Banking 666: Advanced Analysis

December 17, 2009

by Mario Rizzo

This is your final exam.

Question: Suppose you are a profit-maximizing bank, which course of action do you take: (a) Lend $1 million to Herman Dilbert’s Chicken Finger Brasserie or (b) Buy $1 million in 10 year 3.5% Treasuries?

Answer under the fold.

If you answered (b) then your job at XYZ Bank is safe. If you answered (a) you have a job as an economic (political?) advisor in the Obama Administration.

For a more serious treatment of these issues, see Jerry O’Driscoll’s analysis in today’s Wall Street Journal.

4 Responses to “Banking 666: Advanced Analysis”

  1. Roger Koppl Says:

    The answer is (c) you spend a $1 million on a lobbying firm to curry political favor in Washington.

  2. Pete Canning Says:

    Putting money into 10 year treasuries seems pretty risky to me. Did we forget people lose money in treasuries? This year, those who answered “a” would have lost a fair bit, and likely stand to lose more between now and maturity. By that time, depositors very well might want more than 3.5% for the pleasure of banking with XYZ.

  3. chidemkurdas Says:

    How about (d) You borrow cheap short term and buy Fannie Mae bonds–backed by the same public that’s providing you with the cheap loan. Not bad yield, no riskier than Treasuries.


  4. Chidem makes a good point.

    Pete’s point is why the Fed keeps promising not to raise rates for an extended period. It is hoping to keep the game going.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: