Margin calls and computer glitches
You can get a “bad egg” in any basket. And sometimes you get lemons instead of eggs.
Take one recent matter where our client, an experienced margin lending user, found that a margin call was made just after the GFC share market crash began in December 2007. At the time the margin call was made, his loan to value ratio was 10% higher than that which the contract allowed. Instead of making the margin call at 80% (being LVR + 10% buffer), the margin call was made at 91%.
This error was apparently caused by a computer glitch which calculated the value of the share portfolio without deducting from it, the buy-back cost of options that my client had granted to third parties.
The bank then underestimated the amount of funds required to be contributed by our client to bring the LVR back to 70%. Our client paid into the bank’s account the amount requested (which was all he had available in any event) and by the time the bank realised that it was nowhere near what was required to restore the LVR to 70%, 13 days had gone by. That’s a long time in a rapidly falling market.
The value of my clients share portfolio had dropped so much that when the bank finally sold the whole of the share portfolio, the bank was still $450,000 out of pocket.
Had the bank made the margin call at the appropriate time (about 3 weeks before it did), it then could have repaid all that was owing to it and our client would have still had a share portfolio worth $450,000 (instead of being worth nothing).
The bank however is playing hard-ball. It refuses to acknowledge the existence of documents evidencing how and when it calculated the indebtedness of our client. This will only delay the “judgment day”. It won’t avoid it.
The information which the bank is not releasing can be accumulated from stock brokers. Whilst this will cost our client a little more, we will get there in the end.
The bank’s behaviour is not unexpected, but it does make you think that their reputation for “gouging customers” has a degree of truth to it.