Gross invokes RTC and in other parts of his letter, some of FDRs programs. That suggests he IS calling for the government to buy homeowner mortgages, which as we discussed (http://www.nakedcapitalism.com/2007/08/paul-krugman-punts.html) is massively problematic.

BTW, other people read his letter the same way I do:

http://feeds.feedburner.com/~r/MishsGlobalEconomicTrendAnalysis/~3/147790245/bill-gross-wants-pimco-bailout.html

http://www.housingwire.com/2007/08/25/the-borrower-bailout-fallacy-why-pimco’s-bill-gross-is-flat-out-wrong/

http://nihoncassandra.blogspot.com/2007/08/gross-rescue-homeowners.html

And if the government doesn’t buy the mortgages, it has no legal standing. How does it negotiate for homeowners when the bank has every right to foreclose? Oh, and BTW, these foreclosures are governed by state law. You raise staggering Constitutional issues if you try to override well established contractual law.

And imagine the size of the agency that would be required to handle 2 million mortgages individually. The FHA says if it gets the green light, it can double its operations from 120,000 mortgages to 240,000. That is an existing agency with existing procedures and a large degree of standardization. Having a new body handle completely one off negotiations is an impossible task.

Finally, as I have said elsewhere, the Fed DID NOT negotiate the LTCM wind-down. It called the investment banks together because no one wanted to put themselves in a weak negotiating position relative to the other IBs by trying to lead a workout (that would have signaled they were more desperate than the others). The Fed got everyone together, but IBs duked it out with each other and LTCM.

And remember, LTCM was liquidated. The IBs put in enough dough to facilitate an orderly wind-down only. There was zero, zip, nada intent to keep LTCM as a going concern, just to keep it from imploding and taking the financial markets with it. The deal with LTCM also cut all the LTCM partners’ pay big time while they were doing the wind-down.

Extract:

“The payment, settlement and clearing systems in the EU and elsewhere should be taken away from private profit-oriented financial businesses for which these tasks are but a small fraction of their total portfolio of activities. The reason is that the performance of these essential but, from the point of view of the total resources involved, minor tasks of providing payment, settlement and clearing systems, allows the private businesses offering these systems and services to extract massive rents from the state and from their customers, benefiting the entirety of their business activities and not only the units devoted to providing payment, clearing and settlement services. This is most patently the case during financial crises, when the only way to safeguard the payment system often appears to be to safeguard the commercial banks that currently provide many of these payment services. The interest rate cuts sought by the commercial bank lobbyists (and by all those who stand to benefit from enhanced access to cheaper finance) are an extraordinarily inefficient way of safeguarding the payment system. Interests rate cuts aimed at supporting the payment system end up supporting those whose recklessness led them into excessively leveraged speculative activities.

The intermingling, in private profit-oriented businesses, of the provision of public goods or services with regular profit-seeking activities, represents an extremely unhealthy state of affairs. The public provision of private goods is a well-documented disaster. The private provision of a public good without effective regulation (especially when provision is by a complex private businesses for which the public good is but one concern among many), can be a disaster of comparable magnitude.”