Hutch, David Tice calls the 90% Stock Loan a derivative transaction
and calls it a ticking time bomb. You are the only person on this
thread able to understand the truth or falsehood of this article,
so please do if you have enough time to read 4 screen pages of text.
This proprietary financial instrument is described below.
David Tice, The Prudent Bear Fund, ticed@prodigy.net, August 26, 1999
90% Stock Loan - The Magic of Credit & Financial Engineering
First Security Capital 90% Stock Loan, the proprietary financial instrument
that provides liquidity without triggering a taxable event, protection from
a market downturn, and unlimited upside potential.
... continuing from their website: "With capital gains in your portfolio
or vested options, you would be subject to capital gains taxes should
you decide to sell, taxes that would be especially significant if you
have shares with a low relative cost basis, or have employee stock
options with a low relative exercise price. Loans, however, are not
taxable events. So in many cases you could actually net more cash by
borrowing 90% of the current value of your stocks with our 90% Stock
Loan than if you were to sell. And because you still own your stocks,
you retain the ability to realize future growth in the value of your
portfolio. The loan is also non-recourse, so you have no personal
liability for your loan, and your maximum downside is capped at 10%
for your entire loan term. Ultimately the 90% Stock Loan can help you
net more cash, get long-term downside protection, and keep your stocks."
"Diversify into real estate or other ventures by leveraging your stock
portfolio, without the risk of a margin call if your stock declines in
value. You can access standard margin loans when it comes to leveraging
your stock portfolio, but these leave you exposed to downside risk if
your holdings drop in value. Our 90% Stock Loan is non-callable and it
has no margin maintenance requirements, so it enables you to leverage
90% of the value of your stock portfolio without the risk of a cash
squeeze from a margin call. And unlike margin loans, with the 90% Stock
Loan you are not required to make any interest payments until the end of
your loan term. Than means you get 90% of the current value of your
stock portfolio in cash and you have long-term downside protection,
without negative cash flow. So you can leverage your stock portfolio
and diversify into real estate and other ventures without worrying
about making monthly payments or meeting margin calls."
"With the 90% Stock Loan you receive 90% of the current value of your
portfolio in cash, and still keep your stocks. Even if your stocks go
down significantly in value over the course of your loan term, you have
no obligation to repay either the original loan or the accrued interest
at maturity, yet you continue to realize future growth in the value of
your portfolio if it keeps going up."
... this type of loan is very attractive as it provides liquidity without
even having to sell a share of stock; no taxable events and no insider
sales transactions. Derivative desks have been active players as well,
providing "insurance products" that have allowed stock and/or option
holders to lock in gains from this amazing bull market. And, importantly,
derivative "insurance" has likewise allowed individuals to lock in gains
without having to sell.
... our system has developed a dangerous propensity for monetizing asset
inflation. Indeed, the more asset prices have risen, the more keenly our
financial system has focused its lending to the asset markets. And the
greater the focus on asset lending, the greater the inflationary bias
and the greater becomes the asset bubble. With rising asset prices, more
can be borrowed and spent throughout the economy, which only encourages
greater excess and even higher asset prices. Over time, as more and more
of the financial system and economy are geared towards asset inflation
and wealth-effect-generated consumption, the whole quagmire becomes one
big bubble economy.
There are, however, some big problems here. For one, it is built almost
completely on ever-greater amounts of debt; it is one massive credit
bubble. While the "90% Protection" loan is a great deal for those
wishing to convert stocks to cash, the cash comes from additional
credit created within the financial system ... Come the inevitable day
of declining asset prices, our financial system and economy will be
impaired with this mountain of debt backed by insufficient collateral
values ... the "90 Protection" loan is really nothing more than a
derivative transaction and, in fact, the company is headed by a
derivatives specialist.
The reason the borrower maintains full upside exposure to stock gains is
that the shares are not sold. Instead, First Security Capital believes
it can "hedge" its exposure if stock prices decline and, hence, will be
able to repay the company's debt that today provides the cash for stock
and option loans. This, like most derivatives that have come to dominate
our financial system, works well during bull markets ... these derivatives
much a ticking time bomb...
thanks
Doug |
