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.

Comments

[Ishortyou:]

sounds like PIMCO is a little desperate, dont you think?

2008 Sep 05 03:34 PM

[John C. Lee:]

the epitome of conflicting personal interests

2008 Sep 05 03:41 PM

[Dressden Black:]

Tho't Gross was the Guru of Guru's on these matters. Guess he's human and err to mistakes like th rest of us. Crocodile tears..........

2008 Sep 05 04:00 PM

[Upperman33:]

So you are bashing Gross (who has a history of making correct market calls) but not supporting a position of your own. You really aren't explaining why Gross's ideas are so wrong.

2008 Sep 05 04:06 PM

[captainccs:]

Bill Gross is gross in his begging and groveling. The man loves a handout.

2008 Sep 05 05:06 PM

[Jason Rines...:]

He is correct about deflation of assets and the Great Depression. Reality is, we are past the point to stop the Really BIG Great Depression. Paulson isn't listening. President Bush was advised in May to that companies such as PIMCO would be screaming for lube and that the answer should be no. Yes, he was wrong, yes I am wrong at times blah blah blah. Where is my sympathy for having 80% drop in sales YoY from August 2007 to current? What's the worst case for Bill Gross, only two yachts to ski behind instead of twelve? Gimme a break.

2008 Sep 05 05:24 PM

[madasiwannabe:]

I don't think PIMCO is losing a nickle. In fact they are one of the biggest benfiniciaries of Freddie and Fannie's crash. Gross, along with his hired gun Greenspan, has been bashing the GSE's since Paulson's backstop plan announcement. All he wants is larger spreads to buy into and with a government backstop, there's no risk in running the GSE's out of business. My guess is he's hoping a government bailout would over extend the treasury and run government bonds down too. If anything, this is the biggest fleecing scam ever attempted. He should be having long talks with the SEC instead of Erin on CNBC.

2008 Sep 05 07:03 PM

[Dirtt:]

Implications are heating up. If this chapter in American history weren't so very disgraceful then it would be hysterical. Instead we get both.

My questions seem to go unanswered. Who installed the lobbyists in the GSE's? The money flow (looting) from the GSE's to the 527 Groups to the campaign coffers is every bit as big an issue as the bailout.

Even though I have my answers the questions bear (pun intended) repeating. Does America have to bring a class action lawsuit against the perpetrators to finally get those who should be prosecuting off their you know whats?

Ya' know Bill. Give me heads on a platter and then we'll talk bailout. What a disgrace!!

2008 Sep 05 09:48 PM

[gabe borens...:]

I think it is quite clear that the asset deflation at this time is a distortion of facts. Most of the "portfolios" did write off major losses perhaps even too aggressively .I did not hear about any write offs by Pimco.
The FNM and FRE are not the assests that any investor should be apprehensive about. Both agencies have been established by the act of Congress.Untill fairly recently the implicit backing of the agencies debt was taken for granted.That is why the agency paper was trading relatively" tight " tthe treasuries.To date not one official had explicitly denied the implicit guarantee. In fact the biggest issues are created by the speculators fermenting the turmoil and questioning the viability of these agencies .As of today not one official of either agency had asked formally for a bailout?Both agencies have an excess reserves and judging by the the results,easy access to capital markets.The heads of both agencies have publicly denied requesting any assistance.The balance sheets of both agencies comply with the GAAP standards.
The penalties for "creative accounting"under the SOX (Sorbane -Oxley) are punitive enough so that investment community should accept the agencies balance sheets at the face value.
At this time FRE anf FNM are responsible for 80 % of the mortgage activity.If the Treasury choses to inject additional capital that would be a positive catalyst to eliminate the agencies "demise" rumors and would stabilize other shaky assets.
The rumors and distortions refer to the rescue plan -but there is nothing to rescue and the most recent ratings,for both agencies, were raffirmed.In fact capital injection (not requested by the agencies) would likely result in the higher ratings .Either way ,the Treasury should divulge its perception of the issues and solutions if in fact any are required.
Otherwise the mega shorts in the agencies(stock) will attempt to rape and pillage investors.Once we clarify the FRE and FNM issues the risk to stability of other assets will evaporate. All of the analytical paranoia should be evaluated within the context of the record short open interest in the stock of both agencies .Last year I have advised my clients(including Central Banks) to liquidate the positions in the agencies and they did. Given the fundamentals now ,there is a real value in the agency paper(and shares).Volatility will continue but the facts and the fundamentals will prevail.

2008 Sep 05 10:48 PM

[notphaedrus:]

Bill Gross and his confreres have done us all a great public service. By buying distressed assets too early, they have helped spread the losses. Please, let's leave them underwater and not deprive them of an opportunity to continue to bear their burden with our heartfelt thanks!

2008 Sep 05 11:29 PM

[pelican:]

Thanks for the article. I lost some respect for Gross this year as he continued to make self-serving comments. Its so transparent that he sounds almost desperate.

2008 Sep 06 02:34 AM

[User 153012:]

Good try, Mike. You lose.

2008 Sep 06 09:42 AM

[Keepmovingf...:]

Interesting. While Gross sounds as if he is begging to save his own investments, one cannot argue that the asset and deleveraging cycle that he decribes, along with debt deflation, is occuring. We can all worry about moral hazzard, and about how the government cannot and should not support investor risk. Nonetheless, ONLY the government can support an orderly return of private capital to the marketplace given the scale of this problem. To leave this entirely in the hands of private investors and the marketplace has and will continue to result in financial ruin for many hard working Americans. We can all bemoan those who purchased homes they could not afford. However, the average American is wise and frugal, and had NO intention of NOT making his mortgage payments on time. If you believe that, then you must also believe the average american is a crook and therefore all investors should have no faith in our capital markets in the first place, which are based entirely on trust (if so, then our financial system would be BASED ENTIRELY ON moral hazzard). Instead, speculation by private investors (perfectly justified, btw) created an environment that priced homes out of reach for many Americans, the great majority of which simply want to live in a better neighborhood for their children. Not everyone currently facing forclosure is ignorant, or a deadbeat. Many have simply lost jobs because the same private companies that (correctly) are hoarding cash, and develering the balance sheet, are laying off workers. All bubles burst to the extreme in the opposite direction. One cannot say that poor Government supervision of Fannie and Freddie and the private market created at least part of this problem, and then at the same time suggest that the Government should again repeat that mistake and not play a coordinating role is helping the private market to solve this problem. And as with all of the bubbles past, regulation will exist to prevent a repeat of this problem. America's financial market has always created bubbles. It is our job to learn from our mistakes, not simply suggest that it is every man for himself.

2008 Sep 06 11:48 AM

[Bill Herbert:]

This is a crisis brought about by a huge oversupply of unneeded housing, which resulted from a reckless and unregulated investment boom based on phony economics and corrupt business practices in the financial community. I think we can all agree on that, no?

To keep it simple, and without getting into a thorny discussion of various econ viewpoints, I believe we can view the present situation as follows:

1) Major Banks and institutional investors are stuck with a lot of mortgage paper that is truly worth about half of par. Some of this is trading well below that level, and a lot of it is residing in CDOs and whatnot, and has taken various markdowns over the past 18 months or so. Some of these markdowns are perforce based on indices (Markit) that overstate the actual loss profile of the paper being marked down, but that is an anomaly that we have to deal with.

2) There is a large glut of housing, both 'for sale' and already repoed/vacant, that is killing the normal functioning of the housing market.

3) But despite those two realities, most of the housing stock is worth as much as it was two years ago in REAL economic terms - it just can't be easily sold right now for its true worth, in terms of providing shelter, location, access to good schools, and so on - all the traditional measures that influence property prices in a normal, arms-length market.

So, how to solve this predicament? Some would say we need an economic blowout, resulting in lots of lost jobs, severely reduced commerce, increased suffering among those who live paycheck-to-paycheck, and gut-wrenching market drops to "clear" the markets of the excess.

That would surely result in a lot of chaos, many more foreclosures (and the concomitant moving, dislocation, etc. affecting families) and really benefit very few. In short, a lot of true economic pain for little to no discernible gain. In the end, we would reach what many economists define as "equilibrium" or some stability in the sense that people are not forced into self-injuring sales in a panic market, and so on. But the damage would be horrendous.

As an alternative, if we had a government that was both honest enough to assign the blame where it belongs, and responsible enough to realize that there is an overriding interest in protecting the innocent bystanders from undue hardship and property loss, as well as maintaining order and a functioning economy (I know, that sounds altruistic, but it should be a goal of society at large, IMO), then we could find an alternate solution that does not spring from chaos and economic stress. The right solution would also not punish those in the broad economy that did not act irrationally or recklessly in terms of investment decisions.

The answer is to bust up the Lehmans, Bear/JPMs, hedge funds and others who cynically play a paper-credit trading game, strip them of their asset base and market power (i.e. price the govt purchase of the toxic paper at a level that wipes out their equity, and by extension, vanquishes entirely the institutions or funds that created the problems in the first place) and de-leverage the entire parasitic Wall Street machine, while leaving the 'MainStreet' economy to continue to provide goods and services to the broad populace at normal prices, and without needlessly destroying businesses and legitimate investment in essential, everyday enterprises that are the mainstay of a prosperous economy.

2008 Sep 06 01:09 PM

[Diegojames:]

Copperbaron: you are the greatest!!!!

Assign BLAME and PUNISH where normal accounting procedures were ignored by senior management and government agencies.

DO NOT let WALLSTREET AND I BANKS reap Big PROFITS then get taxpayer money to bail them out in BAD YEARS.

Are these people CARPETBAGGERS, PONZI EXPERTS or was GREENSPAN suffering from dementia???

ANY REAL INVESTMENTS IDEAS NOW? OR IS IT LAWSUIT TIME OR SOME OLD FASHIONED JUSTICE TIME?

DIEGO
LETS BRING BACK ZORRO
NORTHRIDGE , CALIFORNIA

2008 Sep 06 02:52 PM

[woodsey:]

Here I am again flogging a dead horse. I still maintain that the introduction of usury into the system in 1980 corrupted us and resulted in our present predicament.

2008 Sep 06 05:31 PM

[viewfromnyc:]

Why bother pontificating about how we got here, who is to blame and why? Why not think about how to make money! The Federal government is poised to take a significant portion of the domestic housing market onto its balance sheet. What are the ramifications? Does anyone think that interest rates are going down because of that action? Anyone want 10 yr U.S. Goverment paper at 3.6%, when the government is going to have to continue to borrow if it wants to maintain the subsisidy, through low cost borrowing, for housing. All the government is doing is interjecting its credit worthworthiness between the American home buyer and the predominately Chinese and Middle Eastern providers of capital. Eventually, the overseas holders of the mighty U.S. dollar will tire of earning negative real rates of return. Investment ideas, short long dated Treasuries,or go long TBT the double short ETF on the Lehman 20+ year bond index.

In the short term, perhaps the hombuiders will rally as market participants believe that liquidity will return to the mortgage market. I would short any strength take your pick of names or use the XHB. The government simply won't have the capacity to reflate the market. All Paulson et. al. are trying to do here is to stabilize home prices. What will probably happen is that home prices will find a bottom but transaction volume will decline and inventories will remain high as the market won't clear due to a wide bid/ask spread and a general lack of creditworthy buyers. After a bailout, I doubt regulators will permit the wide range of "affordability products" to be offered again by banks. Banks will probably be weak too as they continue to be hobbled by a lack of capital and a trouble loan book. It will take some time for potential homebuyers to repair their balances to the point where they can afford 10% down on a Southern California or Northeastern U.S. home.

Asset prices (stocks, bonds, real estate) need to decline for equilibrium to be restored to the market. The government can't keep asset prices at their high water mark through manipulation of short term interest rates. The phantom wealth created by Greenspan is gone! Somebody had to lose the money, it is now just a process of realizing all those unrealized losses. The result will reveal itself in one of two forms, losses at financial institutions as debtors default or long term diminished capacity of debtors/average Americans to consume and invest either because they are debtors who have overpriced assets or they are investors who will never be able to realize the phantom gains. I don't think PIMCO will ever be able to monetize all of its overvalued bonds. Great paper profits and a nice bonus for Bill Gross as the government keeps rates low. Watch out when they lose control.

2008 Sep 06 07:47 PM

[Anonymous123:]

This entire sordid affair is just the end result of what has been a literal pyramid scheme in US real estate, where all but the unemployed homeless, and perhaps those too, were given subprime loans just to pump air into the bubble. The same bubble that Greenspan and his current employer is now profiting from on the downside while families lose their homes. Pimco deserves no sympathy but merely finds itself wallowing in the same cess pool that ordinary investors have been subjected to while "elite" and connected money managers gamed the system. American capitalism has literally become cannabilistic, eating muscle from bones and sucking the life blood from its very self, leaving only a dying, moaning skeleton clinging to its last painful, shallow breath. It's always been about money. It's always been about class.

2008 Sep 07 11:14 PM