Banks are giving ultra-rich cheap loans to finance their way of life
In the field of personal finance, debt is widely seen as a necessary evil, which must be minimized. But with interest rates at record highs and many assets rising in value, this is one of the most important items in a billionaires’ toolkit – and one of the hottest items in the world. private banking.
Thanks to the Bronfmans, Howard and Sverdlovs of the world, America’s largest investment banks have reported a dramatic increase in the value of the loans they have made to their wealthier clients, mainly due to demand for debt-backed debt. actives.
Get 4 weeks of Crain’s for $ 1
Morgan Stanley’s tailor-made and equity-based loan portfolio approached $ 76 billion last quarter, an increase of 43% from a year earlier. Bank of America Corp. said a $ 67 billion balance of those loans, up more than 20% year-on-year, while loans to Citigroup’s private bank – including, but not limited to, loans backed by titles – increased by 17%. The appetite for this type of credit was the main driver of the 21% increase in average lending in JPMorgan’s asset and wealth management division. And at UBS Group AG, US securities lending increased by $ 4 billion.
“It’s a real business winner for banks,” said Robert Weeber, CEO of wealth management firm Tiedemann Constantia, adding that his clients have recently been offered the opportunity to borrow against real estate, portfolios of securities and even individual stocks.
Spokesmen for Howard, Arrival and Laffont declined to comment, while the Bronfmans did not respond to a request for comment.
The lowest interest rates have fueled the biggest borrowing frenzy on record, and even billionaires with enough money to fill a pool hate to abstain.
And for good reason. With both public and private assets at historically high valuations, shareholders are reluctant to cash in and miss higher highs. Appian Corp. co-founder Matthew Calkins pledged to section of its roughly $ 3.5 billion stake in the software company – whose shares rose about 145% last year – for a loan.
“Families with assets of $ 100 million or more can borrow at less than 1%,” said Dan Gimbel, director of NEPC Private Wealth. “For their lifestyle, there may be things they want to buy – a car, a boat, or even a small business – and they can turn to that line of credit for that stuff rather than taking it out. money from the wallet to want this to be fully invested.
Yachts and private jets have been particularly popular purchases over the past year, according to wealth managers, one of whom described it as borrowing to buy social distancing.
The loans also allow the ultra-rich to avoid the capital gains tax hit at a time when valuations are high and rates are set to rise, maybe even almost. double. Tax deferral is a “significant advantage” for concentrated and diversified portfolios, according to Michael Farrell, Managing Director of SEI Private Wealth Management.
Critics say these loans are just one more wedge in America’s ever-growing wealth gap. “Asset-backed loans are one of the main tools the ultra-rich use to reduce their tax obligations to zero,” said Chuck Collins, director of the Inequalities and the Common Good program at the Institute for Policy. Studies.
Although the use of government stocks as collateral is the most common tactic for banks to lend to the wealthy, clients higher up the wealth ladder generally have a multitude of assets against which they can presumably stand. engage, such as mansions, airplanes and even more esoteric collectibles, like watches and classic cars.
A big plus for the wealthy who borrow now is the possibility that eventually rates will rise and they can lock in low borrowing costs for decades. Some private banks offer mortgages on homes for up to 20 years with fixed interest rates as low as 1% for the period.
The rich can also hedge against higher borrowing costs for a fraction of the value of their pledged assets, according to Ali Jamal, the founder of the Azura multifamily office.
“With very high net worth clients, you often think of the next generation,” said Jamal, former managing director of Julius Baer Group Ltd. “If you have a son or daughter and you know they want to someday live in Milan, St. Moritz or Paris, you can now guarantee them a future home and the bank sets your interest rate for two decades. . “
Securities lending involves risks for the bank and the borrower. If asset values plunge, borrowers may have to fork out cash to meet margin calls. Banks value their relationships with their wealthiest customers, but failed loans are both costly and demeaning.
Ask JPMorgan. The bank helped arrange a $ 500 million credit facility for WeWork founder Adam Neumann, pledged against the value of his shares, according to the Wall Street Journal. As the value of the co-working start-up imploded, Softbank Group Corp. had to intervene to help Neumann repay the loans and avoid a major loss for the bank.
A spokesperson for JPMorgan declined to comment.
Yet for the banks, it is a risk worth taking. Asked about the asset-backed loans during last week’s earnings call, Morgan Stanley CFO Sharon Yeshaya said they had “historically seen minimal losses.” Among the bank’s former clients is Elon Musk, who turned to them for $ 61 million in mortgages on five California properties in 2019, and which also owns shares of Tesla Inc. worth billions of dollars pledged to secure loans.
“Like Jacques [Gorman] always said, it’s a product where you lend their money to high net worth clients, ”Yeshaya said, referring to the CEO of Morgan Stanley. “And it’s something that resonates.”
Quality journalism is not free. Consider subscribing to Crain’s.