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PIMCO: Bail-Out Profiteers

PIMCO’s Bill Gross, bail-out profiteer:

in 2008 Gross shifted from Treasuries and corporate bonds into mortgage debt backed by Fannie and Freddie because he believed that the government would ultimately keep those government-sponsored enterprises (GSEs) afloat. By May, Gross had moved 60% of Total Return into GSE-backed bonds, up from 20% the year before. “In a way, we’ve partnered with the government,” says El-Erian. “We looked for assets that we felt the government would eventually have to own or support.”

Pimco also made a bet on GMAC, the struggling finance arm of General Motors, reasoning that Washington would not let the lender fail for fear of crippling the U.S. auto industry. “We tried to move ahead of the government,” says Gross, “to purchase assets before we believe they will have to.”

Once the financial crisis hit, Gross was not shy about calling for a bailout - and he is an especially effective advocate for his causes. Where many big money managers try to keep a low profile, Gross has always maintained a forceful public persona, making regular television appearances to promote his views.

 

posted on 21 February 2009 by skirchner in Economics, Financial Markets

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I’ll watch CNBC interviews with Bill Gross and Mohamed El-Erian in a different light now.

They seem to be playing the government (and the market) perfectly.  Shouldn’t they be admired as good capitalists?  I mean, they’re just out to make a buck, and doing it very successfully it seems.

They certainly picked the economy better than most:

At the 2004 session a view emerged that although the world looked calm, the economy was being fueled by an unsustainable borrowing binge. At some point it would have to end, and this so-called deleveraging process would trigger an economic storm, beginning with housing and financials. Ultimately the government would have to step in to ease the pain.

Posted by .(JavaScript must be enabled to view this email address)  on  02/22  at  11:15 PM


I don’t know what PIMCO’s mandate is, but regardless of how smart these guys are, this seems like a risky strategy!

Posted by .(JavaScript must be enabled to view this email address)  on  02/23  at  03:01 AM


Looks like Citi might be going down tonight: Citi Endgame Nigh?

the indications are that Team Obama is not ready to blink. It looks like it will ... take a depositor or counterparty run to get them to act. Wonder what the stock market will do when it figures that one out


Its time to put the zombies out of their misery.

Oh, and for those in the “just let them fail” camp, I found this comment from Bob Gottliebsen interesting…

To understand what is now being discussed at the highest levels in the US, the UK and Europe I have to take you back to the dark days of last September when Lehman Brothers collapsed. We now know that the world went perilously close to a complete breakdown of the banking system which would have ended globalisation as we know it and led to unemployment of over 50 per cent in most countries. Global leaders looked into the abyss then and they are now determined to do whatever is required to avoid a global banking breakdown.

I think Bob might be getting a bit carried away there (50 per cent!) but supporters of the view that letting Lehman fail was a good move are in a tiny minority these days.

Posted by .(JavaScript must be enabled to view this email address)  on  02/23  at  05:21 AM


Rajat, on the contrary, I think they probably concluded it was a low risk bet given their understanding of the incentives at work.  It shows how implicit government guarantees were working to severely distort the allocation of capital.

David, full marks for entrepreneurship, but as you say, it puts their market commentary in a somewhat different light.

Posted by skirchner  on  02/23  at  06:06 AM


I guess it may be low risk for the return available. I’m just saying that for a bond fund to make such a large bet that the government would step in seems quite aggressive.

Posted by .(JavaScript must be enabled to view this email address)  on  02/23  at  06:38 AM


“supporters of the view that letting Lehman fail was a good move are in a tiny minority these days.”

Being in the minority does not automatically make you wrong.  Wasn’t Bill Gross in the minority?

Posted by .(JavaScript must be enabled to view this email address)  on  02/23  at  09:14 AM


Yes, the Lehman failure went just swimmingly didn’t it?!

Posted by .(JavaScript must be enabled to view this email address)  on  02/23  at  10:21 AM


Actually yes, it did. The company went into bankruptcy and within a short space of time its assets were broken up and sold to other institutions.

http://en.wikipedia.org/wiki/Lehman_brothers

Posted by .(JavaScript must be enabled to view this email address)  on  02/23  at  09:56 PM


E.D.—you’re tripping.  Are you smoking what Craig James smokes?  If you want a good belly laugh, have a look at Mr James’ 2008 Outlook from January last year

This is what actually happened three days after Lehman was allowed to fail:

Rep. BARNEY FRANK (D-MA), Financial Services Cmmt. Chairman: And they said they needed the authority to use $700 billion dollars to unstop the credit markets.

Sen. CHRISTOPHER DODD: Sitting in that room with Hank Paulson saying to us in very measured tones, no hyperbole, no excessive adjectives, that, “Unless you act, the financial system of this country and the world will melt down in a matter of days. “

JOE NOCERA: Bernanke said, “If we don’t do this tomorrow, we won’t have an economy on Monday.”

So were those well known socialists Paulson and Bernanke exaggerating, or are you tripping?

Posted by .(JavaScript must be enabled to view this email address)  on  02/23  at  10:14 PM


“So were those well known socialists Paulson and Bernanke exaggerating?”

Of course they were.

Firstly, TARP did not pass Congress immediately and the following Monday there was still an economy.

Secondly, they claimed that without TARP, the world economy would collapse.  But TARP was never actually implemented as was originally planned, yet the economy did not collapse.

These people have no credibility.

Posted by .(JavaScript must be enabled to view this email address)  on  02/24  at  03:56 AM


Oh I don’t know, the world economy is doing a pretty good impression of collapsing at the moment ... and almost everyone refers to the Lehman collapse as the “cardiac arrest” moment.

These people have no credibility.

In the credibility stakes, the likes of Roubini, Schiller, Stiglitz and our own Steve Keen are looking pretty clever these days, while the laissez faire crowd will be ignored for a generation.

Remember the US Recession that Isn’t?

Posted by .(JavaScript must be enabled to view this email address)  on  02/24  at  06:31 AM


Sure, the global economy is in bad shape.  But Bernanke and Paulson predicted there would be NO economy in the following week of their meeting! You don’t think that was an exaggeration?

Plenty of free market economists predicted that a problem was looming, especially from the Austrian school.

Will they be ignored? They have been ignored for decades, so I expect they will continue to be.  So?

BTW, here is more evidence that the housing bubble was caused by the Fed:


“With the nation suffering from the worst economic downturn since the Great Depression, Susan Schmidt Bies is having second thoughts about some of the votes she cast as a member of the Federal Reserve Board of Governors in the years leading up to the present crisis.
...
In hindsight, however, Bies believes the Fed’s cheap money policy unwittingly fueled overbuilding in the housing market, whose collapse is a big factor in the current recession.

“I realize, and I think some of the other folks realize, that we probably raised rates too slowly,” Bies said. “They needed to go as low as they went in the last recession. But we should have raised rates more promptly afterward.”
...
In addition, she said, there was pressure from Congress, which oversees the Fed.

“When you tighten (mortgage) standards, it tends to be the people with the lower discretionary income, lower credit scores, who tend to be denied housing. And if you’ve got people in Congress who really feel everybody ought to get a mortgage, period, then tightening those standards, they really feel you’re not allowing people to own a home,” she said.”

http://www.greenvilleonline.com/apps/pbcs.dll/article?AID=2009902220336

Posted by .(JavaScript must be enabled to view this email address)  on  02/24  at  07:15 AM


Steve Keen looking clever? He might look fit after he climbs Mt Kozsciusko…

Posted by .(JavaScript must be enabled to view this email address)  on  02/24  at  07:16 AM


E.D.: No arguments about “Easy Al”, but I don’t thing Congress had a gun to the heads of the mortgage brokers saying “Lend!”, nor did they force the mortgage brokers to on sell the loans to Wall St banks, nor did they force the investment banks to package up the debts into indecipherable derivatives, nor did they force the ratings agencies to slap a AAA rating on those derivatives.  No, it was your wonderful unregulated free market that allowed all that to happen.  That’s why you will be ignored for a generation. 

Rajat:  Will you be joining Rory at the top of the mountain if Keen turns out to be correct?

Posted by .(JavaScript must be enabled to view this email address)  on  02/24  at  07:43 AM


Suppose I gave you $1 million to spend, no strings attached.  Further suppose that I offer a guarantee that if you should go broke, I will bail you out.

Would I need to put a gun to your head to force you to spend it?

“That’s why you will be ignored for a generation.”

Again, so what?

Posted by .(JavaScript must be enabled to view this email address)  on  02/24  at  11:33 AM



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