Please bear with my ignorance here, but doesn’t that assume that losses going forward will be much smaller than past losses (on the existing, “toxic” loans)?
What if the future loans also suffer heavy losses that are greater than the 200 bp spread? What if interest rates go up (their cost of funds) so that they are no longer earning that spread on their existing loans?[/quote]
It assumes that EVENTUALLY the future losses will be much smaller than they are currently (probably a reasonable assumption, yes?). Whether that’s next year or in five years only affects the date we get our nominal dollars back, not “if” we get them back. Put another way, how the losses play out will not affect the nominal dollar loss (which will be zero), but rather the real dollar loss (which will be a positive number, no doubt, but a small fraction of the numbers we read about in the media).
I’ve addressed your spread issue before in a prior thread. I must assume that the folks running F&F have a reasonable grip on asset/liability management (their prior sins related to underwriting, as opposed to A/L management) and they are funding the long-term fixed rate portfolio with a combination of relatively long-term fixed-rate funding along with interest rate swaps (one Wall Street innovation that has been relatively helpful in aggregate). The rates on the floating portfolio will adjust as rates increase. So, I’m not implying that rising interest rates are a non-issue, but I’m not overly concerned about rising rates where the portfolio is concerned.
