Rudy
Jordan Hayes wrote:
> [ Re: Legacy Loan Program ]
>
>> The Treasury will match the equity the private hedge
>> funds put in dollar for dollar. And all leveraging is
>> applied will apply to both equity returns proportionately.
>> So whatever upside they make, we'll make.
>
> Well, not exactly. In the example they give (6:1 debt-to-equity, $84
> auction price), each of Treasury and the private investors contributes
> $6 and the PPIF (nee FDIC) issues (and guarantees) debt of the
> remaining $72. If the final value winds up being, say, $90, then PPIF
> gets their $72 back, and each of Treasury and private investor get $9.
>
> This is a 50% return for the private investor (9/6 - 1); it's a 3%
> return for the US government (81/78 - 1). If it winds up being $72,
> the private investor takes a $6 loss; the USG takes a $78 loss. If it
> winds up being $50, the private investor takes a $6 loss ... The USG
> takes a $30 loss. If by some crazy chance it all pays off $100, the
> private investor makes a 133% gain (14/6 -1) and the USG makes about a
> 10% return ...
>
> So the leverage is significant here. All that being said, I still
> don't think it's a terrible plan.
>
>> The private investors will have an incentive to bid as low
>> as possible to make the most amount of money, and we'll make
>> the same.
>
> Sorta. I presume that the *high* bidder will win, but I haven't seen
> details of the auction yet.
>
> /jordan
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-- Rudy Fichtenbaum Professor of Economics Chief Negotiator AAUP-WSU Wright State University Dayton, OH 45435-0001 937-775-3085