He explained that “carry trade” would be a more accurate description of what [JPMorgan Chase and Goldman Sachs are doing to turn a combined profit of $6.8 billion]. 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.
Excerpted from Philip Greenspun’s “How Wall Street is making its billions” at http://blogs.law.harvard.edu/philg/2009/10/17/how-wall-street-is-making-its-billions/
Source: blogs.law.harvard.edu
