Michael Steinberg – Click Broker – discusses Bill Gross’s quest for a bailout.
PIMCO’s Bill Gross Politicking for his own Bailout
PIMCO Bill Gross’ September 2008 “Investment Outlook” asks us to cry for him because he purchased distressed assets too early. Gross complains about deleveraging by not only Fannie Mae (FNM), Freddie Mac (FRE), investment and commercial banks, and hedge funds, but also by individual households. This deleveraging has caused 30-year bonds rates to be 75 basis points higher than they should be and assets prices to drop by over 10%.
Gross claims that we have not experienced an over 10% decline in asset prices since the Great Depression. He cites the vicious cycle of declining asset prices and margin calls. Normally the downward spiral ends when bargain hunters or vultures start seeing value. Gross is worried for the investors (including himself) that entered too early.
PIMCO participated in the more than $400B of bank and finance company recapitalizations. Now PIMCO, hedge funds and sovereign wealth funds [SWF] are all underwater. With risk adverse banks and undercapitalized GSEs pulling back, Gross is calling for “new balance sheets” pumped by the Treasury to stop asset deflation. Gross does not hide his disappointment in the Treasury for not using Fannie and Freddie as its vehicles to prop up mortgage assets.
Gross has gone from being subtly political to downright pushy lately:
“If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.”
Gross is begging the Treasury to support the assets on his books for the public good. At the same time he sends the shareholders of financial institutions to the alter to be slandered. In a bit of public service, he offered to let PIMCO invest in the GSEs alongside of the Treasury, with the same benefits and protection. Treasury Secretary Paulson knows Gross is disingenuous and did not take the bait.
Gross is unwilling to accept that deleveraging takes time. This afternoon on CNBC he was practically ordering Paulson to disregard moral hazard and Republican politics for the sake of saving PIMCO. Then he threatened to withhold PIMCO investments in financial institutions if Paulson does not play ball.
Disclosure: Author is long FNM and FRE.
