Margin Calls Come Calling

Once upon a time, everyone was buying stocks. They didn't need to pay the full price, not when credit was available. All an investor needed was a portion of the price, with the rest picked up on margin. It was a loan, in a fashion, backed up by the ever rising price of the stock.

How could it go wrong?

And so the Roaring 20's came crashing down, when the value of the stocks didn't keep going up and people were left holding paper that wasn't worth what they paid for it.

Welcome to the home mortgage market, where people were able to obtain loans even though they didn't make enough money to afford the house. What could go wrong? The value of the house was sure to keep climbing, so if by chance the borrower couldn't meet the escalating cost of the mortgage, the lender could foreclose and sell, at a profit, to someone else.

Alas, homes didn't keep going up, just like the stocks of the 1920's. People who shouldn't have bought in the first place are faced with another version of the margin call, and just like in the 1920's, they don't have the money.

Farewell, Lehman Brothers. The venerable firm hung around for a century and a half, only to fall victim to the greed that was the mortgage market. Bank of America might buy out Merrill Lynch, which suffocated itself in a sea of bad paper. Other banks will be buffeted by the fall-out, as the stock market tumbles down on all the bad news.

What was a bad idea in the 1920's has proven to be a bad idea in the 21st Century. Batten down the hatches; the storm's rolling in.