Making money from Treasury Bonds with Insider Information

 

Making money from Treasury Bonds with Insider Information

by tonytran2015 (Melbourne, Australia).

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(Blog No.86).

#Treasury Bonds, #Quantitative Easing, #QE,

Making money from Treasury Bonds with Insider Information.

An insider can make outrageous amount of profit with his insider knowledge, at the expense of the tax payers. This blog gives the details description for such a process of transferring public money into private pockets.

1. Assumptions.

1. The going interest rate is 3% in year 2000.

2. The Federal Reserve Banks (FED) will rescue the economy by lowering interest rate on the “signals”.

3. The insider controls banks.

4. Insider has 200M.

2. Execution of plan.

1. Insider borrows 1000M from banks on a year to year basis, renewable up to 2005.

2. Insider buys 5 years Treasury Bonds at the price of 1000M*(1-5*3%)= 850M to be matured in 2005 at value of 1000M

3. Insider pays 4% interest to banks at the end of each year.

4. Insider puts his account of 200M (earning interest) and 1000M Treasury Bonds (to mature in 2005) as securities to banks.

3. Banks have secured loans.

The worse case for the bank is to keep the Treasury Bond until 2005 to obtain 1000M from the Treasury. Interest accrued to that date would be 1000M*5years*4%per-annum = 200M that can be deducted from Insider’s account of 200M.

The Insider still has some earned interest for his decreasing account of 200M left as security for his loan of 1000M.

The loan will be approved by banks as it is fully secured and interest payment is guaranteed by the account of 200M left as security.

4. Insider looks silly.

Without the loan, Insider would collect from his bank account an interest payment of (say at 2%):

200M*5years*2%per-annum = 20M.

With the loan, Insider has a decreasing account starting at 200M ending at almost zero. So the total interest would be

200M*5years*2%per-annum*0.5 = 10M.

Besides that reduction of 10M in interest earned, he earns only 150M from Treasury Bonds but has to pay 200M in interest to the bank. So he would lose 40M after 5 years with that loan.

The insider does indeed look silly with his complicated financial plan.

5. Insider wins big amounts.

The banks with connection to the Insider now behave recklessly and are threatened with bankruptcy ! This worries the Federal Government.

The government decides to bring interest rates down to 0.1% and buy back all affected Treasury Bonds (Quantitative Easing) (to help the reckless banks and indirectly the Insider). Suppose that this happened in the year 2001.

1000M of Treasury Bonds to mature in 2005 is now bought back by the FED at

1000M*(1-0.1%per-annum*4years) = 1000M*(1-0.004) = 996M.

Insider now resell his 1000M Treasury Bonds maturing in 2005 to the FED for 996M and pays off his bank loan.

His out-goings are

850M buying Treasury Bonds in 2000.

40M interest paid to banks.

His incomes are

996M selling Treasury Bonds in 2001

4M Interest earned by his account of 200M left as security (assuming an interest rate of 2% paid to him)

So his net income after one year is

996M + 4M – (850M + 40M) = 110M,

that is an income of 110M on a capital of 200M after one year!

6. How can he earn that much.

The insider now wins because of the Quantitative Easing policy of the Federal Reserve Banks. He has bought Treasury Bonds at market price, hold them for one year then resold them at Government supported price.

His insider knowledge is that the FED will buy back Treasury Bonds at higher than market price. If there was no such thing he would certainly look silly with his plan.

7. Who has won? Who has lost?

The Insider won, the banks made profits on the secured loans to him while the tax payers have lost.

The figure of 200M dollars is only an example figure, in reality the figure is much higher, it may involve trillions of dollars. The year figure was started at 2000 for ease of argument but it can be any year.

That is why any relationship between a powerful financial institution and a government should be looked at with suspicion.

References

[1]. Mish Mishtalk, Margin debts hit record high-coinciding with extreme-consumer confidence, mishtalk.com, http://mishtalk.com/2017/03/30/margin-debt-hits-record-high-coinciding-with-extreme-consumer-confidence-analysts-say-dont-worry/, 30 March 2017.

[2]. stock-markets-sit-blithely-on-a-powerful-time-bomb, sentinel blog, http://sentinelblog.com/2017/04/22/stock-markets-sit-blithely-on-a-powerful-time-bomb/, accessed 22 April 2017.

[3]. https://lplresearch.com/2017/04/07/margin-debt-worry-or-overblown-anxiety/

[4]. Yashaswini Swamynathan, Reuters, The S&P 500 is worth $20 trillion for the first time, business insider, http://www.businessinsider.com/sp-500-market-cap-crosses-20-trillion-for-the-first-time-2017-2, Feb 13, 2017.

[5]. The last time this happened the market crashed, sentinelblog.com, https://sentinelblog.com/2017/04/22/the-last-time-this-happened-the-market-crashed/

[6]. http://wallstreetonparade.com/2016/08/bailed-out-citigroup-is-going-full-throttle-into-derivatives-that-blew-up-aig/

[7]. https://bonnerandpartners.com/u-s-stocks-are-disastrously-overvalued/

[8]. Michael Pento, curve-inversion-and-chaos-to-begin-by-december-2017, Re-Blogged https://us-issues.com/2017/06/10/curve-inversion-and-chaos-to-begin-by-december-2017/
By Michael Pento – Re-Blogged From PentoPort

Added after 2017 Feb 10:

http://riggedgame.blog/2018/02/11/the-game-truly-is-rigged-admits-economist-magazine/

Central Banks: The Great Experiment Has Failed

https://riggedgame.blog/2018/05/15/central-banks-the-great-experiment-has-failed/

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