How to Get a 225% LTV for <5% Interest

Step 1: Obtain a national bank charter & FDIC insurance

Step 2: Lobby politicians to be deemed a "too-big-to-fail" (TBTF) bank

Step 3: Take in and leverage your trusting customers' deposits

Step 4: Buy long-term debt from the most overleveraged institution on the planet

Step 5: Print money out of thin air, driving inflation substantially higher

Step 6: Watch your assets plummet in value as the Federal Reserve raises rates

Step 7: Participate in the Fed's exclusive Bank Term Funding Program (BTFP)

Oh, wait, did you actually think that YOU could get a 225% LTV?!

You can already sense in my tone that this isn't going to be a lighthearted post. However, with everything I've seen this week about record bank profits, I need to shed light on this huge issue. The banking system is not your friend, and they are benefitting significantly at your expense. However, this isn't just a "gotcha" post about LTVs. Towards the end, we're also going to talk about a strategy you can use on your own to safely replicate what the banks are doing without asking for government permission or taxpayer bailouts.

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Covid-19

Let's go back to Covid-19. After the virus started spreading to the United States, the government shut down the economy, which meant that people quit spending money. People thought it's probably better to save some of their money given all the uncertainty, especially for those who were banned from working. However, the Fed's key metric of economic success is GDP, and GDP is mostly consumption. The government and the Federal Reserve determined that it was imperative that we avoid a prolonged recession at all costs, so the Fed cut interest rates to zero to get people to spend more money.

Meanwhile, for the next year or so, banks kept buying long-term U.S. Treasury bonds at ultra-low rates. For instance, I'm looking at a 30-year 1.25% U.S. Treasury bond that was issued in May of 2020. Primary dealers bid $97.73, making their effective yield about 1.34%. Despite the U.S. government printing trillions of dollars, the banks decided to take customer deposits and lend to the U.S. government for a fixed rate of 1.34% for 30 years! Does this sound like a good use of capital, especially when you consider the government already had about $25 trillion in debt it couldn't pay off, not to mention another $100 trillion in off-balance sheet liabilities?

At the time, pretty much anyone who understood money knew this was an awful investment, because the government was likely to default on its debt, thereby crushing bond prices, or more likely, we'd see inflation destroy the value of the dollar. This would push interest rates higher (as investors demanded more yield to overcome inflation), which would push previously issued bond prices (like the one we mentioned) much lower. And this is exactly what happened.

Banking Crisis

Price inflation (CPI) began to skyrocket starting in mid-2021. The Fed then decided to start raising rates rapidly in 2022. Long-term treasury bond yields spiked to 4.3% by late 2023, which meant the value of those bonds had fallen significantly. Despite being the "safest and most liquid" securities on the planet, those 30-year Treasury bonds that were briefly trading over $100 right after being issued dropped to $49 in late 2022. That's a 50% loss in just over two years!

Now, if the bank wanted to just hold these bonds until maturity, then it's probably no problem, but there was another issue. The combination of higher interest rates and higher consumer prices started hitting Americans. People started spending money (remember because that's what the government wanted). Therefore, they spent or withdrew their money from the banks, but as we just discussed, the banks took a huge portion of their deposits and lent them out to the U.S. government for 30 years!

The only way to get money back to pay depositors was to sell the bonds, now trading at 50c on the dollar, for a huge loss. This is exactly what happened with Silicon Valley Bank. Most of their assets were U.S. Treasury bonds. They didn't risk their capital in risky mortgage backed securities like many banks did in the Financial Crisis. They did what the government told them to do, buying a "high quality" security.

Bank Term Funding Program

In order to keep banks solvent (i.e., prevent banks from selling Treasury bonds at huge losses that would wipe out their equity capital), the Federal Reserve rolled out the Bank Term Funding Program (BTFP). This allowed banks to take their awful investments in Treasury bonds, pledge those assets with the Fed, and borrow against them at FACE VALUE.

As an example, let's say a bank bought $10B of this 30-year Treasury bond at ~$97 when it was issued, and then, the price dropped to ~$43 in late 2023. The bank could pledge this bond (now worth just ~$4.4B) with the Fed and take out a loan of ~$10B to help restore liquidity. That's more than a 225% LTV (loan-to-value)!

However, banks weren't the only owners of U.S. Treasury securities. Over half of all Americans have bond exposure, either directly or indirectly through investments like mutual funds. Did you get to pledge your mutual funds at your purchase price and use the liquidity at a much needed time as inflation (that the banks created) skyrocketed? Nope. Again, it's a big club, and you ain't in it.

Bank Profits

Bank CEOs trying to explain their record 2024 profits to shareholders without mentioning BTFP, their "too-big-to-fail" status, FDIC insurance (taxpayer bailout funds), or their risk-free ~5% checking account (IORB) at the Fed (paid for by the taxpayer) while they pay their depositors effectively nothing on their savings and jack up consumer and business loan rates:

What's incredibly frustrating is that banks are still sitting on hundreds of billions of dollars in unrealized losses, yet because the Fed provided them with exclusive access to liquidity, they've been able to drive enough profits to free up capital and buy back stock, further enriching their shareholders.

Think about it. If the largest four banks just made over $100B in profits in 2024, where are those profits coming from? You are likely on the other side of that trade, loaning your money to them for nothing, while borrowing at rates approaching or exceeding double digit rates.

Infinite Banking

If you're like us, and you want no part of this system, then maybe it's time to create your own privatized banking system. Infinite Banking is not a "bank," and there are no "deposits" or "savings." However, it's a process that allows you to closely mimic the successful strategies of the largest banks without stealing from your fellow taxpayers.

• Create your own privatized banking system without government approval

• Buy collateral with zero contractual downside

• Generate guaranteed growth on your capital

• Borrow against your capital at very attractive rates

• Have full control over your loan repayment schedule

• Secure LTVs of ~95%+

Generally, Americans either finance purchases or investments through third-party lenders, or they pay cash. Effectively, you're either paying interest, or you're not earning interest. With Infinite Banking, we're copying a strategy from the wealthy and the biggest banks by building an asset first, and then borrowing against it. We maintain control of our capital, keeping it compounding over time, while we can safely borrow against it to buy the things we want and need.

If you're interested, book a call here, and don't forget to subscribe below.

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