Friday February 18 4:43 PM ET

Wall Street in Drunken Borrowing Binge

NEW YORK (Reuters) - There's a lot of craziness on Wall Street. A clue? Investors are borrowing money like a bunch of drunken sailors so they can buy already overpriced stocks.

Buying on margin, the Street's version of charging stock purchases on a credit card, went up at a heart-pounding pace in January, climbing to a record $243.5 billion from $228.5 billion in December. A decade ago, the debt load amounted to just $35 billion.

Smart move? Probably not.

Some experts say investors are doubling up on their bets, increasing the danger that they could suffer huge losses if stocks plunge.

The market's high valuation has created enough of a risk for investors. But add the huge margin load and the risk together? Forget about it.

Common sense says that people who borrow up to their eyeballs to trade stocks have no staying power when the market turns against them.

The risky business in stocks has attracted the attention of the pinstriped suits at the Federal Reserve.

But the central bankers and their chairman, Alan Greenspan, appear to fear that any attempt to take the air out of this speculative market bubble could set off an avalanche of selling.

A strong economy has more often than not fostered a strong stock market. But in this New Economy, the stock market appears to be pulling the economy and making lots of people feel rich -- the so-called wealth effect.

Dangerous? Sure. If the market crashes, then the economy could go downhill like a speeding bobsledder.

What's the Fed to do? How about raising margins -- the down payment to buy stocks on credit?

Last month, Greenspan said Wall Streeters were playing with fire in using debt to buy stocks.

But the Fed chairman said the central bank did not think that raising margins -- investors put up 50 percent of their own cash before borrowing the other 50 percent -- is the best way to pop the market bubble.

Alan Newman, editor of the Crosscurrents newsletter, said Greenspan has created a financial Frankenstein and the Fed chief is afraid that if he acts on the margins, the house of cards will come tumbling down.

``Margin debt versus gross domestic product is the highest it has been since the 'Roaring Twenties,''' Newman said. ``Add in the resources of home equity lines and second mortgages and we are looking at a draconian level of debt versus equity.''

Still, the jury is out on the effectiveness of margin increases in skimming off some of the speculative froth from the stock market.

In 1951, the central bank raised margins to 75 percent from 50 percent. In 1955, it again boosted margins to 60 percent from 50 percent and months later it raised margins to 70 percent from 60 percent before lowering. In 1958, margins were lifted to 70 percent from 50 percent and in mid-1968 they climbed to 80 percent from 70 percent. ``Only in mid-1968 did any of these margin requirement hikes remotely coordinate with a deceleration in market momentum or a market peak,'' says Warburg Dillon Read Plc. ``In short, margin requirements have been an ineffective tool to control prices or speculation.''

Others say the market would not be happy to see margin requirements go up, citing the danger of changing the rules at this late stage of the bull market.

A boost in margins, which have been unchanged at 50 percent since 1973, could sucker punch the market because traders are totally unprepared for such action.

``It would affect the day traders,'' said John Geraghty of North American Equity Services, a consulting firm.

``Higher margins would restrict the amount of shares that they can deal in, which would cut down tremendously on the market's volatility.''

For example, with the current margin at 50 percent, a day trader can buy $200,000 worth of stocks with a $100,000 down payment. If the Fed raises the margin to 75 percent, the trader would only be able to handle about $133,000 worth of stocks.

``There's no doubt that higher margins are a tool to control speculation because they force the individual traders to put more of their own money into the market,'' Geraghty said. Wall Street hates surprises and a sharp rise in margins could send a nasty signal to the market that the Fed is serious about deflating the market bubble.

``We could see a selloff, if only for psychological reasons,'' Geraghty said. A rising market is particularly susceptible to shocks and margin increases are one of the time bombs that could unleash a wicked correction.

``Another reason is that this high-flying market has been under a cloud of fears that a big correction could take it down quickly after years of incredible gains,'' Geraghty said. ``So far, it hasn't happened because there have been no fundamental reasons to look for the correction.''

The old-line stocks, such as those in the Dow Jones industrial average, may stand up better than technology stocks to higher margins.

``My bet: If they raise margins, New York Stock Exchange shares may not be hurt as much because the NYSE has been lagging the technology-heavy Nasdaq,'' Geraghty said. ``Also, the stocks listed on the NYSE are the buy-and-hold types, not the speculative breed that rules the Nasdaq.'' There doesn't seem to be much of a margin for error in this stock market.

For the week, the Dow Jones industrial average was off 205.69 points at 10,219.52. The Nasdaq composite index rose 15.53 to 4,411.78 and the Standard & Poor's 500 index was off 35.20 at 1,346.09.

http://dailynews.yahoo.com/h/nm/20000218/bs/stocks_leadall_2240.html

-- Carl Jenkins (Somewherepress@aol.com), February 18, 2000

Answers

Thanks Carl,

I wonder what Yardini things about this.

-- No Polly (nopolly@hotmail.com), February 18, 2000.

I betcha there were a few margin calls today.

-- (nemesis@awol.com), February 18, 2000.

But the Fed chairman said the central bank did not think that raising margins -- investors put up 50 percent of their own cash before borrowing the other 50 percent -- is the best way to pop the market bubble.

Alan Newman, editor of the Crosscurrents newsletter, said Greenspan has created a financial Frankenstein and the Fed chief is afraid that if he acts on the margins, the house of cards will come tumbling down.

``Margin debt versus gross domestic product is the highest it has been since the 'Roaring Twenties,''' Newman said. ``Add in the resources of home equity lines and second mortgages and we are looking at a draconian level of debt versus equity.''

Yet the likes of Y2K Pro and LL continue to profess "All is well" and their idiotic counterparts on the Street continue to inflate the Hindenberg. Happy Landings guys.

-- Greed is God cause Greed is Good (@ .), February 18, 2000.

Weird. This article reads like a TB200 rambling commentary, not a Reuters story...

Ah! Link produced the author's name! Again, unlike a Reuter's story. Weird.

"(Questions or comments can be addressed to

Pierre.Belec(at)Reuters.Com). "

-- Hokie (Hokie_@hotmail.com), February 18, 2000.