requirements.
"I was nervous a bit there, but things are looking better now," he said.
Others were still worried. Lynn Badler, a public-school teacher in Alpine,
Calif., said she expected to hear from her broker "anytime now." She said
she had bought shares of Dell Computer on margin at $50. But with the
stock down sharply, she was expecting that she would have to come up
with as much as $40,000 or face having her account liquidated. Dell
closed Tuesday at $38.1875, up $2.75, in Nasdaq Stock Market trading.
She added that she wasn't terribly familiar with margin trading when she
started doing it, but figures she will now get a thorough tutorial. "I have to
feel the pain before I know what I'm doing," she said.
--Aaron Elstein of The Wall Street Journal Interactive Edition
contributed to this article.
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