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April 26, 2012

Math Rescue

The dramatic $700 billion bailout of U.S. banks calmed markets and helped stabilize the financial system, but that doesn’t mean taxpayers will see any direct returns from the investment. The Treasury says the Troubled Asset Relief Program might turn a profit. But the agency’s fuzzy math wouldn’t fly with any sensible portfolio manager. What it calls a gain looks more like a loss of at least $230 billion.

Treasury’s rosy projections aren’t half as bad as its methodology. The government declares a return when an investment’s payments exceed the initial cash outlay. That boldly disregards the cost of money and its value over time.

By contrast, consider Warren Buffett’s bet on Goldman Sachs. In the thick of the crisis, he loaned the bank $5 billion in exchange for 10 percent annual interest and stock warrants. Goldman paid back the Oracle of Omaha a few years later. Though hanging on to the warrants may cost him in the end, even without them he booked an annualized return of 14 percent.

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