Margin Plan Gets Mixed Reviews

Wall Street reacted warmly--but some in Congress with skepticism--Tuesday to a Federal Reserve Board recommendation that the U.S. government should cease regulating how much stock market investors can borrow and turn such regulation over to the stock exchanges and other private groups.

Industry officials and other observers also said they expected that private regulation of such credit, or “margin,” requirements would probably bring an easing of the rules and stimulate the stock market, but only slightly.

They speculated, too, that such easing of credit would draw additional capital to the stock markets from the markets for stock-based options and futures contracts, which have looser credit rules.

The board’s recommendations came in a letter from Chairman Paul A. Volcker telling several congressional committees that a 2-year-old agency study had “raised serious doubts” that the federal government should require investors to put up at least half of the value of any stocks they wish to buy. Concurring with the Fed’s recommendations were Treasury Secretary Donald T. Regan and John T. Shad, chairman of the Securities and Exchange Commission, who also wrote letters to the committees.

The margin requirements were put in effect following the stock market crash of 1929. In his letters, Volcker wrote that the rules were intended to restrain what was thought to be the unproductive use of credit for stock market speculation, to protect unsophisticated investors and to prevent wild swings of stock market prices that were believed to result from ready borrowing.

But Volcker said economists now believe that such borrowings do not reduce the amount of credit available in the economy; that the rules are only partly effective in preventing investors from borrowing more than they can afford, since they can borrow elsewhere to fund their purchases, and that the margin rules are inefficient because they do not take into account whether the money is borrowed to invest in highly speculative stocks or in securities with less risk.

He said a “considerable volume of research” by economists and financial analysts indicates that credit-financed trading has not had a major influence on stock prices, as was believed when the credit rules were first imposed.

Volcker recommended that regulation of margin credit rules could be performed by the exchanges and the National Assn. of Securities Dealers, with oversight from a committee of U.S. agencies that could include the SEC and the Commodities Futures Trading Commission.

The recommendations were hailed by officials of the Securities Industry Assn., the New York Stock Exchange and officials of a number of brokerages, including Merrill Lynch, Shearson Lehman/American Express and E. F. Hutton. “The exchanges are a lot closer to the subject than the Fed,” said Norman Epstein, executive vice president of E. F. Hutton.

But some in Congress remained to be persuaded. Rep. Henry A. Waxman (D-Los Angeles), a member of the subcommittee on telecommunications, consumer protection and finance of the House Committee on Energy and Commerce, expressed concern that the move was “part of a pattern of weakening the protections for the consuming public under the guise of deregulation.”

Ellis Woodward, an aide to the subcommittee, said panel members have thought the margin requirements “have served a useful purpose. . . . We’re going to have to take a hard look” at the Fed’s report.

Morris Mendelson, a professor of finance at the Wharton School at the University of Pennsylvania in Philadelphia, said the effect of a reduction in credit requirements “might be less than it seems” since institutional investors who now account for more than 75% of stock trades do not buy on credit.

He said brokerages might not ease their credit rules drastically even if federal rules were dropped. “The brokerage business is somewhat more mature than it was in 1929; they don’t want to lose their shirts,” he said. Times Staff Writer Robert E. Dallos contributed to this story.