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Regulators have cracked down on margin trading in recent months and the resulting falling share prices have triggered margin calls.
The combined effect was that falls in asset values cut deep into equity and triggered margin calls from lenders.
As regulators have cracked down on margin trading, falling share prices have triggered margin calls – forcing investors to offload assets to come up with the cash.
Last month, rival Bear Stearns, one of the biggest Wall Street firms in the mortgage securities business, disclosed billions of losses in two hedge funds it managed, largely because of subprime mortgage securities that triggered margin calls and redemptions.
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The stock price plunged, triggering margin calls that pushed the Seppenwolde syndicate into bankruptcy.
"At the beginning, banks were willing to accept not to trigger margin calls because they feared forced assets sales," said Philip Gisdakis, a senior credit strategist at Unicredit in Munich, "but now that there is a serious deterioration in the valuation of collateral, they cannot do that any longer and need to protect their loans".
Samuel Chien, at Shanghai hedge fund BoomTrent Investment Management, told Reuters: "The market is still fragile because the clean-up of grey-market margin financing is still going on, and last week's market tumble triggered some margin calls and some investors are under pressure to sell".
As subprime losses mounted, it had to put up more collateral with its counterparties, in turn prompting credit-rating downgrades, which in turn triggered more margin calls.
Biderman is certain that the bulk of the new margin debt was used to buy the biggest Nasdaq stocks at the height of the market, and he's concerned about what will happen when price drops trigger margin calls by brokers demanding more cash.
And the margin increase is unlikely to be reversed, even if ECB buying drives yields back.The triggering of margin calls has changed investors' perceptions of Italian government bonds and will worsen the government's funding position.
Naturally, ratings downgrades will trigger increased margin calls.
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