Bond Fund Manager Bill Gross Calls for a Mortgage Bailout

Bill Gross, manager of the world's largest bond fund, asks for a government bailout of the mortgage market:

Bond manager Bill Gross wants to spread the bailout wealth. Gross says in a commentary posted on the Pimco Web site Thursday that the government must “open up the balance sheet of the U.S. Treasury” to support Fannie Mae (FNM), Freddie Mac (FRE) and, in a new twist, “Mom and Pop on Main Street U.S.A.” as well.

Gross has previously said he believes the Treasury will have to assist Fannie and Freddie in any efforts to raise new capital. His Pimco Total Return bond fund has major positions in mortgage-backed bonds issued by the government-sponsored enterprises, so it’s no surprise that he sees it that way. But now he’s calling on Treasury Secretary Henry Paulson to use federal funds to buy more housing-related assets, in the name of preventing asset-price deflation from spiraling out of control.

Gross writes that the government should be more aggressively issuing subsidized home loans and creating funds to buy distressed properties, to help inject cash into U.S. households and slow the plunge in home prices. He writes that federal assistance is required because the deleveraging sweeping the financial sector has moved from asset liquidiation to debt liquidation — a process, he writes, that “can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.”

Gross argues that Paulson and other policymakers must overcome their unwillingness to offer relief to households, after a decade in which Americans went on a record spending spree using borrowed money. He says that regardless of the source of the problem, plunging asset prices will only become more intractable as time marches on.

“The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later,” Gross wrote. “The tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible.”