Grossed Out: Why Is It OK for Some People To Ask for Handouts?

It’s a done deal.

As I’m sure you’re aware by now, the Treasury Department announced the takeover of the mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) yesterday at 11AM. The details continue to emerge, but overall the basic terms are:

• The Federal Housing Finance Agency (FHFA) now runs the two companies.
• The Treasury is (temporarily) buying the mortgage backed securities of the two firms.
• Both firms will continue increasing their mortgage backed securities portfolios until 2010.
• Starting in 2010, both firms portfolios must be reduced at an annual rate of 10%.
• Fannie and Freddie’s CEOs are being replaced.

These factors and others are being analyzed at length by commentators all over the Internet. Some of the more insightful are Barry Rithholtz at http://bigpicture.typepad.com/ and Mish Shedlock at http://globaleconomicanalysis.blogspot.com/.

So instead of delving into the bailout itself, I’d rather focus on its #1 cheerleader, the investor who most benefited from the deal, and a guy who should currently be under investigation by the SEC, PIMCO’s Bond King Bill Gross.

Gross, as you are probably aware, manages the world’s largest bond fund with assets under management of $121 billion (when you throw in the rest of PIMCO’s portfolios, the total assets he oversees indirectly balloons to well over $700 billion).

What you may not know is that Gross has invested heavily in mortgage-backed securities over the last two years. All told, 61% of Gross’s portfolio is invested in MBSs, primarily in those of two firms … yep, you guessed it … Fannie Mae and Freddie Mac.

So it was rather striking to see Gross virtually begging the Treasury Department to bail out the two giants earlier last week. In a piece titled There’s a Bull Market Somewhere? Gross wrote,

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.

Gross, of course, positions the moves as a bailout for Joe America. And he certainly has a point, if both the housing and financial markets continue to collapse, the average US citizen will be slammed. But Gross is also flat-out talking his book. And he’s doing it both directly and indirectly.

We’ve already touched upon the direct book-talking — Gross owns the very MBSs that the Treasury Department would buy, therefore saving him from continued losses.

As for the indirect book-talking, Gross is also short US Treasuries, which will undoubtedly be harmed by the fact the US Government will essentially be adding $5 trillion worth of debt to its balance sheet — not exactly a move that inspires confidence in the US’s solvency or guarantees.

It’s striking to me that Bill Gross can talk his book, beg for a bailout, and even threaten to stop investing in financial firms if the Treasury Department doesn’t bail out Fannie Mae and Freddie. Yet, when hedge fund managers Bill Ackman and David Einhorn publish honest analyses revealing various accounting gimmicks and corrupt business practices on the part of financial firms, they’re investigated — Ackman and Einhorn both had well-publicized short positions in said firms.

Bill Gross has made a multi-billion-dollar fortune by investing in financial markets. And he did this under the auspices of free market capitalism. Now that he’s super-rich, super successful, and super invested in securities that are in the red, he wants the US government to step in and help him out.

Please understand, I’m not criticizing the Treasury’s moves or Gross’s arguments. I’m just gross-ed out by his obvious conflict of interest. Why are short-sellers who reveal the corruption and awful business practices of financial firms “evil speculators,” while guys who all but call up the Treasury Department and ask for a straight handout — one that will be ultimately be funded by US taxpayers — are simply honest investors?

Doesn’t seem right, does it?

Comments

[blondino:]

smart pimp, this gross! :))

2008 Sep 08 09:02 AM

[fxtrader07:]

'Yet, when hedge fund managers Bill Ackman and David Einhorn publish honest analyses revealing various accounting gimmicks and corrupt business practices '
Please! Give me a break! Ackman and Einhorn are unscrupoulos hedgefundmanagers who could not care less if they destroyed companies, jobs or billions worth of assets by their continued bashing and verbal attacks on the Monoliners and´other companies. And yes, you can destroy entire companies these days just by talking them down long and hard enough and with large enough media coverage. refinancing gets shut - game over, even if the companies are sound. Just read Marty Whitmans latest letter to shareholders. And marty, is an honest guy and a smart one. When he takes on aggresive shart raiders you should listen. instead of publishing your crappy hailing of crooks

2008 Sep 09 07:47 AM

[tom kern:]

Paper.I believe Gross is invested in alot of contracts of a complicated nature not too many of us understand except that the value of has declined. Or has it just stayed the same? A little emotion and fear distorts reality.

2008 Sep 09 09:44 AM

[welcome2work:]

Mr. Gross is fighting and trying to buy himself time to save his money. Mr. Gross sounds like an egomaniac with lots of entitlement going on. Lots of "other people" will benefit when a capitalistic Market falls, and people like Mr. Gross lose their money.

2008 Sep 09 12:35 PM