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<h2>Securities-Backed Loans… Just the Tip of the Iceberg?</h2>
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<blockquote class="wp-block-quote"><p>Aging bull markets are naturally predisposed to excesses –particularly in debt and leverage– and once again nontraditional loans are taking center stage.</p></blockquote>
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<p><strong>Markets are relaxing merrily on a powerful time bomb</strong><br>Stock and bond market leverage is everywhere. Some of it is transparent, such as NYSE margin debt which was $539 billion as of the June report. But the hottest form of stock and bond market leverage is opaque, offered by financial firms that usually don’t disclose the totals: securities-based loans (SBLs) – or “shadow margin” because no one knows how much of it there is.</p>
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<p class="has-text-align-right"><em>Business Insider – 7/30/17</em></p>
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<p>It’s been over 12 years since we warned about the highly questionable mortgage lending practices that mushroomed during the Housing Bubble. Now it appears that innovative lending is back in vogue. Securities-backed loans (SBLs) are among Wall Street’s hottest new products in this bull market, and they’ve been growing faster than Jack’s beanstalk over the past few years:</p>
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<ul><li><strong>Borrowing With Stock Soars as Market Rises</strong>  – <em>Wall Street Journal, 7/28/17</em></li><li><strong>Fidelity taps Goldman Sachs to expand lending services through RIAs</strong><em> – Investment News, 7/27/17</em></li><li><strong>Goldman Sachs is launching a digital platform for the rich to borrow as much as $25 million</strong> <em>– Reuters, 7/27/17</em></li><li><strong>Wall Street Sharks Entice Customers With Securities-Backed Loans </strong><em>– Seeking Alpha, 8/13/17</em></li></ul>
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<p>SBLs are often referred to as “shadow margin” because they’re not tracked in the margin debt figures, nor are they tracked by either the SEC or the brokerage regulator FINRA. Nobody knows how extensive such loans are, but based on anecdotal evidence they total at least $100 billion and we believe the figure could be much larger.</p>
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<figure class="wp-block-image size-large is-resized"><img src="https://ns2020-investech.investech.com/wp-content/uploads/2020/12/MorganStanley-1024x502.png" alt="" class="wp-image-4901" width="577" height="282"/><figcaption><strong>Morgan Stanley</strong></figcaption></figure>
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<p>According to a July 2017 Wall Street Journal article, Bank of America’s wealth unit had $40 billion in outstanding securities-backed loans at the end of 2016, up 140% from 2010. Morgan Stanley had $30 billion in these loans, more than double the amount in 2013. And, not to be left behind, Goldman Sachs is teaming up with Fidelity and other brokerages to broaden the availability of credit via its new digital lending program, “GS Select.”</p>
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<h3>What are securities-backed loans (SBLs), and why are they popular?</h3>
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<p>In simple terms, SBLs are loans that are marketed to investors as an easy and inexpensive way to access extra cash by borrowing against the securities in one’s investment portfolio without having to liquidate those holdings. Funds can be used for any purpose except buying more stock or repaying a margin loan. For instance, these loans might be used for buying real estate, investing in a business, funding education, or for personal use like taking a trip or paying for a wedding.</p>
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<p>Fixed loans can run the gamut from $25,000 to $25 million or more, depending on the lender and the amount of collateral. A typical SBL agreement permits an investor to borrow from 50% to 95% of the value of the assets in his or her non-retirement investment account, based on the size of the portfolio and the types and mix of securities held. These lending arrangements can be set up as a fixed loan, but more often they’re established as a revolving SBL line of credit (SBLOC). It’s not uncommon for a firm to require that account assets have a market value of at least $100,000 to qualify for an SBLOC.</p>
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<h3>The sales pitch is irresistible!</h3>
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<p>Looking at the promotional materials shown in this report from broker websites touting SBLs, who wouldn’t want to avail themselves of this offering? According to the ads, you’ve worked hard to grow your investments over the years; now you can capitalize on those assets to finance your dreams without drawing down your portfolio.</p>
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<ul><li>With an SBLOC, the cash is readily available (up to the credit limits) any time you need it.</li><li>Other than securities related transactions, there are no restrictions on how you use the loan.</li><li>An SBLOC lets you keep your investment account intact, allowing it to continue to grow.</li><li>By borrowing to meet your cash needs, you can avoid selling securities and triggering capital gains taxes.</li><li>Because SBLs are backed by portfolio assets, interest rates can be much lower than traditional loans.</li><li>Once an SBLOC is in place, it can be used repeatedly and you’re only required to make monthly interest payments – there is no maturity date.</li><li>There are usually no fees to establish the loan or credit line and funds are available quickly. Goldman Sachs’ digital platform promotes a 24-hour turnaround.</li><li>Typically, no personal financial statements, tax returns, or other documents are required.</li></ul>
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<figure class="wp-block-image size-large is-resized"><img src="https://ns2020-investech.investech.com/wp-content/uploads/2020/12/UBS-1024x751.png" alt="" class="wp-image-4903" width="357" height="262"/><figcaption><strong>UBS</strong></figcaption></figure>
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<h3>What’s in it for the brokers?</h3>
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<p>SBLs and lines of credit have become lucrative new sources of income for brokerages, helping to replace revenue lost due to recent cuts in commission rates. In addition, brokers retain portfolio assets, along with their associated fees, as customers can access cash without making withdrawals. In some cases, establishing these loans may factor into a broker’s compensation, and marketing these credit options creates “sticky” clients as it’s hard to transfer assets to another broker with a securities-backed loan outstanding. Even if a client doesn’t use the line of credit immediately, the longer it’s in place, the more likely it is that he or she will eventually tap it.</p>
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