Who needs money laundering?
While researching my new life as a perpetual traveller, I started looking into owning my own bank. Believe it or not this can be down with less than $10,000 including the software for managing accounts, wire transfers ect...
Now if I go with the cheap option, The bank will be targeted by the US for possible money laundering and rightly so. The countries selling these things are selling them to crooks. But if I'm not actually doing that, it could be valuable investment. There are other more respectable options to be had in other countries that I've found for about $150,000.
Here's what makes this a good investment. The ability to create money! Not at the reserve levels that US banks do it, but even if I have a reserve rate of 50%, I can still make money hand over fist. The reason is kind of like arbitrage. I simply charge myself 1% over my bank's borrowing rate for the loan. (Banks that don't make money get investigated and closed) I invest both my reserves and my loan into something conservative that will beat that interest rate. If I have 50% reserves and the loan costs are as much as 4% I can make money if the total investment of my reserves and proceeds are only 3%. If you don't believe me, do the math! Now, even though I only make about 1% in that scenario, there are 7 very huge things in my favor to make this a great investment.
1) The ability to modify the terms of my loan. After all, I know me and I think that I'm a good guy. I can extend the time of the loan to lower my loan payments at any time.
2) Inflation! As a borrower, it's much better for me to pay back a buck that is currently only worth 75 cents.
3) Expanding reserves! This is where the real money is made! It pays for me to pay each loan off as quick as I can. When I do that, my reserves more than double and I can loan myself more than twice as much.
4) I can expand this to as many other investors that I want, and make an easy 1% off of their deposits as well. I treat them as most banks treat secured credit card holders. They can only borrow up to the amount that they have on deposit. They can't withdraw the deposit until the loan is paid and both the deposit and loan proceeds will be invested by the bank in the same type of investments. Of course, if those investments sour, I can modify them the same as I do my own loans. Man I'm a friendly bank!
5) Since I have 100% reserves for all those other guys, I have excess reserves to loan myself. I don't think it would be a good idea to borrow against much of those excess reserves, but I think I could borrow 10% - 20% of those and still avoid risk.
6) Diversification is much easier when you control both sides of the economic situation. At this point I'm acting kind of like a market maker and I can allow my depositors to invest in slightly riskier investments. If one guy is bullish on oil, I can offset his investment with another guy that's bearish. The winner of that bet will pay off his loan quicker and get to try something new. The loser will get his loan adjusted to last longer, but adjusted to something that he is able to pay. I have complete control over what both guys invest in and the proceeds of both investments still go to the bank. They trade some of their investment freedom for a margin account from a bank that is still very friendly to them when they lose.
7) Once the bank gets big enough, I can take myself out of the equation entirely. As long as I have an equal weight between winners and losers, my bank should prosper. Once I take myself out of the equation, I have 100% reserves, so I can easily use those reserves to hedge risks. Being a friendly bank seems to me to be a lot more profitable in the long run than being a normal US bank.
As always, if you see a flaw in my logic, please post.