## Very Large Financial Operations

The Paulson plan as a carry trade play. John Berry:

Bloomberg.com: Opinion: There might be a gem in the Treasury's plan to buy $700 billion of dubious mortgage-related assets. Call it the biggest carry trade in history. It might just put as much as$60 billion a year in the government's coffers.... The government will get the $700 billion by selling a range of Treasury securities to the public with yields of 3 percent to 4 percent. With investors around the world clamoring to buy risk-free Treasuries, the market should be able to absorb the jump in supply without a significant increase in yields. Contrast that with likely yields on the troubled assets for which there currently is no market. No one can be sure how big a haircut there will be on the assets Treasury buys, though if it's 50 percent or more, their yields should be 10 percent or higher. That is, the government will be borrowing at 3 percent to 4 percent to buy assets yielding 10 percent or even 12 percent. Conservatively, that spread on an investment of$700 billion should generate income of $40 billion to$60 billion annually. Obviously, there's no way to be sure of the income from this carry trade.... We can be certain that the spread is going to be very wide.... The income from the carry trade will make a big difference on the impact of the bailout on the federal budget....

Do the arithmetic. Suppose the government buys $700 billion worth of assets after a 50 percent haircut, holds them for four years and then sells them for 40 percent of par. That would be a capital loss of$140 billion. Meanwhile, the carry trade has earned perhaps $50 billion a year, or$200 billion over the four years -- an overall profit of \$60 billion -- and lower budget deficits. Remember, there are no taxes affecting this deal.... [T]he risk to taxpayers is much less than you might think based on the congressional debate over the plan offered by Treasury Secretary Henry Paulson...