Professor Elam

Do you know the meaning of the term margin call? When an investor buys an investment with borrowed money, he or she is said to be buying on margin, margin is the credit extended as a loan.

Let’s suppose the buyer puts up $50 and borrows the rest, $50, to purchase $100 of  a sub prime mortgage.  Now suppose the mortgage value falls to $75.  One fourthe of the total collateral has evaporated.  Rules will require the borrower to either put up more margin or the securities will be sold.  Remember the securities (and we use the term advisedly here) are held by the institution that extended the loan.  So they can selll to  protect themselves if the borrower does not put up the money or margin.

Read the hyperlink and discover that various banks and mortgage companies are getting margin calls.

thornburg Mortgage TMA now faces a going concern statement by its external auditor. That is a bit late as the shares have fallen from $28 a couple of months back to just about nothing now.  No doubt we will see more rushes for margin, everyone wants their money before it is too late!  Call up  a chart of TMA and see what it looks like.

I repeated the presentation I did for a civic club in Intermed II this past week, noting that the monthly chart indicators of Moving Average Convergence Divergence had turned down. This is  the first time since 2003!  My point is that these problems will not be corrected quickly, and that is turning out to be the case.