Whiteboard bank profits
I would very much like to see an explanation of how the banks made money in the subprime mortgage securitization market. Surely there was more going on than just mortgage loan interest.
Ok I think I got it but what I did not get in this incestious cycle is where did the bank get the interest? Did the treasury just print it? If so then what was accomplished in this process? My guess is nothing.
To Tony in Toronto,
Maybe Paddy can go into the bond end of it more, but I would have to imagine that the banks are dealing in short term bonds. Also I can bet that they have assurances from the Fed that the interest will remain low for the time being in order to keep the wheel turning.
Outstanding tutorial! Let me see if I get this right... Fed (or taxpayers) are lending money to the banks to lend money to the tresury in exchange for bonds (backed by the taxpayers) so the banks can profit then payout big Bonuses so they can stave off a loss of talent... who needs a drink, we must already be drunk!
no wonder there is such resistance to ''Audit the Fed''
So let me see if I understand this: the Fed is lending money to the banks, which are lending money to the Treasury, which is handing money over to the Fed... and between the three of them the banks are making tons of money?
Sounds to me like the Treasury's getting a really bad deal out of all this. So are the people.
This is a great podcast. I pick up the sound, but not the video, and my iPod has video capability (I get another video podcast that works fine). Does anyone else have the same problem? Any idea how to fix it? I had to end up coming to the website to watch the actual video.
Mr. Hirsch, I was wondering if you could do a whiteboard episode on gold and gold hoarding and its effect on the economy. Thanks.
This video does not contain enough information, perhaps purposefully. I don't know how the author (if that's the correct term) can make the assertion that the "Big Banks" are collecting free money from the Fed and the lending it out at much higher rates to the Treasury.
1. 2 year 2 bill rates = 85 bps
2. 28 day FOMC Primary Window lending = 50 bps
3. Profit = 35 bps
Total lending to primary dealers = 96 billion. 96 billion x 35 bps is under 350 million annualized profit (spread out against all banks in the US).
That doesn't even factor in that to make that profit the banks would have to take the substantial risk that interest rates do NOT increase over the next 2 years. If they do they will lose money on the trade.
It seems highly suspect to me that any banks would put this trade on directly. The risk/reward is just not there.
Great video! Always a pleasure to watch!
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