I kind of paraphrased a line from the Dire Straits song ‘money for nothing’ and replaced ‘chicks’ with ‘bips’. Bips are ‘Basis Points’ and it normally refers to hundredths of a percent when you are talking about rates, so 33 bips is 1/3 of 1% or 0.33. Anyways, this post is about Stoozing or getting money for nothing. Its something that has become more and more popular as of late and it’s also a loophole in the financial system that is being widely abused it even has its own website.

Stoozing is where you get a credit card on 0% and max out the money you can take on it at 0%. Normally cash withdrawals have a separate interest rate but if you know a person who owns a shop you can run it once for your total credit limit and have them give you the money (illegal – I’m just saying how it seems to work in practice). You then place this money in the highest paying deposit account you can find and then keep the interest and pay back the money before the 0% rate expires.

If you do this you are stoozing and are a ‘stoozer’. The name came from a website in the UK where it was being discussed on a forum and one user who’s handle was Stooz was apparently very prolific at this practice. Of course credit card companies have realised the basic method of writing yourself a credit card cheque so that’s where collusion has started to come into play. If you’d like to see how much you can earn there is even a Stoozing calculator!

In a way it reminds me of an old scam where shops would trade on the edge, or on credit. Basically you open a shop and sell Widgets for a really good price (at cost or just below) and pay your suppliers in cash, you get credit with them as rapidly as possible and then start to make an order from supplier one, sell the Widgets and make an order with supplier two for Widgets, paying in cash. You build up a credit line paying A with cash from sales of B’s stock, then one day you make a massive order from every supplier, flog everything at 50% off and skip town.

Why the similarity? Well you are using the asset of Supplier One (in this case the Credit Card company) and then putting it with Supplier Two (the bank) and then paying off the card and closing the account so everybody other than you is losing out, it’s legal but not ethical. If you feel that banks are evil and need to be hit up for whatever you can get from them then the likelihood is that this article is not telling you anything you don’t already know.

You can Stooz almost anything, if you could make an overpayment on a property (thus saving mortgage interest – this would only work with a mortgage that has an offset facility) and put the debt on a 0% card, you are then pulling a stooz on your mortgage. In this case you are offsetting costs in interest payments as opposed to stoozing for a profit but money saved is the same as money spent so it still qualifies.

Many cards require a minimum servicing payment, if you are an advanced stoozer you get another 0% card and pay for it with that, or you just let the savings balace dwindle a bit to meet the payments. Sometimes the market actually encourages debt, for instance Egg cancelled cards on thousands of its UK clients who were actually paying on time! Apparently offering credit where the person carries no balance is not in their interest.

Stoozing has some unusually similar phraseology to Con artistry, there are short cons and big cons in stoozing there are fast and slow stooz’s. A fast stooz is described above, a slow one is where you use your card to make all purchases during the 0% rate, then you put the equivalent into a savings account each month, at the end of the 0% rate you pay it off and keep the interest difference that was earned on the deposit account. To do it effectively requires discipline but it certainly seems to be prolific.

Wanna hear something weird? Big business are the original stoozers but when done in an official capacity its called ‘Carry Trade’, hedge-funds did it all the time by buying Yen (Japans interest rate was 0% for a very long time) then invest in high yielding bonds elsewhere then when the Yen goes through a cycle of weakness – which it isn’t on at the moment but it was for a long time – you repay the loan with stronger currency keeping the difference plus the interest.

Currency traders also do things like this all the time, so maybe the negative connotations attached to stoozing aren’t so much ‘you guys are a bad bunch’ but more ‘stay off of our patch, we designed this trick!’ by traders? In any case it was long predicted that rate increases would see the Carry Trade unwind and the dollars status as a reserve currency would be under threat, this in fact has come to pass and the article above states it two years in advance. Carry trade could also likely be built into the structured finance market that is currently killing every investor around the world. How? Well, you take a structured debt book, borrow Yen to get it then sell it as the other currency strengthens and the interest being paid by the book in the meantime is pure profit, once the currency you are buying in doesn’t fall too far you make money. It likely was making a messy situation much more ugly, although this aspect of the credit crunch has not really been covered in the papers, in fact I just hypothesised the whole idea.

That was until I did some more digging, although it doesn’t abound in the news I did find articles stating that traders were in fact doing this in the past, 2005-2007 and this is one of the things that helped to cause the sub-prime crisis, using carry trade to buy leveraged derivatives means that the predicted risk in the carry trade unwind also added fuel to the general leverage implosion. So perhaps the USA, in having a low interest rate (and Japans has risen) is saving itself from being used as an Interest Milk-Cow. Worryingly for the Euro, we may now hold that mantle.

“The yen’s 9.1 percent rally against the dollar this year will extend as tumbling stocks lead traders to exit so-called carry-trade purchases of higher-yielding securities funded with loans from Japan, according to Morgan Stanley. The yen last traded at 97 per dollar in April 1995.” (taken from Morgan Stanley quote) So the strengthening Yen is a factor in the unwinding of leverage, and as mentioned in previous posts, it was leverage that has caused the current market mess. The fact that ‘carry trade’ is something only understood by a small percentage of people, even within the financial community, is another worrying element of how complex financial instruments are sometimes a danger to the market. CDO’s (collateralized debt obligations) were only mentioned in the press five times before 2005 now they are talked about on a daily basis. CDO’s and Carry Trade and many other complex instruments like it are actually important to keep a healthy and optimistic market going, the alternative of extreme regulation would actually do more to harm the markets than to keep them energized, there will be booms there will be busts, that’s a fact.

The solution is for financial institutions to get it right, so perhaps in seeing how the deal with something as simple as stoozing we can get an idea of how they will deal with something as complex as an SIV.