HD Video Sperandeo: US Depositors Are Taxed At 100%
According to Victor Sperandeo, US Banks can borrow from the Fed below 0.25% and buy 2-year Treasury Notes yielding 0.81% without any reserve requirement. They can lever this investment 100 to 1 (maybe higher) if they want and it’s a riskless trade. If rates go higher, the banks just hold the Notes until they mature.
They also don’t need an underwriting department for this, so they can lay off personnel. Since this is so lucrative, and riskless, and can be done with lower overhead, you can see why banks will be reluctant to lend money to small business owners or anyone without an 850 Fico score.
Depositors are the ones fueling this trade by leaving their funds on deposit at the banks. But they’re effectively taxed at a rate of 100% since they are not getting any yield on their money.
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What do they mean, they can lever it at 100 to 1? Does this mean that the Fed is letting them borrow 100 times the amount of deposits that they actually have?
Treasury securities (Bills, Notes, and Bonds) have collateral value and therefore can be purchased on margin under what is known as “Regulation T”, so the banks don’t have to borrow at all to make purchases.
The amount of Initial margin needed varies between 1 and 4% of the face amount depending on maturity. Depositor funds can be used to post initial margin.
Theoretically speaking, treasuries are considered the safest investment in the world because the US has never defaulted on any principal or interest payment. They have an implied AAA credit rating.
This is all theory, of course, their behavior will predict their future.
Incredible. We’re able to face hyperinflation at some point in the future without even getting any of the benefits of a crack-up boom!
They’ve been able to print money, give it to banks, and have the banks not loan that money. Something tells me this is going to end in disaster.
they’re just setting up small banks to fail. they’re gonna sucker banks in with a “riskless” trade then jack up the rate to 10%.
I should have also noted that there is no Reserve Requirement for the banks to make such purchases. They can use all the depositor funds they want.
The laws are already in place going back to the Securities Exchange Act of 1934. Regulation T is governed by the Federal Reserve and they control the levels of margin, ie, the extension of credit in the brokerage industry.
I think you’re missing an important point. Banks can borrow in the fed funds market for 14 bp right now and put that money to work out on the curve at a higher rate but this trade is not risk free. The fed funds market is for overnight loans. If the fed were to move the FF rate higher by draining reserves via reverse repos, sale of securities, raising the rate it pays on reserves etc. it would raise the cost of funding for the trade while pushing down the price of the treasury…at some point the holder of treasuries would be forced to borrow at higher rates than they are receiving from the coupon or be forced to sell the security at a loss(as yields moved up).
Yesterdays 4wk bill auction went off at 8.1 bp, so even a trade that still has some interest rate risk is not offering a profit (8.1 – 14 = -5.9 bp).
Of course, this all depends what the fed will do…If they keep the FF low banks can squeeze money out of the curve, assuming they are confident the fed will stay uber-accomodative. If banks pile into this trade and short rates climb there could be big trouble.
I think Mr. Sperandeo is missing the point of demand deposits here: the value of a checking account is not the interest return on your balance–everyone knows that’s practically zero. The value is the ability to write checks, use the debit/credit card payment system, access your funds instantly through the ATM network, etc. If I were realistically being “taxed” 100%, of course I would not keep the vast bulk of my cash holdings on deposit.
Great points everyone and thank you for commenting…
I agree it is convenient to work for the bank by becoming your own personal teller and have access to your funds through several means 24/7. But that trade-off of convenience, and what it’s worth to you, goes under your personal set of “tastes and preferences.”
In Sperandeo’s case, “demand deposits” would mean checking accounts only. Some folks refer to demand deposits as both checking and savings.
In the video, Sperandeo mentions “savers” specifically, meaning “savings accounts.”
No trade is risk free, especially considering opportunity cost. In the video, Sperandeo states that the banks are borrowing to purchase 2-year Notes, not 4-week Bills.
If rates shoot up, they can hold the Notes until they mature, or sell them for less gain that they would have before the FF rate hike. Such a hike does not equate to an automatic loss.
On the contrary, good Mr. Watts (may it soon be Dr.), I think Sperandeo is not missing the point at all. While it is true that the checking account industry provides a great number of benefits which make it still worthwhile to hold accounts at zero percent, the artificially low interest rates forced upon us by governmental manipulation do take away from the saver a great deal of interest they otherwise could have. You realistically are being “taxed” 100%, and that is why, I am guessing, you would not think of investing a really significant amount of money in banks, which I suspect you would do if interest rates were higher. And even outside of demand deposits, CD’s yield horrifically low rates (I link something like 0.74% for a one-year CD right now, which, depending, may not even keep up with inflation), so it is not only demand deposits that are being drained of their potential.
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