So....here is a quick and dirty explanation of Margin Loans and why one would receive a Margin Call:
1st, here's a great explanation of the initial stages and requirements for a personal margin account set up with a Broker-Dealer, from the
FINRA website.(Formerly the NASD or National Association of Securities Dealers)
Bold emphasis and
Italics additions are mine.
Margin Requirements
The Federal Reserve Board, FINRA, and securities exchanges, including the New York Stock Exchange (NYSE), regulate margin trading. Most brokerage firms also establish their own more stringent margin requirements. This Alert focuses on the requirements for purchases of marginable equity securities, which include stocks traded in the U.S. Different requirements apply to short sales, securities futures, other types of securities, and certain foreign securities.
Minimum Margin
Before purchasing a security on margin, NASD Rule 2520 and NYSE Rule 431 require that you deposit $2000 or 100% of the purchase price—whichever is less—in your account. This is called "minimum margin." If you will be day trading, you are required to deposit $25,000. To learn more about day-trading margin requirements, please read Day Trading Margin Requirements: Know the Rules.
Initial Margin
In general, under Federal Reserve Board Regulation T, you can borrow up to 50% of the total purchase price of a stock for new, or initial, purchases. This is called "initial margin." Assuming you do not already have cash or other securities in your account to cover your share of the purchase price, you will receive a margin call (or "Fed call") from your firm that requires you to deposit the other 50% of the purchase price. (It should be noted that Broker-Dealers will conduct a credit check on individuals looking to open such an account. If you have poor credit, you don't stand a chance of being able to qualify for this "initial margin".)
Maintenance Margin
After you purchase a stock on margin, NASD Rule 2520 and NYSE Rule 431 supplement the requirements of Regulation T by placing "maintenance margin requirements" on your accounts. Under these rules, as a general matter, your equity in the account must not fall below 25% of the current market value of the securities in the account. If it does, you will receive a maintenance margin call that requires you to deposit more funds or securities in order to maintain the equity at the 25% level. The failure to do so may cause your firm to force the sale of—or liquidate—the securities in your account to bring the account's equity back up to the required level. (This becomes particularly important in a falling market environment, as every day the value of your account is likely to recede even further)
Firm Requirements
Your firm has the right to set its own margin requirements—often called "house requirements"—as long as they are higher than the margin requirements under Regulation T or the rules of NASD and the exchanges. Some firms raise their maintenance margin requirements for certain volatile stocks or a concentrated or large position in a single stock* to help ensure that there are sufficient funds in their customer accounts to cover the large swings in the price of these securities. In some cases, a firm may not even permit you to purchase or own certain securities on margin. These changes in firm policy often take effect immediately and may result in the issuance of a maintenance margin call (or "house call"). Again, if you fail to satisfy the call, your firm may liquidate a portion of your account. (* This can most certainly happen these days if a client has a large position in volatile securities of any type)
And from the same page, this example;
Margin Transaction — Example
For example, if you buy $100,000 of securities on Day 1, Regulation T would require you to deposit initial margin of 50% or $50,000 in payment for the securities. As a result, your equity in the margin account is $50,000, and you have received a margin loan of $50,000 from the firm. Assume that on Day 2 the market value of the securities falls to $60,000. Under this scenario, your margin loan from the firm would remain at $50,000, and your account equity would fall to $10,000 ($60,000 market value minus $50,000 loan amount). However, the minimum maintenance margin requirement for the account is 25%, meaning that your equity must not fall below $15,000 ($60,000 market value multiplied by 25%). Since the required equity is $15,000, you would receive a maintenance margin call for $5,000 ($15,000 less existing equity of $10,000). Because of the way the margin rules operate, if the firm liquidated securities in the account to meet the maintenance margin call, it would need to liquidate $20,000 of securities.
So...that all applies to an individual and a personal investment account. What happened with Thornburg?
Thornburg Mortgage is actually established as a Real Estate Investment Trust (REIT)
Here is their
Profile on Yahoo Finance.
Thornburg Mortgage, Inc. acquires and originates assets, through correspondent lending, wholesale lending, direct retail lending, and bulk acquisition programs from investment banking firms, broker-dealers, mortgage bankers, mortgage brokerage firms, banks, savings and loan institutions, credit unions, home builders, and other entities involved in originating, securitizing, packaging, and selling mortgage-backed securities and mortgage loans.* The company operates as an externally advised real estate investment trust (REIT). It has elected to be treated as a real estate investment trust for federal income tax purposes. As a REIT, the company would not be subject to federal corporate income tax, provided it distributes at least 85% of taxable income by the end of each calendar year.
*The banks are primarily the people who have lent them money and these are the groups making the margin calls.
They basically were leveraged to the hilt, meaning they had loans they took out that were paying off loans they took out. When their income stream slowed down...
Your question; "are margins called on a regular basis, or are they called when it is felt that a company is on shaky ground?" might be better phrased as "Are margin calls
made on a regular basis, etc. and the answer would be NO, not at all. As long as the balance between the value of the assets and the loan amount - the "Regulation T" requirement is met, there would not ever be a margin call. It happens primarily when there is a drop in the value of the assets.
In order for Thornburg to have stayed completely liquid and to keep their rather flimsy balance sheet from crumbling, they ABSOLUTELY needed a constant income stream from the people who have mortgages through them. Once even a small percentage of those folks stopped making regular payments, they were screwed. They could not leverage enough debt to keep themselves afloat. They had to borrow more to pay off loans and when the income stream slowed even further, ...well...we see what has happened. From a high of $28.40 a share last summer to $1.79 today and on the brink of bankruptcy.
Your alluding to the scene in "Trading Places" is not dissimilar. In case you (or anyone else) isn't quite clear why Mortimer had a heart attack at the end ("We're ruined") is because they did, indeed suffer a Margin Call they were unprepared to meet. Wikipedia offers a great
synopsis of how this worked out;
Explanation of climactic scene
With the authentic orange crop report indicating a good harvest of fresh oranges, frozen concentrated orange juice (FCOJ) would be less important to food producers and so would be likely to drop in price once traders heard the news. However, by way of a fraudulent report, the Duke brothers are led to believe that the orange harvest would be less successful, necessitating greater demand for stockpiled FCOJ in orange products in the coming year, thereby driving the price up. By capitalizing on this knowledge (and the Duke brothers' missteps) the protagonists are able to profit by manipulating the futures market as follows:
* Unlike a conventional stock transaction, futures contracts can be sold even when the seller does not yet own any of the commodity. A contract to sell, for example, 15,000 pounds of FCOJ in April at $1.42 per pound, merely indicates the seller's obligation to deliver and the buyer's obligation to purchase the product at the specified price and time. It does not matter how or where the seller gets the product, as long as, one way or another, he is able to deliver it at that price at that time, even if it results in a sale at a loss to him.
* In this case, Winthorpe and Valentine first sell FCOJ futures at $1.42 per pound, a price inflated by the Dukes themselves. (The Duke Brothers' buying leads other traders to believe that the Dukes are trying to corner the market, causing a buying frenzy.) Then, when the price falls — first as a result of Winthorpe and Valentine's eager selling, then to a much greater degree upon the release of the real crop report indicating a good harvest — Winthorpe and Valentine buy futures for prices between $0.46 and $0.29 per pound. Thus, for every futures contract they had previously sold at about $1.42, they buy another back (for resale to those who bought the expensive contracts from them previously) for only $0.46 to $0.29, resulting in a profit of $0.96 to $1.13 per pound. (Winthorpe and Valentine "sold short" meaning they sold what they did not own)
* Though it is not stated in the movie exactly how much they make, if they invested roughly $500,000 from a combination of Winthorpe/Valentine's investment, the Dukes' money from buying the "fake" report from a fake Clarence Beeks, and Coleman's and Ophelia's savings, they would have turned it into over $10 million. It is strongly implied that they purchased additional futures on margin and made dozens (or hundreds) of millions more, since a lesser amount would not bankrupt the Dukes.
* At the same time that Winthorpe/Valentine sell their futures contracts, the Duke brothers are rapidly purchasing them, even at high prices, because they incorrectly expect that the crop report (falsely suggesting a greater need for stockpiled orange juice) will create a demand at even higher prices, securing them a profit. When it turns out that the leaked report they were given was fraudulent and the true report is revealed, the price begins to plummet before they are able to sell off their contracts. This leaves them with an obligation to buy millions of pounds of FCOJ at a price more than a dollar per pound higher than they can sell them for, bankrupting them.
* However, the $1.13 per pound price change on FCOJ futures that generated Winthorpe and Valentine's huge profit would be unlikely in the real FCOJ futures market. The exchange that houses the FCOJ futures trading imposes a daily limit of 10 cents per pound on the price movement of the near month contract from its previous day's settlement price. Most commodities futures contracts have daily limits. After the FCOJ price is 10 cents away from the prior settlement price, trading is halted and the market is referred to as "limit up" or "limit down". Trading reopens if prices are again within the limit, and the next day the price can change 10 cents again. The price limit can be widened under certain market conditions.
Anyway, I hope that helps.
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