Your name is Jim, born and raised in America, went to Stanford University for business. You have a good heart and an entrepreneurial spirit. You recently graduated and it’s 2012. You notice that average folk are financially illiterate beyond comprehension. This is an opportunity for you to create a financial app to help regular people save and invest.
Fast forward to March 2019 and your app has exploded. Office in New York City, 1 billion USD under management with an average account size of $6,200. Your responsible investing team has even protected profits during every market dip.
Meanwhile, across the street, a meeting is going on at a big bank. Chad shouts “I want 57 billion”. The room goes silent. Everyone in the boardroom laughs, including Chad. Chad then snorts a line of coke and gets serious. He says “give me 285 billion, fill or kill”. The deal gets done immediately.
Chad just bought swaps betting that Jim’s clients return 30% over the next three years. Big players currently have over 4 trillion USD in derivatives betting on Jim’s investing performance. Yes, that is right. 4 trillion betting on a 1 billion fund.
It’s February 2020 and Corona Virus hits. Jamie Dimon has a meeting with JPow. Jamie Dimon is sweating, he is telling JPow that banks are starting to offload their swaps. Even though Jim is a responsible investor, no one thinks he can make a return during a pandemic. JPow shoves a hooker off his lap and winks at Jamie Dimon. He tells him everything is ok. He tells him to sell the swaps and that the Fed will provide a market for them.
That night JPow takes too much Adderall. He accidentally printed an extra 500 billion. He knows that he can’t give it to small business wage slaves like Tim’s clients. That will cause inflation. Instead he phones Dimon and tells him to get Wells Fargo to price the swaps. Dimon is not dumb and smiles. “I love you Daddy” says Dimon and they both hang up. THE END.
Wells Fargo ends up pricing the assets to sell to the Fed at a massive premium. The Fed does not care because it is risk free for them. The bankers who owned the swaps should have taken a massive loss in theory, yet they all walked away with fat pockets.
Jim, being a responsible investor envisioned the massive stock market decline before it happened. He went 80% cash, 10% short airlines, and 10% short SPY. His fund earned a small return, yet he saw net outflows of 255 million. His clients are average folk and can barely feed their kids after becoming unemployed. They had to pull out savings to cover the cost of food.