naked capitalism

Boy, when you think you’ve seen the worst in utterly shameless, self serving tripe, someone manages to outdo it. Admittedly, it’s awfully hard to beat Steve Schwarzmann’s recent one-two punch of utter canard wrapped in tasteless hyperbole, that of Obama proposals that private equity kingpins pay taxes on what is really the fruits of their labor like other working stiffs was a ” a “war… like when Hitler invaded Poland in 1939.”

But no, Pimco’s Bill Gross bests Schwarzmann in making it clear to the great unwashed his unabashed belief that what is good for him is good, period. Schwarzmann is a tad less horrid by at least limiting his grandiose claims to his own industry. Gross is marginally less offensive to good taste (although a discussion of his body odor in an investment piece is certainly a novel wrinkle), but makes it up by insulting his audience’s intelligence, namely, by presenting himself as a staunch ally of the little guy.

In case any of missed it, one of the major screwups of the crisis just past was the failure to make shareholders and bondholders of dud financial firms (or ought to be dud, the power that be have gone to great lengths to present the fiction that many insolvent players were merely having a wee liquidity crisis) take losses. These investors signed up to be risk capital, and even if bailouts might have been inevitable, they would have been much smaller and more palatable if the people who had failed to do their job in monitoring their holdings suffered too. And who was the chief lobbyist for the “you better not make bondholders take any pain” camp? None other than Bill Gross.

So get a load of this drivel in his current newsletter:

I’ve had a lot of high perspiration “Right Guard” moments in my life, although I futilely try to live by Gillette’s 1984 advertisement of “never let ‘em see you sweat.” External composure during times when others around you are losing theirs is a quality that leaders are presumed to require, so I walk like a man and talk like a man, while all the while a little boy inside me is screaming, “Run!” The only time I ever remember totally losing it, though, was when I reached the head of a reception line for Bill and Melinda Gates, nearly 10 years ago. “Nice to meet you, Mike,” I said, and my armpits needed a full can and then some for the rest of the evening.

Yves here. So get this, Bill really is a normal guy, he gets nervous when meeting a bigger dog! But of course the only bigger dog than Bill Gross is Bill Gates. The extended commentary on his bodily responses to a verbal gaffe is a further weird effort at Average Joeness. Back to the piece:

Last week was an equally challenging situation as I ventured back to the Treasury in Washington D.C. which, considering how often we’re painted as powerful Washington players, was my very first official visit of any kind in over 35 years at PIMCO.

Yves here. If you are powerful, you don’t need to go to Treasury yourself to make your position known. Phone calls and emissaries will suffice. Back again to the letter:

Yves here. Bill Gross as Man of the People? Utterly ignorant the ways of the the Beltway? Assuming his “Que” story bears any resemblance to reality, he was toying with them to see how they’d react to faux cluelessness, a way to test other people in the room’s reaction to an off the wall comment. And presented differently for mass consumption.

Now keep in mind that, prior to the publication of this letter, various reports on the Fannie/Freddie meetings in which Gross deigned to participate made it clear that he was in the extortion game. As we noted earlier:

Get a load of this…Bill Gross is making threats:

Mr. Gross said Pimco would not invest in bundles of mortgages that lacked government insurance unless the borrowers had made down payments of 30 percent or more.

This isn’t even credible. If other fixed income managers were to invest in Fannie/Freddie insured deals (presumably based on an assessment of risk v. yield), Pimco would follow. For competitive reasons, they couldn’t sit on the sidelines and pout.

So Gross needs to cover his tracks and tell us why what is good for him is really good for us. No, really. He tells us based on twelve months of post crisis shell shock, and refusal to let housing prices correct to long historical level of reasonable valuations relative to incomes and rental yields, that since the government has been intervening to prop up housing, and therefore bonds, and therefore Bill, that is the new natural state of affairs and therefore must continue:

Ninety-five percent of existing mortgage creation over the past 12 months were government guaranteed. The private market was nowhere to be found because they charged too much. It was the cost of private origination and securitization, perhaps more than any other factor, that justified government involvement. Prime, but non-conforming, mortgages (jumbos, insufficient down payments) were being purchased by PIMCO in the hundreds of millions of dollars every week, but at yields of 6, 7, and 8%. If that was the risk/reward tradeoff, compared to FNMA and FHLMC yields at 3.5–4%, how could policymakers pretend that the housing baton could be quickly and cost-effectively passed back to the private market? Few, if any, could afford a new home at those interest rates. If you were a believer in the dominance and superiority of private markets, how could you deny the signal that markets were sending – that the risk was too high given the substantial losses of recent years?

We’ve been writing about the buyers’ strike in private mortgage paper for some time, and guess what? We haven’t seen any evidence to support Gross’s theory. We had a private securitization market that comported itself pretty well for nearly 20 year before the derivatives types started colonizing it. Yes, we would have had a housing bust and investor losses, but it was the leverage of credit default swaps and heavily synthetic CDOs that turned what actually would have been a contained subprime problem into a global financial crisis. Private investors want to see lower housing prices (meaning some value in the house if it defaults), better investor protection, more prudent underwriting, and home buyers with reasonable down payments. The big reason we have no private securitization market is not Gross’s cost story, it’s the direct result of bad policy choices: trying to keep housing prices at artificial levels, and failing to take any meaningful steps on securitization reform.

Gross gives us phony scare talk:

As the Treasury contemplates the “transition” from Agency conservatorship to either public or private hands, how could private market advocates reasonably assume that pension, insurance, bank, and PIMCO-type monies would willingly add nearly $5 trillion of non-guaranteed, in many cases junk-rated mortgages to their portfolio? They would not.

Yves here. As strange as it may seem, even with subprime losses as bad as they are, a lot of AAA rated bonds are paying out just fine (their lower rated tranches, of course, are a completely different story, and a fair number of former AAA pools are in bad shape). And no private investors are going to tolerate a re-run of 2004-2007. People are pretty good at not repeating recent, hugely painful, errors. So his claim, “in many cases junk” is unfounded in our new reality.

And this part is actually funny:

And why do I and PIMCO support this view? Is it some self-interested, money-making plot to allow us to dominate the bond market? Hardly. Any investor would recognize that it’s better to have a 6 or 7% yield instead of 3–4%, so it would be better for PIMCO to let the Administration flood the private market with non-guaranteed, private mortgage product and let us vultures feast on the pickins.

Yeah, right. Tell me what would all the bonds Pimco NOW owns look like if they were priced to yield 6-7%? The result would be massive losses. This is Bill talking his book, pure and simple, and trying to pretend his economic interests lie elsewhere. But that’s his posture all the time, it simply happens to be shockingly obvious in this missive.