Billionaires' Borrowing Binge: Low Interest Rates and Asset Appreciation Fuel Loan Demand

Strategic Insights -

Billionaires with enough cash to fill a swimming pool are taking advantage of record-low interest rates and asset appreciation to borrow hundreds of millions of dollars against their wealth. The largest U.S. investment banks have reported a significant increase in the value of loans extended to their richest clients, driven mainly by demand for asset-backed debt. Morgan Stanley's tailored and securities-based lending portfolio approached $76 billion last quarter, a 43% increase from a year earlier. Bank of America Corp. reported a $67 billion balance of such loans, up more than 20% year-over-year, while loans at Citigroup's private bank rose 17%.

Key Takeaways:

  • Billionaires such as Alan Howard and Denis Sverdlov have taken out significant loans against their assets, with Howard paying $59 million for a Manhattan townhouse and Sverdlov pledging part of his $6.1 billion stake in electric-vehicle maker Arrival for a line of credit.
  • The largest U.S. investment banks have reported a significant increase in the value of loans extended to their richest clients, with Morgan Stanley's tailored and securities-based lending portfolio approaching $76 billion last quarter.
  • The appellation "asset-backed debt" refers to loans that are secured by assets such as stocks, real estate, or other investments.
  • Borrowing is becoming increasingly popular among the ultra-wealthy due to record-low interest rates and asset appreciation, with families with wealth of $100 million or more able to borrow at less than 1%.
  • Loans can be used for a variety of purposes, including buying yachts and private jets, avoiding capital gains taxes, and securing assets for future generations.
  • Critics argue that such loans are just one more wedge in America's ever-widening wealth gap and allow the ultra-wealthy to game their tax obligations down to zero.
  • Some private banks offer mortgages on homes for as long as 20 years with fixed interest rates as low as 1% for the period, allowing the wealthy to hedge against higher borrowing costs.
  • Risks involved in securities-based lending include asset values plummeting and borrowers having to cough up cash to meet margin calls.

Statistics:

  • Morgan Stanley's tailored and securities-based lending portfolio approached $76 billion last quarter, a 43% increase from a year earlier.
  • Bank of America Corp. reported a $67 billion balance of asset-backed loans, up more than 20% year-over-year.
  • Loans at Citigroup's private bank rose 17%, driven by demand for asset-backed debt.
  • 20-year mortgage with a fixed interest rate as low as 1% is being offered by some private banks.
  • Asset values have risen about 145% in the past year for Appian Corp. co-founder Matthew Calkins, who has pledged a chunk of his roughly $3.5 billion stake in the software company for a loan.
  • Families with wealth of $100 million or more can borrow at less than 1%.

Sources:

  • Bloomberg
  • Wall Street Journal
  • Institute for Policy Studies
  • Program on Inequality and the Common Good
  • Tiedemann Constantia
  • NEPC Private Wealth
  • SEI Private Wealth Management
  • Morgan Stanley
  • Bank of America Corp.
  • Citigroup
  • JPMorgan Chase & Co.