Wall Street’s Dirty Little Secret


From The Daily Beast

“Awarding bankers bonuses is tantamount to paying them for not being certified cretins.”

The biggest problem with 2009’s megabonuses is economic, not moral. Tunku Varadarajan on how Wall Street made money soaking savers and taxpayers, rather than adding value.

Bankers do not deserve bonuses this year, at least not in the Western world. And I don’t say this from atop some moral or aesthetic or populist high horse. Instead, my arguments are mostly economic.

Banks are making money because they’re borrowing at ridiculously low rates from the public and central banks and then investing in higher-yielding government securities.

The banks receive deposits from savers (on which they pay negligible interest) and then leverage it several times by borrowing from other banks, or the central bank. LIBOR (the rate at which banks borrow from each other) as well as the Fed’s discount window are below 0.5 percent. This is the cost of money to banks. The loot is then invested in government bonds, which are yielding anywhere from 3.75 percent to 4.75 percent in the U.S. and Europe.

This interest margin may not sound like much, but when applied to the trillions of dollars that make up various banks’ balance sheets, it produces profits in tens, if not hundreds, of billions of dollars. For a well-leveraged bank, this is a safe “carry” trade as long as the value of government securities does not collapse. In fact, a bank would have to be incredibly inept not to make money in these circumstances. Awarding bankers bonuses is tantamount to paying them for not being certified cretins.

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