This from a Wall Street bank, JP Morgan Chase & Co. They just sent a $28 million margin call to Thornburg Mortgage, who can’t pay it. This means JPM is likely out that $28 milllion (admittedly, chump change for them) but more pain is almost certainly coming.
“A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages,” according to the report co-authored by analyst Christopher Flanagan. “We would characterize this situation as a systemic margin call.”
The investment banks loaned money to other entities using their holdings as collateral. If the amount of collateral falls below predetermined levels, then the banks require more money. With the collapse in the value of subprime mortgage holdings, margin calls will be increasing – that’s what JPM means by “systemic.”