A lottery winner is said to have borrowed money from Morgan Stanley against his winning ticket.
Winning a lottery doesn’t mean you get rich overnight. An interesting case has just appeared in American gambling news. A lottery winner in Brooklyn went to Morgan Stanley to ask for a significant loan before he could collect the winnings from the New York State Lottery.
The winner in question, an immigrant from Russia, needed hundreds of thousands of dollars in order to relocate his family to a secure location. Only then he could redeem his winning lottery ticket. He feared that sudden fame would jeopardize his and his family’s life and even put it in danger. Naturally, he also approached the finance giant for a sound advice on what to do with the sudden windfall.
Loaning money out to future millionaire
Morgan Stanley reportedly loaned money against a winning lottery ticket
• A winner asked to borrow money before he cashed in his ticket
• This was the first loan against a win under American gambling laws
• Tailored loans are becoming an important business for Morgan Stanley
After a long consideration the bank’s management agreed to loan the money in order to win a brand new, and mind you, would-be-wealthy customer. Morgan Stanley is looking to build their strength as a brokerage unit and this step was regarded as a right path to achieve that.
The loans to winners under American gambling laws are certainly unusual for any banking institution. Morgan Stanley have invested a lot in their wealth management business, which by now shows much stable revenues than the trading unit, which nearly went bankrupt during the financial recession. Unique loans are a great way to collect new customers and retain them for the years to come.
What does the industry do
Morgan Stanley is not the first finance giant to venture into unconventional loans. It’s actually trying to catch up to rivals Citigroup, JPMorgan Chase, Credit Suisse, and Deutsche Bank in this respect. These financial players are offering loans, where collateral can be just about anything from a case of rare wine to a unique art collection.
Lottery ticket as a collateral may be the first of its kind, but there are a number of unusual examples in the industry. A sports team owner borrowed money against future ticket sales, and a prize bulls owner borrowed against future offspring of his bulls.
Morgan Stanley have set their sights on reaching a high profit margin for their wealth management. By the end of next year they are looking to achieve somewhere between 22 and 25 percent of pretax profit margin, compared to current 20.6 percent. And tailored loans are seen as a very lucrative way to achieve those goals.
In order to propel their tailored loans, Morgan Stanley have hired a team of managers led by Marcus Mitchell from Deutsche Bank. The company now has the ability to give out more loans, thanks to extra deposits coming from the purchase of Citigroup’s retail brokerage unit.
Comments from the executives
Morgan Stanley’s private bank executive, Eric Heaton, had the following comments: “We’ve got 3 million clients, and they’ve got borrowing needs.” As for the lottery winner in question, they didn’t acknowledge any relationship with such a client. Heaton said: “We don’t chase Lotto winners in hopes of establishing a relationship. But if there’s a client that comes in with a liability need, we’ll look at their financial position and see what we can do to help.”
The future of tailored loans
Morgan Stanley still expect tailored lending to remain a relatively small portion of their wealth management business. As a comparison, mortgages are about one third of their business. However, tailored loans are seen as much more profitable with up to 7.5 percent profit on their funding costs, according to industry estimates.
Even though Morgan Stanley executives say their margins are much lower than 7.5 percent, they are still much higher than those on mortgages, making tailored loans a very lucrative business indeed.
The wider margins can be explained by the unique nature of such loans. The company is mitigating its risks by ensuring they got access to collateral, which can be turned into money quickly in order to recoup the cost of the loan. Alternatively loans with a guarantor with enough assets to cover the loan are considered.
The clients of Morgan Stanley’s wealth management unit can get loans against unique assets including rare currency collections and coins. But real estate as collateral makes up about a quarter of all tailored loans. Interestingly enough, Morgan Stanley refers clients to other lenders for auto loans, and others which the institution is not too comfortable with.