BUSINESSWEEK ONLINE : APRIL 17, 2000 ISSUE
COVER STORY Margin Calls: Not a Lot of Wiggle Room Loans from brokerage firms to their customers to buy stock--known as margin debt--soared 62% from 1998 to 1999, to $230 billion, prompting dire warnings from Federal Reserve Chairman Alan Greenspan and other scolds. They said that highly leveraged investors could be wiped out. Bullish investors tuned out the warnings--until now. With the slide in the Nasdaq since Mar. 10, many investors are facing their first margin calls--demands from brokers for more cash to use as collateral for their loans. Brokers say margin calls ran 50% above normal on Apr. 3 and 100% higher on Apr. 4. What investors are discovering is that policies for making margin calls are hardly uniform. Brokerages weigh a range of factors in deciding how much leverage an investor should be allowed and how hard they should come down on someone whose stocks lose too much value as collateral. While some let computer programs call the shots, others depend on human judgment. The Federal Reserve allows investors to borrow up to 50% of a stock's value from brokerage houses. If a stock's value slips significantly, brokerages ask investors to put up more cash or sell some of their position. Although exchange rules give brokerages up to 15 days to get their money, most demand that it be coughed up sooner--in some cases, immediately. At some online firms, the approach is downright impersonal. Datek Online Holdings Corp.'s six risk managers have tagged 100 volatile stocks. The firm uses software that automatically e-mails margin calls to customers. Larger accounts also get a phone call, but all investors have to pay up in three days, no matter who they are. ''Begging and pleading are not a good idea,'' says Datek spokesman Michael Dunn. Datek is more rigid than most. Another online broker, NDB.com, a unit of National Discount Brokers Group Inc. (NDB), usually demands that customers meet margin calls in two days. But ''there's a certain amount of discretion left to the managers'' of the risk department, says NDB.com Chairman Dennis V. Marino. Investors who use traditional brokers say they generally get two weeks to either sell stock or send in a check. Some investors may be trading on margin without being fully aware of it. In an extreme case, Lori Ferguson, a neophyte investor from Brewster, N.Y., says she was given a margin account by E*Trade Group Inc. (EGRP) even though she checked a box on her application saying she didn't want one. As a result, she says, when she accidentally placed an order she couldn't afford, E*Trade put it through anyway and loaned her about $5,000 to cover the difference. She says that when the stock tumbled, E*Trade liquidated shares in her account without contacting her to raise collateral. E*Trade did not respond to phone calls on Apr. 5 seeking comment. ON YOUR OWN. It might seem that margin-call disputes would be ripe for litigation, but Michael Swick, a San Diego-based shareholder attorney, says few lawyers take such cases. When investors open trading accounts, they usually agree to submit disputes to arbitration. And because each margin dispute is unique, he says, it is difficult to bring class actions. Margin debt has soared because investors realize that leverage can improve their returns in a bull market. David Read, an Atlanta-based systems consultant, says he opened a margin account a month ago to juice up his returns even though he's pretty sure that trading on margin ''could be interpreted as a sin.'' But he barely slept the night of Apr. 4 because he feared a margin call that never came. For investors who have bought on margin, there could be many sleepless nights ahead. By Heather Timmons in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Is the Party Over? COVER IMAGE: Wall Street: Is the Party Over? CHART: Tech Comes Back to Earth CHART: Internet Stocks Take a Dive TABLE: The Move to Quality Margin Calls: Not a Lot of Wiggle Room Time to Keep a Cool Head TABLE: Why You Shouldn't Sell in a Panic The Dot-Coms Are Falling to Earth TABLE: The Internet Shakeout Why Gates Is Rolling the Dice TABLE: Bill's Vision ONLINE ORIGINAL: "Ultimately, the Market Gets Priced on Fundamentals" ONLINE ORIGINAL: BW's Bill Wolman on the Stampede to Quality (Video) ONLINE ORIGINAL: Oppenheimer Funds' Marci Rossell on the Market in the New Economy (Video) INTERACT E-Mail to Business Week Online

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