3 ms·

> I don't see how that can be true, you eventually have to repay the loan, to do that you need income which will be taxed. You refinance constantly.

koheripbal 5y ago
Bankers aren't stupid. At some point, they'll stop lending you money and will just seize your collateral.
- imhoguy 5y ago
  You are right, they aren't. You need to grow wealth and hang out with bankers at company expense ;) No more growth and no more yaht trips then it is time for dividends or shares sell off to pay loans.
- toast0 5y ago
  Only if the value of the assets goes down signficantly. Your loan based on Enron stock needs to be paid back (or recollaterialized), but one based on a stock that's been doing well or on a reasonably diversified portfolio can probably avoid repayment until you sell or die. From what I've seen, asset backed loans will have a % limit of value for initiating a loan and a higher % limit to keep the loan, but both limits are often much lower than a brokerage margin loan.
- drdec 5y ago
  You have $100M of stock in Berkshire Hathaway. You use use that as collateral to borrow $11M. You use $1M of the loan to pay expenses (including the interest on the loan). You invest the other $10M in Amazon. A year later you have $11M in Amazon stock and $110M in Berkshire Hathaway. You borrow against the Amazon stock and use that to pay off the first loan. Lather, rinse, repeat. The bankers are always happy. Why would they ever foreclose on you?
  - dnissley 5y ago
    Because stocks don't always go up
    - 34679 5y ago
      When they go down to any significant degree, Congress steps in and socializes the losses.
      - koheripbal 5y ago
        Individual stocks never go down? Is this a serious comment?
- jdmichal 5y ago
  Of course they aren't, which is why they're perfectly happy to continue refinancing. They make money on the interest, not the principle. And each refinance increases the bank's total collected interest. As long as they eventually get the principle back, a bank is perfectly happy with this arrangement.

koheripbal 5y ago

Bankers aren't stupid. At some point, they'll stop lending you money and will just seize your collateral.

imhoguy 5y ago
You are right, they aren't. You need to grow wealth and hang out with bankers at company expense ;) No more growth and no more yaht trips then it is time for dividends or shares sell off to pay loans.
toast0 5y ago
Only if the value of the assets goes down signficantly. Your loan based on Enron stock needs to be paid back (or recollaterialized), but one based on a stock that's been doing well or on a reasonably diversified portfolio can probably avoid repayment until you sell or die. From what I've seen, asset backed loans will have a % limit of value for initiating a loan and a higher % limit to keep the loan, but both limits are often much lower than a brokerage margin loan.
drdec 5y ago
You have $100M of stock in Berkshire Hathaway. You use use that as collateral to borrow $11M. You use $1M of the loan to pay expenses (including the interest on the loan). You invest the other $10M in Amazon. A year later you have $11M in Amazon stock and $110M in Berkshire Hathaway. You borrow against the Amazon stock and use that to pay off the first loan. Lather, rinse, repeat. The bankers are always happy. Why would they ever foreclose on you?
- dnissley 5y ago
  Because stocks don't always go up
  - 34679 5y ago
    When they go down to any significant degree, Congress steps in and socializes the losses.
    - koheripbal 5y ago
      Individual stocks never go down? Is this a serious comment?
jdmichal 5y ago
Of course they aren't, which is why they're perfectly happy to continue refinancing. They make money on the interest, not the principle. And each refinance increases the bank's total collected interest. As long as they eventually get the principle back, a bank is perfectly happy with this arrangement.