Zuckerberg’s free lunch
You are young, gainfully employed, have recently gotten married, and have just found your dream home to start your life together with your new missus.
Your offer is accepted, you sign the contract, apply for a mortgage, and everything is hunky-dory: you close and move into your own little piece of Shangri-La.
Only you are not normal. You are Silicon Valley-entrepreneur and seeming Asberger syndrome poster-boy Marc Zuckerberg. Your dream house in Palo Alto costs $7.2 million (it looks lovely) and the mortgage you got is $5.95 million. The interest rate on the mortgage: 1.05%.
What is going on here? We know houses like this in Palo Alto run big bucks, but good thing for MZ that big bucks are exactly what he has these days, sitting on several hundred million in cash-money (after taxes, baby). Oh, and he still has a few billion in FB stock laying around the house somewhere. He can certainly afford any piece of real estate his heart desires. (“Honey! Where’s the checkbook??!!”)
So, why the mortgage? And why the ridiculously low interest rate?
If you are someone who thinks you can get something for nothing, please go away now. You are doomed, and when your demise is underway the last thing I would like to do is be a part of it.
I am not going to worry about why MZ wanted to do this. He probably looked at the offer and said “Hey, free money! I like free money!” and took it. The offer likely came from one of his many new Friends in the investment banking community, perhaps one of the firms that just made millions of dollars in fees selling the Facebook IPO to the investing public. (IPO price: $38. Current price: $28.95).
A mortgage this big (> $1 million) is called a “super-jumbo.” 30 year adjustable super-jumbo mortgages are currently going for about 4.5%. One generally needs a lot of equity in the property, and if the numbers are correct then Zuckerberg has just under 20%, which ain’t much at this altitude. His rock-bottom rate represents a 76% discount off what these types of loans generally go for.
Borrowed money is a commodity, and the interest rate is how that commodity is priced. Lenders sell access to their money for a profit, at least that’s the goal. When a lender sells something so far below his normal profit expectations, something is amiss. Does anyone in their right mind believe that this lender gave MZ a deal from the goodness of his heart? Was the bank just so overcome with glee over FB’s new Timeline feature that they had to express their gratitude somehow?
Um, no.
The lender who gives a rich guy a dirt-cheap mortgage is the same as the hotel in Vegas that gives the high-rollers a comped suite and limo rides: whatever profit they forego on the room they are going to make up in spades in the casino. If MZ liked to play craps for $100k per roll you can bet some casino in Vegas would be flying a G5 up to Palo Alto to pick him up for the weekend.
Normally, this would just be between the rich guy and his dealer, um, I mean lender. They would sell him all types of wildly overpriced services and charge fees that would more than make back what they gave up on the cheap loan.
But MZ is now an officer of a publicly traded company. He has a duty to his shareholders. I hope for his sake and his shareholders he discloses the source of the loans and what business relationships (if any) the lender has with FB.
Whatever a person does with his money is his business, but I hope for the sake of FB shareholders (neither I nor any of my clients hold positions) that the bankers he’s so cozy with are not the same ones looking for bigger profits from his company and its newest Friends.
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