But that's always the case... isn't it? I mean that's the current state of affairs in our economy and Big Business: Risk is minimized and losses are hidden. How do these companies end up going bankrupt? It's pure madness. In the credit card business you're talking about a profit margin of 5-6% of balances, with the risk premium amounting to 1-2% of that... meaning that even in the worst case scenario (5% profit margin and 2% risk) you can have almost 3 defaulting accounts per every active account and still break even (sort of). How in the fucking world do these massive conglomerates manage to amass such gargantuan losses??
Makes no sense.
Because of the way they leverage their assets. When you get a credit card from a bank, your promise to pay (promissory note/signed loan application) is an asset on their balance sheet. This asset is then leveraged to provide collateral for the purchase of other securities and contracts on margin. When you default on a credit card or loan, you remove the real asset at the base of a reverse pyramid of collateral.
So when you have a 50,000 dollar promissory note that has been leveraged 15:1 and you no longer pay, the bank has just lost 750,000 in collateral. It does not take that many defaults to destroy the balance sheet of a bank.
Banks are not making money by borrowing at 2% (your savings account) and then loaning the same money out at 6% for a mortgage loan. They are borrowing at 2% and then leveraging that many many times on the open market.
