PIMCO fund manager Bill Gross warned a week ago in Bloomberg, U.S. Must Buy Assets to Prevent `Tsunami’
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.
This and with Gross’s previous call to blow up homes are a belief that something around the current level of asset prices is necessary to avoid a collapse of the economy.
Why should asset prices not fall? Of course this is worse for the owners of assets, but it is good for people with cash who wish to purchase assets. There is no particular level of asset prices that is necessary for the economy to function. Assets derive their value, ultimately, from consumer demand for the products that are produced by business firms. Asset prices do (or should) represent the best estimate of the value of the firm’s capital toward meeting consumer demand some time in the future.
The Austrian theory of the business cycle shows how asset prices can rise above the level consistent with the organization of investment to meet consumer demand, through an expansion of credit. Another factor that can distort asset prices is the moral hazard created by central bank bailouts of failing financial institutions.
Falling asset prices, then, are part of the process of reorganizing productive activity to meet consumer demand. What I suspect that this is about is bailing out Gross and his buddies who were large shareholders of paper that would lose most of its value if a rational re-pricing were allowed to occur.
This week, Gross got his wish. The Financial Times reports , “Mr Gross had made a big shift out of US Treasuries and corporate bonds over the past year and into agency bonds, betting that the government would support Fannie and Freddie Mac. By May this year, more than 60 per cent of his $132bn fund was in mortgage debt.”. The value of the bailout to PIMCO was estimated by the FT at $1.7Bn.
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I am trying to imagine the hierarchy in a counterfeiting ring.
Who in the criminal gang of the counterfeit operation do the high rollers, the fund managers, resemble?
Billy the Gross works as a ‘manager’ for PIMCO ( an abbreviation of pimp and company). He is using his ‘influence’ to subtly threaten the inner circle of counterfeiters by saying that he needs bribe money to keep the system going.
Here is the clear conclusion: the unConstitutional coup is like the mafia!
The destruction of some paper value in assets will if I am not incorrect serve to also destroy some of the boundless “paper” money that has been created. This should be good. Buyers can only save the day when prices are set by the market. As for demolishing houses, I suggest that Bill Gross demolish his first so as to set the example. The big boys need to lose something to restore balance. They can’t always have the profit and share out the losses.
The destruction of some paper value in assets will if I am not incorrect serve to also destroy some of the boundless “paper” money that has been created. This should be good. Buyers can only save the day when prices are set by the market. As for demolishing houses, I suggest that Bill Gross demolish his first so as to set the example. The big boys need to lose something to restore balance. They can’t always have the profit and share out the losses.
Earlier in the week, in an interview on CNBC, a smug Bill Gross admitted to lobbying the government for a bailout of Fannie and Freddie’s creditors and his firm, Pimco, profiting to the tune of $8 billion firm-wide. He even joked about it. At one point he made this remarkable admission:
“I likened it to a situation where we’ve had a drunk driver – and face it, we’re all in there in terms of driving drunk and using lots of debt, and poor regulation and all of that. We’re all responsible. But a drunk driver that’s now lying on the road bleeding – you don’t just leave him there. You take him to the hospital and then you throw him in jail. Then, you throw him in the clinker, but not now.”
Poor Bill Gross, barely made it onto the Forbes 400 last year with a reported net worth of just $1.3 billion. Don’t think of that $8 billion check as a handout, but a hand up. Besides, Pimco has a payroll to meet, which includes Alan Greenspan to offer access, er, advice. Sadly, there won’t be any jail time for Gross, Greenspan & Co., despite his appealing suggestion.
Later in the week, an article in the Financial Times had this to say about some of the losers in the deal:
“Up to 40 US regional banks owned preferred shares in the mortgage companies, with analysts estimating that at least eight banks have more than 10pc of their capital tied up in the shares, while another six had between 5pc and 9pc of their capital invested in Fannie and Freddie.”
Which begs the question: Why didn’t any of the large, politically-connected banks show up on this list? Did they know the bailout was coming and position themselves accordingly? And how did Bill Gross position his portfolio? Did he know in advance where the government would draw the line in the capital structure? Did he bet heaviest just above this line while eliminating investments below? Did hiring Alan Greenspan as an adviser give him an inside track on Paulson’s decision? Should Gross be prosecuted as an inside trader?
One more question: Why didn’t former Goldman Sachs CEO Hank Paulson recuse himself from the bailout decision? There is certainly a long history of cross-pollination between Goldman and Fannie Mae. E.g., former co-chairman (with Robert Rubin) and current board member Stephen Friedman and former managing director Robert Zoellick were both Fannie board members at one time. Former Fannie CEO James Johnson is a current board member of Goldman. All three are card-carrying members of the power elite: Friedman a member of the Council on Foreign Relations; Zoellick current president of the World Bank, member of CFR and the Trilateral Commision; and Johnson a bigwig in Democratic presidential politics going back to Mondale ’84, member of the CFR and the Trilateral Commission.
Lew Rockwell is right: nearly all billionaires are statists.
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