With the collapse of Wall Street, Pimco’s Bill Gross has emerged as the world’s most successful bond fund manager and one of the nation’s most influential financiers who seems eager to buy the same subprime loans he once refused to touch.
From the NYT:
[Bill Gross’] mood brightens when he talks about how much money Pimco could reap by participating in the Geithner [Public-Private Investment Program, or PPIP] plan [which would relieve the likes of BofA (BAC), Citi (C) and other banks of an estimated $1 trillion in soured mortgage debt so they can start lending freely again]. No wonder: the terms are deliciously favorable for participants selected as fund managers. Money managers like Pimco would be expected to raise at least $500 million from their clients. The Treasury would match that with taxpayer dollars. Then Pimco and the Treasury would create a jointly owned fund of at least $1 billion that would buy distressed mortgage bonds.
Government largess doesn’t stop there. The fund will be eligible for low-interest financing from both the Treasury and the Fed that analysts at Credit Suisse First Boston estimate could be as high as four times the total equity in the fund. So if Pimco ponied up $500 million, the fund that it manages could borrow $4 billion.
Pimco would then negotiate with banks to buy their wobbly mortgage-backed securities. Mr. Gross says that some of these securities pay an interest rate as high as 14 percent and that even if default rates were 70 percent, Pimco and the government would still make a 5 percent return after covering their negligible borrowing costs. That means the government-Pimco partnership could make at least $250 million in a year on a $5 billion investment fund. Of that amount, Pimco would get $125 million — a 25 percent return on its original investment.
But here’s the part that makes Mr. Gross salivate. If things go badly, the government is responsible for repaying all that debt…
The PPIP program, which basically allows the government to invest side-by-side with private investors – supposedly to cleanse the banks of their toxic assets, is designed as a mechanism that seems unlikely to produce much of a gain for the taxpayer. The fact Wall Street loved the plan on first sight, shows who really stands to gain from its implementation. The bottom line, as we read it, is that should the plan’s calculations go negative, the taxpayer ends up swallowing the losses. Simple as that.