Bank loans

Elon Musk’s bank loans demonstrate financial disparity in the United States

It’s easy to see why the banks agreed to give Elon Musk $25.5 billion in loans for his quest to buy Twitter. The founder of Tesla is a solvent man, with billions of dollars in stocks and possibly cryptocurrencies like dogecoin in reserve. As a serial entrepreneur, he risks paying astronomical fees for financial services in the years to come.

The banks, after all, were by no means welfare organizations. However, they have been gradually moving away from Predominant Avenue business lending lately, as consolidation has changed the shape of American banking. The number of small community lenders plunged while a handful of big banks built stability balance sheets measured in the trillions of dollars. Economies of scale became the holy grail of industry, and the little man in the business world began to get lost in the shuffle.

But there is something worrying about what just happened. The red carpet rolled out for Musk on Wall Street stands in contrast to the obstacles entrepreneurs of modest means face when seeking bank loans — and points to a growing chasm between credit haves and credit-have-nots in America’s business world.

“We’ve gone from too big to fail to too big to care,” says Beth Bafford, technical vice president at Calvert Impact Capital, a nonprofit group that works with private lenders and Indigenous governments to develop the market. mechanisms that would make credit scoring more accessible – and cheaper – for small businesses, especially in minority communities.

The adjustments in lending practices were considerably pronounced in the years following the monetary catastrophe. Bank lending has risen for big businesses, but not for smaller ones, according to statistics compiled by Insurgent Cole, a former Federal Reserve Board economist who is now a professor of finance at Florida Atlantic College. According to him, the full inventory of business loans over $1 million at US banks grew from $1.44 billion in 2010 to $2.75 billion in 2019 (the last year before knowledge not be distorted by the pandemic). In contrast, whole loans under $1 million increased from $652 billion to $645 billion.

“Day in and day out we see small business owners who are simply heroes,” she says. “They provide everything to their company, to their employees, and all they ask for is a good shot, just access to the same tools that Elon Musk has access to. So generally it is not accessible. This is an example of a monetary system that is set up to serve only a few people well, and all driven by scale.

Businesses seeking the smallest loans have been hit the hardest. Cole says the fixed value of creating a business mortgage in the United States can be as high as $10,000 to $15,000, making loans under $100,000 and even $200,000 unprofitable for many. many banks. That result is that small entrepreneurs are sometimes forced to tap into more expensive sources of funding, ranging from bank cards to merchandise often referred to as cash advances from service providers, which typically incur triple-digit annual proportional fees, sources say. commercial.

The super-rich, on the other hand, can really stay on bank loans, borrowing against their stock holdings to avoid declaring income and subjecting themselves to the same taxes as wage earners. The sentences are seductive too; the FT reported only last year that the wealth management arms of major US banks were providing two-year loans against liquid assets like stocks at an interest rate of around 1.4%.

Musk is leveraging his stocks to help fund his $44 billion Twitter buyout. Almost half of its $25.5 billion debt under the deal — $12.5 billion — is secured by Tesla stock. Within the framework of fashionable creativity, margin loans of this type are considered dangerous, because stocks can go down and up. However, banks today are happy to lend against such property. “Stocks are money equivalents,” says Cole. “What could be easier to turn into money than stocks?” The question is how many gigantic margin loans are too many for our personal good. Protecting Musk’s happiness diverts attention — and money — from other needs. The bankers who tripped over themselves to quickly arrange funding for his Twitter offering were likely too busy to relaunch new distribution channels or fulfill their promises to help communities of color.

Now may be the time for policymakers to encourage US lenders to broaden their horizons. I hesitate to strike a word optimistic in the current political context, but I bet we are left and right who would like credit to be more widely available to certified debtors.

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  • Elon Musk’s bank loans demonstrate financial disparity in the United States
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