I understand the concept of billionaires taking out loans against their stock holdings and using that to avoid taxes. I’m not really concerned with whether or not it’s a major tax loophole or whether they do it a lot. I just feel like this is a really really bad idea.
From my understanding all of these situations came about from collateral that had fluctuating value or no actual value: Black Monday and Tuesday, Enron, dot com bubble, 2008 housing crash, and I think this is literally a symptom but Archegos.
By allowing loans against stock, if something significant happens, aren’t we looking at another downward spiral? For example, Tesla stock crashes for whatever reason, bank calls loan, Musk sells stock to pay loan, Tesla crashes harder?
I understand safe leverage and stuff, but you literally can’t be safely leveraged against capital that has no intrinsic value right?
Why do we allow loans against stock holdings?
byu/Potato_throwaway22 inAskEconomics
Posted by Potato_throwaway22
1 Comment
why allow loans at all? if a loan is backed by a future income stream, well that income stream is volatile. if you pledge some sort of collateral, the value of that collateral is likewise volatile (see people using home equity as a line of credit). we allow loans because credit is the circulatory system of the economy, and without it the economy would be paralyzed.
ideally, the riskiness of the borrower’s income stream as well as their collateral is accurately priced by the loan issuer and the loan issuer has the financials to weather a decent bit of bad luck. Sure, downward spirals can happen, but in some sense, the fact that all those crashes are so infamous should be a sign of their rarity.
as a final point:
> but you literally can’t be safely leveraged against capital that has no intrinsic value right?
Stocks have intrinsic value because the underlying company has intrinsic value (capital, intellectual property, existing customers, revenue, etc.)