THOUGH Wall Street has long awaited and yearned for a cut in margin requirements, last week's move by the Federal Reserve Board set off a lively round of debate about the nature and function of one of the Street's most complicated safety valves. To many Wall Streeters, the cut from 90% to 70% seemed too little, too late. New York Stock Exchange President Keith Funston called it a "step in the right direction," but urged a bigger cut to "a more normal rate." Though most welcomed it, some brokers feared that the cut, coming when the market has been sliding, would only create doubts about the market's future.
The change means that investors need now put up only $700 instead of $900 to buy each $1,000 worth of stock. The other 30% of the price of the stock is bought on credit, covered by a loan made by the broker, on which the customer pays 4½% to 5% interest. The Fed's move actually affects a small—but important—part of the market, since only some 20% of all shares traded on the New York Stock Exchange are on margin. With less "down payment" required, an investor is now able to increase his stock holdings immediately if he wishes. Brokers' phones were busy all day after the announcement, answering thousands of questioners who asked: "What is my buying power now?" The margin cut applies only to securities listed on national exchanges. Stocks on the more volatile and speculative over-the-counter markets cannot be bought on margin.
In juggling margins, the Fed tries to control speculative excesses by regulating the amount of credit flowing into the market. The Fed now believes that stock market credit is relatively stable at about $4.2 billion—and that a 70% margin is enough to keep it that way. Actually, this is only $165 million less credit than in October 1958, when the stock market and credit were soaring so high that the Fed raised the margin from 70% to 90%. And in April of last year, despite the increased margin, there was $550 million more credit outstanding on stocks than now. Thus, many Wall Streeters believe that when the Fed says that credit regulation is its only motive, it is telling only half the story. Says Luttrell Maclin, partner of Paine, Webber, Jackson & Curtis: "The Fed became worried about declining business and stock prices. Its action is no longer a function of stock market credit but a veiled effort to fiddle with prices."
Since the end of the 1946-47 period, when 100% margin was required (i.e., stock could not be bought on margin at all), the Fed has cut margins four times. Each time the margin changes had little effect on basic market trends except to stimulate short-term rallies and raise volume.
Many Wall Streeters feel that such "fiddling" causes an unnecessary guessing game about the Fed's intentions. They feel that 70% margin is too high in today's economy, and that with U.S. consumer credit at a record $52.8 billion, too tight a hold on stock credit is unfair. Says Isaac W. Burnham II, senior partner of Burnham & Co.: "To exact 90%, 80% or 70% margin on the world's most liquid collateral—listed securities—is outrageous. The Fed ought to set margins at 50% and leave them there; 50% is adequate protection for customer and broker."