It is desirable also to have as pledged securities those whose market price is not too far below par and that they should be of a varied character, on the theory that in a falling market twenty issues would stand up better than would one security whose posi tion was vulnerable. Diversity in the pledged securities, with market values approximating par, is provided for by a rule fixing the maximum number of shares that will be accepted for a loan, say, 2,0oo shares for a loan of $ioo,000.
When the bank's money-broker places a loan with a stock broker in the board room, the stock broker notifies his house as to the amount, rate, and the name of the borrower. The broker's cashier or loan clerk then makes up on an envelope a list of the securities to be offered as collateral, and this, together with the securities themselves, is sent to the bank. If the loan is accepted, a check is given and the loan is started on its way through the loan department. A loan card is made out, giving the date, rate, name of borrower, list of securities, and the market price and value of the securities. These prices arc put down by the clerk making the card. and are then checked by the bookkeeper after he enters the loan in the loan book. The card is next turned over to the margin clerk, who is responsible for its correctness during its stay in the bank.
Requirements as to Margins During a dull market in which the price changes are small or are spread over a considerable period of time, it is fairly easy to keep the loans properly margined. The chief trouble is the sub stitution of other collateral. A change in the collateral is at once noted on the proper card, together with the market price and value of the new security. The loan card is then retotaled to make sure that it is correct. In case the broker makes an error that is large enough to reduce the margin below the 20 per cent require ment, he is telephoned to send additional margin immediately. It rarely happens that a broker's loan has to be called on account of insufficient margin.
During a bull market, margin is being continually withdrawn, brokers or their customers are taking their profits, and securities at such times must be carefully repriced and the margin closely watched. The character of the loan also must be kept in mind.
With prices of railroad securities advancing and the excess margin in them being withdrawn, the character of the collateral may be materially changed; from a desirable loan secured by well-mixed rails and industrials, it may quickly change to a loan of an unde sirable kind.
Sentiment enters somewhat into the making of loans on collateral security, and stocks or bonds that are acceptable at one bank may be promptly refused at another.
A block of a certain stock among the securities to a loan may seriously affect the loan, even though the margin is ample. It occasionally happens that the objectionable securities can be taken out without reducing the margin below the 20 per cent requirement, and this is usually insisted upon by the loan clerk before he will accept the loan. On first thought this may seem strange, but should there be a bad break in the market and the margin on that particular loan fall to exactly 20 per cent, it be comes an undesirable loan if that undesirable security is still in the collateral.
During a bad break in the market practically everything else in the loan department is made secondary to the watching of margins. Other work can wait until after the exchange closes, but the reading of quotations from the tape must be made as fast as they are printed.
In the handling of loans for out-of-town customers the bank is possibly more exacting in regard to margins than it is for its own loans. In case the market price of some of the collateral slumps so that the margin falls a trifle below the 20 per cent margin, the bank will, in the case of loans for customers, ask immediately and peremptorily for additional margin, but in case of its own loans it will in all probability await developments in the stock market before making such a call.
Collateral Substitutions on Stock Brokers' Loans It has been stated that it is desirable to accept as collateral only such securities as are good delivery upon the stock exchange. The term " rails " is therefore restricted to the stocks of railroad companies listed on the exchange, and "industrials" to the securi ties of manufacturing and mining concerns listed there.