Thursday, October 16, 2008

Two Words the Rich Fear Most

The two dreaded words: "margin call." Robert Frank writes that they're being heard more often:
Private banks are making an increasing number of margin calls to wealthy clients. A spokesman at Citi Private Bank said that “due to market conditions, we have higher than normal call activity.” He added that margin loans are “often employed” by high-net worth clients of the private bank. Other private banks and wealth-management firms tell the same story.

It is easy to blame the extraordinary market forces for all these margin calls. We could argue that the CEO’s and entrepreneurs were guilty of nothing but excessive optimism and loyalty to their company stock. But the margin calls also point to one of the hidden risks of the wealth boom: too many people were too concentrated in one stock or company. It creates enormous wealth–until it doesn’t.

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