Margins

One effect of the Securities & Exchange Act upon Wall Street was a notable improvement in demand for margin clerks, that unsentimental class of brokerage house employes whose thankless task it is to keep tabs on customers' accounts. For the guidance of the Federal Reserve Board, which administers the credit end of Federal stockmarket control, Congress suggested a dual formula for fixing margin requirements which has been in effect since 1934. A broker could lend a customer the greater of either: 1) a flat percentage (now 45%) of a security's current market value; or 2) 100% of the lowest price-since July 1933, so long as that was not more than 75% of the present value.

Last week the Federal Reserve Board, exercising its power to regulate margins as it pleases, abolished the 100%-low rule, leaving in effect the straight 45%-current-value formula, which means 55% margins. It was this part of the old formula that the Reserve Board changed last winter, upping margins from 45% to 55% (TIME, Feb. 3). The other formula was not only complicated but obsolete, since the majority of stocks have long since pushed through the upper limit of the anti-pyramid zone it created, again enabling marketeers to borrow and buy more stocks with their paper profits.

While it was about it, the Federal Reserve Board also slapped the same margin requirements on banks, which have hitherto been free to loan as much on stocks as they saw fit. From his broker a customer could borrow only 45% of the value of his stocks, but from his banker he could borrow possibly 75%. The Reserve Board took great pains to confine its bank margin rules solely to speculative borrowing. If his bank will accommodate him, a man can still pledge his stocks for, say, 70% of their value to buy a farm or build a house. Said the Board: "The regulation does not restrict the right of a bank to extend credit, whether on securities or otherwise, for any commercial, agricultural or industrial purpose or for any other purpose except the purchasing or carrying of stocks registered on a national securities exchange."

Effective April 1, the change in market margins will cause little commotion, for the Roosevelt market continues to be largely a cash affair. Brokers loans, which were as high as $8,500,000,000 in 1929, are now about $1,000,000,000, having risen only $300,000,000 in the past year. The bank margins go into effect May 1, are not retroactive.

Only surprise in last week's margin news was the discovery that the regulations apply only to initial extensions of credit, are not continuing requirements. The 55% margin must be met only at the time a loan is made or stocks are bought. If the stocks decline, the loan or brokerage account becomes under-margined, not in the eyes of the law, but from the viewpoint of the anxious banker or broker. The Reserve Board blandly insisted that this had been true all along.

This file is automatically generated by a robot program, so reader's discretion is required.