7 ms·

How Wall Street is making its billions

86 points by soundsop 17y ago

seldo 17y ago
So, to summarize: 1. The US government loans money to the banks at 0% interest 2. The banks buy treasuries at 2% interest Why is the US government selling treasuries in the first place? In order to have money to bail out the banks' earlier losses. Net-net: the banks are stealing money from US taxpayers. Do I have this right?
- nsrivast 17y ago
  The US taxpayers are lending the money cheaply to banks and whoever else wants it. You can take part in this as well - go buy a government bond.
  - yafujifide 17y ago
    But can I borrow money at 0% interest from the Fed to do it?
  - jjs 17y ago
    > You can take part in this as well Except for the free money part.
- wallflower 17y ago
  Fractional-reserve banking http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Fractional-reserve_banking
- deleted 17y ago
  [deleted]
  - seldo 17y ago
    Stealing is taking another person's property without permission. In this case, taxpayers handed over money to the government on the understanding that it would be used for the public good, to support common infrastructure and institutions. Instead it is being paid to the stockholders and employees of banks for doing exactly nothing: they are taking money from one federal account and moving it to another, producing no value for anyone but themselves. So I guess, technically, it's not stealing. But it's a massive violation of trust that should be criminal.
    - cookingrobot 17y ago
      How about if congress creates a "public option" bank. Then we can stop letting the private banks steal our money through tricks like this, and if that makes them collapse, so-be-it. Honestly I think every major institution should have a public-option competitor. If it turns out that the private companies are worse than a government run version, then they must really suck.
      - seldo 17y ago
        The problem with a public option in this case is that the investment arms of these banks aren't providing a service to anybody, they are profit-making institutions in their own right. We the public are not "customers" of these banks, so we can't take our money elsewhere; they're using their own money. The obvious government reform required here is stop lending the goddamn banks money at 0% interest.
        deleted 17y ago
        [deleted]
        cookingrobot 17y ago
        I agree, but I think the general assumption is that if we stop giving bailouts and 0% loans, then the banks would fail and bring down the economy. That's why we should have public banks ready to replace them.
      - lionhearted 17y ago
        > Honestly I think every major institution should have a public-option competitor. This was a common line of thinking from 1930 to 1980 or so, and lots of world governments had public run businesses. England is a great example actually - the English government owned a lot of business that got preferential treatment in the UK. Under Thatcher, most English government businesses were sold off and most public housing was sold to its current tenants. Here's a short list of some of the businesses that were sold off, you can click on each individual business to see how they fared and the changes to industry afterwards. Generally speaking, it was a very positive thing. http://en.wikipedia.org/wiki/Margaret_Thatcher#Second_government http://en.wikipedia.org/wiki/Margaret_Thatcher#Second_govern... -- "British Petroleum was privatised in stages in October 1979, September 1983 and November 1987; British Aerospace in January 1981 and 1985; the government share in British Sugar in July 1981; Cable and Wireless in November 1981; Amersham International and National Freight Corporation in February 1982; Britoil in November 1982 and August 1985; Associated British Ports in February 1983; Jaguar in July 1984; British Telecom in November 1984; the National Bus Company in October 1986; British Gas in December 1986; British Airways in February 1987; the Royal Ordnance in April 1987; Rolls-Royce in May 1987; the British Airports Authority in July 1987; the Rover Group in August 1988; British Steel in December 1988; the Regional Water Authorities in November 1989; Girobank in July 1990; and the National Grid in December 1990." -- On a personal note, I'm an American, and the worse service I've ever experienced have been at the hands of U.S. government run institutions: The various state-run DMVs, TSA, Homeland Security, the IRS, and the Post Office. About the Post Office, by the way: I was frequently traveling 3-10 days at a time for work, and my mailbox would get completely full and my mail would get wrinkled and ripped and crushed. I ran into my postman one afternoon, and asked him, "Hey there - if I leave a note on my mailbox, can you stop delivering the bulk mail/junk mail? I don't want it, and my mail is getting ripped up and crushed from my stuffed mailbox." He said that the Post Office is paid to deliver the mail, and I have no say in what gets delivered. But, I could request the Post Office hold my mail and pick it up when I get done traveling. Now, can you think of any private business that runs like that? Could you imagine the outrage if FedEx dropped off junk samples at your door without your permission and refused to stop? Look at how outraged we get at email spam - but you're both legally required to have a mailbox, and can't tell the Post Office to stop spamming you. This is what happens when a business can't go out of business - they hold no respect for their customers. I mean, how much nicer, more efficient, and pleasant would the DMV instantly become if they had a competitor for licensing and registering cars?
  - sage_joch 17y ago
    Banks borrow money at 0% interest and lend it to the government at 2% interest. That 2% has to come from somewhere (hint: us). Now suppose the government could also borrow at 0% interest (or print its own money, for that matter). Then taxes could be put to better use than lining the pockets of people who don't actually create any wealth.
    - dantheman 17y ago
      And then money would quickly become worthless, as all fiat currencies have.
- fnid 17y ago
  That's basically what is happening. Wait until the inflation kicks in. See Argentina as an example: http://academic.reed.edu/economics/course_pages/201_f06/Cases/money_and_inflation_in_arg.htm http://academic.reed.edu/economics/course_pages/201_f06/Case...
  - lkozma 17y ago
    As far as I understand (from watching krugman-talks on youtube) the tragedy of argentina was that its debt was in $, which skyrocketed (as expressed in national currency) due to inflation. In case of US, external debt is in national currency, thus inflation might not have the same effect.
    - dantheman 17y ago
      It won't have the same effect, but it produces another incentive -- to get rid of our national debt all we have to do is print our way out of it thus drastically inflating our money, and robbing all holders of US Dollars.
      - lkozma 17y ago
        Again, from krugman-talks: no-one really needs to get rid of national debt, that is what Romania did in 80s and it was the worst economic move ever. You only need to service national debt, i.e. pay off interests, and exponential growth will take care of the rest. US debt right after WW2 is still there but it is peanuts in today's numbers.
- anamax 17y ago
  > Do I have this right? You're missing an important detail - this is nothing new. Banks have always borrowed money from the US govt (and others) at X% and loaned it at Y%, where X < Y. (There's no point in that arrangement if X >= Y.)
  - monos 17y ago
    this is probably trivial economics but it always eluded me: when the govt is giving out amount X money, and wants amount X + INTERESTX back. how can that work? where should INTERESTX come from when they only gave us X?
    - vitaminj 17y ago
      Non-government deposit banks are legally allowed to create money (up to some reserve ratio).
    - vetinari 17y ago
      Time. The govt gives out X/year, not the final amount X. When they want it back, it comes from different 'tranches'. This ensures, that there is always debt. Money has value only if there is debt and you must use some to get out of it. Why would you need it otherwise?
      - eru 17y ago
        And the Fed gives its `profits' back to the government to spend. The ECB does the same (perhaps more roundabout).
  - aaronblohowiak 17y ago
    With risk. What is the risk in buying US bonds?
    - dandelany 17y ago
      That the USD is increasingly worthless in the world economy.
pmorici 17y ago
This sounds like what Enron was doing to cook it's books, just moving money around, except in this case the banks and the government aren't technically the same entity but heck they might as well be after the bail out.
- anamax 17y ago
  The banks and govt aren't technically the same entity, but the govt may well be a controlling entity. What are the odds that the controlling entity won't use the banks for political advantage, say lower loan rates in "red states"?
kenshi 17y ago
So if you are part of the "False Economy" you get to make billions thanks to the suckers... err tax payers... who will bail you out, whilst everyone in the Real Economy gets to suffer the effects of the Financial Crisis. Maybe it's time to go back to contracting work at financial institutions...
jeromec 17y ago
You know between this and the link posted the other day (http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine/print http://www.rollingstone.com/politics/story/28816321/the_grea...) about Goldman Sachs I start to wonder if we that strive to create wealth with technology, with odds of failure stacked squarely against us, are really the smart ones. Sheesh. Too bad I have morals.
- Herring 17y ago
  It helps to think of it as a game. The money's just for keeping score.
  - fnid 17y ago
    The problem with this line of thinking is that games have rules. If people at the top, the bankers, the politicians, et al break the rules, the govt bails them out. If we break the rules, we go to jail. It's like getting points by entering a cheat code.
    - pyre 17y ago
      To use the game analogy, there are always those willing to cheat to get ahead. Those that view the rules as just another obstacle, and if you can get around them you deserve the advantage that you get.
  - aaronblohowiak 17y ago
    You have an odd notion of help.
- aswanson 17y ago
  I've gone through that line of thought more than once and I've come to the conclusion that what we do or attempt to do is far more beneficial to human advancement than these bullshit 3 card monty games. That has to count for something, at least in terms of self-respect.
  - 17y ago
joshu 17y ago
I wonder what fraction of the Treasuries sold at auction are purchased by the banks engaging in this behavior? If it's a decent but not overwhelming amount, it could be causing the auctions to be priced hire and thus overall increase the government's take. So it's not necessarily clear what's happening here...
- joshu 17y ago
  Actually, to get $3b in return, consider how many billions of dollars they'd have to buy of Treasuries. (1yr are paying .37% through 4% on 30yrs, which they probably aren't buying.) Anyone know offhand how much the banks did borrow?
nkassis 17y ago
Hum but isn't that in essence how the government is able to make deficits? I mean, without this process the gov wouldn't be able to fund itself other than by taxes. So the federal reserve creates money by loaning at ridiculously low rates (currently it's not a bad idea if there really is a threat of deflation), banks then use that money to fund the government by buying treasuries and in such we just inflate the money supply? So banks are like facilitators for this to happen and get 2% back for it? I dunno, I mean yes they make awe full amounts of money but can you really go about cutting out the middle men completely here?
- Confusion 17y ago
  without this process the gov wouldn't be able to fund itself How exactly does one fund itself by lending money that is then used to buy bonds? The net result is 0 for the government. If they have money to lend, they would be better off just using that money in the first place.
rebelvc 17y ago
This article is complete crap! At 3.6 Billion per quarter. Let say JP Morgain makes 10.8B a year. To make that with 2% yielding T-Bills the govt would of need to lend JP Morgan well more than 5.4 trillion.
- seldo 17y ago
  That's where the "leverage" comes in. The exact mechanism is a little confusing to me, but I think it works like this: Say you have $100. You can invest that $100 at 2% interest and earn $2. You end up with $102. Leverage is complicated, and I'm not totally sure I understand how it work, but basically it allows you to amplify your money. Instead of just investing $100, you take out a loan of $10,000 at 1% interest: you know you'll have to pay back $10,100, but you've already got that much. Now you've take that $10,100 and invest it at 2%, and you get $202 interest -- you now have $10,302. You pay back the $10,100 you owe, and you end up with $202, having earned 100x more than if you'd just invested without leverage.
- Confusion 17y ago
  Firstly, you're a factor 10 off: 10.8B is 2% of 540 billion. Secondly, 3% already reduces that to 360 billion. Thirdly, you missed the important word 'leverage' in the article.
  - rebelvc 17y ago
    Yea I did get the factor off. Leverage means using borrowed money to make more money. Other than the government where are you going to borrow at less than 2% interest rate? The financial institution does a lot more than buying t-bills.
deleted 17y ago
[deleted]
known 17y ago
http://en.wikipedia.org/wiki/Fed#Goals http://en.wikipedia.org/wiki/Fed#Goals

86 points by soundsop 17y ago

seldo 17y ago

So, to summarize: 1. The US government loans money to the banks at 0% interest 2. The banks buy treasuries at 2% interest Why is the US government selling treasuries in the first place? In order to have money to bail out the banks' earlier losses. Net-net: the banks are stealing money from US taxpayers. Do I have this right?

nsrivast 17y ago
The US taxpayers are lending the money cheaply to banks and whoever else wants it. You can take part in this as well - go buy a government bond.
- yafujifide 17y ago
  But can I borrow money at 0% interest from the Fed to do it?
- jjs 17y ago
  > You can take part in this as well Except for the free money part.
wallflower 17y ago
Fractional-reserve banking http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Fractional-reserve_banking
deleted 17y ago
[deleted]
- seldo 17y ago
  Stealing is taking another person's property without permission. In this case, taxpayers handed over money to the government on the understanding that it would be used for the public good, to support common infrastructure and institutions. Instead it is being paid to the stockholders and employees of banks for doing exactly nothing: they are taking money from one federal account and moving it to another, producing no value for anyone but themselves. So I guess, technically, it's not stealing. But it's a massive violation of trust that should be criminal.
  - cookingrobot 17y ago
    How about if congress creates a "public option" bank. Then we can stop letting the private banks steal our money through tricks like this, and if that makes them collapse, so-be-it. Honestly I think every major institution should have a public-option competitor. If it turns out that the private companies are worse than a government run version, then they must really suck.
    - seldo 17y ago
      The problem with a public option in this case is that the investment arms of these banks aren't providing a service to anybody, they are profit-making institutions in their own right. We the public are not "customers" of these banks, so we can't take our money elsewhere; they're using their own money. The obvious government reform required here is stop lending the goddamn banks money at 0% interest.
      - deleted 17y ago
        [deleted]
      - cookingrobot 17y ago
        I agree, but I think the general assumption is that if we stop giving bailouts and 0% loans, then the banks would fail and bring down the economy. That's why we should have public banks ready to replace them.
    - lionhearted 17y ago
      > Honestly I think every major institution should have a public-option competitor. This was a common line of thinking from 1930 to 1980 or so, and lots of world governments had public run businesses. England is a great example actually - the English government owned a lot of business that got preferential treatment in the UK. Under Thatcher, most English government businesses were sold off and most public housing was sold to its current tenants. Here's a short list of some of the businesses that were sold off, you can click on each individual business to see how they fared and the changes to industry afterwards. Generally speaking, it was a very positive thing. http://en.wikipedia.org/wiki/Margaret_Thatcher#Second_government http://en.wikipedia.org/wiki/Margaret_Thatcher#Second_govern... -- "British Petroleum was privatised in stages in October 1979, September 1983 and November 1987; British Aerospace in January 1981 and 1985; the government share in British Sugar in July 1981; Cable and Wireless in November 1981; Amersham International and National Freight Corporation in February 1982; Britoil in November 1982 and August 1985; Associated British Ports in February 1983; Jaguar in July 1984; British Telecom in November 1984; the National Bus Company in October 1986; British Gas in December 1986; British Airways in February 1987; the Royal Ordnance in April 1987; Rolls-Royce in May 1987; the British Airports Authority in July 1987; the Rover Group in August 1988; British Steel in December 1988; the Regional Water Authorities in November 1989; Girobank in July 1990; and the National Grid in December 1990." -- On a personal note, I'm an American, and the worse service I've ever experienced have been at the hands of U.S. government run institutions: The various state-run DMVs, TSA, Homeland Security, the IRS, and the Post Office. About the Post Office, by the way: I was frequently traveling 3-10 days at a time for work, and my mailbox would get completely full and my mail would get wrinkled and ripped and crushed. I ran into my postman one afternoon, and asked him, "Hey there - if I leave a note on my mailbox, can you stop delivering the bulk mail/junk mail? I don't want it, and my mail is getting ripped up and crushed from my stuffed mailbox." He said that the Post Office is paid to deliver the mail, and I have no say in what gets delivered. But, I could request the Post Office hold my mail and pick it up when I get done traveling. Now, can you think of any private business that runs like that? Could you imagine the outrage if FedEx dropped off junk samples at your door without your permission and refused to stop? Look at how outraged we get at email spam - but you're both legally required to have a mailbox, and can't tell the Post Office to stop spamming you. This is what happens when a business can't go out of business - they hold no respect for their customers. I mean, how much nicer, more efficient, and pleasant would the DMV instantly become if they had a competitor for licensing and registering cars?
- sage_joch 17y ago
  Banks borrow money at 0% interest and lend it to the government at 2% interest. That 2% has to come from somewhere (hint: us). Now suppose the government could also borrow at 0% interest (or print its own money, for that matter). Then taxes could be put to better use than lining the pockets of people who don't actually create any wealth.
  - dantheman 17y ago
    And then money would quickly become worthless, as all fiat currencies have.
fnid 17y ago
That's basically what is happening. Wait until the inflation kicks in. See Argentina as an example: http://academic.reed.edu/economics/course_pages/201_f06/Cases/money_and_inflation_in_arg.htm http://academic.reed.edu/economics/course_pages/201_f06/Case...
- lkozma 17y ago
  As far as I understand (from watching krugman-talks on youtube) the tragedy of argentina was that its debt was in $, which skyrocketed (as expressed in national currency) due to inflation. In case of US, external debt is in national currency, thus inflation might not have the same effect.
  - dantheman 17y ago
    It won't have the same effect, but it produces another incentive -- to get rid of our national debt all we have to do is print our way out of it thus drastically inflating our money, and robbing all holders of US Dollars.
    - lkozma 17y ago
      Again, from krugman-talks: no-one really needs to get rid of national debt, that is what Romania did in 80s and it was the worst economic move ever. You only need to service national debt, i.e. pay off interests, and exponential growth will take care of the rest. US debt right after WW2 is still there but it is peanuts in today's numbers.
anamax 17y ago
> Do I have this right? You're missing an important detail - this is nothing new. Banks have always borrowed money from the US govt (and others) at X% and loaned it at Y%, where X < Y. (There's no point in that arrangement if X >= Y.)
- monos 17y ago
  this is probably trivial economics but it always eluded me: when the govt is giving out amount X money, and wants amount X + INTERESTX back. how can that work? where should INTERESTX come from when they only gave us X?
  - vitaminj 17y ago
    Non-government deposit banks are legally allowed to create money (up to some reserve ratio).
  - vetinari 17y ago
    Time. The govt gives out X/year, not the final amount X. When they want it back, it comes from different 'tranches'. This ensures, that there is always debt. Money has value only if there is debt and you must use some to get out of it. Why would you need it otherwise?
    - eru 17y ago
      And the Fed gives its `profits' back to the government to spend. The ECB does the same (perhaps more roundabout).
- aaronblohowiak 17y ago
  With risk. What is the risk in buying US bonds?
  - dandelany 17y ago
    That the USD is increasingly worthless in the world economy.

pmorici 17y ago

This sounds like what Enron was doing to cook it's books, just moving money around, except in this case the banks and the government aren't technically the same entity but heck they might as well be after the bail out.

anamax 17y ago
The banks and govt aren't technically the same entity, but the govt may well be a controlling entity. What are the odds that the controlling entity won't use the banks for political advantage, say lower loan rates in "red states"?

kenshi 17y ago

So if you are part of the "False Economy" you get to make billions thanks to the suckers... err tax payers... who will bail you out, whilst everyone in the Real Economy gets to suffer the effects of the Financial Crisis. Maybe it's time to go back to contracting work at financial institutions...

jeromec 17y ago

You know between this and the link posted the other day (http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine/print http://www.rollingstone.com/politics/story/28816321/the_grea...) about Goldman Sachs I start to wonder if we that strive to create wealth with technology, with odds of failure stacked squarely against us, are really the smart ones. Sheesh. Too bad I have morals.

Herring 17y ago
It helps to think of it as a game. The money's just for keeping score.
- fnid 17y ago
  The problem with this line of thinking is that games have rules. If people at the top, the bankers, the politicians, et al break the rules, the govt bails them out. If we break the rules, we go to jail. It's like getting points by entering a cheat code.
  - pyre 17y ago
    To use the game analogy, there are always those willing to cheat to get ahead. Those that view the rules as just another obstacle, and if you can get around them you deserve the advantage that you get.
- aaronblohowiak 17y ago
  You have an odd notion of help.
aswanson 17y ago
I've gone through that line of thought more than once and I've come to the conclusion that what we do or attempt to do is far more beneficial to human advancement than these bullshit 3 card monty games. That has to count for something, at least in terms of self-respect.
- 17y ago

joshu 17y ago

I wonder what fraction of the Treasuries sold at auction are purchased by the banks engaging in this behavior? If it's a decent but not overwhelming amount, it could be causing the auctions to be priced hire and thus overall increase the government's take. So it's not necessarily clear what's happening here...

joshu 17y ago
Actually, to get $3b in return, consider how many billions of dollars they'd have to buy of Treasuries. (1yr are paying .37% through 4% on 30yrs, which they probably aren't buying.) Anyone know offhand how much the banks did borrow?

nkassis 17y ago

Hum but isn't that in essence how the government is able to make deficits? I mean, without this process the gov wouldn't be able to fund itself other than by taxes. So the federal reserve creates money by loaning at ridiculously low rates (currently it's not a bad idea if there really is a threat of deflation), banks then use that money to fund the government by buying treasuries and in such we just inflate the money supply? So banks are like facilitators for this to happen and get 2% back for it? I dunno, I mean yes they make awe full amounts of money but can you really go about cutting out the middle men completely here?

Confusion 17y ago
without this process the gov wouldn't be able to fund itself How exactly does one fund itself by lending money that is then used to buy bonds? The net result is 0 for the government. If they have money to lend, they would be better off just using that money in the first place.

rebelvc 17y ago

This article is complete crap! At 3.6 Billion per quarter. Let say JP Morgain makes 10.8B a year. To make that with 2% yielding T-Bills the govt would of need to lend JP Morgan well more than 5.4 trillion.

seldo 17y ago
That's where the "leverage" comes in. The exact mechanism is a little confusing to me, but I think it works like this: Say you have $100. You can invest that $100 at 2% interest and earn $2. You end up with $102. Leverage is complicated, and I'm not totally sure I understand how it work, but basically it allows you to amplify your money. Instead of just investing $100, you take out a loan of $10,000 at 1% interest: you know you'll have to pay back $10,100, but you've already got that much. Now you've take that $10,100 and invest it at 2%, and you get $202 interest -- you now have $10,302. You pay back the $10,100 you owe, and you end up with $202, having earned 100x more than if you'd just invested without leverage.
Confusion 17y ago
Firstly, you're a factor 10 off: 10.8B is 2% of 540 billion. Secondly, 3% already reduces that to 360 billion. Thirdly, you missed the important word 'leverage' in the article.
- rebelvc 17y ago
  Yea I did get the factor off. Leverage means using borrowed money to make more money. Other than the government where are you going to borrow at less than 2% interest rate? The financial institution does a lot more than buying t-bills.

deleted 17y ago

[deleted]

known 17y ago

http://en.wikipedia.org/wiki/Fed#Goals http://en.wikipedia.org/wiki/Fed#Goals