Investment banks borrow money from gov't at 0%, lend it back to them at 3%

Philip Greenspun explains how Wall Street makes billions -- by bilking taxpayers.

Because of the Collapse of 2008 financial reforms, the big investment banks are able to borrow money from the U.S. government at 0 percent interest. Then they can turn around and buy short-term bonds that pay 2 or 3 percent annual interest. Now they’re making 2 percent on whatever they borrowed. They can use leverage to increase this number, by pledging some of the bonds that they’ve already bought as collateral on additional bonds.

How Wall Street is making its billions (Via Dan Gillmor)

• [AirPillo]

  I’m curious to see what kind of reaction to this you’d get from someone who is conservative but also objectivist.

  On the one hand, they’d be unsettled by the obvious waste and exploitation of government money. On the other, restricting it would conflict with objectivist philosophy.

  • [T0AD]

    I haven’t read any objectivist purre philosophical work, but have read some of Ayn Rands novels. From what i get out of the ideas of Atlas Shrugged I don’t think there would be any excuse for a government to lend money. In fact the book entirely complains about any type of government policy that involves itself in business.

    Also i believe i read somewhere that the banks not only got a 0 interest rate but they got money at a discount from the “discount window”. The got something like an extra 33% so like asking for 66 dollars and being given 100 but only owing 66. Someone please correct me if I’m wrong

• [Anonymous]

  Rather than saying that these banks — which do not have responsibilities other than to their taxpayers and creditors — ‘bilk taxpayers’ — you might lay the blame at the feet of the government officials involved.

  Those officials, both elected and appointed, *do* have a responsibility to the taxpayers.

• [Anonymous]

  And what short-term bonds yield “2 or 3 percent annual interest”?

  Right now the 10-year treasury note is yielding 3.4% but that’s not exactly short-term.

  The 2-year is only yielding 1%.

  And the 13-week is yielding a whopping 0.6%.

• [SamSam]

  This story is completely baseless and passing around ridiculous crap like this does not one whit to help the situation.

  As several commentators here and in the original article have mentioned, there are gaping holes so wide there is barely any real story.

  You simply cannot buy short-term treasury bonds for 2-3%. Nowhere. Short-term bonds are now, and have been for months, far under that. Here are the most recent bids. A THREE-YEAR bond gets you a measly 1.4% yield.

  Is it a good deal to borrow and turn around and buy 1.4% bonds? Only if you think that inflation is going to be less than 1.4% over three years, which hardly anyone believes (most predictions are for 3%+).

  I’m all for bringing out the torches and pitchforks, but why to we have to be fed lies first?

• [Anonymous]

  Theodore Dreiser wrote a book about this called The Financier. In it, the hero, Cowperwood, borrows money from the city treasury at 0% interest and uses it to buy stocks, getting loans on the stocks in order to buy more stocks.

  Halfway through the book, there’s a stock panic, and he can’t pay it back. By that point, he’s up to $500,000 in debt to the city. The city never gets the money back.

  Happily, the book is set in a time BEFORE the great depression and its resulting regulation/deregulation. So it’s still illegal to do this, and Cowperwood actually serves some jail time, though not all of his sentence.

  It should be required reading for Congress.

• [fersheezytaco]

  I don’t believe the method mentioned here and in the linked article is really where the money is coming from. There quite a few risky methods being used by the banks, but borrowing at 0% and buying treasuries is not one of them. Treasury yields are very low, and the big banks have much more profitable (and risky) methods of creating the returns they have posted. For instance, High Frequency Trading is being used by Goldman Sachs (and others) to trade with thier own money, and it has generated billions of dollars in profits. Search NYSE at zerohedge.com for more info on HFT.

• [gollux]

  Welcome to the paper-go-round. Our economy is based on buying and selling paper and inflating the price with each deal. Definite long term stability in this method. Do your part, invest so you can participate in “Wealth Redistribution”.

• [IronEdithKidd]

  Just a little reality check for those of you calling bond returns “measly”:

  13 week bond @ 0.6% (per Anon) on say, $1B = $6M

  What if a really big bank borrows $100B at 0% to by bonds? After 13 weeks (just about one quarter) they have $600M in pure profit. Is this still a measly return?

  It’s big money returns on big money. Especially when the billions you’re using to buy T-bills costs you nothing to borrow.

  • [SamSam]

    @ IronEdithKidd:

    No, the yield quotes are generally APYs (I haven’t found a reference to anon’s 13-week link, but I would assume this). This means that, at the rate that you’re getting for your 13-week bond, if you held on to it for an entire year, you would get 0.6%. Most banks would consider this a very bad rate of return, because a) inflation will probably out-pace it, b) they generally prefer riskier bets with higher yields.

    In fact, according to MorningStar, actual 3-month yields are 0.08%. Two-year rates are 0.99%, or roughly half a percent APY.

    Again, this article is bollocks.

• [Anonymous]

  I would like to know this money to invest,where am i going to get it.Please let me know.

• [benher]

  You know, everyone keeps asking, “Where’s the outrage?”

  And I have the answer. It’s the same place it was during the stolen elections, the Iraq invasion, the Patriot Act ratification, etc. etc. ad-nauseating-nauseum.

  All anyone seems to be willing to do is wait for the gubmint to come and help them out instead of helping themselves.

  It’s almost mesmerizing to watch the American continually be struck in the face only to stand back up and ask for it again… to be kicked back and forth between the wall street oligarchs and their hapless cronies in the elected offices of government.

• [Anonymous]

  That’s bad, bad, bad economics.

  Well, yes and no. There is wealth creation, indeed. However, it is also true that if I sell you a financial instrument that has a variable value today, tomorrow one of us will be better off than before the trade took place (putting aside risk management strategies, etc.) The money made or lost in this transaction is not reflective of wealth creation.

  You can certainly advance arguments about creating liquidity or sharing information or providing the tools of capitalism or what have you, but saying that (for instance) profit from a naked put is simply capturing wealth creation is transparently silly.

• [Anonymous]

  Looks like thievery. My Gosh! It is. And then, they lobby not to pay taxes. And then, they complain about regulation and oppose programs to help folks who need help with public funds. Pitiful.

• [Cicada]

  If you leave a box of kittens in a room full of hungry rottweilers, don’t be mad at the dogs when you return to a room full of fur and blood and no kittens- the fault is yours.
  The purpose of those companies is to make money. They have no other reason to exist, nor any other methodology by which they exist. Anyone doing anything other than assuming that the companies will seek to maximize their return is a damned fool.

• [Anonymous]

  You neglected to mention that the rate of inflation is higher than the interest paid on loans from banks to the government. The banks are getting bilked too. Welcome to the New World Order.

• [Roach]

  While I certainly don’t like everything going on on Wall Street, this explanation seems very fishy. Especially this part:

  “For someone to make money trading, there has to be someone on the other side of every trade who is losing money.”

  That’s bad, bad, bad economics. If all we’ve done for the past 100 years is shuffle around resources, we’d look, well, like it was 100 years ago. Instead there actually is such a thing as wealth creation, at least according to economists (although I do hold out the possibility that we’re really just buying a bigger and bigger debt that has to be paid back and paid back massively – but even if so, it has no bearing on the wrongness of Greenspun’s statement as regards this specific case).

  In any case, most places in the country are experiencing an economic resurgence, not just the investment banks. Carry trade seems like a very slight gain potential for the gains we’re seeing.

• [bbreader]

  Be sure to see the Bill Moyers interview regarding this and Goldman Sachs use of interest free loans the Federal Reserve to invest in a risky Chinese car company. Guess who’s on the hook if that investment fails?

  http://www.pbs.org/moyers/journal/10092009/watch.html

  • [Cowicide]

    Thanks for the link to that video; it was very educational for me.

• [hobomike]

  @ benher, well, Gore Vidal doesn’t call us the United States of Amnesia, for nuthin…!

  I think the truth is…that too many of us, conservative or not, hippie or not, caring or not, has too much invested in the status quo. Abby Hoffman may have been right when he said that you couldn’t trust anyone over 30. (Though I am well over that.) Obama couldn’t have won without the Internet but even with all the information and truth out there, it takes much, much more to get people off their asses. The thing I don’t get is, like gas prices, this does hurt them where it counts. So where’s the uprising?

• [Anonymous]

  Outrage cat is out of outrage.

  We the people have been fucked so long and so hard it’s hard to keep getting angry at stuff like this. You’d be outraged constantly. And that gets tiring after a while, and it’s bad for your blood pressure. Especially when you can’t afford basic health care.

  It’s expected. Par for the course. I expect nothing less from the American Plutocracy.

  So, yeah… go peacefully protest in your free-speech zones. I’m sure that’ll really get the attention of those CEOs.

  Just wake me when the shooting starts…

• [LRM]

  The Fed is not a private bank. They are overly influenced by private banks, I would agree, but they are a government institution founded by Congress. Ben Bernanke’s paychecks are from the U.S. Government.

  And call me starry-eyed, but I do believe that public expressions of outrage are effective. It worked for immigration and I think it can have an effect here too. For starters, we need to make taking a donation from the banks like taking a donation from NAMBLA. The way we do that is to keep raising up the issue and keep pointing out how people are getting screwed. The Tea-party people are a great example of this – there’s a huge mob of people who are angry and scared and they don’t really know why. They are being exploited by the right (a lot of them anyway) to focus their anger on Obama. We need to keep communicating to people who’s really behind the loss of their jobs, their retirement and their house.

  I already posted this above, so comment moderators are free to take it out, but I would urge anyone in the area to come to this. I really think the banks are counting on nobody paying attention and/or thinking the issues are too complicated to get involved in.
  http://www.showdowninchicago.org
  it’s also featured right now on Michael Moore’s homepage
  http://www.michaelmoore.com

• [zarathud]

  Exactly, it is like a DOS outrage attack.

  There is only so much time to complain or protest.

• [Anonymous]

  This “outrage” happens every time short-term U.S. Treasury rates are lower than long-term rates. It’s called a positively sloping yield curve and has been the norm for the last century. Banks make money the same way, taking in short-term deposits and making long-term loans. Indeed, the opposite case, when short-term rates exceed long-term rates, has been shown to be a reliable predictor of recessions.

  The “carry trade” — borrowing short to invest long — is far from riskless and has been the undoing of many sophisticated investors.

  Phil Greenspun should stick to reviewing cameras.

• [Brainspore]

  You give them too much credit, Mark… saying that they are borrowing at 0% interest assumes that the banks are going to pay it all BACK.

• [hobomike]

  This kind of stuff has been going on forever. Some call it “arbitrage.” What’s really outrageous to me is the_lack_of outrage among Americans at all this stuff.

  • [Anonymous]

    @hobomike, because this stuff is boring! Can’t compare to video games, Internet porn, or 200+ channels of reality TV! We are well on our way to Idiocracy.

• [Cowicide]

  Dear Americans,

  Can we now… can we now FINALLY…

  Call “campaign contributions” and the like from large corporations BRIBES?

  Let’s just call them what they are… bribes. When a large bank, giant health insurance company give money to a politician please now refer to it as a bribe. Quit sugar-coating the truth, America.

  We don’t need campaign finance reform… we need bribe reform.

  Sincerely,

  Cowicide

  P.S. I’ve been asking to remove this lipstick from this ugly pig for a long time now. Well, actually… since the 90′s, but that’s the oldest link I could quickly dig up.

• [r0b0]

  Dear Mark,

  The article is complete and utter bollocks as explained by commenter Sam in comment #9 of the original article.

  Regards,
  R.

• [LRM]

  @hobomike – a lot of Americans ARE outraged. That’s why we’re going to Chicago the 25th – 27th. To show the banks we’re on to them and express our anger. Come on out!

  http://www.showdowninchicago.org

• [hobomike]

  @LRM, Awesome. I’ll get the word out!

• [Aloisius]

  Yes, but is the stock the US government owns in these banks now worth more than the amount they are bilking us for? If so, then I say screw it. Let’s just hope we sell off that stock wisely.