Banks provide super-rich cheap loans to support their lifestyles

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In personal finance, debt is generally viewed as a necessary evil that should be minimized. But with record low interest rates and a rise in the value of many assets, it is one of the most important parts of the billionaire’s toolbox and one of the most popular parts of private banking.

Thanks to the Bronfmans, Howards and Sverdlovs around the world, the largest US investment banks reported significant leaps in the value of loans they made to their richest clients, mainly due to the demand for asset-backed debt.

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Morgan Stanley’s securities-based loan portfolio approached $ 76 billion last quarter, up 43% from a year earlier. Bank of America Corp. reported the balance of such loans in the amount of 67 billion dollars, more than 20% more than last year, while loans from the private bank Citigroup, including but not limited to loans secured by securities, rose 17%. Appetite for such a loan was the main driver of the 21% growth in the average loan in JPMorgan’s asset and wealth management division. And at UBS Group AG, securities-based lending in the US grew by $ 4 billion.

“This is a real business win for banks,” said Robert Weber, chief executive officer of asset management firm Tiedemann Constantia, adding that his clients were recently offered the opportunity to borrow against real estate, portfolios and even individual stocks.

Representatives for Howard, Arrival and Laffont declined to comment, and Bronfmans did not respond to a request for comment.

Low interest rates have caused the largest borrowing binge in history, and even billionaires who have enough money to fill the pool don’t want to sit back.

And for good reason. With both public and private assets historically highly valued, shareholders hesitate to cash them out and miss out on higher valuation. Co-founder of Appian Corp. Matthew Calkins promised a piece of its roughly $ 3.5 billion stake in the software company, whose shares have risen roughly 145% over the past year, in exchange for a loan.

“Families with a net worth of $ 100 million or more can borrow at less than 1%,” said Dan Gimbel, director of NEPC Private Wealth. “For their lifestyle, they can be things they want to buy – a car, a boat, or even a small business – and they can turn to this line of credit for such things, instead of taking money from a portfolio when they want it. has been fully invested. “

Yachts and private jets were particularly popular last year, according to asset managers, one of whom called it borrowing to buy social distancing.

Loans also allow the super-rich to avoid capital gains tax at a time when valuations are high and rates are about to rise, perhaps even near double… According to Michael Farrell, Managing Director of SEI Private Wealth Management, tax deferral is a “significant benefit” for concentrated and diversified portfolios.

Critics say such loans are just another wedge in America’s ever-widening wealth gap. “Asset-backed loans are one of the main tools the super-rich use to bring their tax liabilities down to zero,” said Chuck Collins, director of the Inequality and Shared Good Program at the Institute for Policy Studies.

While using public shares as collateral is the most common tactic for banks lending only to the wealthy, clients at a higher level of wealth usually have many things they can actually mortgage, such as mansions, airplanes, and even more esoteric collectibles. for example watches and classic cars.

One of the big advantages for rich borrowing now is the possibility that rates will eventually rise, and they can keep borrowing costs low for decades. Some private banks offer home loans for up to 20 years with a fixed interest rate of up to 1% for this period.

According to Ali Jamal, founder of Azura’s multi-family office, wealthy people can also hedge against higher borrowing costs for a fraction of the value of the pledged assets.

“With ultra-high-income clients, you often think about the next generation,” said Jamal, former managing director of Julius Baer Group Ltd. “If you have a son or daughter and you know that they want to live one day in Milan, St. Moritz or Paris, now you can provide them with a future home, and the bank fixes your interest rate for up to two decades. … “

Lending using securities is associated with risks for the bank and the borrower. If asset values ​​plummet, borrowers may have to shell out cash to meet collateral requirements. Banks value their relationships with their wealthiest clients, but debt-secured loans are expensive and demeaning.

Ask JPMorgan. According to the Wall Street Journal, the bank helped arrange a $ 500 million line of credit for WeWork founder Adam Neumann, secured by the value of his shares. When the cost of a coworking startup plummeted, Softbank Group Corp. had to fly in to help Neumann pay off loans and prevent significant losses for the bank.

A JPMorgan spokesman declined to comment.

However, for banks, the risk is worth it. Asked about securities-backed loans in last week’s income statement, Morgan Stanley CFO Sharon Yeshaya responded that they have “historically seen minimal losses.” Among the bank’s past clients is Elon Musk, who turned to them for $ 61 million. mortgage in five real estate properties in California in 2019, and also owns multibillion-dollar shares in Tesla Inc. to secure loans.

“Like James [Gorman] always said that this is a product in which you lend money to rich clients, ”Yeshaya said, referring to the CEO of Morgan Stanley. “And it resonates.”

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