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Bank of America, Citigroup, JPMorgan Chase, and Morgan Stanley loaned more than $600 billion to their wealthiest clients in this year’s second quarter, 17.5 percent more than a year earlier, the Financial Times reported.
These loans now encompass 22.5 percent of the banks’ total loan portfolios, compared to 16.3 percent in mid-2017, according to the FT, and have grown by 50 percent in dollar volume since then, while the banks’ consumer and corporate portfolios have expanded only 9 percent.
Citigroup and JPMorgan are now loaning more money to “a small number of ultra-high net worth clients” than to their millions of credit-card customers, the FT said.
These relatively few clients are using their loans to buy assets from stocks to second homes, but also investing the loans in their own companies, bypassing the banks’ normal vetting process for business loans, the FT reported.
U.S. billionaires have a total worth of $4.25 trillion, $2.7 trillion of which has never been taxed, according to a University of California study this year.
“What concerns me is that you have this flood of credit, all with the [assumption] that the wealthy never go bad,” Peter Atwater, president of advisory firm Financial Insyghts [sic], said to the FT.
The reserves the banks hold against these loans are “meager,” he said.
Banks recognize that these loans are not without risk; market gyrations in spring 2020 prompted the banks to ask rich clients to pledge more collateral.
However, the loans have been expanding more than usual since the U.S. Federal Reserve slashed interest rates more than a year ago.
For a two-year personal loan using stocks or other liquid assets as collateral, a wealthy client pays interest at about 1.4 percent, financial professionals told the FT.
If a wealthy person uses such a loan to buy stocks that gain 2 percent in value over the loan period, the person makes a near-25-percent profit on the borrowed money.
The wealthy also are using the loans to dodge taxes.
Instead of raising cash by selling an asset and facing capital gains taxes of 20 percent or more, rich folks can take a cheap loan against the value of the asset.
“The wealthy operate under a completely different tax system, where all this accumulated wealth is untaxed unless they sell [and incur capital gains taxes]—and they’re so wealthy they don’t need to sell,” president Frank Clemente of the nonprofit Americans for Tax Fairness said to the FT.
The tax system enables the rich to engage in “legal tax dodging,” he said.
TRENDPOST: Supposedly, the writer F. Scott Fitzgerald once said to Ernest Hemingway, “The rich are different from you and me.” Hemingway reportedly replied, “Yes, they have more money.”
As this article shows, they also live by different rules and a different set of expectations: that money buys their way out of the tedium of applications, vetting, and tax obligations that the rest of us regularly confront.
The wealthy are cared for, excused from the drudgery of normal life, and leave us to pay their fair share of taxes while they claim a greater share of the wealth our society creates for them.