Illustration: Aida Amer/Axios
Thousands of employees at Silicon Valley Bank, Signature Bank and Credit Suisse have found out the hard way that the stock they receive from their employer can become worthless overnight – just like Enron employees made in 2001.
Why is this important: Rank and file employees are subtly encouraged to borrow money against their acquired shares, instead of selling them – a decision that, in general, should only be made by the extremely wealthy, operating on highly personalized financial advice.
Driving the news: Better.com offers an “equity unlock” mortgage for Amazon employees through which they can borrow against their Amazon stock rather than selling it at its current depressed level.
- There is a Better.com Conventional Mortgage, secured on the property, for 80% of the home’s value. The remaining 20% comes from a loan against the participation, at a higher interest rate.
- The down payment loan is oversized: the employee needs shares worth twice as much as the down payment.
Between the lines: The main reason not to sell stocks is to avoid capital gains taxes by doing so.
- It’s especially appealing to people who literally plan to hold the shares until they die, hoping that their heirs can then enjoy the base increase arrangement.
The big picture: Generally speaking, it’s a good idea for employees to sell shares acquired from their employer, as they are already massively exposed to the risk of that company doing harm from working for them.
- It’s also a bad idea to have a large stake in a single stock, because most stocks fails to overcome Goods of treasure.
- It’s an even worse idea borrow against a large stake in a single stock, since in this case you only win if the stock outperforms the interest rate of the loan. Which will be significantly higher than the interest rate on Treasury bills.
How it works: At Amazon, however, the company’s entire compensation structure hinges on an outperforming stock price. “The compensation was based on the assumption that Amazon shares would rise by at least 15% each year,” reports the WSJ.
- By partnering with Better to allow employees to keep their stock And climb the housing ladder, Amazon implicitly encourages them to do so.
- An Amazon spokesperson told Axios that the product was part of an attempt to provide “benefits that contribute to short-term and long-term financial success.”
What they say : The announcement gave Better’s CEO the opportunity to paint himself as a “creative” financier; THE Press release presents its product as a solution for Millennials who “cannot afford to buy a house”.
- By definition, however, anyone using this product can afford to buy a house, just by liquidating half of their Amazon inventory.
The bottom line: If you can use your savings to put down a deposit, that usually makes more sense financially than any nifty alternative.