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.