The $117 Billion Formula

Many readers, and not a few journalists, have asked the Washington Report how former news editor Parker Payson arrived at the conclusion in his article in the August/ September issue: "The Real Cost of Israeli Loan Guarantees: $3.1 to $117 Billion."

He explained in the article that the guarantees Israeli government officials and their supporters in Congress and the media say "will cost the US taxpayer nothing" will in fact cost the US taxpayer $3.1 billion if Israel's performance is impeccable, and up to $117 billion in the far more likely case that the US government winds up paying all the interest and ultimately the principal as well. (This has been the case with virtually all direct US government loans to Israel to date, as regular readers of this magazine well know.)

For those who aren't paying off 30-year mortgages at an interest rate of 8.6 percent (most people should be so lucky), it may seem impossible that a $10 billion debt can, after 30 years, have cost the borrower (or the guarantor who picks up the tab if the borrower defaults) $117 billion.

The key to this magic trick (which normally benefits the lender if the borrower is financially sound and conscientious enough to pay his debts) is compound interest. The formula for determining it is:

Fn = P(I + r)n

F represents the final total, n the number of years (29, after the first year when interest is not added), P the principal ($10 billion), and r the interest rate (.086). Thus,

10 x (I + .086)29 = 10 X 10.941

$109.41 billion

+ 7.1 billion servicing and secondary placing costs

$116.51 billion.

If the interest (n) is figured so that n = 30, the subtotal before adding the servicing costs would be $118.8 billion, and the grand total

$125.9 billion.

Just in case you're a mathematical klutz (like the executive editor of this magazine, who doesn't have a clue how come his home mortgage won't be paid off until he's 83), here's a tip.

Reporters for Jewish weeklies called while Mr. Payson was on vacation asking how he derived his figures. We suggested that if after they talked to any mortgage banker they still questioned the figure, they should challenge it in print.

Some of our readers, who may trust us even more than we trust ourselves, managed to get the figure into their mainstream daily newspapers, including The New York Times.

In no case, so far as we know, has it been challenged—anywhere.

So, the next time you hear someone say, "the loan guarantees won't cost the taxpayer anything, " just answer:

"Fn = P(I + r)n"

That ought to stop his clock!