Earning interest income in cash with IB

Discussion in 'Retail Brokers' started by Daal, Nov 16, 2008.

  1. Daal


    with the effective fed funds close to zero IB is not paying anything these days. I did something to earn some interest that I want to share. lets say you got $100K, you can buy $20k worth of too big to fail corporate bonds(the 8-9 banks that got tarp money), that will pay 10-12% a year(C and MS to be exact some other names pay much less). there is no liquidity to get out of these bonds, thats why you keep $80k in cash.

    Now what you accomplished is a synthetic yield of 2%-2.4% on your $100K while still preserving liquidity. you can chase yield and buy more of course
  2. So if they do fail to pay on those bonds you won't mind?
  3. MrBean


    is GM too big to fail too?
  4. this has a "nice in theory" sound to it
  5. The risk/reward is ridiculous, IMO. C is leveraged to the hilt: 31/1 most recently. Do you know what assets are on their balance sheet? Lots of dead mortgages and soon-to-die consumer debt, no doubt. Ratings downgrades work their wickedness mighty fast. Treasury and Fed are making up their 'rescue' as they go along. Many scenarios where debt can still get wiped out.

    Now is one of those times when buy and hold just makes sense. Pick just a handful of the best stocks you can find and walk away from the market for 12-18 months. Find some that pay +5% dividends and stop worrying about interest.
  6. Daal


    Lehman became the scapegoat for the liquidity crisis, C or Morgan wont be allowed to go down. recently it became clear that Lehman wasnt 'allowed to fail' bernanke and paulson wouldn't have the guts to do that, they just didnt had the authority to lend to lehman because the company didnt had adequate collateral. with the tarp all these problems are now gone
  7. Seems like a lot of hassle/risk to earn 'just' 2-2.4%. Better off taking periodic cash disbursements from your trading account and parking them in CDs earning 4%.
  8. Daal


    if you can do that then its a better way but you will lose buying power. for some keeping a certain amount of cash with IB is essential
  9. What if they are not too big to fail?

    What if they are too big to save?
  10. Daal


    thats why its called gambling :p

    bernanke said just yesterday in congress that the tarp would be used to prevent large failures. the g7 statement said large failure would not be allowed as well. C is too huge to fail, fre fnm got bailout and they were levered 150-1 with an even bigger exposure
    The government can puke $100b or so to keep it afloat, they got their pre-tax earnings going into capital as well too

    Even if they go bankrupt, LEH paid out 10c to bond holders, after the government injections C should pay something like 20-30c(you are senior to the government as a bond holder and C is bit more solvent)
    at 10%(roughly 6% more than an equivalent treasury) you are getting compensated for the risk you are taking

    or you can buy agency debt at 6%
    #10     Nov 19, 2008