Making Money the Old Fashion Way. Not.

William Cohan writes in the NYT about why the big Wall Street banks are making so much money right now:

Mostly, though, Wall Street is making money by taking advantage of its rock-bottom cost of capital, provided courtesy of the Federal Reserve — now that the big Wall Street firms are all bank holding companies — and then turning around and lending it at much higher rates.

The easiest and most profitable risk-adjusted trade available for the banks is to borrow billions from the Fed — at a cost of around half a percentage point — and then to lend the money back to the U.S. Treasury at yields of around 3 percent, or higher, a moment later. The imbedded profit — of some 2.5 percentage points — is an outright and ongoing gift from American taxpayers to Wall Street.

You’re welcome.

But then comes the obscene part.

By keeping interest rates so stubbornly low — and by remaining committed to doing so — the Fed is crushing the rest of us, especially senior citizens on fixed incomes and those who have rediscovered saving in order to have some peace of mind.

For instance, despite my bank calling it a “premier platinum savings” account, I am getting a measly 0.15 percent interest rate. On my “premier platinum checking” account, the interest rate is 0.01 percent. In an essay in The Wall Street Journal recently, Charles Schwab pointed out that there is more than $7.5 trillion in American household wealth stored in short-term, interest-bearing checking, savings and CD accounts. (The average interest rate for a one-year CD is 1.3 percent.)

Our savings is another source of virtually free capital for banks to use to lend out at much higher rates. These anemic yields are a “potential disaster striking at core American principles of self-reliance, individual responsibility and fairness,” Mr. Schwab observed correctly.

Sure seems to be working for Wall Street, though. At $140 billion in compensation and benefits, the 2009 paychecks on Wall Street were the best ever. While several top executives named in public filings may have tried to minimize their 2009 compensation after so much populist rage, they could only take this charade so far.

The author worked at the heart of the beast for 15 years, before turning to journalism. Maybe to find redemption?