Wall Street’s Securities-Based Lending Craze

According to recent reports, major banks and brokerages on Wall Street seem to have learned nothing from the subprime mortgage meltdown that threw our entire financial system into crisis. Ok, maybe nothing isn’t quite fair. Since the bankers and the brokers do seem to have learned how to add just a slight variation on their repeating of recent history. Instead of selling unqualified buyers on subprime mortgages they can never afford, this time Wall Street is selling wealthy investors on securities-backed loans for purchases they don’t need.

What Is a Securities-Based Loan and How Can I Get One?

Securities-based lending, also known as non-purpose lending, offers high net-worth investors an opportunity to use their investment portfolio as collateral in order to secure low-interest loans for - well, for whatever they want. Cars, fine art, boats, even houses… According to a blog post on Fortune, these loans are being given out to investors at an astonishing clip, providing major banks like UBS, Bank of America, JP Morgan, and Merrill Lynch with many millions of dollars in additional revenue, and stimulating the kind of headlong competitive rush among Wall Street banks and brokers that helped shove US financial market over a cliff just a few years ago.

The Threat to All of Us of Rampant Securities-Based Lending

Where these securities-based loans differ from the subprime mortgages of the early 2000s is mainly in the fact that they are primarily offered to wealthy investors. One might think that means there isn’t much risk spread across the market - because these investors have securities and other assets that might be used to cover in the event the loans are called. But one would be wrong. Just because an investor is wealthy in today’s irrepressibly bull market doesn’t mean he or she will be rich forever - or in the likely scenario that the market contracts. The big worrying problem here - and how securities-based lending resembles subprime lending - is that super-cheap financing is being back by an asset whose value is unstable - typically highly unstable. The low volatility in today’s stock market probably will not last.

When Your Broker Stops Being a Fiduciary and Starts Chasing Fees

Financial advisors have a legally mandated fiduciary duty to act in the best interest of their clients - always. However, as with many “hot” products and trends in the financial markets, and especially those that promise higher fees and commissions, FAs and brokers can easily forget their duty and focus on the booty. Not to mention these same broker are being incentivized (read: pushed) by their broker-dealers to create more and more securities-based loans. According to the Fortune post, defenders of the securities-based lending boom point out that:

wealthy people have always borrowed against their assets and that ultra-low rates make such offerings a logical option, especially compared to second-lien mortgages or credit card debt. And this is true. The bigger question revolves around whether a true financial advisor (read: a fiduciary) would really be recommending that their clients put retirement assets up as collateral for increased consumption in the first place. Can you really be giving quality advice while tacitly facilitating the purchase of luxury goods or other forms of consumption using additional debt?

Experienced Securities Lawyers

The Green Firm has a team of experienced securities attorneys ready to help you recover for your investment losses. If you or anyone you know has been the victim of investment fraud or broker misconduct, please contact us for a free consultation at 1-855-462-3330 or via email by clicking here.