Wikinvest Wire

Bill Gross will work for free ... kind of

Thursday, September 25, 2008

Bill Gross describes how the bailout plan would make the U.S. government oodles of money and offers to work for free to help manage the procss.

From the original op-ed piece in the Washington Post:
I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.
This yield spread would purportedly earn the U.S. government $25 billion a year.

And from a follow-up story in the New York Times:
William H. Gross, the manager of the country’s largest bond mutual fund, has a solution: he is offering to sort through the toxic assets — free.

“We have a large and brilliant staff that can analyze and has analyzed subprime mortgages that can help the Treasury out,” Mr. Gross, the co-chief investment officer for the Pacific Investment Management Company, said in an interview at the company’s headquarters here.
Despite his proposal to offer his talents, gratis, some investment managers say the government should be wary of giving authority for the auction of mortgage securities to anyone in the private sector, particularly someone with as dominant a position in the bond market as Mr. Gross.
For more than a year, Mr. Gross, whose investment expertise has earned him a net worth estimated at more than $1 billion, according to Forbes, has indeed played the role of the financial markets’ Cassandra. Beginning in July 2007, he warned that the subprime mortgage crisis would become far worse before it would improve.

Other sectors of the financial markets, he predicted, also could seize up if the Federal Reserve and the Treasury did not do something to help keep the markets liquid.

But Mr. Gross and Pimco also attracted criticism when it became clear that the Pimco Total Return fund earned more than $1.7 billion on the day the federal government bailed out Fannie Mae and Freddie Mac.
Why doesn't Pimco just buy the distressed assets themselves like they did earlier this year when the meltdown in muni bonds presented the buying opportunity of a lifetime?

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Anonymous said...

I think the real danger here is that this bailout plan starts throwing off TOO MUCH money. Just imagine what happens when the deficit turns to surplus and, before you know it, the Federal debt gets wiped out. This leaves nowhere for foreign investors to put their money and just leads to another, more serious, global credit market meltdown in 2011.

No, not a good idea.

Anonymous said...

I'm counting my profits already too. Heck, I think each time a company is on the verge of bankruptcy, the government should buy its assets at fair market value - imagine how much money we taxpayers can make! Heck, we'll be living pie in the sky high! The deficit will be paid off in no time! (Of course without government debt, or the ability for the rich to enslave future generations, we might go back to a more egalitarian wealth distribution.)

Anonymous said...

The truth of the matter is the deficit will never be paid off. The goverment will find new ways to blow the money, more useless studies, more capital for military and aerospace projects, etc, etc. Will the goverment make money off the bailout? yes, eventually, but we'll never see a dime.

Anonymous said...

While they are nationalizing the banks, why not just nationalize health care at the same time?

Anthony J. Alfidi said...

That financing estimate of 3-4% is far too optimistic given the damage this ailout will do to Uncle Sam's credit rating. Try at least 8%, wiping out most of the profit.

Anonymous said...

I wrote to Nancy Pelosi yesterday, begging her to make sure the government does not pay 1 penny more than FIRE SALE prices for Bill Gross' stressed bonds. In the two recent Fire Sales of stressed assets the REAL NET PRICE was between 5 cents and 8 cents on the dollar. (Not 65 cents) As for all American Bill volunteering to work for free, I told her Vladimir Putin would work for free too, if she paid him 13 times the value of his bonds. FIRE SALE PRICES ONLY!

The Gambler said...

Alright I have be to honest and Erin Burnett CNBC is really hot! Bill Gross also did a great job of selling the plan, man this guy would have been a great used car salesman! I can't imagine a better spokesman for Pimco.

However I think what Bill Gross forgets is the fundamental problem of lending: duration risk. In other words the funadmental model for banking has been lend long but borrow short. This can be a huge problem if interest rates spike, which is exactly what happened in the late 70's and early 80's with the S&Ls.

Your borrowing costs are 8% and you're getting 6% on your mortgages, that means you're eating 2%.

The real problem with these mortgages are the interest rate caps that limit the interest rates a borrower can pay. Of course to make matters worse the interest rates are not allow to rise with market rates but rise in increments over a fixed period of time.

Of course let's not forget that Pimco is one of the world's largest holders of bonds, its not as though they're objective and uninterested observers.

Its the equivalent of asking a crack dealer what he thinks of crack cocaine, is he really going to say something bad the stuff that he is dealing?

Anonymous said...

$87 BILLION TAX PAYER DOLLARS! Were spent without your knowledge on 15 September! Treasury, J.P. Morgan and Lehman Brothers pulled a fast one. After Lehman filed bankruptcy J.P. Morgan advanced Lehman $138 Billion Dollars which Lehman used to settle CDS contracts. Then without anyone watching The Treasury Department secretly paid J.P. Morgan $87 Billion Dollars on behalf of Lehman Brothers. If you need to verify that check the ammended bankruptcy papers filed by Lehman.

If we can't trust the Treasury with $87 Billion why in the hell are we giving them $700 Billion?

Anonymous said...

If it's so friggin' lucrative, why aren't private investors stepping forward to buy pieces of Big Shitpile?

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