What Up With Pimco?
WTF is up with PIMCO ?
Strange things are afoot at the biggest bond fund in the world. A weird sense of panic seems to be emanating from the West Coast fixed income specialists.
I suspect it may have something to do with with the fact they are loaded to the gills with paper from Fannie & Freddie (FNM & FRE) -- a trade that has worked out exceedingly well. Despite this -- or perhaps because of it -- the latest noise from the boys from Newport Beach is increasingly odd, even desperate sounding.
I do not know if they are genuinely terrified of a major meltdown in the global economy, or worried about their book. Maybe they are looking for an exit, and not finding one.
The WSJ noted about PIMCO:
The bond-management firm has posted good gains since the credit crunch began last year, in part by betting big on mortgage debt tied to Fannie Mae and Freddie Mac -- whose implicit government backing and relative safety compared with other securities has helped keep their bond returns in the black.
Now as both entities show continued financial weakness and many parts of the bond market remain pressured, a main challenge for Mr. El-Erian, 50 years old, will be sustaining Pimco's winning returns.
Then came the very strange commentary Bill Gross posted at the PIMCO site -- a weird, quasi-homage to Cramer, which then reiterated the expected pain of a deleveraging and asset liquidation.
>
Gross: Please Bailout Frannie!
click for video
Here's Gross:
What Happens During Delevering
1. Risk spreads, liquidity spreads, volatility, term premiums – they all go;
2. Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium;
3. The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down;
The above might seem simplistic to us at PIMCO but it is not necessarily clear to all readers. Term premiums? Risk spreads? Volatility? What do they have to do with bull or bear markets? Well, what Step 1 really says is that as GSEs, banks, investment banks, global hedge funds and even individual households delever their balance sheets by shedding assets, they lower the prices of not just what they are selling, but other securities that are arbitrageable within the marketplace.
Odd.
Maybe this is part of the problem: China Pulls Back From Fannie, Freddie
Amid jitters about the future of Fannie Mae and Freddie Mac, China's four biggest listed banks have pared back their holdings in debt related to the two U.S. mortgage giants. At the end of June, the four banks held a combined $23.28 billion of debt issued or guaranteed by Fannie and Freddie. That's a small fraction of the trillions of dollars outstanding, but the reductions attracted interest as a possible gauge of broader sentiment toward such securities.
In an interview with Bloomberg, Gross all but pleaded for a Federal bailout of Fannie/Freddie (U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says):
The U.S. government needs to start using more of its money to support markets to stem a burgeoning "financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm's Web site today.
"Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross said. "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.''
The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.
OK, I'm game for a Federal bailout -- but what's a fair haircut for Stock holders? Preferred holders? Bondholders? In exchange for the US putting the 5 trillion dollars worth of exposure back on the US books, I propose haircuts of 100%, 25% and 10% respectively.
Perhaps there is no natural exit, and they are fearful of holding this to term, as some of the marks will be quite negative between now and when the paper is due.
Their solution? You and me and that guy behind the tree !
The rescue of Frannie PIMCO is proposing risks hyper inflation, as the government would be on the hook for another 5-6 trillion in liabilities, of which less than 10% are likely to default...
>
Sources:
U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says
Jody Shenn
Bloomberg, Sept. 4 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aZLLPW9YEa60&
There's a Bull Market Somewhere?
PIMCO September 2008
Bill Gross
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/Investment+Outlook+Bill+Gross+Sept+2008+Bull+Market.htm
Pimco's Gross Lets the Freak Out
Kevin Depew
Minyanville, Sep 04, 2008 3:47 pm
http://www.minyanville.com/articles/index/a/18807
China Pulls Back From Fannie, Freddie
Rose Yu and Amy Or
WSJ, September 3, 2008
http://online.wsj.com/article/SB122037859304991457.html
Pimco Names El-Erian CEO Of the Bond-Investing Giant
DIYA GULLAPALLI
WSJ, September 5, 2008
http://online.wsj.com/article/SB122057292319901669.html
Friday, September 05, 2008 | 12:00 PM | Permalink
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Comments
The government needs to use more of its own money? What money? Money to be printed, or does he mean debt?
Posted by: bk | Sep 5, 2008 12:21:54 PM
Remember, we're also giving $1B in aid to Georgia. Print away! This is getting ridiculous.
Any bailout that doesn't include some pain for shareholders and bondholders will be a travesty........therefore, that's probably what will happen.
Sad to see Gross begging for a bailout of his own bad decisions. THIS is capitalism and the "free markets?" What a joke......
Posted by: Jeff M. | Sep 5, 2008 12:36:08 PM
I develop an idea for a cartoon and proposed it to an artistic friend for execution. It showed Goldman's Lloyd Blankfein, Merrill's ex Stan Oneil, PIMCO's Bill Gross and Countrywide's Angilo Mozilo under a corner street light in mini-skirts wearing lipstick leaning into the window of a foreign made luxury auto asking the driver if he liked what he saw. But after thinking about it a while I decided it was to much of an affront....to prostitutes.
Posted by: MJ | Sep 5, 2008 12:39:59 PM
It's not just FNM/FRE paper that's got them worried. Gross, El Erian & McCulley all articulated the "under the Fed umbrella" thesis in buying paper of the broker dealers and commercial banks.
And to add, McCulley was all over the place in Jackson Hole, almost hysterically telling anyone and everyone that Paulson needs to "Show us the money!". I believe Kathleen Hays of Bloomberg correctly asked him, after he made his plea that “it’s the only choice to save the economy”, if he owned the paper that would be saved, and he shamelessly said “That’s the point, when the money is shown, spreads will tighten and profit will be made”.
BR has it right; You wanna play with moral hazard you have to be ready to get burnt. If, but more likely when, the "new balance sheet" is deployed, PIMCO and all the rest of the moral hazard players need to contribute, and haircuts on the debt is appropriate.
Posted by: RJ | Sep 5, 2008 12:41:52 PM
Here is the money quote from his piece...
"Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments."
Gee, Bill, I'm just a guy in a basement and even I knew you were too early.
I'll buy my mortgage off you right now for 90 cents on the dollar.
But if you want me to buy it off you at par with my tax dollars you can go to hell.
Posted by: Vermont Trader | Sep 5, 2008 12:42:11 PM
Gross gives new meaning to an old classic...
"Rich man, poor man, beggar man, thief."
Posted by: MarkTX | Sep 5, 2008 12:43:18 PM
I think more of a haircut is in order, since many of these guys were looking for a tax payer... I mean government bailout. I like how Gross is screaming about Armageddon now so he can get his own bailout, but I suppose that was his strategy all along.
Regards,
TDL
Posted by: TDL | Sep 5, 2008 12:47:50 PM
Kevin Depew' article rightly calls out Gross, the head of PIM(P)CO.
His Flashback to Gross' call of DOW 5000, in '02, is all one needs to understand about Gross' willingness to shill/ride this massive Credit Bubble.
Are we seeing Gross ponying up his 10 digits to Help the USTreas swallow the load he's willing to shoot their way?
I think not, that'd be in major contradiction to the way this game is played..
Posted by: Mark E Hoffer | Sep 5, 2008 12:48:27 PM
A little off topic, but me-thinks that McCain loses all of the Libertarian types (if he hasn't already) to Bob Barr (to stay home) if the Feds come to the rescure here.
If the mass American public had any clue how this impacts them, there would literally be rioting in the streets, but since 90% or more of this literally country has no clue, it's merrily back to watching "American Idol" they go.
I'm convinced that this phenomenon is the result of our decaying culture and educational system. The chickens are finally coming home to roost, folks.
Posted by: Jeff M. | Sep 5, 2008 12:55:53 PM
The only reason to consider a bail out is to control systemic risk. So with that in mind, I think you dole out the "haircuts" this way:
Equity/Stock - 100%
Bonds - 0%
Preferreds - 0% or as close to that as you have to be to prevent the banking system from seizing up (or maybe a hybrid approach that includes a time component).
The equity/stock is what it is-ownership interest in a failed enterprise. But worrying about issues like moral hazard relative to the debt instruments is missing the big picture (pun intended...). There are going to be a lot fewer of us with jobs and money to manage if the US clips everyone in the world on the GSE debt instruments. Normally I would favor flushing all of it like it deserves. But the risks to the whole system outweigh the benefits of a traditional capitalist solution.
Posted by: TRW | Sep 5, 2008 12:57:25 PM
It makes me so pissed off.
He wants the US taxpayer to take out a loan to buy our own loans?
He gets the cash and gets to reinvest it and earn interest.
We get to pay twice the interest on our mortgages and the government debt?
Someone needs to punch him.
Posted by: Vermont Trader | Sep 5, 2008 12:59:13 PM
Since PIMCO bought all of the GSE paper for it's "implicit" wink-wink Government guarantee then surely they won't mind if it all gets paid off at the comparable US Treasury Rate. After-all safe investments usually pay diddly in interest...
Posted by: Dale | Sep 5, 2008 1:03:44 PM
TRW,
The "System" Is the Risk. The name of the Game is, in fact, "Bailout".
We've, for too long, been Socializing the Risk that bred the Private Gains.
We're going have to pay the Piper sooner or later. We'd be better off with sooner, while there's still some meat left on the Carcass.
Posted by: Mark E Hoffer | Sep 5, 2008 1:07:12 PM
@TRW: I don't necessarily disagree with you but what's to stop this from happening again if people like Gross know that they can just load up on this crap and the government will make them whole every time there's danger they will lose. The only premise that Gross loaded up on this garbage is because he knew he'd bet bailed out if they went bad. That's NOT the "free markets". This is reckless behavior that should NOT be rewarded. That is RIGGING the game. Am I being naive here? Our whole system is bullshit if they do this over and over and over again. That's the cynical part of this - Gross knows that and he's capitalizing on that. Who's going to make ME whole on my bad investments? [crickets chirping.........] I thought so. This is just welfare for the rich but most people are just too stupid and lazy to figure it out. As we've seen this past week, a good half of this country seems to not care about facts or reality. Let's just continue merry sunny optimism of Reagan with our heads up our asses while the whole thing just falls apart.
Posted by: Jeff M. | Sep 5, 2008 1:09:13 PM
Funny how the guys that ARE the "system" are always screaming about the risk to the system.
What B.S.
Banks and brokers and pools of speculative capital have been failing since the beginning of trading.
Saving the weak or the foolish is like letting the ram that lost the fight sire the herd.
DB
Posted by: Bully | Sep 5, 2008 1:26:18 PM
Bill,
If you didn't hedged your bets in this kind of market environment, you deserve all the losses that are coming at you.
Wanna bailout? Alright, but with the proviso that everyone (yes buster! that includes YOU) takes a painful flesh cut.
Sucks no?
It's called risk. Ignore it at your own peril.
Posted by: Francois | Sep 5, 2008 1:33:20 PM
Bill needs to relax and smoke a fatty. I'm tired of this incessant whining by these rich MF'ers that created this mess. I'll tell you what, if we get someone really serious about reform in the White House, the shit is really going to hit the fan as not only the state AG's but "THE" AG revs up his or her engine.
Posted by: bdg123 | Sep 5, 2008 1:37:01 PM
Its interesting that Good ole Al Greenspan was recently hired as a consultant for PIMCO.
Posted by: johnnyvee | Sep 5, 2008 1:40:15 PM
I like what James Carville observed about the bond markets--that it was bullshit what everyone said about not pissing off the bond markets.
Bill Gross can go to hell. I hope whomever is the next President just tells him to come on over to the White House barber for a free haircut. You made your bets and you lose, and it's not the taxpayer's fault you don't understand risk.
BTW: Vermont Trader--I'd happily buy your mortgage at 90 cents on the dollar. Even if you are some guy in a basement (me, the attic) I'm sure I'd get paid back. I wouldn't lend Frannie a penny, though.
Posted by: Donkei | Sep 5, 2008 1:41:04 PM
gosh... the titanic is sinking.
oh well... we have the 2008 PREZ-PICK to go back to... in one corner we have the great speaker, Author-Senator, who's Harvard-educated (like Bush) from Chicago and the other corner War-Vet Senator from ???, brought to us by the same people that picked us that G.W.Bush... can we trust either will do a good job???
I would prefer if China just called in the loan... they do put on a good show. And we can all just get along with one party, no religion and less chaos.
Posted by: Mattie | Sep 5, 2008 1:43:04 PM
I wonder how many investment firms are out there - - in the same position as PIMCO - - which have made “campaign contributions” to Obama and McCain with the expectation of a bailout.
Posted by: DL | Sep 5, 2008 1:46:09 PM
Just to keep the record straight, I advocated *punching* Bill Gross year ago.
He was never anything BUT slime.
His conflict of interest, esp. with CNBC, is so flagrant, so over-the-top criminal.
Posted by: CaptiousNut | Sep 5, 2008 1:48:11 PM
Didn't this cow leave the barn already?
PIMCO's MBS is backed by Fred and Fan and Ginnie. In July of 2008, the Feds backed Fan and Fred. Ginnie is already part of the Feds. So PIMCO's MBS is already 100% guaranteed by the Feds, yes?
The only point that Gross is making is that every day the Feds delay their already promised bailout, it hurts the economy and the debt markets and the financial system.
Sounds reasonable to me.
Talk of bailouts and moral hazard do not seem to apply in this set of circumstances. The sequencing is all wrong. You need a little situational awareness.
Try this: PIMCO owns MBS, not Fan and Fred debt. The MBS gets no haircut. Period.
The promise has already been made. Gross is only asking that the Feds deliver on the promise in a prompt manner.
And he makes a good case... prompt resolution of this matter avoids a downward spiral in all asset values that WILL impact the economy in a very severe way. If the Feds are going to bail, they should do it now. Due to his personal ideology, Paulson wants to wait so that he can inflict maximum damage on Fan and Fred. Gross thinks there are larger considerations of harm that take priority over Paulson's desire to delay the bailout. And THAT was the point of his two-pager.
Besides, PIMCO is a very large once and future customer of the Feds. This gives them (and not BR) the right to say whatever they want, and be listened to attentively by the powers that be in Washington.
And by the way, the Feds are not on the hook for 5 or 6 trillion dollars. The shareholders and bondholders of Fan and Fred are, along with the homeowners. Several brokerage firms came out with research this week that said the cost to the Feds would be incredibly low. you can argue the point with the brokers, but you can't make a claim that the loss to the taxpayers would be significant.
Posted by: JohnB | Sep 5, 2008 1:48:13 PM
Gross said. "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.''
Of course, Bill. The answer to the problems of any Ponzi Scheme is simply to find another sucker.
But here's the killer - the answer is always only temporary.
Posted by: Winston Munn | Sep 5, 2008 1:52:03 PM
While the GSE's bond portfolios grew, the Bill Grosses of the world sold them hedges which comforted the politically-appointed morons who "ran" them. These hedges also helped PIMCO (and other smart money groups) to slightly outperform your typical bond fund.
To think that PIMCO has made a big one-way bet on GSE paper is silly. To think that the US is going to let the GSE's default on their debt is silly. So....
...PIMCO's talking their book in that all Gross et al are asking for is for the credit markets to start trading again.
The Bush administration wants to kick this can down the road. They do not want another nationalization-looking bailout on their watch. Bill Gross doesn't care about Bush's record and wants the market to start working now. He's doing it by applying pressure to Paulson who hopes to return to finance one day. What's wrong with that?
It's not the first time politicians let things in the country go to heck to satisfy some narrow self interest. It won't be the last.
Posted by: VennData | Sep 5, 2008 1:54:31 PM
