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How To Make The World's Easiest $1 Billion

123 points by bobbyi 17y ago

Slashed 17y ago
Can you really borrow $9B against $1B at such low rate? Obviously, I'm missing something here.
- nazgulnarsil 17y ago
  existing banks with insiders can. you forming a bank with your buddies can not. otherwise every already existing small bank would be doing this.
  - DougBTX 17y ago
    Unless your buddies were until recently bankers, with those connections remain intact </dreamer>
- bobbyi 17y ago
  Only for certain values of "you" that don't include you.
- dpatru 17y ago
  This is called fractional reserve banking. It's how fiat money is created. In my experience, if you understand it, you're either benefiting from it and support it, or you're angry about it and a Ron Paul supporter.
  - bobbyi 17y ago
    This isn't about fractional reserve banking. If the bank could only lend out 100% as much as it had, it would still be making free money here by borrowing from the government and lending the money back to the government at a higher rate.
    - dpatru 17y ago
      The key to the money-making scheme is access to very cheap money from the federal reserve (what you're labeling as government) and lending it to the government (what you're calling the government.) The fed and the government are not the same thing. If they were, the government would not have to borrow money from the banks. It would just get it directly from itself. So I think this is about fractional reserve banking because this is what enables the borrowing/creation of money at below market rates. If a bank had to buy its money on the open market like everybody else, it would have to pay more than what the government pays for money because it's a greater risk. Without a fractional reserve/fiat money/central bank system, a bank would not be able to borrow money at essentially 0% in a credit shortage.
      - ars 17y ago
        Sorry, but you have no idea what you are talking about. That is not fractional reserve banking. Maybe go and actually read what it is before posting about it?
        mattmaroon 17y ago
        Reading and thinking are hard. Understanding the complexities of our global financial system is even harder. Repeating economic "wisdom" you gleaned from a YouTube video of an obscure doctor-turned-Congressman that made the front page of Digg, then assuming everyone who doesn't agree with you is either uninformed or evil, is easy.
        deleted 17y ago
        [deleted]
        xster 17y ago
        Would you care to elaborate more about why fractional reserve banking isn't the primary satire of the article? Because the more I read, the more I frown at your lack of distinction between the bond selling government and the money printing fed
  - anamax 17y ago
    Interestingly enough, fractional reserve banking is not significantly different from the way any other business works. If I loan money to a business, that business almost always does something with the money, like buy stuff or pay expenses. It doesn't keep the money sitting around to pay me back. If things go wrong, the biz won't have money to pay me back. Let's compare that with the Wikipedia description of fractional reserve banking. "The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds)." Yes, there's the quibble about "demand deposits" vs other kinds of loans, but that doesn't really have anything to do with the expansion in the actual money supply. Yes, I know that the article defines "money supply" as "cash plus demand deposits". However, as a loan matures, it becomes closer to a "demand deposit" and eventually becomes one. The original money, meanwhile, has already left the biz. Maybe some came back, maybe it didn't. Either way, the only thing that's there for sure is the obligation to pay. Note that a bank has loans as assets. A biz has whatever it got in return for the borrowed money that it spent. Either one can go bad.
    - DougWebb 17y ago
      The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. When the Fed loans money into the US economy, there is no place to pull money from to pay the loan interest; only the principle can be repaid. The loans can only be repaid with hard assets (gold, real estate, etc) or by inflating the currency sufficiently to devalue the principle that was borrowed to below the repayment cost.
      - anamax 17y ago
        > The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. That's not a difference. When a biz spends borrowed money, it does so with the expectation that money will come back, just as the bank expects that its loan (of deposit money) will be repaid. In both cases, the bank/biz sent borrowed money out the door and only has an expectation that sufficient money will come back. (Yes, deposits are borrowed money.) The Fed is different because it gets to print money. We're talking about ordinary banks here. Yes, banks can get into trouble if its lenders call at an inconvenient time, but so can biz.
ctingom 17y ago
Phase 1: Collect Underpants Phase 2: ? Phase 3: Profit
dimitar 17y ago
The first thing I want to ask when I hear something about easy money, is: "Then what stops everybody from doing it?"
- bobbyi 17y ago
  In this case, the government. This article shows what would happen if everyone were able to operate the way the big banks do now.
- dpatru 17y ago
  I think everybody is not doing it because 1) most people don't understand it, 2) it's not easy to form a bank, and 3) although banks can easily get money for loans, they will be shut down if the loans are not paid back. Because new money is created whenever a loan is created, the cost of money is artificially low. This discourages savings and encourages debt. So even though there are massive amounts of money to be made with a bank, I think that it's pretty hard to come up with the capital needed to open a bank. In this sense being a banker is like being a drug dealer. You can make a lot of money, but you can't consume what you sell. If you do, you end up being just another customer, a buyer not a seller.
  - deleted 17y ago
    [deleted]
- chrischen 17y ago
  I'd say that $1 billion in initial capital's got to stop at least a couple people.
pmorici 17y ago
So basically this is just an elaborate shell game that allows the government to pump a bunch of no strings attached money into the big banks and make it look like they are paying back the tax payers TARP bailout money when in effect the only thing they are doing is calming the public outrage that would ensue if they just gave the money to the banks outright with no strings attached and no expectation of repayment.
- patrickgzill 17y ago
  Pretty much.
tsiki 17y ago
Can't be done, and here's why: the 0.25% rate he's referring to is the federal funds rate, which is the rate banks borrow/loan money from/to each other. You don't just "borrow from the Fed". Most loans between banks are very short-lived, for example a bank might want to loan money to a major company but doesn't want to wait days or weeks until it has enough in reserves, so it loans the money from another bank. Because the loans are very short-lived and are usually between established banks, they're also very cheap compared to the loans offered to the public. The interest rates of the loans are also negotiated between banks. Now, when you take the fact that, in this case, the borrower would be a complete unknown, and especially the fact that this loan would be for a much longer period than what is usual, 0.25% is impossible. Hell, you could be the Goldman Sachs and be lucky to get under 5% for a 30-year loan. (TL;DR: can't loan that much money with a rate that low for 30 years)
- mattmaroon 17y ago
  Wait, you mean there isn't an easy way to make a billion?
- pmorici 17y ago
  I think that's the point of the article (it's not something just anyone w/o the right connections could do). It's a satirical illustration of how this small group of people who should have gone bankrupt are making out like bandits at the general publics expense whilst the whole scheme is constructed in a way to obscure the nature of what is ultimately happening. Also it isn't saying you should take out the .25 percent loan for 30 years it is saying you buy 30 year treasuries. I think it is assumed you can sell those treasuries back to the Fed at some point when the original loan needs to be repaid.
- stevedekorte 17y ago
  You don't need to take any loans at all - the bank with $1B in deposits could just "loan" a subsidiary $9B to buy US treasuries with via the magic of fractional reserve banking. Then it's earning 4-5%. The real problems I see with the plan is that 1) that rate is on 30 year treasuries - so you don't get income immediately and 2) inflation may exceed the return on those treasuries. Why not just use $3B of the $9B the fed let's you effectively print to buy 300% overpriced assets (say, mortgage bonds) from shadow companies you and your buddies own and lend the rest to whomever eg: loans for overpriced homes. So you spent $1B on the bank, $1B on the assets and sold the assets you sold for $3B. You end up with $1B in profit (100% ROI) and who cares about what happens to the rest?
j_baker 17y ago
No process is easy when step 1 is "form a bank".
leelin 17y ago
Wait, it's very easy to borrow at short term rates (3M LIBOR) and then receive fixed long term rates (30 Years). It's called an interest rate swap. http://en.wikipedia.org/wiki/Interest_rate_swap http://en.wikipedia.org/wiki/Interest_rate_swap And no, simply receiving on 30Y swaps is not a sure path to money. Sure you will probably pick up carry in the first year or so, but eventually you need to get out of the trade (or take on the risk for 30 years), and if LIBOR / Treasuries sell off you'll have to pay a hefty amount to unwind.

123 points by bobbyi 17y ago

Slashed 17y ago

Can you really borrow $9B against $1B at such low rate? Obviously, I'm missing something here.

nazgulnarsil 17y ago
existing banks with insiders can. you forming a bank with your buddies can not. otherwise every already existing small bank would be doing this.
- DougBTX 17y ago
  Unless your buddies were until recently bankers, with those connections remain intact </dreamer>
bobbyi 17y ago
Only for certain values of "you" that don't include you.
dpatru 17y ago
This is called fractional reserve banking. It's how fiat money is created. In my experience, if you understand it, you're either benefiting from it and support it, or you're angry about it and a Ron Paul supporter.
- bobbyi 17y ago
  This isn't about fractional reserve banking. If the bank could only lend out 100% as much as it had, it would still be making free money here by borrowing from the government and lending the money back to the government at a higher rate.
  - dpatru 17y ago
    The key to the money-making scheme is access to very cheap money from the federal reserve (what you're labeling as government) and lending it to the government (what you're calling the government.) The fed and the government are not the same thing. If they were, the government would not have to borrow money from the banks. It would just get it directly from itself. So I think this is about fractional reserve banking because this is what enables the borrowing/creation of money at below market rates. If a bank had to buy its money on the open market like everybody else, it would have to pay more than what the government pays for money because it's a greater risk. Without a fractional reserve/fiat money/central bank system, a bank would not be able to borrow money at essentially 0% in a credit shortage.
    - ars 17y ago
      Sorry, but you have no idea what you are talking about. That is not fractional reserve banking. Maybe go and actually read what it is before posting about it?
      - mattmaroon 17y ago
        Reading and thinking are hard. Understanding the complexities of our global financial system is even harder. Repeating economic "wisdom" you gleaned from a YouTube video of an obscure doctor-turned-Congressman that made the front page of Digg, then assuming everyone who doesn't agree with you is either uninformed or evil, is easy.
        deleted 17y ago
        [deleted]
      - xster 17y ago
        Would you care to elaborate more about why fractional reserve banking isn't the primary satire of the article? Because the more I read, the more I frown at your lack of distinction between the bond selling government and the money printing fed
- anamax 17y ago
  Interestingly enough, fractional reserve banking is not significantly different from the way any other business works. If I loan money to a business, that business almost always does something with the money, like buy stuff or pay expenses. It doesn't keep the money sitting around to pay me back. If things go wrong, the biz won't have money to pay me back. Let's compare that with the Wikipedia description of fractional reserve banking. "The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors (those with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds)." Yes, there's the quibble about "demand deposits" vs other kinds of loans, but that doesn't really have anything to do with the expansion in the actual money supply. Yes, I know that the article defines "money supply" as "cash plus demand deposits". However, as a loan matures, it becomes closer to a "demand deposit" and eventually becomes one. The original money, meanwhile, has already left the biz. Maybe some came back, maybe it didn't. Either way, the only thing that's there for sure is the obligation to pay. Note that a bank has loans as assets. A biz has whatever it got in return for the borrowed money that it spent. Either one can go bad.
  - DougWebb 17y ago
    The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. When the Fed loans money into the US economy, there is no place to pull money from to pay the loan interest; only the principle can be repaid. The loans can only be repaid with hard assets (gold, real estate, etc) or by inflating the currency sufficiently to devalue the principle that was borrowed to below the repayment cost.
    - anamax 17y ago
      > The big difference is that when a bank loans money to a business, the business can bring in revenue from other parts of the economy to enable it to pay that loan back. That's not a difference. When a biz spends borrowed money, it does so with the expectation that money will come back, just as the bank expects that its loan (of deposit money) will be repaid. In both cases, the bank/biz sent borrowed money out the door and only has an expectation that sufficient money will come back. (Yes, deposits are borrowed money.) The Fed is different because it gets to print money. We're talking about ordinary banks here. Yes, banks can get into trouble if its lenders call at an inconvenient time, but so can biz.

ctingom 17y ago

Phase 1: Collect Underpants Phase 2: ? Phase 3: Profit

dimitar 17y ago

The first thing I want to ask when I hear something about easy money, is: "Then what stops everybody from doing it?"

bobbyi 17y ago
In this case, the government. This article shows what would happen if everyone were able to operate the way the big banks do now.
dpatru 17y ago
I think everybody is not doing it because 1) most people don't understand it, 2) it's not easy to form a bank, and 3) although banks can easily get money for loans, they will be shut down if the loans are not paid back. Because new money is created whenever a loan is created, the cost of money is artificially low. This discourages savings and encourages debt. So even though there are massive amounts of money to be made with a bank, I think that it's pretty hard to come up with the capital needed to open a bank. In this sense being a banker is like being a drug dealer. You can make a lot of money, but you can't consume what you sell. If you do, you end up being just another customer, a buyer not a seller.
- deleted 17y ago
  [deleted]
chrischen 17y ago
I'd say that $1 billion in initial capital's got to stop at least a couple people.

pmorici 17y ago

So basically this is just an elaborate shell game that allows the government to pump a bunch of no strings attached money into the big banks and make it look like they are paying back the tax payers TARP bailout money when in effect the only thing they are doing is calming the public outrage that would ensue if they just gave the money to the banks outright with no strings attached and no expectation of repayment.

patrickgzill 17y ago
Pretty much.

tsiki 17y ago

Can't be done, and here's why: the 0.25% rate he's referring to is the federal funds rate, which is the rate banks borrow/loan money from/to each other. You don't just "borrow from the Fed". Most loans between banks are very short-lived, for example a bank might want to loan money to a major company but doesn't want to wait days or weeks until it has enough in reserves, so it loans the money from another bank. Because the loans are very short-lived and are usually between established banks, they're also very cheap compared to the loans offered to the public. The interest rates of the loans are also negotiated between banks. Now, when you take the fact that, in this case, the borrower would be a complete unknown, and especially the fact that this loan would be for a much longer period than what is usual, 0.25% is impossible. Hell, you could be the Goldman Sachs and be lucky to get under 5% for a 30-year loan. (TL;DR: can't loan that much money with a rate that low for 30 years)

mattmaroon 17y ago
Wait, you mean there isn't an easy way to make a billion?
pmorici 17y ago
I think that's the point of the article (it's not something just anyone w/o the right connections could do). It's a satirical illustration of how this small group of people who should have gone bankrupt are making out like bandits at the general publics expense whilst the whole scheme is constructed in a way to obscure the nature of what is ultimately happening. Also it isn't saying you should take out the .25 percent loan for 30 years it is saying you buy 30 year treasuries. I think it is assumed you can sell those treasuries back to the Fed at some point when the original loan needs to be repaid.
stevedekorte 17y ago
You don't need to take any loans at all - the bank with $1B in deposits could just "loan" a subsidiary $9B to buy US treasuries with via the magic of fractional reserve banking. Then it's earning 4-5%. The real problems I see with the plan is that 1) that rate is on 30 year treasuries - so you don't get income immediately and 2) inflation may exceed the return on those treasuries. Why not just use $3B of the $9B the fed let's you effectively print to buy 300% overpriced assets (say, mortgage bonds) from shadow companies you and your buddies own and lend the rest to whomever eg: loans for overpriced homes. So you spent $1B on the bank, $1B on the assets and sold the assets you sold for $3B. You end up with $1B in profit (100% ROI) and who cares about what happens to the rest?

j_baker 17y ago

No process is easy when step 1 is "form a bank".

leelin 17y ago

Wait, it's very easy to borrow at short term rates (3M LIBOR) and then receive fixed long term rates (30 Years). It's called an interest rate swap. http://en.wikipedia.org/wiki/Interest_rate_swap http://en.wikipedia.org/wiki/Interest_rate_swap And no, simply receiving on 30Y swaps is not a sure path to money. Sure you will probably pick up carry in the first year or so, but eventually you need to get out of the trade (or take on the risk for 30 years), and if LIBOR / Treasuries sell off you'll have to pay a hefty amount to unwind.