Monday, March 10, 2008

Margin Calls

First it was the subprime mortgages in the US. Now the latest news is margin calls in the US. Margin calls occur when people borrow money and put up stock as security for the loan. I could do this through my broker account but I never have to date. It sounds like the Bank of Montreal is being hit by the margin call problem. I wonder about the other Canadian Banks.

The thing is-when a margin call is made people have to come up with more cash or sell some of their holdings. This can translate into a wide stock market sell off taking the good companies down with the bad. And, I guess...if it is large enough - the sales reduce the values of the equities even more, the ones being used for collateral and this in turn can lead to additional more margin calls...and the cycle feeds on it self.

I wonder...could the reduction in equity values lead to margin calls or something equivalent for those doing the Smith Manoeuvre?

I see the sell off today has brought some Canadian Banks to the brink of making new lows...TD, RY and BNS.

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