On a commercial level, it’s easy to see why the banks agreed to provide Elon Musk with $25.5 billion in loans for his Twitter takeover bid. With hundreds of billions of dollars in stocks and possibly a cryptocurrency like dogecoin in reserve, the Tesla chief is a solvent man. A serial entrepreneur, he is also likely to pay significant fees for financial services in the years to come.
However, there is something disturbing in what has just happened. The red carpet being rolled out for Musk on Wall Street contrasts with the hurdles entrepreneurs of more modest means face when seeking bank loans — and points to a growing divide between credit haves and credit-have-nots in America’s business world.
Banks, of course, have never been welfare agencies. But they’ve gradually moved away from Main Street business lending in recent years as consolidation has changed the shape of the U.S. banking industry. The number of small community lenders plunged while a handful of large banks built balance sheets measured in the trillions of dollars. Economies of scale became the holy grail of industry, and the little business guy started getting lost in the shuffle.
“We went from too big to fail to too big to care,” says Beth Bafford, vice president of strategy at Calvert Impact Capitala nonprofit group that works with private lenders and local governments to develop market mechanisms that would make credit more available — and cheaper — for small businesses, especially in minority communities.
“Day in and day out we see small business owners who are nothing but heroes,” she says. “They’re giving their company, their people, and all they’re asking for is a fair shot, just access to the same tools that Elon Musk has access to. Very often it is not available. This is an example of a financial system that is set up to serve very few people well, and it’s all driven by scale.
Changes in lending practices were particularly pronounced in the years following the financial crisis. Bank lending has risen for big businesses, but not for smaller ones, according to statistics compiled by Rebel Cole, a former Federal Reserve Board economist who is now a professor of finance at Florida Atlantic University. According to his tally, the total stock of business loans over $1 million at US banks rose from $1.44 billion in 2010 to $2.75 billion in 2019 (the last year before the data not be distorted by the pandemic). In contrast, total loans under $1 million fell from $652 billion to $645 billion.
Businesses seeking the smallest loans have been hit the hardest. Cole says the fixed cost of issuing a business loan in the United States can be as high as $10,000 to $15,000, making loans under $100,000 or even $200,000 unprofitable for many banks. . This result is that small entrepreneurs are often forced to tap into more expensive sources of funding, ranging from credit cards to products known as merchant cash advances, which sometimes carry triple-digit annual percentage rates. , according to industry sources.
The super-rich, on the other hand, can actually live on bank loans, borrowing against their equity to avoid declaring income and subjecting themselves to the same taxes as the working masses. The terms are also appealing; the FT reported only last year that the wealth management arms of major US banks were offering two-year loans against liquid assets like stocks at an interest rate of around 1.4%.
Musk is leveraging his stock holdings to help fund his $44 billion Twitter buyout. Nearly half of its $25.5 billion debt under the deal — $12.5 billion — is secured by Tesla stock. In the popular imagination, margin loans of this type are considered risky because stocks can go down as well as up. But banks today are happy to lend against such assets. “Stocks are cash equivalents,” Cole says. “What’s easier to convert to cash than stocks?”
The question is how many gigantic margin loans are too many for our own good. Keeping Musk happy diverts attention — and money — from other needs. The bankers tripping over themselves to quickly arrange funding for his Twitter offering were likely too busy to support new supply chains or deliver on 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 give an optimistic note in the current political environment, but I bet there are people left and right who would like credit to be more widely available to qualified borrowers.
Ask yourself: is the national interest better served by helping the current Elon Musk get even richer – or by finding new Elon Musks? Feel free to tweet your response.