WSJ: Maybe the Rich Really Are Like Us -- in Debt

Maybe the Rich Really Are Like Us -- in Debt

They Diversify, or Just Buy Toys, With Their High-End Loans; But 'Strategic Debt' Has Its Risks

By ROBERT FRANK
Staff Reporter of THE WALL STREET JOURNAL
May 5, 2005; Page C1

Brother can you spare a million?

Adding to the nation's personal-debt load, wealthy people have been borrowing increasingly against their homes, stocks, and businesses to fund purchases and investments.

Private bankers and wealth managers say that borrowing among the richest Americans has grown in the past few years as interest rates have remained historically low. And this increase in debt comes from already lofty levels. The richest 1% of American households -- or those with more than $5.9 million in net worth -- had $346 billion in debt in 2001, up $50 billion from 1998, according to the most recent data compiled by Arthur Kennickell, a senior economist with the Federal Reserve.

While many of the ultrarich use debt to amplify investment strategies or for other financial planning, high-end loans carry risks. With interest rates rising and markets becoming more risky, many say the wealthy could be caught in a short-term cash-crunch. Some say the borrowing wave resembles the heavy margin-lending of chief executives and high-tech entrepreneurs in the late 1990s to buy stock and trinkets such as vacation homes or yachts. When tech stocks crashed, many of the investors were forced to default.

A survey of people worth more than $5 million, conducted by Chicago-based Spectrem Group, found that 19% had a second mortgage or home-equity loan. Fully 11% had margin loans, 14% had credit-card balances and 11% had other loans. Private bankers say high-end lending, while easing slightly as interest rates have risen, remains a robust business.

The loans suggest that debt addiction cuts across all classes. Unlike debt-laden consumers, who have been using debt to pay bills and buy cars, homes and other items, the rich have been using debt as a financial tool to make more on their investments. Private bankers call it "strategic debt." Some are also using debt to finance lifestyle purchases, like second or third vacation homes, private jets, racehorses, art and yachts. Buying big-ticket items with debt can free up cash that then can be used in higher-return investments.

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Write to Robert Frank at robert.frank@wsj.com

URL for this article:
http://online.wsj.com/article/0,,SB111525812602125418,00.html

Because if you are over the debt limit for one of these new ghastly Chapter 13 five year plans, you can still file a Chapter 7...

Debt limit is about a million, depending on what's secured and unsecured.


How conveeeeenient.

...complete economic collapse looming ahead.

The problem then was that people were buying stocks on the margin, on credit. If many wealthy people need to sell their stocks to pay off their debt around the same time, they will have to sell in a falling market and get little for their investments. That's what happened back them. It could happen again -- in a different way.

they have assets to back up their debt.