Raise $1 billion of equity.
Borrow $9 billion from the Fed at an annual cost of 0.25%.
Buy $10 billion of 30-year Treasuries paying 4.45%
My goodness, he just made everything so clear. And, yes, that's all true. When people rant about giving Goldman Sachs access to the discount window, here's what we mean: The Federal Reserve loans money to banks like Goldman Sachs. The interest rate they loan the money at is called the discount window.
The United States Department of the Treasury sells U.S. Treasuries. Purchasing a Treasury is really just lending the government money. The Treasury Department pays a yield - that's really just a way of saying "interest rate."
Thus, the Federal Reserve loans money to Goldman Sachs at .25% interest. Goldman can then make a risk-free investment in Treasuries, earning 4.45% interest. If we used the example of $1 billion, then Goldman Sachs would earn $400 million in interest. How do you go from $1 billion in actual cash to $400 million in annual returns?
Due to fractional reserve banking, the Federal Reserve will loan you tens times as much money as you have in capital. Incredible, right? Imagine earning $100,000 a year, but borrowing $1,000,0000 in cash from Bank of America. What are the odds of that loan occurring? Yet where banks are concerned, a 10-to-1 debt to equity ratio is child's play. Thus, Goldman Sachs' $1 billion becomes $10 billion, which becomes $400 million in easy money. Every year.
Whoever said that there is no such thing as a free lunch surely didn't know anything about Wall Street. Their lunch is free to them, because they've stolen your lunch money. God bless America.
