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> (including, with respect to the Margin Loan Facility a condition which requires that the borrower thereunder satisfy a maximum loan to value ratio of 20%, whi

> (including, with respect to the Margin Loan Facility a condition which requires that the borrower thereunder satisfy a maximum loan to value ratio of 20%, which is expected be satisfied by the contributions of a portion of Mr. Musk’s unencumbered shares in Tesla, Inc. to such borrower) Musk is putting up some of his Tesla stock as collateral on the loans. The effect of this is pretty similar to if Musk had sold his Tesla stock and used the money to buy Twitter, but avoids some of the tax and regulatory consequences of doing that.

lotsofpulp 5y ago
The big difference is the lending terms will surely require the borrower to do something such as sell assets or deposit more money if the value of the collateral (and/or the asset being purchased) falls below a certain amount.
im3w1l 5y ago
Borrowing against your shares is like taking out a mortgage on your home. You still get to live in it (dividend + voting rights), and you are still exposed to swings in value. And you can end up underwater.
- blip54321 5y ago
  It's a little bit different. Most of the ultra-wealthy live on debt. Here's the basic scheme: - Let's say I own $10B in startup.com stock, but haven't sold it. My income tax burden is $0. - If I sell the stock, and taxes are 40% in my country, I get $6B, and the government gets $4B. - If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes. The trick is to never realize gains or income. Debt lets you do that. One more trick is that a lot of purchases are "investments." If I buy a mansion, yacht, and Picasso on debt I can use them. When I'm bored of them, I sell them, and pay off that debt. I've probably made money on the mansion and Picasso, and lost money on the yacht. I've paid a little bit of interest and a little bit of tax, but much less than I would have otherwise.
  - sokoloff 5y ago
    What you describe sounds pretty much the same as “if I start with a paid off house and take out a mortgage on it…”
    - hannasanarion 5y ago
      One big difference is that you are constantly paying property taxes on the house, levied as a proportion of its total value, making the mere ownership of it a financial burden. Stock ownership comes with no such burden. Another is that, should the need arise, stock can be sold at the drop of a hat. It is liquid and fungible so a stock-collateralized loan is seen by banks to be a very safe investment. Houses are not.
  - eadmund 5y ago
    You left out the portion where you get the money to pay the principal and interest. Either you actually sell some of that stock, or you work a job to get that money. Either way you that income will be taxed.
    - thefreeman 5y ago
      I'm no expert but in other parts of the thread people are saying that interest is tax deductible. So you sell just enough stock to cover the interest and the capital gains are not taxed because they are offset by the interest deduction.
      - bombcar 5y ago
        You still have to pay down principal at some point. In this case explicitly I suspect it has more to do with the uncertainty of the deal going through AND not wanting to incur the tax penalty ALONG with the share penalty (liquidating $30 billion in TSLA would affect its price for sure). If you sold the shares to raise the cash, paid the tax, and then the deal didn't go through and bought the shares back, you'd be out the tax (with a stepped-up cost basis to be sure).
    - 5y ago
- ricardobayes 5y ago
  In a certain central european country they had 5% yield govermnent bonds, combined with 1-2% lombard loans for private banking clients they invented a financial perpetuum mobile.
- zzleeper 5y ago
  His approach has been to leverage and leverage and leverage forever. Wonder where he would be in a parallel scenario with a recession in, say, 2018
- throwawaycities 5y ago
  Unlike a home a publicly traded stock is supposed to be immediately liquid. I really don’t think the banks should be giving rich people loans against publicly traded stock to facilitate a tax avoidance scheme, these billions of dollars would have been better of being loaned to home buyers.
  - kjksf 5y ago
    You know how you only work for companies who pay you salary instead of companies who don't? Aligned self interest is the engine of capitalism. You don't care if society would be better of if you donate your time and skill to company X for free. You care that company Y will pay your for your time and skill and that's why you work company Y. The good of society doesn't enter your calculus. Only the good of throwawaycities Similarly the banks don't care what is optimal way to allocate capital for the good of society (apparently as decided by you). They care about their self interest. Their business is providing loans so they provide loans to people most likely to repay those loans. From the perspective of the bank, margin loans are the safest loans they can give because the collateral is fully liquid and under the control of the bank i.e. the moment the borrower crosses margin loan threshold, he gets margin call and the bank sells his stock to ensure the loan gets repaid. Study the wildly successful economies of communist countries to see what happens when people think they know better that free market what should or should not be allowed in the economy. So far good intentions have vastly inferior economical results than lightly regulated free market where, for example, participants decide what kind of loans they want to make.
andruby 5y ago
I assume he also retains the voting rights associated to the Tesla shares.
throwawaycities 5y ago
Banks are chartered by the government, thus should be prohibited from giving loans against publicly traded stocks, at least at rates less than the applicable capital gains tax, otherwise these loans are nothing more than government sanctioned tax loopholes for the rich.
- georgeecollins 5y ago
  This sounds like an interesting point but I don't understand it. Why is it worse to give a loan against a building for less than the capital gains rate then it is to do so for a public stock. Can you explain or link to an explanation? Thank you.
  - throwawaycities 5y ago
    Although they are both subject to capital gains taxes there are many differences between real estate and publicly traded stock. As a preliminary matter, as investment vehicles publicly traded stock is a liquid asset, whereas real estate is an illiquid asset. Generally one invests in liquid investments so that they can be readily converted into cash when needed. From the tax perspective a building/building owner would at all times be subject to continue paying property taxes. If there were some equivalent wealth tax for stock holders then at least society wouldn’t lose out entirely on this kind of tax avoidance scheme designed for the rich, but I’d still probably prefer these billions in bank loans go to qualified home buyers before lending it to the world’s richest man to circumvent a taxable event.
- eadmund 5y ago
  Not really. The loan isn't really income: the borrower gets $X, but is also on the hook for $X plus interest. It costs him money.
  - hannasanarion 5y ago
    It doesn't cost him anything, because the interest rate on the loan is virtually guaranteed to be less than the appreciation rate of the underlying asset.

lotsofpulp 5y ago

The big difference is the lending terms will surely require the borrower to do something such as sell assets or deposit more money if the value of the collateral (and/or the asset being purchased) falls below a certain amount.

im3w1l 5y ago

Borrowing against your shares is like taking out a mortgage on your home. You still get to live in it (dividend + voting rights), and you are still exposed to swings in value. And you can end up underwater.

blip54321 5y ago
It's a little bit different. Most of the ultra-wealthy live on debt. Here's the basic scheme: - Let's say I own $10B in startup.com stock, but haven't sold it. My income tax burden is $0. - If I sell the stock, and taxes are 40% in my country, I get $6B, and the government gets $4B. - If I keep the stock, and borrow against it, I pay no taxes, but I do pay finance fees (e.g. interest). The finance fees work out to less than taxes. The trick is to never realize gains or income. Debt lets you do that. One more trick is that a lot of purchases are "investments." If I buy a mansion, yacht, and Picasso on debt I can use them. When I'm bored of them, I sell them, and pay off that debt. I've probably made money on the mansion and Picasso, and lost money on the yacht. I've paid a little bit of interest and a little bit of tax, but much less than I would have otherwise.
- sokoloff 5y ago
  What you describe sounds pretty much the same as “if I start with a paid off house and take out a mortgage on it…”
  - hannasanarion 5y ago
    One big difference is that you are constantly paying property taxes on the house, levied as a proportion of its total value, making the mere ownership of it a financial burden. Stock ownership comes with no such burden. Another is that, should the need arise, stock can be sold at the drop of a hat. It is liquid and fungible so a stock-collateralized loan is seen by banks to be a very safe investment. Houses are not.
- eadmund 5y ago
  You left out the portion where you get the money to pay the principal and interest. Either you actually sell some of that stock, or you work a job to get that money. Either way you that income will be taxed.
  - thefreeman 5y ago
    I'm no expert but in other parts of the thread people are saying that interest is tax deductible. So you sell just enough stock to cover the interest and the capital gains are not taxed because they are offset by the interest deduction.
    - bombcar 5y ago
      You still have to pay down principal at some point. In this case explicitly I suspect it has more to do with the uncertainty of the deal going through AND not wanting to incur the tax penalty ALONG with the share penalty (liquidating $30 billion in TSLA would affect its price for sure). If you sold the shares to raise the cash, paid the tax, and then the deal didn't go through and bought the shares back, you'd be out the tax (with a stepped-up cost basis to be sure).
  - 5y ago
ricardobayes 5y ago
In a certain central european country they had 5% yield govermnent bonds, combined with 1-2% lombard loans for private banking clients they invented a financial perpetuum mobile.
zzleeper 5y ago
His approach has been to leverage and leverage and leverage forever. Wonder where he would be in a parallel scenario with a recession in, say, 2018
throwawaycities 5y ago
Unlike a home a publicly traded stock is supposed to be immediately liquid. I really don’t think the banks should be giving rich people loans against publicly traded stock to facilitate a tax avoidance scheme, these billions of dollars would have been better of being loaned to home buyers.
- kjksf 5y ago
  You know how you only work for companies who pay you salary instead of companies who don't? Aligned self interest is the engine of capitalism. You don't care if society would be better of if you donate your time and skill to company X for free. You care that company Y will pay your for your time and skill and that's why you work company Y. The good of society doesn't enter your calculus. Only the good of throwawaycities Similarly the banks don't care what is optimal way to allocate capital for the good of society (apparently as decided by you). They care about their self interest. Their business is providing loans so they provide loans to people most likely to repay those loans. From the perspective of the bank, margin loans are the safest loans they can give because the collateral is fully liquid and under the control of the bank i.e. the moment the borrower crosses margin loan threshold, he gets margin call and the bank sells his stock to ensure the loan gets repaid. Study the wildly successful economies of communist countries to see what happens when people think they know better that free market what should or should not be allowed in the economy. So far good intentions have vastly inferior economical results than lightly regulated free market where, for example, participants decide what kind of loans they want to make.

andruby 5y ago

I assume he also retains the voting rights associated to the Tesla shares.

throwawaycities 5y ago

Banks are chartered by the government, thus should be prohibited from giving loans against publicly traded stocks, at least at rates less than the applicable capital gains tax, otherwise these loans are nothing more than government sanctioned tax loopholes for the rich.

georgeecollins 5y ago
This sounds like an interesting point but I don't understand it. Why is it worse to give a loan against a building for less than the capital gains rate then it is to do so for a public stock. Can you explain or link to an explanation? Thank you.
- throwawaycities 5y ago
  Although they are both subject to capital gains taxes there are many differences between real estate and publicly traded stock. As a preliminary matter, as investment vehicles publicly traded stock is a liquid asset, whereas real estate is an illiquid asset. Generally one invests in liquid investments so that they can be readily converted into cash when needed. From the tax perspective a building/building owner would at all times be subject to continue paying property taxes. If there were some equivalent wealth tax for stock holders then at least society wouldn’t lose out entirely on this kind of tax avoidance scheme designed for the rich, but I’d still probably prefer these billions in bank loans go to qualified home buyers before lending it to the world’s richest man to circumvent a taxable event.
eadmund 5y ago
Not really. The loan isn't really income: the borrower gets $X, but is also on the hook for $X plus interest. It costs him money.
- hannasanarion 5y ago
  It doesn't cost him anything, because the interest rate on the loan is virtually guaranteed to be less than the appreciation rate of the underlying asset.