Bill Gross Softens His Fannie/Freddie Rhetoric

Maria Bartiromo interviewed PIMCO’s Bill Gross Friday (8/15/08) on CNBC. Gross’s tone was decidedly less abrasive when questioned about Fannie Mae (FNM) and Freddie Mac (FRE). Gone was the anger and disgust that had been amplified by PIMCO’s consultant and spokesman former Federal Reserve Chairman Alan Greenspan. There was no talk of insolvency and systemic financial risk emanating from the failure of the GSEs.

Instead, Bill Gross seemed to be asking for our sympathy. He started his argument for government aid to the GSEs by saying the banking system will not be stabilized until housing prices are stabilized, in sync with Greenspan’s mantra. Gross then went on to say that housing prices will never be stabilized with 7% 30-year fixed rate mortgages. He explained that the reason for the large spread between the 2% Fed funds rate and 7% 30-year fixed rate mortgages is due to lack of investor confidence in the GSEs. Gross cited Fannie’s and Freddie’s stock prices as evidence.

Gross wants the Treasury to insert $15B each in new capital to Fannie and Freddie, for a total of $30B. He now says the most likely method would be for the Treasury to purchase preferred shares. PIMCO and the shorts appear to be diverging. PIMCO does not need nationalization to win. Unlike the shorts, PIMCO has multiple paths to victory.

I believe Gross has read the tea leaves, and realizes that nationalization is unlikely. He needs to update Greenspan with the new game plan. PIMCO’s new plan is to motivate the Treasury to strengthen the GSEs in their present structure so that their outstanding debt is more valuable. Gross is trying to gather a constituency to press for lower mortgage rates through a better capitalized Fannie and Freddie.

A better capitalized Fannie and Freddie would be able to demand lower interest rates on its debt through higher investor confidence. More capital would also allow the GSEs to expand their owned mortgage portfolios, thereby increasing the supply of mortgage money. Both would increase the value of PIMCO’s GSE debt portfolio.

Gross’s new tenor brings complications to Greenspan’s life, at an age when he should be retired. The 82 year old still has clients that will only win if Fannie and Freddie are nationalized or severely diluted.

Disclosure: Author is long FNM and FRE.

Comments

[madasiwannabe:]

Sounds like the SEC had a little talk with Mr Gross. It's blatenly obvious to the most casual observer that Gross and Greenspin had an agenda that would make them money at the demise of the GSE's.

2008 Aug 18 07:21 AM

[muley101:]

The GSEs should be treated like any other government give away program. Their mission borders on socialism and the stockholders should not be devistated for supporting them. They should either be funded without having to sell preferred shares or paying the feds back, or they should be terminated.

2008 Aug 18 08:52 AM

[PhinT:]

I am personally just looking for the facts… All I am seeing is that the “sky is falling” via options and rumor mills What are the actual assets of F&F? Humm, Greenspan is consulting firms wanting a collapse of F&F…seems to be some sort of “self-interest” here… What needs to occur is that the news media along with the government need to stat facts only especially to us “Common” shareholders…Hey…what we really need here is someone like Buffet to invest that would turn around the market

2008 Aug 18 11:39 AM

[dickjanine:]

Why would anybody listen to Steinberg, who is heavily long the F's?

2008 Aug 18 03:25 PM

[Dirtt:]

Revolting. As the lack of investigations back log...

2008 Aug 19 12:03 AM