Friday, September 05, 2008

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.”

7 comments:

  1. Enough of these bloody bailouts! Why is it that "risk" is no longer a part of investing anymore???

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  2. “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.”

    personally, i'd rather have retribution on those responsible which would include Gross, Paulson, the Fed, Wall Street, Schumer, Dodd, Frank, et al.

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  3. "personally, i'd rather have retribution on those responsible which would include Gross"

    How is Gross responsible? PIMCO was one of the only fixed income managers out there who predicted this real estate downturn. They completely avoided the subprime market and their performance lagged for a couple of years prior to the credit crunch. Their prediction has come to fruition and is now paying off. I could see if you were bashing someone like Ken Leech at Western Asset saying because they made poor investment decisions, but Gross is just stating what he thinks is best for the economy going forward.

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  4. marc-

    you are correct, Gross predicted it. he knew full well the mortgages written since 2004 were garbage or, at best, grossly over-valued. so what does Bill Gross do? he goes all in. he takes his billion $$ bond fund and buys the garbage like somehow the default rate had hit bottom. now that his bet has turned more sour than year old Chinese food he is calling for the FedGov to step in and buy up all the over-valued properties that banks are sitting on so as to create an imaginary floor where he can exit at a profit.

    F*CK Bill Gross. he's just another profiteer bilking the taxpayer.

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  5. "he takes his billion $$ bond fund and buys the garbage like somehow the default rate had hit bottom."

    The fund hasn't bought any junk mortgages (subprime), they've bought performing MBS loans that still have equity in underlying properties. He's beating his benchmark YTD, so I'm not sure how his bet has turned "sour". I guess the reports I saw on my due diligence in New Port Beach which broke down theie underlying mortgage exposure by location and % equity was a bunch of fake numbers....

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  6. if you think subprime is the only junk out there, then don't bother posting a link to what you consider due diligence.

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  7. here's some fun factoids to play with:

    http://tinyurl.com/5k5ge2

    check Mish's math on PIMCO's mortgage holdings.

    http://tinyurl.com/5qf3pk

    this time hattip to MyBudget360 for the crunching... only 25% of Fannie's $737B portfolio is trad'l single-fam 30 year fixed.

    good work, taxpayers. you(we) now own the GSEs. or should i say we now own the guarantees to China's GSE debt holdings. sweet.

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