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To: SouthFloridaGuy who wrote (119444)	3/6/2001 12:34:24 PM
From: Bilow	Read Replies (4) \| Respond to of 164684

Hi NewYorkCityBoy; Re 1929 derivatives and margin requirements... While there was no statutory margin requirement in 1929, and a few firms did give 10% margin to a few well heeled (powerful and wealthy) clients, the vast majority of stock owners who did have a margin account (probably a majority had cash only accounts) were restricted to 50% margin or less. The reason was simple. Brokerages then, as now, make money on commissions, not by risking their own money. If the brokerages had been so certain that 10% margin was a safe level, instead of making piddly commission profits they would have invested their money in the market directly. Undoubtedly some brokerages did just that, but they certainly never gave a typical guy off the street 10% margin. If you want to learn more about this subject, the book on the crash of '29 by John Kenneth Galbraith discusses the margin situation at length. He also makes hints about the derivatives situation, but does not state how widespread the activity was. My guess is that then, as now, most people did not get near options or even margin, most people instead kept cash accounts. This is not to say that the current situation is better. Instead, I believe it is worse in many ways. The worst way is that the a lot of small time players bought stocks with money obtained from credit cards. That means that there is no margin call to force them to sell while they still have equity. In addition, the interest rate is higher than what a broker would charge, both now and in the '20s. (See the Galbraith book for the actual rates charged.) Consequently, where their grand parents walked away from the market with no money, their grandchildren are being forced out of the market with big debts as well. The rumors of widespread 10% margin being the cause of the '29 bubble and crash were created by the brokerage industry in the aftermath of the financial destruction. The purpose behind those rumors was to give the investing public a reason to believe that the 90% price drop could never happen again. While there was not a market for freely traded derivatives in '29, derivatives were well known even in 1905. I gave a reference for a broker being questioned about this in the Burke thread. The difference was that a broker arranged the contract between two parties, and an actual piece of paper was signed giving the terms of the contract. That is why the terms "contract", "call", "put" all seem kind of 19th century - Wall street has been trading these things (on stocks as well as debt) since as far back as I can find records. One of the tendencies that humans have is to believe that this current generation (whether that is the 18th century or the 21st) is the first generation to rise out of barbarianism. While it does take a lot of technology and smarts to create a computer, it doesn't take jack to create an option agreement, and our ancestors were more than perverse enough to do so. -- Carl