Using HedgeLoan to Your Advantage in a Credit-Dry Financial Environment Having been in the stock-secured lending industry for more than a decade, I've ridden our stock HedgeLoan product through most every kind of financial circumstance. In the up-trending days before 9/11, our loan product was just another of many liquidity options investors were willing to try. Borrowers were less interested in the overall advantages of HedgeLoan financing and more interested in staying in the market without losing their interest in their stocks. We provided that. After 9/11, when fear and uncertainty prevailed, investors drew back and held onto their portfolios, preferring to do nothing to doing anything. We at HedgeLender had to break through the shell of indecision to bring information on our stock loan choices to the market. When things picked up again with less exhuberance than pre-9/11 but more enthusiasm for sectoral stocks, we were there to customize and tailor our loans to each borrower's needs and portfolios, and our steady growth continued. So when in early October 2008 the effects of long, flawed policy of lending to individuals who had shaky credit or weak means to repay their loans finally came to roost, HedgeLender watched carefully to determine how and where, if at all, the meltdown would affect its business. That question was answered rather quickly as the phone began ringing off the hook almost as soon as the headlines appeared. Home equity lines were not being renewed. Loans of all types were disappearing. The already reeling real estate market was being pummeled further as mortgages became harder than ever to obtain. Even new car buyers faced a close-down of lending options. They all had one thing in common: They were tied to the credit markets. They were tied to credit ratings. They were tied to rebuilding of confidence amongst banks. All things that our HedgeLoan has absolutely nothing to do with. Of all the types of loans one could market, our HedgeLoan suddenly became the best option of all, particularly for those with real estate requirements. How? Why? We always used the generic version of the definition of “hedge” here at HedgeLender. We’re not a hedge fund. But we find ways - using private options contracts, careful holding, cash, and fund-based strategies - to reduce our risk of loss overall to the point that we can analyze the history of a stock and make a good guess as to make any loss in value palatable. That “guess” - though an educated one, allows us to turn the variable stock asset into something that is for our purposes virtually “fixed” - at least enough to enter into a HedgeLoan contract with. Those with hands-on control of this process are established professionals with long track records of outstanding performance. The bets are hedged the collateral stock portfolio. You get the fixed stock loan as your anchor out of this process; the lender if he plays his cards right (as in the case of HedgeLender loans) will operate profitably by ensuring his downside loss potential is always limited. That meant that of all the types of loans on the market, none was better positioned that HedgeLoan to be unaffected by the meltdown. HedgeLoan was benefiting enormously because it was designed to operate well in every type of market condition. A HedgeLoan stock loan in an up market gives the client the confidence of having up to 85% (even 90% in some cases) of his portfolio's value in cash today, without having to issue a sell order to his/broker. He could take advantage of the nice value to get maximum cash now. He could repay the loan with quarterly or accrued interest repayment. And at loan maturity date, he could ask the lender to sell enough stocks to repay the loan if he so chose. Should it fall, it was a nonrecourse loan, so he could forfeit the stocks (even if they did an Enron or a Fannie Mae and dropped dramatically in value) and that would be completely fulfillment of his loan obligation. They could go after no other assets, even if the collateral he forfeited was worth only half of what it was at loan inception (or worse). And regardless, there was no reporting of the default to credit bureaus. But n a down market? Here we had something new: Not just a downturn in the market, but a drop of historic proportions. Portfolios were dropping at astronomical rates. Media-driven investor panic was hurting the market further. The prospect of an anti-big-business, anti-Wall Street president was causing pessimism while the front-runner's call for higher taxes on high net-worth individuals -- those who had the largest bank deposits and were most likely to be employers -- was leading to a chill on new investment and hiring. Many other factors, including poorly regulated mortgage-backed securities trading and a do-no-evil policy towards the two largest mortgage guarantors Freddy Mac and Fannie Mae - meant the free-fall would continue for a while. One real estate investor contacted us with a huge dilemma. He had a shopping mall half finished and a second round of financing due for its completion. All was well until the banking crisis hit. His bank, with which he had a long-standing relationship, had decided to shut the door on any further financing unless the came up with $2M more of his own cash. He went through his options and finally went online. In time he landed at HedgeLender's website, where he found he could avail of an 85% LTV nonrecourse stock loan with no payments of any kind due until loan maturity and an early repayment window after the first year (with small penalty). There were no margin calls if the price/value of the stock collateral fell during the loan term, and he could avail of the full upside -- all of any growth or rise in the porfolio's value during the three years of the loan were his and his alone, as were dividends (credited against interest). This is a guy who had hated the idea of selling his stocks, stocks he had bought at $25 a share five years ago that were now worth $10 a share. He had a substantial amount of stock - more than enough to reach his goal of $2M in cash at 85% loan-to-value. He closed the loan in a week and his funding was resumed, a rare bright spot among his colleagues, many of whom faced termination of their projects at substantial risk of loss in a credit-less economy. How will our borrower fare down the road? Let's take a look. With prices of stocks so low now, this may be the best time of all to get a HedgeLoan. (Judging from the huge uptick in HedgeLender business sinc early October, this conclusion must have been reached by others). They: - Do not have to sell their stocks outright, retaining an interest as beneficial (contractual) owners of their shares, able to repatriate them upon repayment of the loan. - Are entering the loan when their stocks may be their lowest ever -- knowing that given their history and the inevitable cycles of the economy, prices are likely to rise again by the time the loan matures - Rather than sit on their stocks and get no use of them whatsoever until the economy recovers, they can tap them for cash now for their real estate projects - when they most need the cash - without having to completely sever their relationship to their stocks. - Should the stocks rise, they can either pay the loan of out-of-pocket and get all the shares back, or ask the lender to sell a percentage of them sufficient to pay off the loan, at which point all remaining stocks (or cash, if client prefers) will be repatriated to the borrower. - Should they default on the loan instead, there is nothing owed beyond the forfeiting of the stocks, and they keep the loan cash with no negative credit reporting. Meanwhile, the real estate project gets funded. - Some HedgeLoan borrowers will consult with their licensed tax advisors to apply strategies that are helpful in tax planning. Best of all, the investor's stocks are their qualifier for a stock HedgeLoan. No credit rating, relationship with banks, etc. are factored into the loan process. Your stocks are your passport to a nonrecourse stock-secured loan and the cash on your terms to do with as you wish. (Which is virtually any legal thing except for the repurchase of marginable securities.) Want more information on how HedgeLoan can benefit you? Visit www.hedgelender.com.

HedgeLender has benefited greatly from the financial meltdown on Wall Street. How could that possibly be? Are we not a company that depends on healthy stocks to guarantee our lending products? Yes, but a company that is otherwise healthy at the mercy of market behaving in an irrational manner is a perfectly good stock my our measure.

 

We are not a hedge fund, and are completely untied to the credit system. Your credit rating means nothing to us. Your stocks are your only qualifier for whether or not we can underwrite a stock HedgeLoan, and whether they have dropped 10% or 40% in the last month is not likely to make much difference. You'll still likely to get at least one nonrecourse, no-margin-call loan offer backed by your stocks from our company.

 

But lately it has been more than that. A lot more, it turns out.

 

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Borrowers come to us who never really considered a HedgeLoan before. "Not invented here" was the feeling, or "Why should I bother when I can draw on my line of credit." Having always thought their bank credit lines would be there, their real estate projects or company purchases, etc. were based on the assumption that credit would be plentiful. They often had stocks, but with their stocks falling dramatically in recent weeks, they couldn't bring themselves to sell at such a loss.

 

they've started to take a hard cold look at HedgeLoan now. Our loan programs gives them up to 85% - even 90% for strong stocks - of today's value in a loan that they can walk away from if they they need to default, owing nothing but the collateral stocks regardless of how low in price they may have fallen, and no negative credit reporting. These individuals get to remain beneficial owners of their securities while they enjoy the use of their cash during the loan term. They are making a bet that as the economy regains strength, their collateral stocks will rise in value too, allowing them to ask the lender to sell enough shares to pay off the loan and recoup the upside profits as stocks or cash. 

 

When the news came over the airwaves that Lehman Brothers, the venerable, forever titan of Wall Street, was going bankrupt and was in the process being sold off, we at HedgeLender recognized that the financial landscape had changed far more rapidly than anyone could have dreamed. Coming on the heels of the surreal takeover of Freddie Mac and Fannie Mae, the twin pillars of the American mortgage system, a new day was dawning, and with it was coming unforeseen new opportunties for private placement hedged portfolio stock loans such as those we offered.

 

 Conventional credit markets had dried up. Our phones at HedgeLender lit up.

 

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Back in Washington, scapegoating had already begun. There couldn't be worse timing than to have a Wall Street correction held hostage by election-year politics, but that was precisely what was happening, and the candidates were simply fueling the fire, making matters worse as their goal of undermining their opponent superseded any desire to say the hard things the American people needed to hear. The first scapegoats, not surprisingly, were the easy pickings -- the "fat cats" as Barack Obama called them, and later McCain -- at places like Lehman and Freddie, those "detestable con men with the golden parachutes" who supposedly got us into this mess.

 

Which was untrue, a cheap shot. Though bad decisions may have been made, there never was even circumstantial evidence of fraud. Blaming the titans of Wall Street is like blaming the guy who bought your Rolex watch from the yard sale your kid put together. It is facetious to say the least. These "despicable fat cats", after all, were the ones who trusted Fannie Mae and Freddie Mac, and helped keep the loans to low income minorities flowing - loans that were part of a policy pushed firmly by a Democrat-majority Congress and accepted passively to by the Republican administration (all unwilling to be accused of "insensitivity" to those less fortunate in an election year). When the very Congress that encouraged lending to unqualified homeowners held hearings to tar-and-feather financial executives who were instrumental in making those policies possible, the irony is inescapable.

 

This is not to say there have been no excesses on Wall Street and of course no one is defending golden parachutes or obscene salaries for execs who failed to see the shakiness of this system of subprime-mortgage-backed securities. But they are not the true guilty parties. They guilt begins on a much broader scale with the wrongful assumption that if you simply extend a loan to an individual to buy a home, they will create better neighborhoods and have more of a stake in their families and communities and therefore leapfrog to a more optimistic and better life. It may have worked that way with the tiny minority who did pay their subprime loans on time. It did not for the majority.

 

No one can quibble with the goals, however. No one can deny what a source of hope it was when hard-working lower-income/class people who deserved a break got a home of their own. The goal, the desire to do this, is not the issue here. It was a good goal. It still is.

 

It is the means that were at fault. Our society, through the representatives we elected, encouraged what most see quasi-governmental organizations like Fannie Mae and Freddie Mac to back these loans. Our Congressional leaders pushed, then blessed the practice -- particularly Democrats. Barney Frank, the Democrat Senator now leading the charge against supposed excess on Wall Street was instrumental in letting the two mortgage giants off the hook when they had the chance to review the crumbling subprime loan situation over a year before they were taken over. He declared them fundamentally sound. He ahd his colleagues with the help of a few Republicans did nothing when they had the chance and the first evidence of shakiness was coming in. Despite the fact that Congress had by their neglect in effect put a "stamp of approval" on the practice, we let them divert blame and place it on the Lehman Brothers and the Merrill Lynch's of the world who had  bought up the securities created from the grouped mortgages Mr. Frank and his colleagues had said was so essential to keeping the programs moving.

 

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The crisis will work itself out, there can be no doubt. It would have been resolved painfully but naturally by the free-market economy had there been no intervention. if we had been more patient, if our tolerance of pain had been greater, with the exception of some targeted assistance for renegotiation of mortgage, added insurance, and better regulation, it would have resolved itself on its own. Resolution will move along more speedily now with the new government infusions, but there will be some entities allowed to survive that do not deserve to, which will be drags on the economy, artificial life support for no good economic reason.

 

But overall, even with the infusion, it will be a stronger, sounder world financial system at the end of the day and a more vigorous America.

 

 

In the meantime, business couldn't be better at HedgeLender, and should the powers-that-be find it impossible to make the right decisions and avoid excessive fiddling with the economy, we'll be happy to remain a great cash liquidity alternative.

 

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