ELI5- how exactly do ‘bankers’ become the richest people around(Jp Morgan, Rockefeller, rothschilds etc.), when they don’t really produce anything.
In: 17100
I know this will get buried but no one is talking about it.
Leverage.
Many of todays modern “bankers” can amass fortunes through the clever use of leverage. The neat thing about leverage? Every home owner is trying to engage in it.
Think about it, you buy your house in a hot market, put down your 20%. For easy math lets say you paid $100,000 for it. and in 5 years the market goes crazy, and you sell it for $200,000. If you paid $800 a month, you’d spend $48000 to own the house. But you’d make $52000 on selling it, so you just turned your $20,000 into $52000+ profit in 5 years, roughly 2.6X return (the actual number is a little different, but I’m keeping it simple)
Now take that same exact method *and go buy a company.*
Lets say you go out and buy a Greeting Card Company. You scratch together a million dollars, and then go to the banks and *borrow 79 million.* You use the company you just acquired as collateral, just like when you buy a house. 3 years later after some good management and improvements you sell the business via ipo for $290 million and after expenses you pocket 66 million. So you make 66x return on your investment.
When debt has a lower cost of capital, than equity you can use that to multiply equity growth.
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