Flutterby™! : Screwed by Wall Street again 2009-10-19 17:05:49.458511+00

Screwed by Wall Street again

2009-10-19 17:05:49.458511+00 by Dan Lyke 13 comments

Philip Greenspun points out that the current Wall Street profits are being made by borrowing from the U.S. government at 0% and using that money to buy Treasuries at 2%.

[Edit: Ben Williams points out that I should have done the simple math, so be skeptical.]

#Comment Re: made: 2009-10-19 17:20:12.320424+00 by: Chris in Florida

In a similar vein, the recent Rolling Stone article on 'naked' short sales was ... interesting.

Actually it is not again, but continuing. Arbitrage of interest rate imbalances has long been a favorite, practically risk free mechanism of stealing money.

Greenspan is wrong, and I am sure he knows it, when he says there is a risk if general short term interest rates go to 20% and the bond prices fall. As long as the period of the US loan to the bank is longer than the term of the bond, all the banks need to do is wait out the term of the bond. After all, they don't have any of their money own invested.

Their only risk is if the US defaults on its bonds. But even if that happens the banks can undoubtedly set up a novation where the US has to accept its own worthless bonds in payment of the initial loan to the bank. The banks real problem here would be a US default, not the risk of the loan.

True risk for this type of a deal might occur if say country X was paying 5%, country Y was charging say 1%, and X defaulted. The bank would be on the hook to country Y when it couldn't get X (or perhaps the bank's own government or Federal Reserve) to repay the principle.

Sounds like the US Government as a Ponzi Scheme. we just need a faster growing taxable population to support the bottom of the pyramid.

God, I feel guilty. I've been looking at several short sale commodities.... thinking, Jesus.... Rick..... feeding off the the public now??? It's definitely out there, if one wishes, like flesh before crocodiles.....

#Comment Re: The Real Economy made: 2009-10-20 12:49:52.402197+00 by: jeff

When you deliberately outsource your manufacturing to China, your IT to India, and create an artificial housing bubble, you get what you deserve. Sigh.

I meet a lot of young adults seeking job/career thoughts. I'm blown away by the meme that skilled physical work (manufacturing/building) is dirty and bad, and IT is just a cubicle slave (even if it can be).

Before anyone goes spreading this one around (too late?) you may want to read "Sam"'s comment on Phil's blog. He and several other commenters do a pretty good job debunking this possibility. Phil only talked to "a friend who has worked in the money business" who offered one theory on how the investment banks might be making their profits. That's far from reliable information on what the banks are actually doing. I'm not saying what the banks are doing isn't nefarious, I'm just saying this probably isn't it.

Ben, Sam's "debunking" said that this can't be happening because it can't account for all the banks profits second quarter profits. Why does it have to make up the total profit in order for this arbitrage to be going on?

One guy speaks of slim interest margins, but short term two year Treasury notes are a little less than 1% which makes for now lots of room for profits. Anyway, how small is the differential needed to make a profit when you are lending someone's own money back to themselves at no risk? On a billion dollars, a 0.1% differential produces a million dollars a year, at 1% its ten million. Arbitraging success is made on smaller margins than that. There may be other reasons to make such a trade as well, such as equity to lending ratio requirements.

This process of borrowing money from a banking system with artificially low interest rates, and lending it to another with higher rates, is one of the standard mechanisms that banks use to make money. It would be surprising if the banks didn't do this. Given the way that TARP funds have been handled for even worse boondoggles, it is more than reasonable. Some of the process may have been circuitous, through third parties or derivatives.

As far as the guy who worked at a large bank went, just how did he know what everybody else was doing? If it was that easy, the someone would have seen the malfeasance going on inside the large banks, insurance companies and financial houses. I worked for an organization of 15,000. I barely knew the program and process details of what was going on in my own department of 700, even though I had the responsibility for IT within that group. There was always something hidden in some administrative byway, or new that was going on, that I was totally unaware of.

It is impossible to know what is going on with the banks. It is starting to appear that the rosy forecasts, and the repayment of TARP funds were merely mechanisms to forestall additional regulation, and that the banks remain in significant trouble. Both Citi and BOA have announced third quarter losses which pretty much imply that accounting, rather than real business made up the 2nd quarter profits.

Things are rarely what they seem in the world of medium to large business, and never in government. We can only surmise on a retrospective view of behavior.

It is not just the banks that are getting in on the borrowing at low interest rates from the Fed, and investing elsewhere at higher rates. This is now such a popular practice that there are now at least three mutual funds in on the act. TALF is the US Government's Term Asset-Backed Securities Loan Facility. T Rowe Price now has a fund that will borrow cheap money from TALF, and reinvest it in mortgage securities. PIMCO and Franklin Templeton reportedly have somewhat similar funds as well.

M, at one level that's what they're supposed to be doing with the TARP money: Using it to prop-up allegedly undervalued assets and to provide market liquidity. I think TARP was a monster boondoggle, but at least they're doing what TARP was supposed to be fore. Buying T bills is just way too directly stealing taxpayer bucks.