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With Market Declines, Investors Face Margin Calls

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NEW YORK -(Dow Jones)- With the stock market reeling, many investors who
bought stocks on margin are facing a tough choice: double down or cut their
losses.


"The maintenance calls are coming quicker and harder than ever before," says a
Merrill Lynch & Co. (MER) broker, responding to seemingly stricter-than-usual
demands from Merrill for investors to pony up money to backstop margin loans.


"I'm swamped" explaining the situation to clients, added the broker, who isn't
authorized to speak to the press.


A Merrill spokesman said recent margin calls were triggered by declining stock
prices.


Across Wall Street, investors are getting hit with similar demands to shore up
margin accounts, a result of tumbling stock prices and moves by some, but not
all, brokerage firms to tighten margin lending practices.


Investors that buy stock on margin - with money borrowed from a brokerage
house - can magnify returns if their bets turn out well. If stocks fall,
however, losses can quickly pile up.


Brokerage firms typically require investors to keep a certain level of
collateral in their accounts. A sharply declining market can hit investors two
ways: As stocks fall in value, their collateral shrinks below the prescribed
threshold, or brokerage firms themselves get nervous and tighten those
thresholds. The recent climate has seen instances of both.


TD Ameritrade Holding Corp. (AMTD) says it's pulled back on the amount of
money it lends investors for certain stocks and has been using more conservative
criteria to trigger margin calls. Wachovia Corp. (WB) discussed tighter
restrictions in an email to financial advisors earlier this week, according to
one broker there. Wachovia didn't respond to emails seeking comment.


Fidelity Investments sent a memo warning brokers of stricter rules on Friday.
At Citigroup Inc.'s (C) Smith Barney unit, declining markets have led to a spike
in margin calls and some investors have been asked to respond more quickly than
usual.


Still, the firm "has not made any changes to its margin lending policies,"
says a spokesman. Morgan Stanley (MS) also said it had not changed its margin
policies.


Customers of prime brokerages, like hedge funds, may also be finding it more
difficult to borrow. While these do not always face the same tightening margin
requirements as retail customers, credit fears and banks' desire to hoard cash
has made margin borrowing more expensive.


Even some mutual funds appear to be suffering. Of 27 so-called 130/30 funds
that use borrowed money to magnify returns and bet against certain stocks, only
seven outperformed similar plain-vanilla funds' average returns in the third
quarter, according to Morningstar Inc.


"Between rapidly shifting margin requirements and on-off-uncertain shorting
restrictions on financial and other stocks" it's been a "perfect storm" for
these funds, says Morningstar analyst Steve Deutsche.


Of course, many financial advisors with retail clients don't recommend buying
on margin at all. While clients of those brokers may also be suffering, their
woes haven't been magnified by borrowed money.


"We've seen some inquiries from investors wondering if now was a good time to
buy on margin," says Mark Willoughby, a principal at Greenbaum and Orecchio Inc.
"We positively discourage it. Leverage is what got us into this mess in the
first place."


-By Ian Salisbury, Dow Jones Newswires; 201-938-5219; ian.salisbury@
dowjones.com


(Annie Gasparro and Joe Checkler contributed to this report.)