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If an ultra high networth individual, like Bill Gates, Mark Zuckerberg, Carlos Slim, Paul Allen, Elizabeth of Windsor, Amancio Ortega, Liliane Bettencourt, Stefan Persson, Bernard Arnault etc. would leverage their fortune in the way a bank does with savings, would that multiply their wealth?:

If an UHN individual owns their own 'bank' and puts their fortune in it as savings, they could create e.g. 10 x their fortune in loans.

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  • $\begingroup$ Welcome to Economics SE! Please ask only one question per question, so that both questions and answer are findable for people who may have different concerns. $\endgroup$ – VicAche Dec 3 '15 at 21:02
  • $\begingroup$ Thanks, I did, you can find the others here and here $\endgroup$ – imonaboat Dec 3 '15 at 21:47
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Its legal to borrow and lend money, but if you become anything close to a bank, (take deposits, make loans, take risks, make a business out of it) then you will be regulated. You will be insured by the FDIC, and since you are insured, you will then be required to follow certain guidelines regarding how you asses risk and which risks you can take or not. Moreover, they will not be allowed to lose money in a large scale, so they would have to recapitalize the 'bank' after any of the charitable projects swallows up capital.

So to answer your question, they would not have more wealth, but they would manage a bigger pot of capital with which to invest. However, at some point they will lose the freedom of doing whatever they want. Since its not their money, then they can't do whatever they want.

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Banks (and other firms), do not leverage their fortunes, they leverage their investment power. Individuals, often through family trusts, may use the same tool, of course.

This does not allow for more spending but for more investment. Given expected benefit higher than the cost of leverage, this can be a good way to invest more, but remember that leveraged funds can only be spent on activity that generates revenues, because both interest and capital has to be payed back in the end. This does increase the impact of big players in the economy, but does not change their purchasing power, just their investing power.

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  • $\begingroup$ Thanks, so that confirms my guess - I am no economist - do you know if the Gates 80 bln. is the value of his shares? does that make his fortune already leveraged? and what about the comparison to the GDP? Banks leverage savings, but that's less important, you got my point. $\endgroup$ – imonaboat Dec 3 '15 at 21:18
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    $\begingroup$ Irrelevant. You should compare Bill's fortune with National Wealth rather than PIB $\endgroup$ – VicAche Dec 3 '15 at 21:38
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    $\begingroup$ But Bill can use debt to leverage his fortune, just like a bank or a government, or whatever. I think you're missing the point with leverage, would you buy say \$60 in cash and \$40 in actions that you can sell or buy immediately for any other amount than \$100? For the same reason, "having" \$1000 in debt and \$1100 in actions is exactly the same as having \$100 in cash (as long as everything is liquid, but this is a point of detail). $\endgroup$ – VicAche Dec 3 '15 at 22:16
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    $\begingroup$ Again, I think the right comparison is with National Wealth. National Wealth can be looked at as the sum of all wealth of individuals in a given country. Then those individuals, and Bill Gates, can invest their wealth in anything they please, leveraged or not. $\endgroup$ – VicAche Dec 3 '15 at 22:27
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    $\begingroup$ OK, so you say his 80 bln compares to the 42,000 bln US national? And his impact on GDP is complex? $\endgroup$ – imonaboat Dec 3 '15 at 22:30
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$$\text{Assets - Liabilities = Equity}$$

$$\Delta \text Equity =\text Profit$$

$$\text {Leverage ratio} = \frac{\text {Liabilities}}{\text{ Equity}}$$

Using these identites, it would become apparent that as the billionaires increases the leverage ratio, liabilities grow, equity stays constant, and there is no change in profit.

What is described could multiply their assets, but also liabilities. They would not gain anything in profit. In the long run they might gain something in profit because more efficient capital structure. But they already should have capital structure that reflects their risk appetite and profitability desires.

Also only banks legally have the ability to lend currency which they don't actually own. Other businesses don't have such legal rights (although they can leverage through other means, ie. corporate bonds).

(The 2nd equation is not an identity, as there are other means of raising equity than profits, but it rather characterizes the situation. In addition, to be clear I am talking about their businesses, leverage ratio has little meaning when it comes to non-business life).

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