Posted on 09/24/2008 10:36:33 AM PDT by rightinthemiddle
NEW YORK (Reuters) - The Treasury's proposed $700 billion bailout for financial firms could yield a profit of at least 7 percent to 8 percent and benefit taxpayers, Bill Gross, who manages the world's biggest bond fund, wrote in an opinion piece in The Washington Post on Wednesday.
Gross, the chief investment officer of Pacific Investment Management Co., or Pimco, 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 percent to 15 percent to the Treasury, Gross said.
"Financed at 3 percent to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 percent to 8 percent," Gross argued. "The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic," Gross added.
(snip)
Gross' estimate of double-digit returns in scooped up mortgage securities assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, "but the Treasury's program is, in fact, directed to prevent just that," he added. Gross manages the $133 billion Pimco Total Return Fund and helps oversee the more than $812 billion in assets at Pimco.
(Excerpt) Read more at biz.yahoo.com ...
Taking that approach (of looking out for oneself), how about refunding $700 billion to the American taxpayers instead? That will get the economy moving! Some will even invest their money in a savvy way to improve the credit situation.
Whoopee!! The bubble’s back! Cigars, champagne and liar loans for everyone!
bump for later read.
So when we foreclose on houses that “The Poor” are in we will put them on the street so we can sell the house?
Tooo funny, no way, we will just give them the house for free and we (people who work) will pay for the FREE houses.
well, he’s right to point out one thing: this is not a gift, its a purchase of assets - at a discount to their original value.
So indeed there is a potential for it to be neutral or positive or negative fiscally, depending on what happens to the assets’ prices later.
I suspect that this theory is based on the fact that the deadbeats who aren’t currenlty paying their loans are just waiting to begin those payments until the government owns their note. I want some of whatever he’s smokin!
I have seen him interviewed a few times. He’s a pretty sharp guy. The assets should be dumped by the banks into the arms of an available buyer (government) who can bring them back to market and make some money.
If you want to be bailed out then you have to give up the assets. Take the loss, take the hit on earnings and come out of it still in business.
At a 7 to 8 percent return why can't the market fix the problem? $700 billion is just about 3.5 percent of 20 trillion dollars if I calculated correctly.
As for the CDS problem (AIG, et al) one Internet source explained the insurance ignorance:
"'Any one house burning down doesn't increase the likelihood that lots of other houses will burn down,' Davidson said. 'That doesn't apply to bond insurance.'
"In the case of bonds, one default can create a domino effect. Investors lose confidence in the market. Interest rates spiral. Borrowers can't find new capital to stay afloat." [End quotes]
Obviously the youngsters who came up with CDS have never been through a business cycle downturn -- or maybe companies used summer interns to come up with CDS. It turned out to be a gold mine. The market will never fail. Up! Up! What a deal!
Yes, with the market handling the problem some segments may suffer a recession -- it's happened before. They'll recover. They always did in the past -- unless they roll over and "die."
Yup! And our own houses, too.
Carolyn
Maybe the FBI can investigate Gross and Pimco re the profit they generated with the Freddie and Fannie worthless bonds and Bob’s what’s his name, the liberal so called financial guru on weekend radio. Bob’s what’s his name, is a liberal who pushed owning Fannie/Freddie bonds and mutual funds loaded with the bs.
How does Mr. Gross know that the mortgages are going to bought for 65 cents on the dollar?
A lot assumptions are in his explanation of this, but then Mr. Gross is also a big leftie, a Barack supporter, and a pretty fair bond manager.
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Interesting post you made. I usually have talk radio on during the weekends and listened to that show this past Sunday. I mentioned to my husband that he was incredibly cranky - a tone I never heard him take before.
Yup! And our own houses, too.
Sorry, I won't be able to afford both, but maybe I'll be better off. I will have to give up my home, which I've always made timely payments on, so some, more deserving, person can have their "discounted" or "free" home. Maybe then, when I'm homeless, I will be able to get into some government program that will give me a free home too.
Thank you elite government and Wall street rulers. It all makes sense now.
A bunch of us outed him during Clintoon’s second election and again in the 2000 election as true liberal.
“Gross is also a big leftie, a Barack supporter, and a supporter of the Clintoons, Gore and John, “I was in Nam”.
That may be ,....but basically I think he is right.,...
Our modern economy is very dependent on the Free Flow of Money via credit and credit lines....
And actually I am surprised that the estimate for distressed properties being sold to the government is as high as 65 cents on the dollar.
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