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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 s

by 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).
  - HWR_14 5y ago
    Or continually roll the debt over, borrowing more money and more money. Then, when you die, your estate can sell the assets to cover the debt, but that avoids taxes.
- MockObject 5y ago
  > - 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. I'm not following the whole lifecycle. You borrow against your stock, spend that money, and then repay the loan using stock? Without having technically sold the stock?
  - sokoloff 5y ago
    You don't repay the loan using stock. You repay it with cash from other sources (possibly thrown off by the new investment) or you keep the loan open and continue to pay interest on it.
  - aeyes 5y ago
    You repay the loan with the next loan because you have $10b in stock but only took out a $10m loan. In the meantime the stock appreciates some more or you have more vested stock. I guess the risk here would be that the stock goes to 0, you get margin called AND you are now on the hook to pay taxes.
  - kjksf 5y ago
    You don't have to repay the loan (for a very loooong time). Let's say you have 10 million in stock. A typical margin account allows you to borrow up to, say, 40% of that. That's 4 million dollars. Let's say you borrow $1 million and spend it. Currently interest rate on a margin loan is under %2. So every year the amount you need to repay grows by $20k (2% of $1 million, for simplicity I don't count compounding). So in 10 years that would be $1.2 million to repay. But you're authorized for $4 million. If in those 10 years the value of stock doubles to $20 million, then you're authorized to borrow $8 million - the amount you can borrow grows faster than the amount you need to repay. To be clear: eventually you have to repay it but in the corner case it could be done when you die. There are of course caveats. If interest rate increases dramatically, then the amount to repay will grow much faster etc. but you can see how e.g. if you have $10 million then you could borrow and spend $100k to live a good life and never have to sell your stock to fund your life (especially if stocks keep going up faster than interest rate, inflation and your spending habits)
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.

by im3w1l 5y ago

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).
- HWR_14 5y ago
  Or continually roll the debt over, borrowing more money and more money. Then, when you die, your estate can sell the assets to cover the debt, but that avoids taxes.
MockObject 5y ago
> - 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. I'm not following the whole lifecycle. You borrow against your stock, spend that money, and then repay the loan using stock? Without having technically sold the stock?
- sokoloff 5y ago
  You don't repay the loan using stock. You repay it with cash from other sources (possibly thrown off by the new investment) or you keep the loan open and continue to pay interest on it.
- aeyes 5y ago
  You repay the loan with the next loan because you have $10b in stock but only took out a $10m loan. In the meantime the stock appreciates some more or you have more vested stock. I guess the risk here would be that the stock goes to 0, you get margin called AND you are now on the hook to pay taxes.
- kjksf 5y ago
  You don't have to repay the loan (for a very loooong time). Let's say you have 10 million in stock. A typical margin account allows you to borrow up to, say, 40% of that. That's 4 million dollars. Let's say you borrow $1 million and spend it. Currently interest rate on a margin loan is under %2. So every year the amount you need to repay grows by $20k (2% of $1 million, for simplicity I don't count compounding). So in 10 years that would be $1.2 million to repay. But you're authorized for $4 million. If in those 10 years the value of stock doubles to $20 million, then you're authorized to borrow $8 million - the amount you can borrow grows faster than the amount you need to repay. To be clear: eventually you have to repay it but in the corner case it could be done when you die. There are of course caveats. If interest rate increases dramatically, then the amount to repay will grow much faster etc. but you can see how e.g. if you have $10 million then you could borrow and spend $100k to live a good life and never have to sell your stock to fund your life (especially if stocks keep going up faster than interest rate, inflation and your spending habits)

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.