Thanks to the Bronfmans, Howards, and Sverdlovs of the world, the largest U.S. investment banks saw a sizeable surge in the value of the loans they extended to their richest clients, largely driven by demand for asset-backed debt.

Morgan Stanley's bespoke and securities-based loan portfolio reached nearly $ 76 billion last quarter, up 43% year over year. Bank of America Corp. reported $ 67 billion in net such loans, up more than 20% year-over-year, while loans at Citigroup's private bank – including, but not limited to, securities-backed loans – rose 17% . The appetite for such credit was the main driver behind the 21% increase in average credit in JPMorgan's wealth and asset management division. And at UBS Group AG, US securities lending increased $ 4 billion.

Borrowing

"It's a real business asset for the banks," said Robert Weeber, CEO of asset management company Tiedemann Constantia, adding that its clients have recently been given the opportunity to borrow against real estate, security portfolios and even individual stocks.

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

Low interest rates fueled the biggest credit spree ever, and even billionaires with enough cash to fill a swimming pool hate sitting it out.

And for a good reason. With public and private assets at historically high valuations, shareholders are hesitant to withdraw and miss higher heights. Matthew Calkins, co-founder of Appian Corp., has committed to a loan part of his roughly $ 3.5 billion stake in the software company – whose stake rose 145% over the past year.

"Families with assets of $ 100 million or more can borrow less than 1%," said Dan Gimbel, director of NEPC Private Wealth. "As part of their lifestyle, there may be things they want to buy – a car or a boat, or even a small business – and they can turn to this line of credit for those kinds of things instead of taking money out of the portfolio like they do want to be fully invested. "

Yachts and private jets were particularly popular last year, according to asset managers. One of them described it as borrowing to buy social distance.

"Considerable advantage"

Loans also allow the ultra-rich to avoid the capital gains tax burden when valuations are high and interest rates rise, perhaps almost double. According to Michael Farrell, Managing Director of SEI Private Wealth Management, deferring taxes is a "significant benefit" for concentrated and diversified portfolios.

Critics say such loans are just another wedge in America's widening wealth gap. "Asset-backed loans are one of the most important tools the ultra-rich use to reduce their tax liabilities to zero," said Chuck Collins, director of the Inequality and Welfare Program at the Institute for Policy Studies.

While using public stocks as collateral is the most common tactic for banks that only loan out wealthy loans, customers higher up the wealth scale usually have a variety of possessions to mortgage, such as mansions, airplanes, and more more esoteric collectibles like watches and classic cars.

A major benefit for the affluent borrower is the possibility that interest rates will eventually rise and hold on to low borrowing costs for decades. Some private banks offer home mortgages for up to 20 years with fixed rates of just 1% for the period.

For a fraction of the value of their pledged assets, wealthy people can also hedge against higher borrowing costs, says Ali Jamal, founder of the multi-family office Azura.

"With very wealthy customers, you often think of the next generation," says Jamal, a former managing director of Julius Baer Group Ltd. "If you have a son or daughter and you know that one day you want to live in Milan, St. Moritz or Paris, you can secure a future home for them now and the bank will fix your interest rate for up to two decades". "

Risks

Securities lending involves risks for both the bank and the borrower. When assets plummet, borrowers may need to raise cash to meet margin calls. Banks value their relationships with their richest customers, but failed loans are both costly and humiliating.

Ask JPMorgan. According to the Wall Street Journal, the bank helped arrange a $ 500 million line of credit for WeWork founder Adam Neumann, which was pledged against the value of his shares. When the coworking startup's value imploded, Softbank Group Corp. intervene to help Neumann repay the loan and avert a significant loss for the bank.

A JPMorgan spokesman declined to comment.

Still, it is a risk for banks that is worth taking. When asked about securities-backed loans on last week's conference call, Morgan Stanley's chief financial officer Sharon Yeshaya said they had "historically minimal losses." The bank's past clients include Elon Musk, who reached out to them for $ 61 million mortgages on five California properties in 2019 and who has also pledged billions of Tesla Inc. shares to secure loans.

"As James [Gorman] has always said it's a product that gives high net worth customers their money back, "said Yeshaya, referring to Morgan Stanley's chief executive officer. "And that's something that resonates."

source https://seapointrealtors.com/2021/07/24/banks-are-giving-the-ultra-rich-cheap-loans-to-fund-their-lifestyle/

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