1 Adam 12 see the Margin Calls

[Lisa & Ian Murray]

http://www.iht.com/IHT/TODAY/FRI/FIN/margin.2.html

Paris, Friday, June 2, 2000
After Stocks Slide: The Margin Call
Demand to Cover Debts Ruins Some Who Borrowed to Buy Shares


By Sharon Walsh Washington Post Service

NEW YORK - The ultimatum comes in a harmless-looking white envelope with
blue writing, a Mailgram.
''Either make an immediate payment or close out some of your portfolio,''
reads one. Another one ''reserves the right to take action at ANY time with
or without notice if market conditions warrant.''

''Although we are reluctant to take further action, if we have not received
the funds by then,'' a third says, ''we will be forced to liquidate a
sufficient amount of securities to meet these requirements,'' adding:
''Losses may be realized that you do not wish to take at this time.''

This is the dreaded margin call. As ominous-sounding as it may be, the fear
of a margin calls did not keep hungry investors from leveraging their stock
portfolios to invest more money than they had when the markets were
climbing. At the end of March, the New York Stock Exchange reported that
balances in margin accounts were $278.5 billion, the highest level ever.

Regulators and Wall Street analysts were concerned that too many investors
were speculating in the market with borrowed ''margin'' money. But margin
debt declined in April by $26.8 billion - its biggest dollar drop ever - and
it is likely to be flat or down again in May, according to the NYSE and
brokerage houses.

The drop did not result from more caution among investors. Rather, many who
invested on margin when the market was soaring had to raise cash when the
value of their stocks plummeted. Some lost everything.

''I don't think it went down because people paid off margin debt,'' said
David Carr Frank, a broker with Financial West Group in Los Angeles. ''It
went down because people got wiped out.''

Margin calls rose substantially in May, said Mike Dunn, a spokesman for
Datek Online Holdings Corp., one of the biggest online trading companies.
''Some people were closed out,'' he said. ''Some made payments. Some sold
stocks. It was not unpredictable. Whenever the market goes down sharply,
there are more margin calls.''

''I think that's good,'' said Charles Pradilla, chief investment strategist
at SG Cowen Securities. ''I mean, my butcher was on margin. These were
speculative investors.''

Margin debt, $251.7 billion in April, has been the fastest-growing component
of U.S. private debt in the past year, according to the Securities Industry
Association. And new horror stories of investors being destroyed by margin
calls are likely to emerge.

''It's like holding the kiss of death in your hands,'' said one investor who
has received margin calls and asked that his name not be used.

''You think, 'Oh, God. How will I tell my wife?' Using margin is great when
the market's going up, but a margin call is awful,'' he said. ''People don't
understand that you can lose your house, your savings, everything.''

Margin calls come to investors who borrow from brokerage firms using their
stock portfolios as collateral so that they can invest even more money in
stocks. If the value of the stock portfolio declines below the collateral
requirement and they are unable to come up with the money, a broker can sell
the stocks immediately - without consulting him - to meet the margin call.

The Federal Reserve Board sets U.S. margin rates. The initial rate is 50
percent, so an investor with $50,000 in cash could borrow on margin - take a
loan from a brokerage firm - to buy a total of $100,000 of stock.

But if the stocks he has purchased fall substantially, he must meet the
brokerage's margin requirement. If the brokerage requires that the value of
the margin account not fall below 30 percent of the total value, then the
investor must provide additional collateral when the stocks are worth
$30,000 or less

Margin calls can nibble an investor to death. If his stocks are going down
consistently, he can get daily calls for deposits of thousands of dollars.

''The hardest thing about that phone call is that you have to have the money
tomorrow,'' said Michael Stearns, 60, of Long Beach, California, who once
invested heavily on margin but now tries to keep his margin account small.
''What if you don't have the $30,000 today? Are you going to take out an
equity line on your home?''

Brokers tell stories of investors who go home when the mail is delivered
each day to prevent their spouses from finding out they have received a
margin call.

''It's a cancerous process in terms of money,'' Mr. Frank said. ''You start
out with a little margin call, and suddenly you're losing money you didn't
know you had invested.''

A shareholder who had been investing for about 10 years said he started
investing on margin, mostly in high-tech stocks, about three years ago. The
investor, who asked that his name not be used, said he had bought a stock at
$8 a share and ''waited for it to go to the moon.'' But it did not. Instead
it fell.

The investor was borrowing from his home-equity line of credit to come up
with the cash he needed. And he still had to sell most of his stock before
it went back up.

''I owed $80,000 on margin,'' he said. ''And I'll tell you, I had some
sleepless nights. That's a sickening amount of money. But I was lucky. I
bailed myself out.''