Pimco's Gross lobbies for bigger housing bailout

Fear and loathing were the usual suspects in today's 340-plus point decline on Wall Street, as Tom Petruno points out, and Pimco bond guru Bill Gross (pictured) probably didn't help much either. In his widely read "investment outlook letter," and in an interview on CNBC, he made the case for a bigger government bailout of financial firms and the housing market. In doing so, he was saying, as CNBC summarized it, "that his firm would be staying out of any and all bank offerings for the foreseeable future."

In other words, he was telling the markets that private money won't save the banks, and the borrowers, and it's time for the Treasury -- using your money -- to start bailing out Freddie, Fannie and perhaps others:

... 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.

Analysis/bloviation: It's worth noting that influential economist Joseph Stiglitz made an even stronger argument for government intervention this week in The New Republic, arguing that the free markets' current failure to manage risk and allocate capital is not "rare" -- as Gross maintains -- but part of a pattern of market failure. Worth noting from the Stiglitz essay is his two-sentence recap of the housing mess:

Behind the subprime crisis were mortgages designed to encourage repeated refinancing of homes -- a pyramid scheme that generated billions of dollars in fees for the mortgage company as long as home prices continued to soar. It was inevitable that the bubble would break.

It's worth repeating: The mortgage industry designed products that would "encourage repeated refinancing of homes."

--Peter Viles

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Photo Credit: Bloomberg News

Comments

[Sam]

a colleague of mine once told me that in financial markets and trading there is a reason that someone says they are doing something and then there is the real reason. Bill Gross' Total Return fund is super-long mortgage-backed securities and Agency bonds. Moreover they are starting distressed fund for mortgages. This "bond kingpin" is basically saying, US government take me out of my position because i'm underwater on them.

My Vanguard GNMA fund has performed in line with the vaunted "authority on bonds" flagship fund. Oh yeah, and I didn't pay 3.75% (year's worth of interest) to get in and pay 80 basis points less in annual expenses.