Eric Fry, in teh Daily Reckoning, provides an interesting insight into the profitability of today's banking sector:
When it converted into a bank holding company back in 2008, Goldman became eligible to borrow
cheap money from the Fed's discount window. Morgan Stanley did the same thing. As a result, Goldman,
Morgan Stanley et al. may borrow billions of dollars from the Federal Reserve and use the
proceeds to purchase higher-yielding government securities of longer duration.
In other words, Goldman may borrow from the government at 0.75%, then loan the money back to the
government at 3% or 4%. All in a day's "trading." Not surprisingly, all the major financial
firms have been reporting blockbuster profits. Yesterday, for example, Morgan Stanley
wowed the Street by nearly doubling its expected earnings result. Bond trading provided most of t
he juice, as Morgan's fixed-income revenue more than doubled from the prior year's first quarter.
Prior to Morgan Stanley's results, Bank of America, JP Morgan Chase and, yes, Goldman Sachs, h
ad all reported record quarterly revenue from fixed-income trading. On the surface,
these monster profits would seem like good news. But this silver cloud contains a very dark
lining: without the Fed's low-cost financing, fixed-income profits will be much harder to come by.
