Persfi/29″/dt1st/mark2nd

By JANE BRYANT QUINN

Wall Streeters call it the Crack of Doom. It’s the moment when you know, not just that you’re going to lose money, but that you’re going to lose a lot more money than you can afford.

The investors most likely to hear the Cra-a-ack are those buying volatile stocks in margin accounts. They think they know what they’re doing, then Doom!

The risk in margin accounts is debt. You borrow from your broker to buy more stock than you have the cash to pay for, and hope that a rising market will make your gamble pay. Maybe it will, but then again, maybe it won’t.

Investors who trade their accounts online can blunder into debt unintentionally. For novices, trading is an accident waiting to happen.

Margin debt today accounts for more than 2 percent of disposable personal income, says Irwin Kellner, economics professor at Hofstra University in Hempstead, N.Y. That’s double the previous record, set in 1987.

Margin is wonderful when it works. To see the potential, take a $20 stock that rises to $30. If you bought for cash, you made 50 percent on your money. If you bought on margin investing just $10 and borrowing the other $10 from your broker you made 100 percent on the money you put up (minus the interest you owe on the loan).

But just as margin enhances your gains, it deepens your losses. For example, say that your $20 stock dropped to $10. Cash buyers lose 50 percent of their money. Margin buyers lose 100 percent (and still have to come up with the interest they owe on the loan).

Brokers charge an adjustable interest rate, with higher rates charged on smaller loans. At Charles Schwab, it’s an annualized 8.75 percent for loans under $10,000, and 8.25 percent for loans up to $25,000.

That doesn’t count the cost of daily interest compounding. The actual rate you pay is slightly higher than the stated rate, but Schwab and others don’t figure it for you.

The Federal Reserve establishes minimum margin requirements. At present, you can borrow up to 50 percent of the value of most stocks. In recent months, many brokers have reduced the amount they’ll loan on the most volatile stocks.

If you invest online, there are at least three ways you can borrow by accident:

1) You might place an order for a volatile stock say, 1,000 shares of an Internet stock, currently selling for $8 a share. You expect to pay $8,000. But if there’s heavy speculation, the price might jump to $15 before your order gets through. Suddenly, you’ve spent $15,000, and you may not have the extra $7,000 in your account. The trade triggers an automatic loan.

To avoid this risk, use a “limit order.” It states the maximum that you’re willing to pay per share.

2) You might place an order the night before, see the stock jump when the market opens, and send the broker a quick cancellation. But the cancellation might not go through in time. You’re generally stuck with your purchase, which might have triggered a loan.

3) You click the mouse to place an order and the system doesn’t respond right away. After a few minutes, you click again. Unknowingly, you’ve doubled your order. If you can’t pay for both, the second order will be on loan.

Now comes the painful part: What happens if you borrowed, accidentally or on purpose, and the price of the stock goes down?

You have to maintain the equity value of your account at a certain level. In general, your “equity value” equals the market value of the securities in the account (not counting stocks priced under $5), minus whatever you owe the broker.

The securities regulators require you to maintain at least 25 percent equity in your account. Many brokers set a higher limit say, 35 percent or 40 percent equity. They may require 70 percent equity on volatile stocks.

Computers monitor customer accounts throughout the trading day, Jackie Hipps, a senior vice president at Schwab, told my associate, Dori Perrucci.

If your stocks drop too far, you get a margin call. That means you have to add cash or securities to your account, and fast. If you don’t, your stocks will be sold at a loss.

If the stock is tumbling, it may be sold before you’re even notified. If there’s not enough value in your account to cover the loss, your broker will dun you for the cash.

You never think it will happen to you. You’re sure you’ll sell in time, says economics professor Lawrence White of New York University. Cra-a-ack.

Universal health insurance

In 1993, President Clinton proposed a plan for universal health insurance. In beating it back, opponents smoothly assured the public that they supported the idea in principle, they just wanted to package it in a better way.

Here’s what you get for listening to smoothies: No serious interest anymore in guaranteeing all Americans access to medical care. A congressional majority mostly Republicans but including some Democrats strangled the Clinton plan, then walked away.

More of the nation’s 11 million uninsured children will be covered under Clinton’s program for children’s health insurance, passed in 1997. But most of the growth in the uninsured has been among adults.

Unfortunately, the forecast is for rising numbers of uninsured. All sorts of little bills in Congress would try to plug this or that small hole. But nothing seems to have majority support, and no bill would create a true medical safety net.

What might put universal care back on the table? Maybe Congress would get interested if the uninsured reached a critical mass, as they might in a bad recession when people are losing jobs. But that’s a pretty high price to pay.

And even a recession probably wouldn’t be enough. Members of Congress care the most about being re-elected. Health insurers can often bring them to heel by threatening to support an opponent in the primary or blitz the district with negative ads.

No rich Political Action Committee supports the uninsured. To overcome Big Money’s heavy hand, public support for universal care would have to be intense.

Any plan for universal care would also need the backing of the powerful corporations that pay the majority of medical bills today. Corporations lost interest in reform in the mid-1990s, when their own costs of insurance fell. But now their costs are heading up again.

Employer medical costs jumped an average of 6.1 percent last year, as measured by the consulting firm William M. Mercer. This year’s projection is 9 percent.

Revamping America’s health care system from the ground up could potentially slash employers’ costs. For example, it could eliminate the huge and wasteful overhead found in the dozens of insurance-company bureaucracies.

But employers would also want the government to pick up some of their employees’ medical costs. That, plus the cost of expanded care, would require federal funds. With Social Security, Medicare and tax cuts all on the front burner, the uninsured haven’t got a chance.

Every other developed country offers universal care. We’ll get there someday, but a lot of suffering will go down first.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.