The richest people borrow against their stock (2021)
Wealthy individuals like Elon Musk and Larry Ellison use stock pledging to access cash without selling shares or incurring capital gains taxes, raising concerns about margin calls and corporate governance.
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Many of America's wealthiest individuals, including Elon Musk and Larry Ellison, utilize stock pledging as a means to access cash without incurring capital gains taxes. By borrowing against their stock holdings, these billionaires can secure lines of credit while avoiding the sale of shares. Musk, for instance, has pledged 88.3 million Tesla shares, valued at over $94 billion, to access funds without selling his stock. This practice is prevalent among the Forbes 400, with 32 billionaires identified as pledging public stock for credit. The average pledge among these individuals is approximately $427 million, contributing to a total pledged value of $239 billion. However, concerns arise regarding the potential for margin calls, which can lead to forced sales of shares and negatively impact stock prices. While many companies restrict pledging, exceptions often exist for founders and major shareholders. For example, Oracle's policy prohibits pledging for most but allows it for Ellison. The practice of pledging shares is seen as a financial strategy that allows billionaires to maintain liquidity while minimizing tax liabilities, although it raises questions about corporate governance and the alignment of interests between executives and shareholders.
- Billionaires borrow against stock to access cash without selling shares.
- Elon Musk has pledged a significant portion of his Tesla shares for credit.
- Concerns exist about margin calls and their impact on stock prices.
- Many companies restrict pledging, but exceptions are often made for founders.
- Pledging shares is a strategy to minimize tax liabilities while maintaining liquidity.
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- Many commenters argue that stock pledging is a common financial strategy available to anyone, not just the wealthy.
- Concerns about market risk and potential margin calls are highlighted, especially for less experienced investors.
- Some believe that stock pledging should be considered a taxable event, while others argue it is a legitimate financial maneuver.
- There is a comparison made between stock pledging and other forms of leveraging assets, such as home equity loans.
- Interest rates and the cost of borrowing against stocks are discussed, with a focus on how they differ for wealthy individuals versus average investors.
14 commentsThe gotcha is market risk. If there's another crash akin to the housing crisis - and there will be - the bank will liquidate your holdings and possibly leave you on the hook for more. The difference is that Elon may be diversified enough to survive, while less savvy margin-surfers might not.
This worked a lot better when interest rates were near zero.
Of course, the interest rates are pegged to SOFR plus a spread, so they're not great right now, though a little better since the Fed lowered rates. IIRC Interactive Brokers offers lower rates.
My father was using this feature for past 15 or so years from same bank. We are solidly middle class in India.
The only difference between what we do and what rich folk get is probably lower interest rates and higher percentage of loans against the securities value.
Wealth taxes do not need to have someone guess a value of someone’s wealth. The wealthy can tell the government what they think it is at each point.
If I attempt something like this via Interactive Brokers (which generally has the best rates), it would cost me 5-6%:
https://www.interactivebrokers.com/en/trading/margin-rates.p...
I'd figure if you're a billionaire, with multi-millions in collateral, the rate is probably significantly lower, but they still need to pay down the interest.
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