Interest Rate Roundup

Monday, September 08, 2008

Did he really just say that?

I highlighted Pimco fund manager Bill Gross' comments last week in which he essentially begged for an even more aggressive government bailout. We now all know that within 48 hours, the biggest bailout in U.S. history was announced.

What we also know is that as part of the bailout, the government is directly manipulating ... er ... intervening in the mortgage backed securities market to drive prices up and yields down. Who will pay for it? The Treasury, and by extension, us taxpayers. Of course, we're told that by playing hedge fund (borrowing at cheap Treasury rates and buying at dear MBS yields), this won't actually cost taxpayers anything. The Treasury will probably make money. Or at least, that's the plan.

Anyway, back to Pimco. Before publicly urging the government to bail out the housing and mortgage markets -- and going on CNBC to underscore that message -- Mr. Gross (and his investment team) positioned Pimco's Total Return Fund with 61% of its holdings in mortgage backed securities as of June 30 (per this Bloomberg story). Those MBS holdings would naturally rise in a bailout scenario, especially one like we ended up getting. And indeed, they have. Mr. Gross didn't stop there, however. He just went on CNBC again and basically spelled out his investment thesis as follows: You want to buy MBS now and then sell them back to the Treasury later, hopefully at a higher price.

So in a nutshell -- a huge bond fund manager buys up paper that would benefit from a taxpayer-funded government bailout ... goes public with an aggressive "we need a bailout out now" pitch ... gets his wish ... and then openly admits that he wants to make money by dumping that paper back to the Treasury (read: taxpayers). Or in other words, he wants U.S. taxpayers to basically help his bond fund make money. Nice work if you can get it.

There's is some other interesting reading on the Fannie/Freddie situation at other sites today, including this piece from Minyanville and this one at Housing Wire.


  • from a historical standpoint it's hard to object to the government's mass bailouts since similar debt-producing methods were put into action to save the U.S. from the Depression; it's like we've been headed for socialism this entire time...

    By Anonymous media kingdom, at September 19, 2008 at 8:02 PM  

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