Suppose I want to raise a metric frick-ton of cash to start up…something.
I *have * a million dollars and deposit it in a bank account and immediately take out a loan for another million dollars, using the first million as collateral.
The bank now has in their possession a million dollar account with a lien on it.
I take the borrowed million to another bank , deposit it, and borrow against it.
Repeat until I have enough money to satisfy my investment venture
Sounds like loan stacking which IIRC is not technically illegal, unless you are intending on defaulting on any of these loans, which is fraud. And all of these loans will require repayment…
You still only have a million dollars in hand, since you took the first loan and deposited it in the second bank. I don’t know bank lore, but I assume if you try to withdraw from any of those accounts, you have to pay the loan first. So if I take a million out of bank A, I have to give back the million loan since it is no longer guaranteed. I assume if B asks A “does this guy really have a million deposited?” A will also say “but it’s being held as surety for a loan of a million”.
A friend once told me about someone who wanted to start a business, and hit up several banks the same day for the max personal loan his circumstances would allow. The managers were pissed when they found out, but apparently he did nothing wrong; Presumably he did not officially have a loan from A when he applied to B, C, and D - each loan became official later after he applied at each. If he’d concealed actually having a loan, presumably that wouuld be fraud. He managed to start his business and did not default on the loans. This was a while ago (1970’s?) and I assume the credit tracking systems are more up-to-date in tracking this stuff today.
Right. $1 million in your hand, and several million in the bush that you’re paying interest and principal on all the while. Why would anyone obligate themselves to multiple loans to obtain just $1 million to work with that they had in their hands, debt free, when they started?
It had occurred to me that having a million alone doesn’t carry as much weight as a million plus several more million…albeit tied up and not quite liquid.
Some number of interested parties…such as investors, analysts, brokers, etc…may be swayed by the “appearance” of solvency if they don’t look too closely at the books.
I’m sure the financial shenanigans would be apparent to a forensic accountant…after the fact.
If you think having a large balance sheet is important, you can open a brokerage account, deposit $1 million cash and buy $10 million of low risk bonds on margin. You can buy a $10 million property with a 90% mortgage.
But it doesn’t take a forensic accountant to grasp that you need to look at the liability side of a balance sheet as well as the assets. I think you’re only going to “sway” people who are so naive that you could just lie to them.
The kind of shenanigans (potentially fraud) that certainly does happen is to try to pledge the same assets as security against multiple loans, something Trump is notorious for.
Trump is entitled to have a crime named after him. Trump Rolled?
Moderator Note
Keep political pot-shots out of FQ, please.
On the business side of things, if you have a legitimate business idea and a million in cash already, you won’t be short of opportunities to borrow a significant amount more than the cash on hand. That does enable loan stacking. But clearly crosses into fraud if you are not disclosing the full nature of your finances when pitching for the next loan. In reality you are not going to just get a huge slab of cash as a business loan. A significant line of credit perhaps, but banks are not stupid. They are going to want some pretty solid assurances that their money isn’t vanishing into hookers and blow or generally unsafe and valueless directions. A business plan with clear milestones where the next tranche of money becomes available for designated purposes. That give both you and the bank security.
The obvious counterpoint to the OP’s scenario is from the banks viewpoint.
Bank has a million dollars in deposits. They provide loans. Lent money is used to buy goods and services. People providing goods or services bank money. Bank lends it out again. Ad infinitum. Welcome to fractional reserve banking.
Which works fabulously so long as there really is a fraction in reserve and everyone is confident in the structure.
The key is - if you apply for a loan, you must disclose all the assets and liabilities you have that matter to that loan. If you ask for a loan and say “I have a million in Bank A” but don’t disclose the fact that there’s a lien (?) on that, or that you already have another outstanding loan, then it becomes fraud. (IIRC, this is one of the crimes Michael Cohen was charged with, regarding his taxi medallion business). If the bank has full discosure and gives you a loan anyway, that’s their problem.
This is actually a way to build up credit for young people.
Put $1000 (or whatever you can afford to not have access to for a while) into a passbook savings account. Then take out a personal loan from that bank for $1000 using that deposit as collateral. The account is frozen. Nothing is more secure to a loan than the cash itself.
Then take the $1000 to another bank and do this again. And again and again at other banks.
As you pay down the loans the money in the collateral accounts will be unfrozen bit by bit.
Do this on 3 month-1 year personal loans.
Yes, it will cost you some money via interest. But over a relatively short period of time you will have several banks showing you have good payment history and a credit line up to whatever amount you use.
Myself and my brother did this using 10K our parents loaned each of us to do it. By the time I was 20 I had a credit rating in the upper 700’s and a credit risk of around 40 grand. Keep in mind that was in 1980.
We worked with the banks and savings and loans we did this and they were aware of what we were up to. I know no reason why it still wouldn’t be a valid credit builder today.
All this tells us is that the credit rating system is pretty stupid. But… we knew that.
The way the modern economy works, I would presume by the time someone is graduating university they would have had a credit card and demonstrated some sort of meaningful payment behaviour anyway.
The credit card, yes. The meaningful payment behavior not necessarily the case. When I first wanted a credit card around 1980 I had to build up credit and my income to justify it. It wasn’t long before the credit card companies didn’t care and start handing out credit cards like candy to anyone who was simply attending college. I think the astronomical interest rates at the time were a prime incentive.