Banks are going to the Fed and getting money at 2.5% and putting it onto their balance sheets.
What do the big money centers do with the money? They make investments in high-yield instruments. Or, put it into their proprietary trading operations. A bank that takes in $10 billion could make a $1 billion return on that over the course of a year, perhaps more, by "playing the spread" on the dirt cheap cash from Bernanke & Company.
The game the banks are playing at the expense of tax-payers due to inexpensive money from the Fed is outstanding for investors who hold stock in the firms. It could be one of the best money-making opportunities that companies like Citigroup (NYSE:C), JP Morgan (NYSE:JPM), and Bank of America (NYSE:BAC) have had in years. And, it is an opportunity which exists independent from the issues of their write-downs in mortgage-backed paper and LBO debt which they cannot syndicate.
On the face of it, the action by the banks would seem to be fine. But, in many ways it is not. One place that the money from the Fed is not going is to consumer and small business banking customers who need to re-finance mortgages, make capital expenditures, or add pay-roll to growing operations.
The Fed has a great deal of leverage now. It does not have to hand the money to big money center operations without strings attached. It could insist that some of that capital flow to consumer lending. But, that is not what is going on, which is fabulous news for bank stockholders.
Douglas A. McIntyre