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Pimco's Bill Gross published a more sober analysis yesterday that indicated a 7-8% profit -- after borrowing at the T Bill rate. So that would be a profit of roughly $50 billion if the full $700 billion is used. Of course it all depends on what you are paying and no one knows exactly what will happen there or what kind of rates will be necessary to get buyers.
Here is an interesting point though. If the government pays at the close to maturity price
at the beginning then that becomes the market value. Then banks can carry the various financial products at that value and that fixes the balance sheet right up. Example, Washington Mutual might be carrying some CDOs on the books at 20% of the value at maturity assuming some default rate. Since there is no liquidity they are carrying them at some fire-sale price. Whatever price some firm going out of business last sold them at, for example, So the government comes in and buys a similar financial product at say 70% instead of 20%. All of a sudden WaMu writes UP the value of those investments, the asset side of the ledger suddenly improves and VOILA! no need to sell anything.
I can't believe all the articles, blogs, news stories, talk show hosts and so on that don't get the fact that the government is not giving money to anyone but instead purchasing assets with some value. Even some on the Hill don't see to get that.
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