Monday, May 13, 2013

Margin Accounts Are Back

Except this isn't the movie.

Obama's print money, borrow money policies are working their magic. Abundant low cost credit and subnormal returns on government bonds are driving increased borrowing and higher stock prices.  Balances in margin accounts maintained by brokerages have bounced back within a fare thee well of their pre-financial crisis levels.

Margin account debt is incurred to buy stocks, secured by the value of the security.  Margin account loans are famously subject to call when stock prices drop, forcing investors to sell shares in a panic, reinforcing downward price spirals and potentially freezing the financial system.   This run up in margin lending is,

[A] warning sign that the Federal Reserve's easy-money policies are creating a bubble mentality among stock investors. 
That is just shy of the record $381.4 billion in margin debt set in July 2007.  As of the end of March, the most recent data available, investors had $379.5 billion of margin debt at New York Stock Exchange member firms, according to the Big Board. 
In March, the level of margin debt stood 28% higher than one year earlier, a time frame that saw the Standard & Poor's 500-stock index rise 11.4%. 
The fear is that as more investors rely on money borrowed against stocks, any significant fall in stock prices will be magnified if investors are forced to sell securities to raise cash and meet margin requirements. 
"Borrowing is cheap," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab Corp
Margin calls on a grand scale are what precipitated the Lehman Brothers bankruptcy in 2008 and came within weeks of destroying the entire U.S. financial system.  Easy money policy drove excessive borrowing leading up to 2008 and easy money policy is driving excessive debt now.

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