IB Net Payout Yields Model

The Money Making Bailout

It seems very ironic to me that while most of the media and politicians keep harping about the size and scope of the 'Bailout' proposal, alot of well respected investment pros continue to harp on how this deal would potentially be profitable to taxpayers. So while certain politicians want to protect the taxpayer, they are actually just pandering to the uninformed or at least thats what their doing according to these people.

Andy Kessler wrote the follow in the WSJ Mother of all Trades

My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

You can slice the numbers a lot of different ways. My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment.

Warren Buffett on CNBC Explains GS Investment

If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

Bill Gross in the Washington Post How Main Steet Will Profit

Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.

The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic

So why would taxpayers turn down this trade?


Mark Holder said…
Another comment on the potential profits...With investors snapping up Treasurys yielding just 3-4%, a $700B bailout could potentially become the world's biggest carry trade, John M. Berry says. "It might even help reduce deficits in coming years."


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