<p>Its legal to borrow and lend money, but if you become anything close to a bank, (take deposits, make loans, take risks, make a business out of it) then you will be regulated. You will be insured by the FDIC, and since you are insured, you will then be required to follow certain guidelines regarding how you asses risk and which risks you can take or not. Moreover, they will not be allowed to lose money in a large scale, so they would have to recapitalize the 'bank' after any of the charitable projects swallows up capital.</p>

<p>So to answer your question, they would not have more wealth, but they would manage a bigger pot of capital with which to invest. However, at some point they will lose the freedom of doing whatever they want. Since its not their money, then they can't do whatever they want. </p>

CC BY-SA 3.0
2016-05-03T16:11:20.593Z
2016-05-03T16:11:20.593Z
Fix.B.
<p>$$\text{Assets - Liabilities = Equity}$$</p>

<p>$$\Delta \text Equity =\text Profit$$</p>

<p>$$\text {Leverage ratio} = \frac{\text {Liabilities}}{\text{ Equity}}$$</p>

<p>Using these identites, it would become apparent that as the billionaires increases the leverage ratio, liabilities grow, equity stays constant, and there is no change in profit. </p>

<p>What is described could multiply their assets, but also liabilities. They would not gain anything in profit. In the long run they might gain something in profit because more efficient capital structure. But they already should have capital structure that reflects their risk appetite and profitability desires.</p>

<p>Also only banks legally have the ability to lend currency which they don't actually own. Other businesses don't have such legal rights (although they can leverage through other means, ie. corporate bonds).</p>

<p>(The 2nd equation is not an identity, as there are other means of raising equity than profits, but it rather characterizes the situation. In addition, to be clear I am talking about their businesses, leverage ratio has little meaning when it comes to non-business life).</p>

CC BY-SA 3.0
2016-01-02T22:36:02.007Z
2016-01-02T23:33:31.070Z
2016-01-02T23:33:31.070Z
Dole
<p>Banks (and other firms), do not leverage their fortunes, they leverage their investment power. Individuals, often through family trusts, may use the same tool, of course.</p>

<p>This does not allow for more <strong>spending</strong> but for more investment. Given expected benefit higher than the cost of leverage, this can be a good way to invest more, but remember that leveraged funds can only be spent on activity that generates revenues, because both interest and capital has to be payed back in the end. This does increase the impact of big players in the economy, but does not change their purchasing power, just their investing power.</p>

CC BY-SA 3.0
2015-12-03T21:18:09.053Z
Thanks, so that confirms my guess - I am no economist - do you know if the Gates 80 bln. is the value of his shares? does that make his fortune already leveraged? and what about the comparison to the GDP? Banks leverage savings, but that's less important, you got my point.
imonaboat
CC BY-SA 3.0
2015-12-03T21:25:36.893Z
No, it's the value of its share but equity value is different from entreprise value (ie when you buy a firm, you (mostly) do not buy its debt).
VicAche
CC BY-SA 3.0
2015-12-03T21:29:39.757Z
Anyway, how would you rate the investment / GDP comparison and the impact you mentioned?
imonaboat
CC BY-SA 3.0
2015-12-03T21:38:38.983Z
Irrelevant. You should compare Bill's fortune with National Wealth rather than PIB
VicAche
CC BY-SA 3.0
2015-12-03T21:39:36.793Z
But the GDP "adds" 14000 bln in wealth annually.
imonaboat
CC BY-SA 3.0
2015-12-03T21:49:34.937Z
And how would you rate the fortune [National Wealth](https://en.wikipedia.org/wiki/National_wealth) comparison @VicAche? (taking the leveraging into account)
imonaboat
CC BY-SA 3.0
2015-12-03T22:08:10.317Z
Bill's fortune grows (or not) each year too depending on what he decides to do with it. Again, there is no leveraging to be taken into account.
VicAche
CC BY-SA 3.0
2015-12-03T22:11:11.877Z
Now I believe you are missing the point. And I believe you are wrong, a leveraged fortune has more potential to grow.
imonaboat
CC BY-SA 3.0
2015-12-03T22:16:10.350Z
But Bill can use debt to leverage his fortune, just like a bank or a government, or whatever. I think you're missing the point with leverage, would you buy say \$60 in cash and \$40 in actions that you can sell or buy immediately  for any other amount than \$100? For the same reason, "having" \$1000 in debt and \$1100 in actions is exactly the same as having \$100 in cash (as long as everything is liquid, but this is a point of detail).
VicAche
CC BY-SA 3.0
2015-12-03T22:20:09.477Z
Yeah ok, so the point is `Bill can use debt to leverage his fortune, just like a bank or a government, or whatever` so that amplifies his `economic impact` as you said. To what macro economic figure should this be compared then? If I look up National [investment](https://en.wikipedia.org/wiki/Investment_%28macroeconomics%29), it says that the macro-economic investment is a component of GDP.
imonaboat
CC BY-SA 3.0
2015-12-03T22:27:42.130Z
Again, I think the right comparison is with National Wealth. National Wealth can be looked at as the sum of all wealth of individuals in a given country. Then those individuals, and Bill Gates, can invest their wealth in anything they please, leveraged or not.
VicAche
CC BY-SA 3.0
2015-12-03T22:30:53.537Z
OK, so you say his 80 bln compares to the 42,000 bln US national? And his impact on GDP is complex?
imonaboat
CC BY-SA 3.0
2015-12-03T22:59:08.353Z
I'm not saying it's complex, I'm saying it doesn't depend on his wealth but on his income. Yes, that's what the 80 compare with.
VicAche
CC BY-SA 3.0
2015-12-03T21:08:38.040Z
2015-12-03T21:08:38.040Z
VicAche
<p>If an ultra high networth individual, like Bill Gates, Mark Zuckerberg, Carlos Slim, Paul Allen, Elizabeth of Windsor, Amancio Ortega,  Liliane Bettencourt, Stefan Persson, Bernard Arnault etc. would leverage their <code>fortune</code> in the way a bank does with savings, would that multiply their wealth?:</p>

<p>If an UHN individual owns their own 'bank' and puts their fortune in it as savings, they could create e.g. 10 x their fortune in loans.</p>

CC BY-SA 3.0
2015-12-03T21:02:19.840Z
Welcome to Economics SE! Please ask only one question per question, so that both questions and answer are findable for people who may have different concerns.
VicAche
CC BY-SA 3.0
2015-12-03T21:47:52.960Z
Thanks, I did, you can find the others [here](http://economics.stackexchange.com/questions/9581/comparing-private-individual-fortune-to-gdp) and [here](http://economics.stackexchange.com/questions/9582/how-does-an-uhn-individual-leverage-their-wealth)
imonaboat
<gdp><inequality><capital-returns>
Leveraging private capital
imonaboat
# Leveraging private capital

(Asked by: username_0 on 2015-12-03)

If an ultra high networth individual, like Bill Gates, Mark Zuckerberg, Carlos Slim, Paul Allen, Elizabeth of Windsor, Amancio Ortega, Liliane Bettencourt, Stefan Persson, Bernard Arnault etc. would leverage their `fortune` in the way a bank does with savings, would that multiply their wealth?:

If an UHN individual owns their own 'bank' and puts their fortune in it as savings, they could create e.g. 10 x their fortune in loans.

**Tags:** gdp, inequality, capital-returns

> **Comments:**
> **username_1**: Welcome to Economics SE! Please ask only one question per question, so that both questions and answer are findable for people who may have different concerns.  
> **username_0**: Thanks, I did, you can find the others [here](http://economics.stackexchange.com/questions/9581/comparing-private-individual-fortune-to-gdp) and [here](http://economics.stackexchange.com/questions/9582/how-does-an-uhn-individual-leverage-their-wealth)  

---

## 3 answers

### Answer by username_2 on 2016-05-03. Score: 1 | Accepted answer

Its legal to borrow and lend money, but if you become anything close to a bank, (take deposits, make loans, take risks, make a business out of it) then you will be regulated. You will be insured by the FDIC, and since you are insured, you will then be required to follow certain guidelines regarding how you asses risk and which risks you can take or not. Moreover, they will not be allowed to lose money in a large scale, so they would have to recapitalize the 'bank' after any of the charitable projects swallows up capital.

So to answer your question, they would not have more wealth, but they would manage a bigger pot of capital with which to invest. However, at some point they will lose the freedom of doing whatever they want. Since its not their money, then they can't do whatever they want.


---

### Answer by username_1 on 2015-12-03. Score: 0

Banks (and other firms), do not leverage their fortunes, they leverage their investment power. Individuals, often through family trusts, may use the same tool, of course.

This does not allow for more **spending** but for more investment. Given expected benefit higher than the cost of leverage, this can be a good way to invest more, but remember that leveraged funds can only be spent on activity that generates revenues, because both interest and capital has to be payed back in the end. This does increase the impact of big players in the economy, but does not change their purchasing power, just their investing power.

> **Comments:**
> **username_0**: Thanks, so that confirms my guess - I am no economist - do you know if the Gates 80 bln. is the value of his shares? does that make his fortune already leveraged? and what about the comparison to the GDP? Banks leverage savings, but that's less important, you got my point.  
> **username_1**: No, it's the value of its share but equity value is different from entreprise value (ie when you buy a firm, you (mostly) do not buy its debt).  
> **username_0**: Anyway, how would you rate the investment / GDP comparison and the impact you mentioned?  
> **username_1**: Irrelevant. You should compare Bill's fortune with National Wealth rather than PIB  
> **username_0**: But the GDP "adds" 14000 bln in wealth annually.  
> **username_0**: And how would you rate the fortune [National Wealth](https://en.wikipedia.org/wiki/National_wealth) comparison @username_1? (taking the leveraging into account)  
> **username_1**: Bill's fortune grows (or not) each year too depending on what he decides to do with it. Again, there is no leveraging to be taken into account.  
> **username_0**: Now I believe you are missing the point. And I believe you are wrong, a leveraged fortune has more potential to grow.  
> **username_1**: But Bill can use debt to leverage his fortune, just like a bank or a government, or whatever. I think you're missing the point with leverage, would you buy say \$60 in cash and \$40 in actions that you can sell or buy immediately  for any other amount than \$100? For the same reason, "having" \$1000 in debt and \$1100 in actions is exactly the same as having \$100 in cash (as long as everything is liquid, but this is a point of detail).  
> **username_0**: Yeah ok, so the point is `Bill can use debt to leverage his fortune, just like a bank or a government, or whatever` so that amplifies his `economic impact` as you said. To what macro economic figure should this be compared then? If I look up National [investment](https://en.wikipedia.org/wiki/Investment_%28macroeconomics%29), it says that the macro-economic investment is a component of GDP.  
> **username_1**: Again, I think the right comparison is with National Wealth. National Wealth can be looked at as the sum of all wealth of individuals in a given country. Then those individuals, and Bill Gates, can invest their wealth in anything they please, leveraged or not.  
> **username_0**: OK, so you say his 80 bln compares to the 42,000 bln US national? And his impact on GDP is complex?  
> **username_1**: I'm not saying it's complex, I'm saying it doesn't depend on his wealth but on his income. Yes, that's what the 80 compare with.  

---

### Answer by username_3 on 2016-01-02. Score: -1

$$\text{Assets - Liabilities = Equity}$$

$$\Delta \text Equity =\text Profit$$

$$\text {Leverage ratio} = \frac{\text {Liabilities}}{\text{ Equity}}$$

Using these identites, it would become apparent that as the billionaires increases the leverage ratio, liabilities grow, equity stays constant, and there is no change in profit.

What is described could multiply their assets, but also liabilities. They would not gain anything in profit. In the long run they might gain something in profit because more efficient capital structure. But they already should have capital structure that reflects their risk appetite and profitability desires.

Also only banks legally have the ability to lend currency which they don't actually own. Other businesses don't have such legal rights (although they can leverage through other means, ie. corporate bonds).

(The 2nd equation is not an identity, as there are other means of raising equity than profits, but it rather characterizes the situation. In addition, to be clear I am talking about their businesses, leverage ratio has little meaning when it comes to non-business life).


---

