Stock brokers have been pushing securities based loans (margin loans) for quite some time. And they've been succeeding. Margin debt went from $153 billion in January 1999 to $278.5 billion by March of 2000. It may be of interest that the dot.com bust started soon after. The loans are being pushed to cover a wide range of activities - mortgage funding, tax liabilities, weddings, graduations, to buy more securities, vacations. They differ in a very important ways from your typical bank loan. Each month’s interest is added to the loan balance, thus compounding the interest expense. Borrowers have no protection from actions taken by broker-dealers to preserve their collateral. Loan accounts are susceptible to forced liquidation at unfavorable prices because, as the value of the securities declines, the borrower must either deposit additional collateral (which he often does not have) or sell multiples of the amount of his margin call. Furthermore, the broker can effect these sales without contacting or seeking the permission of the borrower. The broker can even choose unilaterally which securities it wishes to sell.
So, why are margin loans now at a record high of over a half-billion dollars?
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