Banks

  • Banks earn money by lending the money you deposit to other people. For example, if you deposit $1,000, a Big Bank will pay you 0.5 percent to hold on to that money, and then they’ll turn around and lend it out at 7 percent for a home loan. Assuming that everyone repays the full amount they’re loaned, the bank makes a fourteen-times return on their money for simple arbitrage.-I Will Teach you to be Rich by Sethi.

  • Private Equity funds do the same thing with companies; they flip them, using the leveraged buyout technique. They get a bunch of investors together to pony up some cash- that’s the equity; then they go to the bank and borrow several times that initial amount- that's the leverage; and then they acquire a target company- that's the buyout. They then tweak the company with the aim of making it more profitable, so that they can sell it off in a few years for a profit. Pay back the loan and split the profits.-Man v. Markets by Hirsch.

  • Bankers quickly realized they could make tidy profits by investing the money that their customers had deposited with them. They needed to keep a certain amount of money on hand, in case any of their customers wanted a little cash quickly, but they could lend the rest out for a steady rate of interest.-Man v. Markets by Hirsch.

  • Today most banks work this way, borrowing money from depositors at one rate of interest, and lending the money out again at another, higher rate of interest. And pocketing the difference.-Man v. Markets by Hirsch.

  • 1933: Following the great stock market crash of 1929, the government formed the FDIC which insures accounts, up to a certain amount.-Man v. Markets by Hirsch.