When Zuckerberg fired Morgan Stanley, mortgage edition

By Felix Salmon
July 16, 2012

Mark Zuckerberg has a reputation as a geek who’s focused mainly on technology; the finance stuff he’s outsourced to his COO, Sheryl Sandberg, and his CFO, David Ebersman. When anonymous griping about the Facebook CFO started appearing in the press attributed to senior Facebook executives, I didn’t think those executives would be as senior as Zuckerberg himself.

Still, the timing of Zuckerberg’s marriage was interesting, coming as it did the weekend of the IPO. And today we learn, in the 23rd paragraph of a Bloomberg story, that Zuckerberg was annoyed enough at Morgan Stanley after the IPO that he severed his mortgage relationship with the bank, paying off his loan in full and moving his mortgage to a rival bank, First Republic.

When you’re rich enough to buy any number of homes you want for cash, a mortgage isn’t the same kind of financial product as it is for we mere mortals. Instead, it’s part of a suite of financial services and wealth management, which can cover everything from big-picture investment strategies to providing someone who’ll make sure your electricity bill is paid.

According to Bloomberg, by moving his mortgage from Morgan Stanley to First Republic, Zuckerberg managed to reduce his monthly loan payments from $21,256 to $19,275. His new bank explains how the game works:

First Republic Bank, which provided Zuckerberg’s mortgage, doesn’t comment on specific loans or clients, said Greg Berardi, a spokesman for the San Francisco-based company.

“First Republic, like most banks, prices its credit products based on the strength and totality of the entire client relationship,” he said in an e-mailed statement. “This is our approach with all of our clients.”

The story here, then, isn’t the 1.05% initial rate that Zuckerberg was paying on his mortgage, or even the Libor +80bp rate that he’s been paying since June. Rather, the story is that Zuckerberg has decided that he wants to have his wide-ranging client relationship with First Republic, rather than Morgan Stanley — and that he made that decision in May, within a couple of weeks of the Facebook IPO. The new mortgage is the only publicly-visible part of the change, since it needs to be recorded in public records, but you can bet that First Republic is taking over much more than just Zuckerberg’s home loan here.

Which puts into focus just one of the many risks, to a bank like Morgan Stanley, of messing up a high-profile IPO like Facebook’s. If things go wrong, you don’t just take a hit to your reputation. You can also lose a lifetime relationship with Silicon Valley royalty. And those relationships are worth many millions of dollars.


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I think the story is why does a guy worth $30 or $40 billion need to have a mortgage on a $7 million house? I know he can borrow pretty cheap, so that means he has an extra $7 million to invest in other things. Doesn’t he have enough money otherwise for his investments outside Facebook?

Money is supposed to be a means to an end, not the end itself. He has enough means to do whatever he wants to, so is making more money (which he doesn’t have enough time to even give away, let alone spend) the only reason he has a mortgage?

Posted by KenG_CA | Report as abusive

@KenG, perhaps it is because he can borrow at something well below the current rate of inflation?

If I had $30B, I’d be tempted to play that kind of arbitrage myself. Given my more limited resources, it isn’t worth the risk. (Besides, I can’t get the same pricing that he can.)

Posted by TFF | Report as abusive

TFF, yes, he can borrow at near 1%, and then invest it in something earning more, most likely in a passive vehicle with no risk. But why? Doesn’t he make enough money already? Is it really important for him to make another $140K/year or so, and to consume capital that would otherwise have to be lent elsewhere?

Posted by KenG_CA | Report as abusive

@KenG – I wouldn’t count on Zuckerberg necessarily having much cash today. Yes, he’s got billions in Facebook stock, all of which I would think is currently subject to a post-IPO lock-up. IIRC, he did sell some of his Facebook shares in the IPO, but he also has a very large federal tax bill related to stock options that I believe is the intended use of those proceeds. He could borrow against his Facebook stock, but he’s not likely to get better than a 1.05% rate doing that. I’d be surprised to see Zuckerberg borrowing money once the lock-up on his Facebook shares expires, but it doesn’t surprise me right now.

Posted by realist50 | Report as abusive

realist, Zuckerberg sold shares at the IPO to pay the taxes he incurred when he exercised options. I was under the impression he had sold shares well before the IPO, on the secondary market, as he was living well beyond the means of a startup CEO’s salary. His salary is only $1 now, I believe, so he’s not paying the mortgage out of his paycheck.

Posted by KenG_CA | Report as abusive

Isn’t my playground, KenG, but I would imagine these guys have “personal bankers” to handle the six- and seven-figure stuff for them, so they can focus on the 10-figure stuff?

That “personal banker” won’t be working with the full $30B, just with the liquid assets, and may feel it is worth a few hours of his time to save $140K/year.

Posted by TFF | Report as abusive

you nailed this Felix. I’m a mortgage banker in San Francisco who cometes with First Republic. I expanded on your theme here: http://thebasispoint.com/2012/07/16/who- gave-zuckerberg-a-1-mortgage/

Posted by TheBasisPoint | Report as abusive

Maybe, TFF, but if that’s the case, he will eventually realize the banker is yet one more person he has to personally manage. And it’s just not worth it, because he has to learn about all the stuff the banker is going to try to get him to invest in. If he doesn’t learn about that, he’s going to wake up one day wondering how he lost so much money in a madoff scheme, or maybe just why are the returns no better than the markets in general.

In any case, my point is why do incredibly wealthy people need to maximize their income from passive activities? Do they really need to make another few bucks?

Posted by KenG_CA | Report as abusive

@KenG, your point on Zuckerberg selling shares previously may well be correct. I don’t personally recall reading if he did so or not, but I think that we’re in agreement that his liquid assets are presently a quite small portion of his net worth. Sort of fitting with TFF’s point, my sense – which I’ll admit is only an educated guess – is that Zuckerberg’s liquid assets until his Facebook stock becomes freely tradeable are “only” in the range of $10′s of millions up to perhaps a couple hundred million dollars. It’s a small enough liquid amount that I could see Zuckerberg, or his financial advisors, thinking that borrowing $5.95 million at a negative real rate makes sense.

If, on the other hand, I saw someone like Bill Gates or Warren Buffett, who own far more liquid assets, taking a mortgage in this amount I’d agree that it doesn’t make much sense because the dollars involved are such a small fraction of net worth.

Posted by realist50 | Report as abusive

i don’t know, realist & TFF, when I sold my company for the stock of a publicly traded company, I was able to sell shares in a private sale, even though the shares I received were locked up for a year. the buyer couldn’t sell the shares, but bought them and put a collar on them. I’m sure Zuckerberg has even more options at his disposal, and doesn’t need to mess around with a mortgage. He could also just as easily borrow against his shares, for about the same rate, and have all of the interest deductible, since he would most likely be “investing” the money that he borrows, as opposed to just deducting interest on the first $1M of his mortgage.

One of the best things about a great liquidity event like that is that you get to pay off your mortgage.

Posted by KenG_CA | Report as abusive

Is that 0.8% above ‘Barclays LIBOR’ or above ‘Real’ LIBOR?

Ken has the same memory I do, Sugarmountain sold about £50m worth of shares through a private deal with Goldman Sachs a while back. How much of that was his personally, how much stayed in the biz, and how much went to VCs I don’t recall, but there was definitely enough to make me surprised he has a mortgage at all.

Posted by FifthDecade | Report as abusive

The bottom line is Zuck is getting crappy advice. As others have already pointed out the value of that sweet loan deal are meaningless to someone worth +10billion.

The us vs them 99% vs .0001% is something that he will deal with the rest of his life. Details about his personal finances being needlessly made public are nothing short of foolish.

Posted by y2kurtus | Report as abusive

Excellent point, y2kurtus.

Posted by TFF | Report as abusive

** wonders if the Ken & Taffy Show is concluded yet **

When one examines Z’berg’s record, starting back in school, at the time FB was merely the germ of an idea, and continuing to today, one constant stands out – with grim predictability he fu…-over any and every muppet who gives him the opportunity to do so; while being careful not to inflict damage on certain major-league shylocks, who are tougher and more unprincipled than he is. His presence pollutes The Valley – he’s NY/NJ all the way, FB having nothing whatsoever to do with ‘tech’. Really should do something about that. The Valley elite can start by shunning him, his wife and his company – and WTH, his dog too.

And MS – turns out he made muppets of them as well. IMO they are fortunate to be free of the malign soul; he can’t hurt them any more now. (Not like they didn’t have it coming, being what they are – so at least there’s that ‘silver lining’.)

Posted by MrRFox | Report as abusive

I have the Beverly Hillbillies song running through my head now and visions of Milburn rubbing his hands together gleefully for having scored such a fine, upstanding citizen and nouveau riche client.

Posted by youniquelikeme | Report as abusive

At the rate mortgage rate Zuckerberg got, Morgan Stanley did not so much as loose a return on capital but got capital freed up. Sounds like they won on the mortgage.

Posted by Sechel | Report as abusive

MrFox, are you suggesting this blog wasn’t created so two guys, who don’t know each other and have never met, can exchange ideas and opinions?

The Valley elite will start shunning Zuckerberg when the rest of the world recognizes Facebook for the narcissistic time sink that it is, and moves on to the next cool thing. The valley only likes people and companies on the way up.

Posted by KenG_CA | Report as abusive

I believe it is correct to say that commercial blogs exist first and foremost to serve the interests of their readers, and secondarily to serve the interests of the authors – and not at all to serve the commenters. One should post comments with that in mind.

Posted by MrRFox | Report as abusive

@MrRFox, if blogs are “not at all to serve the commenters”, then why do they permit commenting? As a public service?

As with any ecology, the blog system must serve all participants to remain healthy. Traditional press serves the readers and authors, if that is your preference.

Posted by TFF | Report as abusive