How many times in history we have seen articles like this?
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April 21, 1999
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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.
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