McMillan Market Commentary
Thursday, October 9th, 2008

The selling has reached historic proportions. There literally is a “run
on the market,” as investors worldwide are dumping stocks. It seems
that the major catalyst for this selling is the fact that the newest large
banks primarily J. P. Morgan, Goldman Sachs, and possibly Morgan
Stanley as well — have issued massive margin calls to hedge funds and
other professional traders who use these banks as prime brokers.
These calls were not issued because of market losses, but more
because the banks arbitrarily decided that they wanted their customers
to use less leverage. Margin rates as low as 15% for broker dealers
were raised to 35%; hedge funds who had been used to operating on
high leverage were told that they had to bring accounts up to a much
larger percentage of equity. In this illiquid environment, where all
manor of exotic securities literally have no bids, the only place to raise
the cash to meet margin calls was to sell stock. That is what really set
this market over the edge — as the first notice of these calls were issued
on October 2nd and 3rd. There was something of a grace period to meet
the calls, but funds realized they weren’t going to be able to meet them
other than by selling stock. There are rumors that the most massive of
the calls are due Monday (October 13th). If so, this market could
continue to decline through then.

There doesn’t seem to be any reason for this increase in margin.
The most benign one is that the banks became overly worried that their
prime brokerage customers could cause problems with leverage. A
more sinister reason revolves around the fact that the banks issuing the
calls will likely wind up the owners of some excellent inventory
(relatively illiquid preferreds, bonds, etc., which are being sold at
prices well below theoretical value). They are in effect confiscating
from their prime brokerage customers.