The truth about all-cash buyers: Goldman Sachs is lending out billions so its rich clients can swoop in for real estate

  • Loan growth has slowed on Wall Street, except among the clients that need them least: America’s rich.
  • They can borrow against their portfolios to scoop homes with all-cash offers or invest in other assets.
  • Insider spoke with bank executives and analysts to find out why the trend is here to stay.

Loan growth has slowed at Wall Street’s biggest banks, except among the clients that need them least: America’s rich.

For Goldman Sachs, wealth management client loans grew by $12 billion in the second quarter, a 43% increase year over year. GS Select, a four-year-old division of its private bank, is also profiting from providing security-based lending for independent financial advisors’ clients. Its book of credit lines doubled in 2020 and currently hovers above $8 billion, according to GS Select co-head Whit Magruder.

GS Select loans, ranging from $75,000 to $25 million, can be used for anything other than buying margin stock, but by far the most common use is real estate, accounting for half of loans. Clients borrow against their assets to get cash rather than dipping into their portfolios for myriad reasons, including renovation and real estate investing.

Most importantly in this white-hot housing market, they can use these loans to beat other buyers with all cash-offers. They can close on a house quickly and later take a mortgage within 90 days.

“This product can be used to actually create the cash to be an all-cash buyer,” Magruder told Insider.

At Morgan Stanley, wealthy clients are using loans to pay capital gains tax on stock market windfalls, according to Kevin Meyersburg, who heads Morgan Stanley’s executive-services unit. Securities-based lending for Morgan Stanley nearly reached $76 billion last quarter, up 43% from a year ago.

This type of lending is not new, but the pandemic’s market rally and low interest rates turbocharged borrowing among America’s wealthy.

“When you look at the cost of money as less than 3%, I think people view it as cheap, and then they’re still getting a decent return in the stock market,” said Ann Thompson, specialty lending executive at Bank of America.

Why loans will continue to be in demand with the rich — and a boon for wealth managers

These sweetheart interest rates won’t last, but jumbo mortgages and loans are expected to stay popular. Taking a loan is more attractive than selling stock and incurring capital gains tax.

“The merry-go-round will keep going until the music stops, whether rates go up significantly, the market falls off dramatically, or the needs of those borrowing is reduced drastically,” Stephen Biggar, director of financial services research at Argus Research, told Insider.

Even if interest rates increase, loans will still be attractive if the Biden administration successfully doubles the capital gains tax. They can afford to wait and see if the next administration lowers taxes in their favor.

“I could see why these loans would continue at a good pace until people get clarity on the timing of potential capital gains changes,” Biggar said. “If [the tax hike] did come into force, would you kick that down the road three years, four years into some next administration?”

The rise of lending is one of many reasons why banks are expanding their wealth management services, with the industry set to reach $73.3 trillion assets under management by 2025. If the drastic estate and capital gains tax hikes come to pass, America’s rich will turn to advisors to find ways to reduce their tax liability.

And the wealthy are continuing to get creative about which assets to borrow against, such as art and stakes in sports teams, according to Vince La Padula, head of lending solutions at JPMorgan’s private bank.

“I can lend you 55% on a Renoir, and you can use that money again in the public markets or your private business,” he told Insider.

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