Pimco & PPIP

The New York Times has a detailed interview & article with Pimco's Bill Gross in Treasury has Bill Gross on Speed Dial. While the article is a nice warm fuzzy on guy pulling himself up with his own bootstraps, outside the box brilliant business acumen etc., some very interesting pieces of information are revealed about Pimco, Bill Gross and the Treasury's PPIP plan.

First is this tidbit:

Last fall, the Federal Reserve Bank of New York, run at the time by Mr. Geithner, hired Pimco — along with BlackRock, Goldman Sachs and Wellington Management — to buy up to $1.25 trillion in mortgage bonds in an effort to keep interest rates from skyrocketing.

Later Gross said he cannot even say Merry Christmas to the guys working for the Fed. at Pimco...without a lawyer present. But who needs salutations when one is now making huge fees?

And now check out this relationship with the PPIP program and Pimco:

Pimco tried to influence the direction of the bailout itself. In the spring of 2008, Pimco’s chief executive, Mohamed A. el-Erian, a former policy expert at the International Monetary Fund, floated a plan in Washington for a public-private partnership similar to the P.P.I.P. plan that Mr. Geithner later unveiled. It didn’t get much traction.

and now that the game is rigged, with fund managers about to be announced for P.P.I.P.:

Today, Mr. Gross is eager to buy the same subprime loans he once refused to touch, as part of the Treasury’s distressed-asset initiative. After all, the thinking goes, if anybody can figure out how much all this debt is worth, it’s Pimco. But Pimco’s involvement in so many aspects of the bailout has made many other financiers and analysts uncomfortable. They say its proximity to the Treasury Department and the Fed may allow it to reap billions of easy dollars through federal contracts and preferential investment opportunities.

A frequent complaint is this: Why is the Federal Reserve paying Pimco to buy mortgage securities on its behalf, when the firm is already a huge buyer and seller of the same bonds? “That’s the equivalent of a no-bid contract in Iraq,” fumes Barry Ritholtz, who runs an equity research firm in New York and writes The Big Picture, a popular and well-regarded economics blog. “It’s a license to steal.”

His mood brightens when he talks about how much money Pimco could reap by participating in the Geithner plan. 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.

and look at this media play:

In a CNBC interview on Aug. 20, 2008, he argued that Americans were putting “their money in the mattress” because the government hadn’t rescued imperiled financial institutions like Fannie and Freddie.

On Sept. 7, Henry M. Paulson Jr., then the Treasury secretary, announced that the government was taking over Fannie and Freddie. The value of the Total Return fund rose by $1.7 billion in a single day.

It might have been a mistake for Bill Gross to even do this interview, but do it he did, giving additional hints at how government policy is being shaped by those who are in the best position to gain from it....and that is not the taxpayer.

This might explain why TARP was ramrodded through Congress.

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Gross just last month said

Last week’s furor over the possibility of an eventual downgrade of America’s AAA rating demonstrates that only too clearly. On the night of May 20, Standard & Poor’s announced a downgrade watch for the United Kingdom and since the U.S. and U.K. are Siamese-connected, financially-levered twins, the implications were obvious: the U.S. might be next. 



One can only infer that Gross' actions are in line with this assumption and that those who have him on "speed dial" are aware.