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Fixing the Problems on Wall Street is Easy: Raise Margin Requirements

Posted April 6, 2008 | 11:22 PM (EST)

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Margin requirements should be the centerpiece of any congressional testimony dissecting the recent market meltdown on Wall Street (Iceland, Spain, and Poland). The securities acts of '33 and '34 (covered at length in the series 7 exam I took in 1983 when I got my broker's license) contain excellent reforms that cleaned up the excesses that led to the '29 crash. Margin requirements mandating customers put up 50% or more (instead of 10% or less) of the purchase price of stocks deterred noxious speculation. The logic behind it makes sense. Raise the cost of speculation, deter speculation.

Market theocrats, however, don't like this idea. They like to think of the market as existing in a Friedman-esque vacuum of pure, unadulterated price discovery nirvana encapsulated by the virginal image of Adam Smith's "invisible hand" that serves as the market fundamentalist's equivalent to Mary's virgin birth. I don't buy it. I don't buy it for the same reason I reject religious fundamentalism; whether it's Christian or Muslim. Absolutism in any form is the enemy of reason. Only feudal lords (Bush, Cheney, Rumsfeld) and monopolists (Larry Ellison and Bill Gates) believe in the divine right of kings and corporations and I'm sorry, but my American ancestors fought a Revolutionary War to defeat that kind of thing.

There are many who believe that Greenspan, when he spoke of 'irrational exuberance' back in '96 should have raised margin requirements, Robert Shiller of Yale being one of them. If Greenspan had done so, many argue, much of the damage of the dot-com bubble would have been avoided and therefore much of the damage of the subsequent 'bubble transplant' of '00 when the 'hot money' bolted NASDAQ and juiced real estate prices (but much worse).

Adam Smith is not God and Greenspan-Bernanke are not his appointed representatives on Earth. But millions of home owners are getting crucified for their sins nevertheless. The efficient market theory is bunk. Neo-liberalism doesn't work. Margaret Thatcher's reputation is entirely due to the UK's lucky oil find in the North Sea (now that it's nearly all used up, Britain is re-opening the coal mines Maggie shut). If Reagan were alive today he'd be working at J.P. Morgan along with Tony Blair.

To reign in the hedge funds and the 'hot money' that is terrorizing the world's finances with what Warren Buffet calls 'weapons of mass financial destruction,' the Fed must raise margin requirements. It's cheaper than bailing out banks and it's 'deflationary' so we would see a drop in the price of energy and food.

Max Keiser's recent film documenting the war between savers vs. speculators can be found here.


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collapse research See Profile I'm a Fan of research

Great idea,

do it slowly.

favoriteFavorite Flag as abusive Posted 02:47 PM on 04/08/2008
collapse montemalone See Profile I'm a Fan of montemalone

Brokers get paid regardless. They love margin sales, because that means more trading, which means more commission.
Volatility is the lifeblood of today's market. Margin buying allows for greater volatility.
Wall street loves this system. They get to earn billions on trading, with no risk at all. (See: Bernanke, Ben)

favoriteFavorite Flag as abusive Posted 04:16 PM on 04/07/2008
collapse ProudNeoCon See Profile I'm a Fan of ProudNeoCon

Great idea. Now please tell me what will happen when position swhich were put on on margin will be unwound? Who will buy them? You will have a crash.... If you want to raise margin - it has to be done during the bull market, not when the market barely survived

favoriteFavorite Flag as abusive Posted 04:07 PM on 04/07/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

the choice is an orderly unwinding - with gradual increase in margin rec's and margin rates; or let the bond vigilantes wake from their slumber and CRASH the bond market - result; higher rates, margin rates, margin rec.'s... The pain cannot be avoided, let's deal with it responsibly. Paulson's plan is to simply defer the problem and hope it goes away... and in do doing, making it much worse.

favoriteFavorite Flag as abusive Posted 04:36 PM on 04/07/2008
collapse asl3676 See Profile I'm a Fan of asl3676

MUCH TOO SIMPLISTIC.....Margin requirements for individuals are not the cause of the volatility in the market. The fact that the brokerage firms are trading securities that have no published price is the problem. Another problem is that hedge funds use unlimited margin and the prime brokers are happy to let them trade with outrageous leverage makes the system a "crisis to crisis" scenario.

favoriteFavorite Flag as abusive Posted 02:20 PM on 04/07/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

margin requirements apply to all security trading by all traders; indivs., institutions, etc. high volatility has, in the past, been addressed with higher margin rec's. As has been pointed out here - the response in perceived volatility in commodity prices recently - has been to raise margin rec.'s. Why selectively apply this to commodities and not financials shows some unhealthy bias on the part of regulators IMO. In the case of securities with no published prices; the 'model' that is used to come up with the theoretical value incorporates things like the discount rate, time value of money and margin rates - so it does have an impact.

favoriteFavorite Flag as abusive Posted 03:40 PM on 04/07/2008
collapse procrustes See Profile I'm a Fan of procrustes

AND reinstate the Uptick Rule.

favoriteFavorite Flag as abusive Posted 11:44 AM on 04/07/2008
collapse monkeyinatree See Profile I'm a Fan of monkeyinatree

yes! another law/rule that was in place since post 1929 crash . . . but disappeared last August . . .

we are seeing the fallout now

favoriteFavorite Flag as abusive Posted 01:24 PM on 04/07/2008
collapse Justtellthetruth See Profile I'm a Fan of Justtellthetruth

TO MAX KEISER

I am somewhat confused by your entire premise. The current problems we are facing have almost NOTHING to do with the stock market. They stem from a systematic failure of the mortgage issuing, selling, insuring, and securitizing process. IE, Banks, in an effort to maximize gains, sold increasingly risky mortgages to borrowers who COULD NEVER REPAY THEM with methods that defy belief. They then took those bogus mortgages, and sold them immediately to other institutions who were should have known they were bogus, who then grouped them into large pools, had those pools insured as AAA and then used them as collateral to finance other business transactions of all sorts.

How could raising margin rate have ANY effect on any of these processes? Stocks of the banks and mortgage insurers that took part in this process are understandably tanking. Unfortunately, anyone else who was in any way touched by the deals spawned by those securitized mortgage pools is suffereing as well, and this is helping to deepen a dip into a recession.

NONE OF THIS IS CAUSED AT THE SECURITY LEVEL. The people who need to be hung out to dry are the banks and mortgage insurers who LIED by issuing these loans in the first place, and who then said that they were worth ANYTHING and furthermore, insured them as AAA.

Please give me ANY credible evidence that what is now happening has ANYTHING to do with margin. Otherwise, please clarify or change your article.

favoriteFavorite Flag as abusive Posted 11:39 AM on 04/07/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

On the subject of higher margin rec's. Eric Jensen over at iTulip had an interesting observation; the Fed's are raising margin rec's for commodity trading but not for financials... this is yet another instance of the Fed's playing the market when they shoudn't. Why the positive bias toward financials?

Securitized mortgage pools are securities like any other securities including bank stocks; so margin rec's apply in determining their collateral value. When the rules of the '33 and '34 acts were codified - stocks were basically the only game in town (perhaps this could be the source of some confusion). The rules have changed and/or adapted with the introduction of listed options, options on futures, financial futures, options on financial futures, etc.

The question is not how to avoid a recession. The question is how to restore some equilibrium in the market - that has become horribly lopsided due to a distortion of the risk/reward fulcrum on which the free market rests. Bankers appear to have 'captured' the regulatory authorities and now enjoy an environment of very little if any over sight.

Introducing new regulations, or hiring wall street cops to over see brokers and bankers is one way - - but it is probably not the easiest, cheapest or most effective way.

Higher rates across the board - including margin rates and margin rec's - can restore some balance to the system (as it has done so in the past) and I think that is what Mr. Keiser is referring

favoriteFavorite Flag as abusive Posted 01:12 PM on 04/07/2008
collapse Henry See Profile I'm a Fan of Henry

"AAA" is not insurance, it is a rating that is done by the likes of Standard & Poors or Moodys. The ratings are independent vis-a-vis the banks.
Banks were used to fund the respective loans and then sell the paper to the securitizing Investment Bank. It is most likely that the Lending Policy of each bank that participated in this scheme was violated, yet it did not worry the bankers as once sold, it was "out of site, out of mind" and they have made what was a "processing" fee in the interim.
Margin comes into play at two stages: 1) no equity down home loans, indeed, I have read where some of these loans were LTV (loan to value) of 120%! 2) Bear was levered 30 to 1 to fund this subprime paper on its books. Since the market was illiquid for this paper, when Bear had to meet a margin requirement from JPMorgan, it precipitated the inevitable.
So... there are two separate margin requirements that would have precluded the entire mess from developing.

favoriteFavorite Flag as abusive Posted 01:08 PM on 04/07/2008
collapse Justtellthetruth See Profile I'm a Fan of Justtellthetruth

I agree with a few things that you've said, but it still fundamentally does not rise to the level of suggesting that "margin" rates were the problem.

The problem lies in several things; as you pointed out, the mortgages were sold to people who could never repay them with unbelievably stupid and reckless terms. But asking people to have good credit and SOME level of collateral to tie them to the home loan is NOT related to Margin. Any bank should be free to make those decisions, although If a bank wants to make such loans, they should be IMMEDIATELY and forever branded LESS than subprime. they should NOT be allowed to be mixed into packages of other securities that hide their true (Lack of) value. The investment banks that securitized and worked to hide the true lack of value of these mortgages are at fault, and certainly, The mortgage INSURERS, who bless these securities by insuring them, DID NOT DO THEIR JOB. They were calling fools gold "gold".

So the banks lied, the investment banks lied, the ratings companies lied, and the insurers lied. There is no reason to punish companies who did NOT lie by increasing the burden to leverage their existing capitol.

The transparency needs to increase, those who lied need to be prosecuted or put out of business, but MARGIN rates are not the culprit, and raising them simply punishes EVERYONE for the sins of the few.

favoriteFavorite Flag as abusive Posted 02:58 PM on 04/07/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

structurally speaking, higher margin rec's, margin rates, and higher rates in general is coming either by the regulators increasing rates, or by foreigners dumping US treasuries (they own close to 1/2 of all US t-bonds and they are NOT HAPPY with the falling dollar) As Bill Gross at PIMCO said today, the US t-bond market is the most overvalue market in the world... When that bubble bursts, rates (including margin rates) will zoom higher.. IMO I'd rather see the Fed's tackle this head on and raise margin rates and margin rec.'s than wait and have the massive sell off in bonds in what looks like an extreme disorderly way - do the job (the vigilantes will ride again in the bond market...) Yes everyone will pay for this but the cake is already baked so the only question is; do we want to deal with this responsibly or deal with a bond crash.

favoriteFavorite Flag as abusive Posted 03:45 PM on 04/07/2008
collapse Justtellthetruth See Profile I'm a Fan of Justtellthetruth

Take a look at China. People tried to make up scary stories about how much US mortgage debt that they had assumed and that they could crash the market by selling it off in huge proportions. Rather, BEAR Stearns, and all the players on down that I listed above, screwed THEM, and they are in no position to try to sell those hugely depressed securities in the current market. Rather, they, like every other Investor, waiting for them to return to better levels, and possibly doubling down on the now fire sale prices.

Again, it is about transparency and properly vetting the quality of the securities at hand, and NOT about reducing peoples or institutions abilities to leverage their capitol.

favoriteFavorite Flag as abusive Posted 07:03 PM on 04/07/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

structurally, I believe that margin rec.'s and rates - that form the basis of a fiat currency system like the one we have in US - and China too - requires close monitoring of one its key variables; that being margin rec's and margin rates IMO. Not to discount the transparency issue, of course it is important, but I believe it is secondary in importance if matched up against the structural issue of margin rec.'s/rates.

favoriteFavorite Flag as abusive Posted 03:11 AM on 04/08/2008
collapse Justtellthetruth See Profile I'm a Fan of Justtellthetruth

P.S.

Lets say you buy gold, and use it as collateral to finance other deals, and then you find out that it is NOT GOLD AT ALL. Would it be helpful to suggest that you need to have even MORE fools gold as collateral in the future? I think not. Rather, the problems lies with the people who told you that you HAD gold in the first place, rather than your decision to use collateral, or the relative rate of credit that you were issued for it.

favoriteFavorite Flag as abusive Posted 12:42 PM on 04/07/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

this is not a gold based currency but a fiat currency as part of a fractional reserve banking system - where interest rates and margin requirements are the back bone of the collateral that is put up for trading. raising margin rec's would have the effect of increasing the collateral value - and reducing leverage and volatility. In the UK we see the market responding to the credit crisis - raising margin collateral - as 0% down mortgages are being pulled from the market. In the US - 'yen-carry trades' that borrow money in japan at extremely low rates and invest in high yielding currencies - with very little in the way of collateral or margin on the books - are now unwinding as banks want more collateral. The risk here is a sudden withdrawal of collateral and we see illiquidity freezing up markets completely. Again, a more managed way to do the same thing is for regulators to systematically increase margin rec's and margin rates in a more or less homogenized (hopefully harmonious) way.

favoriteFavorite Flag as abusive Posted 04:08 PM on 04/07/2008
collapse Justtellthetruth See Profile I'm a Fan of Justtellthetruth

I think we fundamentally disagree here.

You could raise the margin,slow down trading and deal making, but not address the process by which these bogus pools of sub prime mortgages masquerading as AAA rated securities entered the market in the first place, and you could very easily see the problem crop up again, even with a more restrictive environment for capitol investment.

The ENTIRE PROCESS BREAKS DOWN, as evidenced by the current situation, when nobody really knows the true value of these pooled mortgages. That's what I meant by the Gold analogy; Method of valuation is KEY in any monetary system. the gold standard is very straightforward generally, but it msut be based on REAL gold, just as these pooled mortgages must be based on mortgages that are properly vetted and have a VERY high probability of being repaid.

The level of transparency MUST be increased. Simply restricting people and institutions access to capitol is not going to solve anything by itself.

When you say that the margin requirements must be raised, but that the possibility that the value of the securities that make up the increased collateral might still be approaching 0, it does absolutely nothing to shore up confidence in the market.

favoriteFavorite Flag as abusive Posted 01:22 AM on 04/08/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

i'm not sure we disagree... the problem of the bogus securities you mention - yes - and looking at the history of how these products were created over the past 20 years or so.. starting from listed options in the 1970's up through today... you find that a declining standard for margin rec's goes along with the creation and proliferation of these products. these products that are 'invisible' and have no quoted price... were still created per algorithmic assumptions - that incorporate numerical inputs like the current margin rec' and margin rate... structurally, if we are to have a non gold based currency; a fiat currency - we need to revisit some of the basic assumptions that go into floating such a currency and system, like margin rec's and rates IMO

favoriteFavorite Flag as abusive Posted 03:06 AM on 04/08/2008
collapse monkeyinatree See Profile I'm a Fan of monkeyinatree

Well, I'm not Max Keiser, but the current problems do not "stem from a systematic failure of the mortgage issuing . . . " etc, they stem from negative real interest rates following the dotcom crash (and to a lesser extent 911). Greenspan argued that the Fed could not stop bubbles, they could only mop up. In fact, he could have raised margin requirements. As the CFTC has now done for the commodities market.

favoriteFavorite Flag as abusive Posted 12:09 PM on 04/07/2008
collapse Paul See Profile I'm a Fan of Paul

Why not jail time for the CEO of Countrywide?

As it is now, he will get away with millions while his company is acquired by BofA (goodluck, Countrywide staffers) and his customers lose their homes.

favoriteFavorite Flag as abusive Posted 11:19 AM on 04/07/2008
collapse davidaugusta See Profile I'm a Fan of davidaugusta

Keynes, Friedman and their ilk may be discredited, but I would be very surprised if any politician has heard of or even read any of these people, from my perspective they appear to make it up as they go along. I'm living in Ireland and have contacted all the major political parties asking what their policies are on fractional reserve banking and which political theorists and theories inform their economic policies. Not one party made a connection, they haven't got a clue, and even if they did I'd wager they couldn't care less.

As for Max, have been listening to his show the Truth about about Markets on Resonance FM on Saturdays for approximately 3yrs, have to give it to him he's been bang on with just about everything he says, thanks to him what little assets I own are good as gold, in fact that's exactly what they are.

The Huffington post have done well to get him on board.

favoriteFavorite Flag as abusive Posted 10:37 AM on 04/07/2008
collapse Overd0g See Profile I'm a Fan of Overd0g

Huh? People are getting "crucified" for their poor financial decisions, as it should be. Should they be rewarded for it? Protect people from themselves. Classic.

favoriteFavorite Flag as abusive Posted 10:24 AM on 04/07/2008
collapse monkeyinatree See Profile I'm a Fan of monkeyinatree

"Their poor financial decisions" were actually a rational economic response to the signals being sent by the Fed. It is Greenspan's real negative interest rates that resulted in one of the grossest misallocation of resources in financial history.

You don't need to protect people from themselves, you need to protect them from the Fed.

favoriteFavorite Flag as abusive Posted 11:07 AM on 04/07/2008
collapse brownshirted See Profile I'm a Fan of brownshirted

it would be nice if the pain home owners were experiencing was contained to the dopey hom e owners who believed Greenspan when he extolled the virtues of adj. rate mort. products (at the top of the market); but the pain is being experienced by anyone who has bought food or filled their tank with gas recently. As the Fed bails out their mistakes - selling debt like it was crack cocaine - they do so by expanding the credit supply (dropping money out of helicopters ad Ben B. says). This debases the currency and drives up prices - inflicting pain to those who were prudent and never bought into the scam mortgage products. I sense a need to grasp at Libertarian straws... But for Libertarianism to work, you need at least some basic frame work of rules in place. The banks, as we have seen, are making it up as they go along. No Libertarian or Conservative (or Liberal) that I know off supports banking anarchy and yet that's what we have in the US now; pure banking anarchy.

favoriteFavorite Flag as abusive Posted 11:27 AM on 04/07/2008
collapse lobear00 See Profile I'm a Fan of lobear00

Take all those Humans on Wallstreet and send them to Gitmo for mind intervention, then onto the Kremlin for the rest of their lives. "Wishful thinking.

favoriteFavorite Flag as abusive Posted 10:23 AM on 04/07/2008
collapse joebhed See Profile I'm a Fan of joebhed

Here's another tip.
The real problem is the power held by the private banking cartel to carry on fractional lending through this nation's debt-money system, a money-creation power
All new money - the money supply - comes into being as debt.

A true scenario as I see it.
The USA decides to CREATE a new Hundred Billion or so US Dollars -like the "Stimulus" thing.
Out of thin air, the US economy gets a Hundred Billion boost.
The HOLDER of the note is owed THREE Hundred Billion over the term of that note.
The key is - they didn't have the money - they CREATED it.
The taxpayers now owe THREE Hundred Billion over the say 30-year term of that note?
They have to create THREE Hundred Billion in new money.
How?
By OBLIGING ourselves to pay back about a TRILLION dollars to the HOLDERS of those notes.
This scenario takes place over almost three generations, which is the main factor that allows the perpetrators to continue to "boil that frog".
Private bankers have the right to remove a TRILLION dollars in potential wealth from the American people, using the ultimate power of government the right to create the nation's money?
Said Thomas Jefferson:
"I believe that banking institutions are more dangerous to our liberties than standing armies. The issuing power of money should be taken from the banks, and restored to the people to whom it belongs."
I agree.
see: http://www.neweconomics.org/gen/uploads/CreatingNewMoney.pdf

favoriteFavorite Flag as abusive Posted 09:16 AM on 04/07/2008
collapse EspritDeVoltaire See Profile I'm a Fan of EspritDeVoltaire

You got it, Max. I was security licensed at the same time as you in 1982 and I agree totally. Friedmanism is a fairy tale and Adam Smith was more relevant to the 18th century than to the 21st.

The other big problem is that we've allowed the derivatives to sneak in through the back door. Bankers will do ANYTHING except that from which they're specifically prohibited and this is a classic example.

Now the question is how can we get regulation from a political system which pledges obeisance to Wall Street? Most brokers would rather choose which leg they're going to cut off than go along with this.

favoriteFavorite Flag as abusive Posted 08:34 AM on 04/07/2008
collapse apduncan1 See Profile I'm a Fan of apduncan1


All you guys are is glorified Monopoly players...

favoriteFavorite Flag as abusive Posted 10:18 AM on 04/07/2008
collapse dadw5boys See Profile I'm a Fan of dadw5boys

I agree shut down the auto margin accounts.

ETRADE lost my business because of the automatic margin account.

I will not be forced into a margin call when I never gambled more than I could lose.

favoriteFavorite Flag as abusive Posted 08:08 AM on 04/07/2008
collapse Henry See Profile I'm a Fan of Henry

Agreed. The funny thing here is that what you propose is a move towards a more "conservative" market. Yet it will be anethema to conservatives. Funny world we find ourselves in.

favoriteFavorite Flag as abusive Posted 08:02 AM on 04/07/2008
collapse Joeseo See Profile I'm a Fan of Joeseo

How dare you bring standards learned and applied from our Great Depression. I want a Free Market and I want bids on my Voting rights. After all, the laws, rules, regulations, exemptions are all up for bid each day in our Congress.

Applying Margin applied discipline to Wall street, auctions on each Americans' vote is free market discipline.

favoriteFavorite Flag as abusive Posted 07:33 AM on 04/07/2008
collapse LeftRight See Profile I'm a Fan of LeftRight

In addition to raising the margin requirements, we also need to make sure that ANYTHING that's traded is on a regulated market!!

favoriteFavorite Flag as abusive Posted 07:11 AM on 04/07/2008
collapse zaneblue See Profile I'm a Fan of zaneblue

Finally someone talking some sense! Thank you!

favoriteFavorite Flag as abusive Posted 05:39 AM on 04/07/2008
collapse salimfadhley See Profile I'm a Fan of salimfadhley

Max, I'm delighted to see you finally on HuffPo - it's been way too long.

favoriteFavorite Flag as abusive Posted 03:15 AM on 04/07/2008
collapse monkeyinatree See Profile I'm a Fan of monkeyinatree

I'm happy to see him here too! I've been watching his Aljazeera stuff on Youtube. Max should make a film about the North Sea oil financing Maggie's neoliberalism story.

favoriteFavorite Flag as abusive Posted 05:13 AM on 04/07/2008