Greenspan Says Fed Looking at Margin Buying

Federal Reserve Chairman Alan Greenspan said Wednesday that the central bank is worried about recent high levels of borrowing by investors to buy stocks and that it has been studying the matter.

But the Fed is reluctant to exercise its authority to tighten limits on such borrowing, a practice known as buying on margin, he told the Senate Banking Committee during his nomination hearing.

The hearing was largely uneventful, with Greenspan mostly reiterating previous statements about the Fed’s view of the economy. Greenspan, 73, is expected to easily win confirmation from the full Senate for a fourth term.

The margin issue offered Greenspan a fresh opportunity to comment on the stock market’s dramatic fourth-quarter rise and surging volatility. He said little, however.

Greenspan acknowledged, though, that a surge in margin borrowing in November and December--cited at the hearing by Sen. Charles Schumer (D-N.Y.)--had caught the Fed’s attention and is under study.

To buy securities on margin, investors borrow part of the purchase price from their brokerage firm and put up the securities as collateral for the loan.

The Fed controls brokerage margin requirements but hasn’t changed them since 1974. Generally, investors can borrow as much as 50% of a stock’s purchase price. Brokerages are allowed to set tougher loan rules for their customers, but they cannot allow them to borrow more than that.

Asked by Schumer whether he was concerned about rocketing margin borrowing in November and December--which coincided with the stock market’s latest explosive move up--Greenspan said: “Obviously, we are. . . . If we were not worried, we would not be studying it.”

But, he added, “I can’t say where this particular endeavor on our part is going to come out.”

Schumer said some people active on Wall Street have told him they are “truly troubled by this” latest rise in margin debt.

Should the market dive, investors who have purchased stock on credit can see their losses quickly mount. If they sell shares to cover their losses, that can worsen the market’s decline.

Greenspan, however, said previous studies have suggested that a rising level of stock prices is unrelated to liberal margin lending rules, and thus the Fed’s power is limited in terms of using margin to slow the market.

“We have been reluctant to move margin requirements [that] clearly would have no effect on large investors,” who can get credit to trade stocks in other ways, Greenspan said.

Richard Bove, senior vice president for research at brokerage firm Raymond James Financial, noted that the Fed could trigger market turmoil by raising margin requirements for investors who already have loans outstanding.

Those investors would be forced to scramble to come up with more cash to back up their accounts. Many might have to sell stocks to raise cash.

In other testimony Wednesday, Greenspan pledged that in a fourth term he would promote greater openness at the traditionally secretive Fed as well as pursue the central bank’s traditional goal of keeping inflation pressures from derailing the economy.

The Fed’s rate policy committee meets next week and is widely expected to raise short-term interest rates again to slow the economy.

Greenspan also repeated his strong preference that the soaring federal surpluses be used to cut the national debt rather than diverted to tax cuts or higher spending.

But he did lend support to a decision the Clinton administration has made in its new budget to seek a boost in restrictive federal spending caps in light of the rising surpluses.

Sen. Phil Gramm (R-Texas), who chairs the Senate Banking Committee, praised Greenspan for “doing more than anyone else on the planet” to foster the current prosperity.