can someone show me how the profitability measures such as ROA and ROE increase when a bank securitizes its loans. lets say we have 100 in cash and 50 in loan notes and 50 in equity.
Lets see…bank loans out $1 million dollars at 10%, the exec can: 1) carry it on the books, collect $100k per year in interest, and say there was 10% return on investment 2) securitize it, collect $2500 per year in service fees, and move it off balance sheet to show infinity return on investment. infinity >> 10%, thus increase ROA/ROE. At the same time the bank lowers risk profile of its book.
wait… what if the commercial bank sponsoring the CDO is not the investment bank repackaging the loans?