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Heads the banks win, tails they also win. And they win if you don't flip.

William Cohan explains how the banks have been making such extraordinary money after the crash:

The benefits for Wall Street started with the extensive de-leveraging that continues the world over in the wake of the financial crisis (it caused) by helping companies raise new equity and refinance existing debt. The Wall Street firms that survived the crisis reap billions of dollars in fees for this sort of work. Mostly, though, Wall Street is making money by taking advantage of its rock-bottom cost of capital, provided courtesy of the Federal Reserve — now that the big Wall Street firms are all bank holding companies — and then turning around and lending it at much higher rates.

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

You’re welcome.

It's a bit of a heads-they-win, tails-they-win game for the banks. They made a ton of money selling time bombs in the run-up to the crisis and now they're making a ton of money selling the cheap cash that we've given them to get ourselves out of the crisis. Nice work, if you can get it.

By Ezra Klein  |  April 21, 2010; 11:06 AM ET
 
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Comments

Yo Ezra, here's a follow-up assignment, should you choose to accept it.

If all these "big bad banks" are generating massive profits. And most of the profits are derived from expensive fees. And the expensive fees are typically attached to the complicated derivative-like instruments that got us into this mess in the first place, doesn't this suggest that there is still a fairly massive demand for these products?

Who are these customers, why do they feel they need these complicated investment instruments, and why can't "non-big bad banks" compete with simplified financial products?

A lot of commentators have been operating under an assumption that complicated derivatives don't add much value to the economy, and yet firms are spending billions to continue to purchase them. Are they just being duped again or is there a method their madness?

Posted by: twweaver7777 | April 21, 2010 11:43 AM | Report abuse

"The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street."

It's worth noting that this post comes right after one about how the left handles financial crisis while the right allows them to happen. Um, Democrats control every elective branch of government, and thus all the relevant committees and appointments. So this process--of the tax payers giving money to wealth bankers in the form of this usurious shell game--is happening under the Democrats. This is "handling" the crisis?

Which, again, makes me feel that the previous posts's assertion--that the left handles financial crisis--is based on very selective inclusion of examples, and very selective interpretation of data. If you interpret things that seem as transparently insane as AAA rating junk mortgage derivatives should have been (such as the government giving the banks money to loan back to the government, that the tax payer then pays interest on) . . . if you interpret almost certainly destructive behavior as "handling the crisis" just because it is occurring post-crisis, and hasn't blown up in our faces yet, as "handling", then, okay.

Otherwise, this sort of thing seems as destructive, in the long term, as any sort of supposedly Republican led deregulation of the 80s and 80s.

Posted by: Kevin_Willis | April 21, 2010 11:55 AM | Report abuse

There is certainly a role for derivatives trading for commodity producers/owners to hedge their risks due to factors beyond their control. Naked derivatives trading is like buying fire insurance on someone else's house. The real problem comes when people that hold those contracts then try to influence the value of the underlying commodities to their advantage. It would be like buying fire insurance on someone else's house and then building a huge fire right next to it so that it would be more likely that you would get a payout when the house actually catches fire. This is what currency futures traders were doing to Greece and other currencies lately.

Posted by: srw3 | April 21, 2010 11:56 AM | Report abuse

Ezra,

so then fix it one and for all. End the Fed's ability to manipulate the rate as they do. You bash the bankers but don't correctly go to the start of the money trail. If the Fed charged banks a reasonable rate then there's a train of thought that says that you'd cut into banks profits and not individuals because individuals would only bear what they could afford (or maybe better said they SHOULD only bear what they could afford).

So this monetary policy that's been going on for YEARS now (including during GWB's term) of keeping easy money available is seemingly doing nothing more than making the banks richer. Was that really its intent?

Posted by: visionbrkr | April 21, 2010 12:05 PM | Report abuse

I thought we were lending to banks at basically 0% interest so that they would lend to businesses and jumpstart the economy, not to their investment bankers to just make more money for the bank. Another argument for separating commercial and investment banking. Glass Steagal, now!

For all their talk of reform, the banks own congress, no matter which party is in charge.

Posted by: srw3 | April 21, 2010 12:12 PM | Report abuse

srw3,

I rarely agree with you (as you know ;-)

but I'm 100% with you. Glass Steagal all the way!

Posted by: visionbrkr | April 21, 2010 12:20 PM | Report abuse

Kevin Willis picked up on the flow.

Considering Gramm-Leach-Bliley (signed by Clinton) and the various Obama Acts, it seems as if the payoffs to the Democratic Party are working quite effectively.

Two quotes from President Wilson are appropriate. First “Will one of you gentlemen tell me in what civilized country of the earth there are important government boards of control on which private interests are represents?” and later "we should also seek to give the discussions of such matters such publicity and such general currency and such simplicity as will enable men of every kind and calling to understand what we are talking about and take an intelligent part in the discussion. We cannot shut ourselves in as experts to our own business. We must open our thoughts to the country at large, and serve the general intelligence as well as the general welfare."

Posted by: rmgregory | April 21, 2010 12:23 PM | Report abuse

The post you cite, and your comments on it, are notable for being completely off base. In fact, I can't find one factually accurate statement in it. First, bank borrowing from the Fed is trivial in scope. Almost all the Fed's assets are Treasury securities and Agency mortgage backed securities. That's $2 trillion of $2.3 billion in total assets, as per the April 15 H41 report. (There's roughly another $100 billion in Fed assets related to the Bear Stearns and AIG interventions, and just over $150 billion in miscellenous assets, basically none of which is credit to banks.) Instead, commericial are major lenders to the Fed, having $1.1 trillion in excess reserves on deposit, on which the Fed pays banks about 24 basis points. What the author of the should say is that banks' short-term cost of capital is low because the Fed Funds rate is low. A low Funds rate translates into low savings deposit rates (still bank's largest single source of financing) and low rates on short-term financial commercial paper (at least for high-quality credit). Even here, banks have to earn money via maturity transformation: to earn any spread, the bank has to make loans or buy other long-term assets (even long-maturity Treasuries expose the bank to duration risk). Next mistake: there hasn't been much of a shift of banking system assets into Treasury or Agency paper: as of march, commercial bank holdings are up just $338 billion since prior to the recession, and make up just 12% of banking system assets. Wall Street firms have been making boatloads of money mostly via underwriting--the one point the post gets right--trading activity, and restating the value of existing assets as the markets improve. The biggest problem with the post and your gloss on it is the big picture. If you think bank's cost of short-term capital is too low, you think the Federal Funds rate is too low. You wantin effect, the Fed to be aggressively tightening policy in a weak economy. Wall Street surely needs to be cut down to size, but doing it that way would be perverse.

Posted by: madhoboken | April 21, 2010 1:07 PM | Report abuse

Thank god we don't have a nationalized financial sector! Can u imagine if it was the fed lending money directly rather lending money to wall street who then lends it back out? If struggling homeowners had access to money at .005 interest? Or if we could pay off our credit cards with even ten times that interest rate? Yay private financial instituitions.

Posted by: Levijohn | April 21, 2010 1:48 PM | Report abuse

"Considering Gramm-Leach-Bliley (signed by Clinton) and the various Obama Acts, it seems as if the payoffs to the Democratic Party are working quite effectively."

I guess the payoffs to the republican party are also working as it was the republican congress that passed Gramm-Leach-Bliley in the first place.

Banks own congress, no matter who is in charge. Public financing for elections is the only way to limit their influence.

Posted by: srw3 | April 21, 2010 1:48 PM | Report abuse

madhoboken is exactly right. This post is misguided and inflammatory.

Posted by: Quant | April 21, 2010 2:08 PM | Report abuse

"It's a bit of a heads-they-win, tails-they-win game for the banks. They made a ton of money selling time bombs in the run-up to the crisis and now they're making a ton of money selling the cheap cash that we've given them to get ourselves out of the crisis. Nice work, if you can get it."

I don't think this is so much a case of how those SOB bankers are profiting from a crisis they created, as much as this is an intentional, backdoor bank recapitalization plan that Treasury, Bernanke, the White House, and Wall Street all know about without ever explicitly saying what's going on. Back when TARP was passed, there were quite a few people who said $700 bil was not even close to enough, and it might take as much as $2 trillion. In fact, I think Schumer threw out that $2 trillion number. But obviously, there's no way such a large bailout could pass, whether it really was a bailout or whether it was nationalization. So this is just a backdoor way of doing it. It's regulatory forbearance supercharged by giving them an easy way to make lots and lots of money.

Posted by: JamesCody | April 21, 2010 2:31 PM | Report abuse

Of course, it's not the Fed's fault that the yield on T-bills is so high.

Posted by: tomtildrum | April 21, 2010 3:24 PM | Report abuse

It's a good deal if you can get it except you can't get it.

Cheap loans from the Fed are overnight.

Treasury bills mature in 10 years.

Nobody with a shred of sanity is going to take out an overnight loan to buy something that won't pay back that loan until 10 years later.

And quite obviously so. T-bills are auctioned. If this scheme were possible, the price of T-bills would be bid down at auction to the point that it wouldn't work any more.

Posted by: pj_camp | April 22, 2010 10:13 AM | Report abuse

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