Pimco’s Bill Gross, the chief investment officer of the world’s biggest bond fund says the Treasury’s proposed $700 billion bailout plan for financial firms, which would raise the national debt ceiling to $11.3 trillion and grant the Treasury unprecedented power to buy and resell mortgage debt, could yield a profit of at least 7% to 8% and benefit taxpayers.
According to Gross’ estimates, the average price of distressed mortgages that pass from “troubled financial institutions” to the Treasury at auction will be 65 cents on the dollar. That will represent a loss of one-third of the original purchase price to the seller, and a prospective yield of 10% to 15% to the Treasury. The double-digit return estimated by Gross in scooped up mortgage securities assumes a lengthy ownership of the assets and is in turn reliant on the level of home foreclosures, but this program, Gross notes, is in fact, directed to prevent just that.
Gross argues that “financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.”
Gross also thinks that the purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below “par” or cost, and prospectively at levels allowing for capital gains, making this package Wall Street-friendly to the extent that it frees up funds for future loans and economic growth.
Gross believes the Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street. The manager of the country’s largest bond mutual fund also expressed his willingness to have his “brilliant staff”, as he put it, assist the Treasury Department’s $700 billion rescue plan by analyzing subrime mortgages free of charge. Mr. Gross explained his offer as a philanthropic one.
Bill Gross manages $133 billion Pimco Total Return Fund and helps oversee more than $800 billion in assets at The Pacific Investment Management Company [Pimco].
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While Mr. Gross’ s offer is philanthropic, given the numbers he outlines perhaps his firm should step up and purchase these assets at such great yields (without government intervention).
Wait — isn’t Pimco the company that made billions shorting sub-prime mortgages? Excuse me, but what’s wrong with this picture?