Warning: the author acknowledges that the model used in this post is seriously flawed.
Finally, Mr. Geithner released Details on Public Private Partnership Investment Program. Read it, especially the Legacy Loan Program with a higher leverage, because it is a good deal.
The program allow you to put down $1 equity, together with matching $1 from Treasury and $6 FDIC guaranteed financing.
Expected Return
Suppose there’s a loan portfolio of a should-be price of $1000 (not market price, but fair price), you win the bidding at $800, or 80% at discount. You put down $100, and if the net interest rate is 2%, your rate of return would be …. 15%.
Notice that the above model is, as a legacy of this blog, oversimplified.
Here’s the sensitivity analysis by net interest rate and purchase on discount.
Risks
This is selling distresses lemon. The return depends on the auction result, but remember that the selling banks are supposed to be in distress, so is the market price. On the other hand, however,
“To start the process, banks will decide which assets – usually a pool of loans – they would like to sell.”
Dah!
It also depends on how you foresee the economy and the trend of interest rate. I have no idea on both of them.
The upside is the $500 billion to $1 trillion rearrangement inject fresh cash (as well as write-downs and moral hazard) into the banks. Let’s hope they will prudently lend them out.
Conclusions
To save the economy, the Fed turned into the biggest hedge fund, the Treasury the biggest LBO fund, and FDIC is writing a bunch of CDSs. Who says the President is a socialist?
This is Geithner’s Deal or No Deal plan, Geithner’s eBay plan, Geithner’s weekend poker game. Care to join him?
Please respond directly (rich guys only). Evil spirits!
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