Hello!
I just watched “Buffaloed”- a movie on Hulu… which goes into great detail about debt collectors in America. How they buy debt from banks for pennies on the dollar, and then come after debtors for the full debt making immense profit when the “debt” is repaid.
My question is, why does the bank need to sell the debt?
To whom does the bank owe money too?
I know banks give loans, but where do they get that money?
I know they can make profits off interest, but would that not take YEARSS to do before seeing profits large enough to dish out real cash to borrowers in a newly established bank?
I see how it all just cycles basically but my brain still doesn’t fully comprehend.
Maybe I’m asking for too much, and if I am and nobody has the time to explain- maybe someone could point me into the direction of educational material online because I’m not finding much on Google that doesn’t give me a headache because there is oftentimes a lot of financial jargon.
And before I get roasted, I went to a sh-t public school system deep in the rural south and I am still young, so please excuse me for my very very shallow understanding of all of this.
In: 5
Banks operate because the government gives them special permission to operate. One of the conditions of that permission is that they operate in a safe and sound manner (the government’s interest is that depositors **always** get their money from the bank).
As a result, the government prefers that they not sit on old loans that aren’t paying (the government doesn’t trust the bank’s management to accurately asses the value of these old bad loans) so the government pressures the bank management to sell non-paying loans so the bank can stay in the business of making loans and paying depositors, and also to force the bank to recognize the cost of their bad loans as a cost of operating their business.
As for how banks make money, they are loaning $1 of the bank’s capital and $9 of depositors money (these are loans to the bank), and they earn the spread between the lending and deposit rate. That’s normally enough to account for a nice return on the $1 they had to put up for the loan.
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