ELI5- how exactly do ‘bankers’ become the richest people around(Jp Morgan, Rockefeller, rothschilds etc.), when they don’t really produce anything.
In: 17100
First two corrections:
1. Rockefeller was not a banker. He made his fortune in oil.
2. When JP Morgan died it was discovered he was not uber rich like the peers of his age. He was just good at parleying his banking connections and assets to make it look like he was uber rich. He was flexing so he could be the banker for the uber rich but he himself was the next tier (or two tiers?) down in wealth.
The Rothschilds are the only people I know who got uber wealthy banking from a long time ago that is still around. I got to give you some some set up. During the Napoleonic Wars nations where borrowing money like mad (to give you perspective, the UK only finished paying off that war debt in the last 15 years on a war that happened 100 years before WW2). They even gave out IOUs to soliders in lieu of pay. Basically this war debt went up and down in value based on how war the was going. The Rothschilds were already rich at the time of the Napoleonic Wars and were doing well from financing the wars of various nations. What shot them to epic wealth is they had bought a lot of government debt during the war when people thought the Britain might loose, and sold it later after the war when deeply slashed government spending was maximizing need for safe debt to invest in.
Now another correction. A lot of these billionaire “bankers” you hear about now a days are not bankers. They work outside the banking system in the more general financial system of which the banking system is just part of the whole. From this point on I will call them “financiers”
**How financiers become overnight billionaires is by “arbitrage”. Arbitrage in finance is when you find a way to get an asset or liability treated as though it is a better asset or liability by either investors or the government.**
Let me give you an example of a common form arbitrage. Pension funds are funds that people have invested in for retirement. The thing about pension funds is that they are often under strict rules from their investors on what they can invest in. People don’t want their money for retirement to disappear. They like safe investments. But safe investments pay garbage and managers of the pension aren’t going to get fat bonuses at the end of the year if they stick to what is normally available. They many not even keep the pension fund liquid.
To the “rescue” come the financiers. They find ways to turn assets the pension fund is not allowed to own (and thus pay more interest) and turn them into assets the pension fund can buy. They do this buy bundling risky assets together, buying some default insurance, giving then assets to a shell company, and then selling bonds that have first right to cash flow to all those risky assets. The end result is something that pays like half a percent to 2 percent more than the traditional low risk assets.
To grant perspective, the California State Teachers’ Retirement System is worth $254.7 billion. If just that pension fund invests just $100 billion in your new asset you are looking at a commission of like $500 million. And the pension fund is glad to play your commission because this will result in like $1 billion more in earnings every year. Additionally you will still be managing this shell company for the rest of its existence and will be collect an annual fee to manage those assets every year of tens of millions a year. And this shell company only takes like $200k to run a year. Maybe some offices, a secretary, and lawyer on retainer.
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