A year ago JP Morgan Chase was one bank among many that was teetering on the edge of insolvency. Enter the Great Federal Bailout.
Now
less than a year removed from receiving bailout money, JP Morgan Chase reported
quarterly earnings of $3.6 BILLION. Including the
$2.7 BILLION they made last quarter, JP Morgan Chase has netted $6.3 billion-with-a-b in the last 6 months. And while they're leading the pack in profits this quarter, they're far from the only bank making record profits.
How in the world could they POSSIBLY do that?
Is it that they are just extraordinarily smart? If that were the case, they likely wouldn't have been on life support last fall.
Maybe they're just really lucky . . . But that doesn't explain how lots of other banks are posting record profits as well.
Perhaps they're simply benefiting from the surge in the overall U.S. and world economy . . . Um, no. That one's a non-starter.
So how?
This comes from
Philip Greenspun, an ultra-smart MIT guy who writes a blog for Harvard Law.
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.
Oh . . .
So here's how it works:
1. Borrow $1 billion from the U.S. Government (read: taxpayers) at 0%.
2. Buy $1 billion in U.S. Treasuries (read: virtually risk-free) paying 2%.
3. Leverage $1 billion in Treasuries and buy another $9 billion.
4. Collect $50 million per quarter in interest payments on a risk free investment.
5. Go out for drinks to celebrate that taxpayers are paying you 2% on a risk free investment you bought with their money to begin with.
6. Repeat 1-5.
Brilliant!
I'm gonna go throw up now.
