Pimco's Bill Gross: Bailout Plan Benefits Main Street

Pimco’s Bill Gross, the chief investment officer of the world’s biggest bond fund says the Treasury’s proposed $700 billion bailout plan for financial firms, which would raise the national debt ceiling to $11.3 trillion and grant the Treasury unprecedented power to buy and resell mortgage debt, could yield a profit of at least 7% to 8% and benefit taxpayers.

According to Gross’ estimates, the average price of distressed mortgages that pass from “troubled financial institutions” to the Treasury at auction will be 65 cents on the dollar. That will represent a loss of one-third of the original purchase price to the seller, and a prospective yield of 10% to 15% to the Treasury. The double-digit return estimated by Gross in scooped up mortgage securities assumes a lengthy ownership of the assets and is in turn reliant on the level of home foreclosures, but this program, Gross notes, is in fact, directed to prevent just that.

Gross argues that,

financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.

Gross also thinks that the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below “par” or cost, and prospectively at levels allowing for capital gains, making this package Wall Street-friendly to the extent that it frees up funds for future loans and economic growth.

Gross believes the Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street. The manager of the country’s largest bond mutual fund also expressed his willingness to have his “brilliant staff”, as he put it, assist the Treasury Department’s $700 billion rescue plan by analyzing subprime mortgages free of charge. Mr. Gross explained his offer as a philanthropic one.

Bill Gross manages $133 billion Pimco Total Return Fund and helps oversee more than $800 billion in assets at The Pacific Investment Management Company [Pimco].

 

Comments

[SA Guest:]

You'd think that the vast amounts of money sitting on the sidelines would jump at such a great opportunity. How much did Pimco make again on the Fannie Freddie Bail out -- was it $6B or was it $7B - I guess one good philanthropic turn deserves another -

With the announcement of the Fannie bail out Gross stated that the Category 4 financial storm had been downgraded to a Tropical Storm -- what a difference a week makes...

2008 Sep 25 09:28 AM

[Francofile35:]

Makes excellent sense to me. As for his offer of free service intelligence, so long as it is complemented with appropriate oversight, it sounds like a good offer.

2008 Sep 25 10:51 AM

[User 143167:]

The problem is: They won't find that 700B money who wants to buy T bond at 3 or 4%. Japs? Chinese? Arabs? They will walk away.
If the Treasury can't bring foreign dollars back into America, this plan will be USELESS!

2008 Sep 25 11:41 AM

[wcrxlp edit...:]

There are three thousand community banks that are capital starved or near capital starved.

When Wall Street absorbs the $700 billion, Main Street banks will pay dearly to maintain their capital ratios.

It makes more sense to distribute the $700 billion to American community banks so they can lend for local transactions or use it to recapitalize Wall Street.

2008 Sep 25 08:10 PM

[whidbey:]

Gross is a great guy, but his acquisition prices seem generous for something that has no value to the current holders. How he got the number must be based on the needs of the street for cash (Maxi-Min?). Next one wonders what treasuries are available in volume for 3-4% for long term money. I think money at that price will not be available and finally the arbitrage forecast seems unlikely at best. Why would Brian jump on this one? Other than that I think Gross is still the same promoter he has been in the recent past when he pushed for bailouts of his MBS portfolio and rate cuts. Am I being fair? I hope not.

2008 Oct 14 06:58 PM