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Politics : GOPwinger Lies/Distortions/Omissions/Perversions of Truth
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To: geode00 who wrote (157424)3/23/2009 8:17:18 PM
From: SeachRE  Read Replies (1) of 173976
 
I like this math. >>Example #1 - Buying Toxic Assets -- Income Is from Interest Only.

Step 1: Put up $1 billion
Step 2: Receive $5 billion from the Federal Reserve at 2% interest.
Step 3: Buy toxic assets now paying interest rate of 3% (Keep in mind interest could be higher, depending on asset and market)
Step 4: Calculate return: $6 billion x .03 = $180 million or 18%.
Step 5: Less interest to Fed of $5 billion x .02 = $100 million. Net return = $80 million or 8% (Note that the Fed takes most of the risk in this deal, so our 8% looks pretty good. If the interest rate is 5%, then we make $300 million. Subtract our interest payment to the Fed, and we net $200 million, or 20% on our money.)

Example #2 - Return with higher leverage

Step 1: Put up $1 billion
Step 2: Receive $9 billion from the Federal Reserve at 2%
Step 3: Buy toxic assets paying 3%
Step 4: Calculate return: $10 billion x .03 = $300 million
Step 5: Less interest to Fed of $180 million = $120 million/$1 billion = 12% return.
Step 6: Return with guarantee = $120 million/$500 million = 24%.

Example #3 - Return with higher leverage and capital appreciation on toxic assets.

Step 1: Return on interest of 24%.
Step 2: Assume 5% appreciation on assets. $10 billion + $500 million = $10.5 billion in our toxic asset portfolio
Step 3: Sell off assets and pay back the Fed: $10.5 billion - $9 billion = $1.5 billion return.
Step 4: $1.5 appreciation - $1 billion invested = $500 million
Step 5: Split profit with federal government: $250 million return which equals 25% return on a $1 billion investment and 50% on money at risk, assuming the government provides a guarantee.
Step 7: Add 24% return from interest to 25 - 50% return from capital appreciation to get total return of 49 to 74%.

But this assumes that prices for toxic assets are now lower than they should be because there is no financing to buy anything right now. Of course, there may be so much uncertainty out there investors could still end up with a loss.(by Gersh - NBR)<<
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