liongterm investor

The $1.7 Billion Payday: How Bill Gross Made a Killing on the Bailout

The real point that you make is that the same people that created and invested in the low quality debt have been provided an incentive to go out and try again.

The Treasury should have offered the debt holders 20 cents on the dollar along with diluting the shareholders 5 to 1. This was in no way a bailout of the shareholders, but a bailout of sophisticated debt investors that understood how to game the system. This includes the US Treasury who protected their own ability to access capital cheaply.

Bailouts Slope: Slippery, and Expensive

Interesting article. I would like to know who ends up receiving the approximately money that the taxpayers are likely to lose. I suspect that it is mostly foreign central banks, sovereign wealth funds and others like PIMCO/Gross. These groups surely are not getting the "moral hazard" message and will be back to making risky investments again soon.

Rescuing Frannie

By guaranteeing the debt of FNM and FRE, the (mostly sophisticated) investors that purchased this debt are held harmless from their stupid decisions. If these are private sector companies, then the equity and debt are private sector. If the company is allowed to fail, then the debt also should be allowed to fail.

If these companies are in fact really owned by the government, then buy out the equity holders at the full value they held before the housing bubble collapsed along with the debt holders.

It appears that the way that this is happening, there will be little market discipline to the "bond investors", therefore they will be willing to try again soon with some other creative financial products that the government will have to bail out.

I need to have Gross teach me how to game the system.

Bill Gross: 'Pick Me! Pick Me!'

Gross and others are insistent that the holders of equity not be rescued since an investor there is risk when stck is purchased. This is a good use of the "moral hazard" argument.

However, when an investors buy DEBT, they also assumes risk - whether an individual, a large bond fund or even foreign countries in the case of FRE and FNM.

IMO coming to the rescue of Gross and other holders of
the debt is a worse moral hazard than saving the shareholders. After all, it was the debt markets that exhibited the risky behavior. I suspect that most of the FNM and FRE shareholders held the stock because they thought it was a conservative investment. The big traders of debt knew what they were doing and deserve to go down with the ship, right along with the holders of the equity if those companies fail. Otherwise the debt traders, now free of any pain and with some assurances that they will be held harmless in the future, will once again resort to the risky behavior that got them into trouble in the first place.