Wall Street doubles down on loans to the rich with “cheap money”

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US Banks News

Credit companies from major US banks are doubling up wealthier clients as wealthy Americans borrow to buy second homes, invest in the stock market, and possibly reduce their tax bills.

The aggregate value of loans issued by asset management divisions JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley exceeded $ 600 billion in the second quarter, up 17.5% from a year earlier. This represents 22.5 percent of banks’ total loan portfolios, up from 16.3 percent in mid-2017.

Banks are comfortable making these loans because they have very low losses, but they are not without risks. Market turmoil in the early stages of the Covid-19 pandemic last year prompted wealth managers to ask customers take an oath additional deposit.

“What worries me is that you have this flood of loans, all while the rich never go bad,” said Peter Atwater, President of Financial Insyghts, naming the benefits the bank holds against their wealth portfolios. , “Scarce”.

This type of borrowing has been on the rise for over a decade, but the pace of growth has accelerated after the Federal Reserve cut interest rates in response to the pandemic. For a two-year loan against liquid investments such as stocks, asset management clients can expect to pay a rate of around 1.4%, bankers and consultants say.

“The rates are so low that they see it as cheap money,” said Christopher Boyette, co-chair of private wealth practice at law firm Holland & Knight.

The differences between banks’ consumer and corporate loan portfolios are striking. Wealth management loans at JPMorgan, Bank of America, Citi and Morgan Stanley have risen 50 percent in the past four years, up from 9 percent in their total loan portfolio.

JPMorgan and Citi currently provide more loans to a small number of ultra-high-income clients than to millions of credit card clients. A decade ago, JPMorgan issued credit cards to its customers five times as much as it did to private customers.

The Swiss bank UBS, which is the world’s largest wealth manager and has significant U.S. business, said this week that aiming lend more to the US.

Loans to wealthy borrowers are often used for financial investments, as well as for the purchase of second homes and luxury goods. Investors also take out loans to invest in their companies, bypassing the corporate lending divisions of banks in order to get cheaper and faster loans.

“There has been a lifestyle shift as people reconsidered where they want to live,” said Scott Milleisen, head of credit solutions at private bank JPMorgan in the United States. “They need money to buy new houses or to renovate houses by spending on furniture and art.”

Ironically, borrowing can also help lower taxes. Rather than selling assets to raise cash – and face capital gains tax – wealthy clients receive financing through loans against the value of their investments.

“Another way these families could get liquidity from these assets is to sell them, and this will of course have tax implications and not be favorable,” said Sabrena Silver, a partner at White & Case law firm.

Linear chart of cumulative lending across JPMorgan, Bank of America, Citi and Morgan Stanley's asset management divisions surpassed $ 600 billion in Q2, reflecting Image of Wealth

Silver said the tax issue is “relevant but not a top priority” for high net worth bank customers, but critics of the practice disagree.

Frank Clemente, executive director of the liberal advocacy group Americans for Tax Justice, said wealthy borrowers are engaged in “legal tax evasion.”

“The rich, they operate on a completely different tax system, where all this accumulated wealth is not taxed unless they sell – and they are so rich that they don’t have to sell,” Clemente said.

Emmanuelle Saez and Gabrielle Zucmaneconomists at the University of California, Berkeley, earlier this year, estimated that the combined fortune of US billionaires is $ 4.25 trillion, of which $ 2.7 trillion is tax-free profits.

The Biden administration’s proposed tax bill would raise capital gains taxes from 20% to 39.6% and close the so-called “hardened base” loophole that allows wealthy families to transfer capital gains between generations without capital gains tax.

Such a capital gains tax increase could further increase lending to the rich. However, advisers say the future pace of lending by banks’ asset managers is likely to depend more on interest rates than on tax policies outlined in Washington.

“I believe this is not so much a tax motivation as an investment one,” Boyette said. “The attraction will disappear if rates rise.”

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