Why Banks Traders Make Record Profits...
As TPM has even point out, banks are now reporting sudden profits based on their trading activities. But don't believe for a minute that these profits come from the skills of the traders or that the traders are, in the end, worth the princely sums they demand in compensation.
One thing that's very hard to do, in money management and trading, is to separate skill from luck or, more appropriately, skill from market conditions in which it's almost impossible to do wrong. "Everyone is a genius in a bull market," the saying goes because in a bull market, most stocks are going up. You either have to be very bad or very unlucky to constantly pick the losers.
The current situation with the banks is far easier than trading stocks in a bull market. All these bank traders have to do is put the banks capital to work profitably. The banks are getting free capital from the government and near-free capital from the Federal Reserve. So the cost of capital is nothing. The trade you do to make money is very simple: buy anything. If you use free money to buy a Treasury bond, bam... you make 3%. Use it to buy a junk bond and, sure, you take some risk that you'll lose money it cost you nothing to obtain and will cost nothing to replace, but if the loan performs (as the vast majority do), you make 15-20%
Now, lets say your banks had to borrow its money at some actujal rate of interest, even 1-5% -- the trade becomes more difficult. Your junk bond stops paying, you lose your money and have to spend 1-5% to get it. Now you're in the hole and need a bigger win to make the money back. That's a hard trade.
What's happening at the banks now is a no-lose trade. There's no skill. Anyone can do it. Take free money, buy anything. Wait.
One thing that's very hard to do, in money management and trading, is to separate skill from luck or, more appropriately, skill from market conditions in which it's almost impossible to do wrong. "Everyone is a genius in a bull market," the saying goes because in a bull market, most stocks are going up. You either have to be very bad or very unlucky to constantly pick the losers.
The current situation with the banks is far easier than trading stocks in a bull market. All these bank traders have to do is put the banks capital to work profitably. The banks are getting free capital from the government and near-free capital from the Federal Reserve. So the cost of capital is nothing. The trade you do to make money is very simple: buy anything. If you use free money to buy a Treasury bond, bam... you make 3%. Use it to buy a junk bond and, sure, you take some risk that you'll lose money it cost you nothing to obtain and will cost nothing to replace, but if the loan performs (as the vast majority do), you make 15-20%
Now, lets say your banks had to borrow its money at some actujal rate of interest, even 1-5% -- the trade becomes more difficult. Your junk bond stops paying, you lose your money and have to spend 1-5% to get it. Now you're in the hole and need a bigger win to make the money back. That's a hard trade.
What's happening at the banks now is a no-lose trade. There's no skill. Anyone can do it. Take free money, buy anything. Wait.
