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Home > Blog > Monthly Archives: November 2008

Monthly Archives: November 2008

Margin Call Madness Underway

When stock markets plunged to their lowest level in four years in October, it quickly became news that margin calls were a key culprit to the problem. In the weeks since, the volume of margin calls has steadily increased, exacerbating issues for investors and adding turmoil to an already battered financial environment.

Investors who buy stock on margin – meaning the money is borrowed from a brokerage or lender – stand to reap big returns if their bets turn out positive. On the downside, if the value of a stock plummets, as they have recently, investor losses can grow fast and furious.

Margin calls affect more than just the wealthy. When the stock market is overloaded with sell orders, stock prices often fall further in value, thereby causing additional financial losses for ordinary retail investors who sell their shares at deflated prices. 

Hedge funds also are feeling the effects of margin calls these days, particularly funds with billions of dollars worth of positions in Lehman Brothers Holdings. Despite the fact the funds cannot touch their assets at Lehman, which are frozen because of the firm’s Sept. 15 bankruptcy, they nonetheless may be forced to meet margin calls on their positions. 

PricewaterhouseCoopers, which is handling Lehman’s bankruptcy and liquidation, confirmed in mid-October that it would not rule out demanding additional collateral via margin calls on some $60 billion in frozen Lehman assets if the value of those securities falls.

Making a bad situation even worse is it may take months, or even years, for PricewaterhouseCoopers to determine which assets clients actually are entitled to and which they are not.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The Dark Side Of Margin Calls

The downturn in the economy is shedding new light on two dreaded and unwanted words no investor wants to hear: margin calls. Recent margin calls – in which shares of stock are bought using borrowed money – have created a margin blowout lately, sounding the alarm for CEOs and fund managers at companies from Chesapeake Energy to Williams-Sonoma and forcing them to sell billions of dollars worth of stock in order to make good on their loans with lenders.

Meanwhile, investors in companies whose executives must meet margin calls often learn after the fact about the selling sprees and ultimately bear repercussions of their own. Why? Because a margin call can subsequently mean investors are forced into liquidating their portfolios at a time when a company’s stock is at its worst possible low.

Moreover, when CEOs or other senior-level management borrow heavily against their portfolios to buy large amounts of stock, it can send a false message to other investors, who may believe the buying is reflective of a company’s financial position or future performance potential. Should a margin call arise, the investors are at risk when the stock price plummets.

An Oct. 23 article in Forbes reports on how margin calls sealed the fate recently for some of the world’s richest people – and the not-so-rich people who invested in their companies. On Oct. 8, Aubrey McClendon, CEO of Chesapeake Energy, owned more than 32 million shares in the nation’s largest natural gas producer. Forty-eight hours later, most of it was gone.

McClendon had bought a majority of his Chesapeake Energy shares on margin. When the stock began to tank in value, he was forced to meet margin calls. According to the Forbes article, “McClendon sold 1.8 million shares of Chesapeake for $12.65 per share in one of his Oct. 10 transactions. Just four months earlier, those shares traded as high as $74 each.”

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

What About Elm Street?

Over the past several months, both with the election and the credit crisis, much has been written and spoken about Wall Street vs. Main Street. But what has been largely overlooked is how the current financial crisis is affecting the individual, small investors on Elm Street.

 

Everyday it seems the headlines highlight the poor economic conditions in this country and the previous day’s new record Wall Street losses.  We read ample coverage of what the Treasury and Fed are doing (or going to do) to fix the problems. We read what policies President-elect Obama is likely to enact. We read about the Big Three and more financial institutions than you can name facing bankruptcy.  But there has been a noticeable lack of coverage on the pain being felt by the millions of individual investors suffering through these unprecedented times.

 

The financial services industry has spent tremendous amounts of money over the last two decades convincing all Americans that they need to invest in the markets.  The expansion of investing through 401(k)s and IRAs has paralleled these marketing efforts.  Today, unlike during the Crash of 1987, investors are not only the rich and sophisticated.  Investors are grandmothers, college students, single mothers and blue collar workers.  It is these individuals who truly suffer when the market losses 50 percent of its value in a year.

 

Too many of these small investors do not fully understand the markets and are confused by what is going on currently.  In response, most place all their trust (and their life savings) with the “professionals” they hire to assist and guide them. Unfortunately, all too often, these investors are not given suitable advice, are sold products they do not comprehend and are in many instances simply overlooked. They are told to “hold tight” even as they tell their advisors they cannot take any more losses. These small, individual investors are not likely to question or challenge the people deemed to be the experts. 

 

In times like these, it is imperative that all investors pay attention to their investments and make sure that their needs, objectives and desires are being met.  Failure to do so will result in losses that many simply cannot withstand. When losses do occur, investors need to seel legal counsel to determine whether an action exists to seek to recover those losses. 

    


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