Word: investor
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...Here's where things start to get interesting: A lower price translates into a high potential return for an investor. When the loans were made, an investor who bought them at "par," or the dollar value of the loan, could expect a return of around 7%. That's a more than acceptable rate of return if you believe you will get paid back. But now that defaults are rising on home loans, investors are demanding higher returns to compensate them for the risk that a mortgage will end up delinquent or in foreclosure. A price of $0.26 implies that investor...
...course, the hope of the Treasury's PPIP program is that with cheap loans from the government investors will be willing to pay more. Why would they do that? Like lower prices, leverage boosts returns. So an investor buying an asset in part with loans should be willing to pay more than someone who has to buy that same asset with just their own cash. Based on TIME.com's analysis, an investor, using the 6-to-1 leverage the government is providing, can pay as much as $0.70 per dollar lent, and still expect to get the same return...
...loss could potentially be much bigger. Current rules require banks to hold assets that trade on their books at the value they would fetch if a bank had to sell them to another investor. Loans typically don't trade, so the rule typically only applies to stocks or bonds a bank might happen...
...government’s gaze. Geithner’s plan to address systemic risks in financial markets is comprehensive, if still relatively non-specific. Presented to lawmakers last Thursday, the proposal outlines general changes in four areas: the limitation of broad economic risks, the enhancement of consumer and investor protections, the closure of gaps in regulatory oversight, and the global coordination of any actions that are undertaken. The most aggressive of Geithner’s reforms would establish a systemic-risk overseer—possibly the Federal Reserve—that would serve as a super-regulator in charge...
Several tests of investor optimism will come in the weeks ahead, as U.S. companies begin reporting first quarter earnings (or losses). Moreover, the U.S. Treasury will probably make public the results of the bank stress tests that it has conducted in recent weeks. If stocks perform well in the face of bad quarterly numbers, or mixed news on the stress tests, market analysts will take that as a strong indicator that investor sentiment is truly turning...