- The Washington Times - Friday, January 28, 2000

Americans borrowed 62 percent more last year than in 1998 to buy stocks, the biggest increase in 15 years, a trend that worries federal regulators and even some high-flying financiers on Wall Street.

The amount of credit extended by members of the New York Stock Exchange to individual investors jumped by $88 billion to $228.5 billion by the end of last year, according to Ned Davis Research, a Venice, Fla., market data firm.

The level of debt has been soaring with stock prices in a way that reminds some analysts of the Roaring '20s, when buying stock "on margin" was popular and largely unregulated.

While the borrowing enables investors to double their stock purchases and maximize any gains in stock prices, it also doubles the pain when stocks fall and poses a danger of extreme tumult and financial ruin if the market crashes. Many historians blame the crash of 1929 on widespread margin buying.

Since the '29 crash, borrowing has been regulated by the Federal Reserve, which requires investors to have a minimum of $2,000 in their trading accounts and borrow no more than twice their assets. But the central bank has not tightened its rules on borrowing since 1974, and some lawmakers and financial experts are starting to ask why.

"Is there a speculative bubble in the stock market? One way to find out is to raise the margin requirement," said Edward Yardeni, chief economist with Deutsche Banc Alex. Brown in New York.

"If investors believe in the new era of perpetual prosperity, they should be willing to invest more of their own money in the stock market," he said.

Some Fed watchers are perplexed that the central bank has not used its regulatory hammer to stamp out the borrowing binge, especially in light of Fed Chairman Alan Greenspan's frequent criticism of soaring stock prices and contention that the wealth gains may be fueling an inflationary spending spree by the public.

The Fed has been studying whether to tighten its regulations, Mr. Greenspan disclosed at his renomination hearing before the Senate Banking Committee Wednesday, and he admitted that the central bank is concerned about the phenomenal growth in the leveraging of stocks.

"If we weren't worried, we would not be engaged in trying to understand the process and what it means," he said.

But Mr. Greenspan argued that tightening the lending rules will not accomplish what many advocates want, which is to temper the rise in stock prices, while it would primarily hurt small investors who do not have the financial wherewithal that big investors have to get around the rules.

The increase in borrowing to buy stocks was particularly pronounced at the end of last year. Double-digit growth in margin lending in November and December helped propel the stock market to record levels and catapulted the Nasdaq Composite Index to a record 86 percent gain for the year.

Borrowing appears to be increasingly concentrated among day traders betting on stratospheric gains in the stocks of Internet start-up companies and other go-go technology stocks. Some day-trading companies have devised ways for their clients to get around the Fed margin requirements.

Even without a market crash, the practice of margin buying by these amateur traders can have tragic consequences. One such day trader, Mark Barton, gunned down nine persons at two Atlanta brokerages in July after he made losing bets on stocks and was confronted with heavy losses when his loans were called in.

To curb abuses, the New York Stock Exchange and the National Association of Securities Dealers, which oversees Nasdaq, have proposed increasing to $25,000 the minimum amount that active day traders need to keep in their accounts.

While the Fed argues that raising the bar will primarily hurt small investors, Sen. Charles E. Schumer, New York Democrat, said that may not be so bad, since small investors are the ones who are most likely to get hurt if the market turns down.

"Probably the people who are most overextended, should the market begin to fall, are the smaller investors," he said, noting that small investors often invest in only one stock and can be left "holding the bag" if that stock suffers a losing streak.

Even the traders on Wall Street are starting to get nervous about the astronomical level of some stock prices and are worried that the fallout one day could be severe, he said.

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