[Marxism] Fictitious capital

Louis Proyect lnp3 at panix.com
Wed Oct 21 10:38:06 MDT 2009

How Wall Street is making its billions

Wall Street banks have had profitable quarters. JPMorgan Chase 
reported $3.6 billion in profit (more than $1 billion per month). 
Goldman Sachs was only slightly behind, at $3.2 billion. These 
profits supposedly came from “trading.” I asked a friend who has 
worked in the money business how this was possible. “For someone 
to make money trading, there has to be someone on the other side 
of every trade who is losing money. Where does each bank find 
someone who can lose $1 billion every month?”

He explained that “carry trade” would be a more accurate 
description of what they’re doing. Because of the Collapse of 2008 
financial reforms, the big investment banks are able to borrow 
money from the U.S. government at 0 percent interest. Then they 
can turn around and buy short-term bonds that pay 2 or 3 percent 
annual interest. Now they’re making 2 percent on whatever they 
borrowed. They can use leverage to increase this number, by 
pledging some of the bonds that they’ve already bought as 
collateral on additional bonds.

I asked if they were taking any risk in order to earn this return. 
“If interest rates went up to 20 percent, even though the bonds 
are short-term, the price of the bond could fall enough to make 
the trade a money-loser.” (Though since the banks are too big to 
fail, they would simply be bailed out with additional taxpayer funds.)

What kind of bonds are they buying? Are they investing the money 
in American business? “No, they are mostly buying Treasuries.” So 
the money is just being shuffled from one Federal bank account to 
another, with each Wall Street bank skimming off $1 billion per 
month for itself? “Pretty much.”

[A more old-fashioned way of making supranormal returns is insider 
trading, which was perfectly legal until the Crash of 1929 
(history). The New York Times ran a story yesterday on Raj 
Rajaratnam, a hedge fund manager who invested heavily in inside 
information. Rolling Stone published "Wall Street's Naked Swindle" 
on October 14. The story is much more sensational and entertaining 
than anything from the Times. It covers a guy who spent $1.7 
million on out-of-the-money put options on Bear Stearns on March 
11, 2008. The options would become worthless on March 20, just 9 
days later, unless Bear Stearns basically went bust. Bear Stearns 
collapsed the next day and the guy made a $270 million profit. He 
has never been identified by the SEC.]

More information about the Marxism mailing list