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Tuesday, April 20, 2010

My Sentiments Exactly: Why Can't I Be a Megabank?

Just in case you didn't read this in The New York Times: a piece called You're Welcome, Wall Street.

I have wondered about just this myself: why can banks borrow at near zero and then get Treasury Bonds for 3%, while I can get anywhere from 0% to 1.3% on my savings. Why can't I be a megabank? I promise: I'll spend locally and start a ripple effect in the economy.

And, why, if I want a mortgage do I have to pay about 5% (a spread of almost 5%) while, when I bought my house, the spread was 1%. WHY??????

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.

And now for the truly obscene part. By keeping interest rates so stubbornly low — and by remaining committed to doing so — the Fed is crushing the rest of us, especially senior citizens on fixed incomes and those who have rediscovered saving in order to have some peace of mind.

For instance, despite my bank calling it a “premier platinum savings” account, I am getting a measly 0.15 percent interest rate. On my “premier platinum checking” account, the interest rate is 0.01 percent. In an essay in The Wall Street Journal recently, Charles Schwab pointed out that there is more than $7.5 trillion in American household wealth stored in short-term, interest-bearing checking, savings and CD accounts. (The average interest rate for a one-year CD is 1.3 percent.)

Our savings is another source of virtually free capital for banks to use to lend out at much higher rates. These anemic yields are a “potential disaster striking at core American principles of self-reliance, individual responsibility and fairness,” Mr. Schwab observed correctly.


Over the Cubicle Wall said...

It's a racket. As long as interest rates stay low, the banks have a license to effectively print money.

Companies like Annaly Capital Management (NLY) have taken great advantage of this by selling mortgages back to the Feds under the pools that Fannie and Freddie Mac are guaranteeing.

As long as rates stay low, their printing press is in business. They offer a great dividend yield (15% or so), and because they are set up as a REIT, they are required to pay out most of their profits in the form of dividends.

When rates eventually go up, their stock price will drop because the printing press gets shut down. You can reap the benefits of the megabanks if you want to take on that risk through a stock purchase.

I can't convince myself to do it, but it has been interesting to read about and research.

Shelley said...

Have you looked into credit unions? Mine isn't paying huge interest either, but I'm thinking the loan rates are likely more fair. The bigger credit unions can do mortgages, money market accounts, stock investment etc. Not sure what is their relationship with the US government re: borrowing. I do know they annoy the banking industry and that is one of the main reasons I love my credit union!

Frugal Scholar said...

@Cubicle--I THINK I understand what you're saying. Very snazzy! My problem is that I'm a good saver, but a mediocre investor.

@Shelley--No magic in interest rates from credit unions, I'm afraid. My kids are getting .75% on a savings acct at a credit union. I'm getting a whopping 1.3 at AMEX personal savings.