Elon has a lot of equity in ownership of tsla, spacex, etc, no doubt plenty of other things. Instead of selling for cash and buying Twitter with cash, he’s taking out loans based on assets he owns.
On top of that there will probably be “imaginary money” where a bank will give him money to buy Twitter with Twitter as collateral, but not the whole thing, just part. I.e. loans against his personal capital will provide a kind of down payment for loans against the value of Twitter.
In this scale it’s called leverage, banks loaning you a multiple of assets you’re willing to risk.
It is quite common for people with extreme net worth to take loans out against assets instead of selling them.
Doubly so when the interest on these loans is tax deductible. This is why he and most other wealthy people pay 0 taxes - he never has a taxable event, like selling stock. He just uses his stock as collateral to take out loans and writes off the interest.
We know that no companies pay tax (ignore the billions paid in tax), and no rich people pay tax (ignore the billions paid in tax), so therefor all taxes must be paid by me personally.
Margin loan against your stock is more like a line of credit.
Once you upgrade your brokerage account to include margin loans you're allowed to borrow up to, say, 40% of the value of your stock (I simplify, the exact rate is dynamic).
Say you have $1 million in stock.
You're allowed to borrow up to $400k. You have a line of credit of $400k.
Say you borrow $100k. And in this context "borrowing" is simply transferring money from your brokerage account to your bank account. There's no additional paperwork as in most loans.
Let's say over 5 years you accumulate $10k interest (interest rates are really low, can be below 2% right now).
You don't have to "repay" that $10k or the principal. You now owe $110k which is well below $400k limit.
It's a line of credit, you can still borrow additional $290k.
In the limit that line of credit would only have to be settled when you die.
This is where the weird negativity around billionaires taking loans is odd, even as someone who doesn't particularly like Musk. Sure, if their stock holdings keeps increasing in value, they can handle the loans easily and come out ahead on the deal. But that isn't a given, so what is the issue?
Reed Hastings would currently being losing a lot under this scheme.
Personally, my issue is that taking loans against equity is the reason billionaires don't pay any income tax. Sure, they should be able to take loans in order to keep their voting share, but not as a tax loophole.
For a long time this always felt awkward to me but I was never able to pin-point exactly what was wrong. Then I found georgism, with its claims of not needing any income and capital gains taxes, and it was even harder to quantify.
But I think now I've been able to work it out. There's actually two different types of loans but we treat them equally. The first is the nice type, the 'I built a factory, used that factory to pay back the loan with interest', that loan is a positive sum loan, the company wins, the bank wins, and the community wins. The second are loans for land, loans for stock, and other similar loans - these are zero-sum loans. The company can win, the bank can win, but someone is losing, and as is the community.
And so the real problem with this if you track how the money flows - a possible scenario is that a company might take out a bond, use the money for that bond to buy its own stock. The people who sold that stock and got that money might then go out and buy a house, the people who sold that house - you betcha, put that stock into an index fund, which includes a larger and larger share of the companies buying their own shares. Now that their share price is raised, they have more equity, and can once again take out another bond to do it again. It's a positive feedback loop. Each cycle is inflating the bubble. Valuations end up not being based on actual productivity, but on assumptions as to how money will flow through the markets.
We're at a stage now that the stock market flows of funds is only positive because of the stock buybacks. Companies that aren't buying back their stocks are going out of business. The Russel 5000 is getting punished despite the s&p recovering. We're at a stage now where north of 40% of all money is being held behind passive flows. We're now seeing the consequences of that with things like Netflix - when the stock does drop, it drops quickly and massively. Average volatility might be down considerably, but peak volatility is up massively.
The issue is that loans are ways of realizing gains on investments that aren’t taxed.
A proposal to correct this is to require that when you use an asset as collateral for a loan you have to reassess its value and pay capital gains taxes on the increased basis between when you acquired it and took out the loan.
Basically there needs to be friction and taxation with equity transactions like these loans.
On top of that there will probably be “imaginary money” where a bank will give him money to buy Twitter with Twitter as collateral, but not the whole thing, just part. I.e. loans against his personal capital will provide a kind of down payment for loans against the value of Twitter.
In this scale it’s called leverage, banks loaning you a multiple of assets you’re willing to risk.
It is quite common for people with extreme net worth to take loans out against assets instead of selling them.