Posted 11/8/2012 10:07 (#2685700 - in reply to #2684082) Subject: RE: Borrow 1 million at 1.3%
Ok till the value of the collateral drops below maintenance level and they call up with a margin call.
We as farmers are used to long term land loans where as long as the payments are being made, the value of the collateral is not being worried about. Or even shorter term loans, the collateral is only looked at when the loan is initiated or when additional funds are drawn.
On an account like that, collateral is looked at daily. If the value of the collateral in the account goes down, the amount they will loan against goes down. Also they can change the rules any time they want (unless there is special provisions in the deal where they say they will not). For example, say you have $100k worth of GM stock and that asset is what is being used to collateralize the loan. The price of GM stock goes in the tank (It did) and all of the sudden your loan is under collateralized. As soon as the value of the collateral is under the value required to maintain the loan, there is a margin call to make up the difference.
Leverage works great as long as everything is going up. When it all comes crashing down it is a bitch. Those type of accounts and loans are marked to market every single day the markets are open. If you don't have the cash to pony up, they sell you out of some of your positions. That usually will be at the very worst time to sell.
I have used margin loans in my personal savings brokerage account a few times when I needed quick cash. But I always keep it under about 10% of the account value to be very conservative. I had an account that was at 20% margin many years ago right before "Black Monday" (or was it black Thursday???) and got a nasty margin call. I paid it and added some more so I would not get another call and stuck with my positions. A year or two later I ended up back even and then the next year up a big bunch. The point is, I was able to stick with my position and it eventually turned out all right. Had I not been able to make the margin call, they would have sold assets out to meet margin requirements and sold me out at the very worst time. Worse yet, I was holding a bunch of small caps and they would have been terrible timing to have been forced to sell them. Some of them had no margin-able value (there were not accepted as collateral). I learned a lot about investing that year. LOL