Could there be a better industry to be in than the banks at present? With the yield curve its steepest in years, a bank can borrow from one branch of the government at close to zero via the discount window and lend to another branch of the government at 3.5% buying Treasuries, for a risk free 3% profit margin. Leverage that at a very conservative 10x (meaning 10% reserves, versus required 3%), and a risk fee 30% ROR. Plus a big chunk of the competition is out of business and your biggest client, the government again is churning out fees and commissions at a record pace via Treasury auctions and the like. Sounds like the best business model going.





Speak your mind

3 Comments so far

  1. Steve on January 11, 2010 8:36 pm

    You don’t have to be a bank to enjoy this positive carry. This can be done synthetically by buying Eurodollar futures anywhere from 3 months to several years out. As time passes, the price of the Eurodollar contact will rise as it moves towards the front month. Just as with the banks, the risk to this position is that the Fed raises the Fed Funds rate quicker and further than is currently priced in.

  2. Thomas Miller on January 11, 2010 11:02 pm

    One has to wonder if the banking system is in much worse shape than admitted to and the government is letting them build up their reserves. With such a sweet locked in profit, they are not putting too much of the money out in the system which may be keeping inflation from rising at this time.

  3. Nick Pribus on January 12, 2010 8:26 am

    The only way it could be better is if you are the Fed, now according to the latest report, showing a record $45 billion in profit for 2009. The word “bailout” seems to be missing from the media vernacular these days as the people being “bailed out” are the taxpayers it seems and not those greedy awful bankers.

    I told everyone I met last year, when talking about the topic, that it was not a bailout, but rather the US administration had become the biggest distressed debt hedge fund in the world and was making some pretty wise investments getting terms even a hedge master would envy, and renegotiating those terms after the fact at will.

    It is most surprising that any branch of the government can make a profit, or even knows what a profit or wise investment is. Maybe it’s simply proof that even a stupid monkey finds a banana every now and then, because I am not convinced anyone in Washington had any idea that these were good companies they were bailing out, with profitable operations, although questionable risk management, and no foresight of the monumental liquidity challenge.


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