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Earth to Bill Gross: We Chickens Know You Are the Fox Minding the Henhouse

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:

I sort of saw myself as a modern-day Jimmy Stewart – a Bill Gross, instead of a Mr. Smith, going to Washington, but with the same populist spirit; no filibusters or anything, but an idea or two on how to benefit Main as opposed to Wall Street, in the ongoing housing crisis. And who could possibly object to helping the little guy, I thought? Wrong! Just like Oz isn’t Kansas, Washington D.C. isn’t Newport Beach or Des Moines, Iowa. There were lots of powerful people there – special interest groups who said their home was in neighboring Chevy Chase or Arlington, but that they all worked at a place called “Que” street. Remembering my high school Spanish, I innocently asked if that began with a “Q,” and one of the lobbyists gathered around my circle rather dismissively said, “no, it’s a single letter and it’s between J and L in the Greek alphabet.” Shortly thereafter they all drifted off, presumably to find a more informed but less entertaining source of conversation. I guess they must have taken French in high school or maybe I hadn’t used enough Right Guard that morning, but at least in my defense, I hadn’t called any of them “Mike.” My image as a leader presumably was still intact, although my intelligence was in question, a not too uncommon condition in Washington, I might add.

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.

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33 comments

  1. Bruce

    With a few limited exceptions, bondholders have been the clear primary beneficiary of every government action to date. Every single one. From TARP, to QE, to the fannie/freddie implicit gtee, you name it. All to protect bondholders. The only thing I can figure out is that there must be so much “leverage on leverage” in the system, that if bonds start defaulting, it creates an immediate default cascade.

    Personally what I thought even more bizarre was that he seemed to suggest that the private option for mortgages was on the table. It’s not, that I am aware of? So what was he worried about? Why did he feel the need to wrote this now?

  2. Conscience of a Conservative

    Wow, Yves, you are totally off base. First Bill Gross’ right guard comments is an attempt at humor and very much the style he writes as do others. Second he’s attempting to act in the best interest of his investors who have already invested considerably in GSE guaranteed MBS.

    I may no agree with his prescription for the markets, but his approach is honest and he’s acting as a fiduciary. The problem if any is politicians in Washington thinking people like Gross don’t have a bias.

    1. skippy

      Bias has its price and the results speak for its self…nuff said.

      Skippy…I expect a mass exodus from DC at some point or contracts ripped up.

    2. poopyjim

      His approach is honest?!??!? This is some of the most dishonest crap I’ve ever read. You also say “Second he’s attempting to act in the best interest of his investors who have already invested considerably in GSE guaranteed MBS.” Well if he’s *honest* then why is he trying to spin it as good for the public in general?

      And the right guard comment was idiotic, and demonstrates Gross is a deplorable, sniveling asskisser. I wouldn’t break a sweat or even walk across the street for some rich turd. Give me a break dude.

      1. Chris

        I’d run across the street to lay him out.

        Why can’t we have serial killers targeting these scum? My guess is we’d be hearing about a War on Serial Killers.

    3. i on the ball patriot

      The smell is in Shilly Billy’s fear filled mind and it is the smell of rope and creosote on the lampposts …

      Yes, he is talking his book of course, and playing the media sell out assisted Too Big To Fail card, but the excessive “I smell and sweat just like you” bullshit is very revealing.

      Folks are on to the intentional global scam he has played a part in orchestrating and he smells the rope and the creosote on the lampposts. The anger in the victims is surging mightily. Their hanging rage is right around the corner and he knows that. Excessive trying to relate is very common in the top tool puppets as the scam intensifies and word gets around as to the real causes of it. Orchestrated societal deflation on this scale is not without peril for the perps.

      Watch for blame game cracks in the Pernicious Greed crowd at the top.

      Deception is the strongest political force on the planet.

    4. Yves Smith Post author

      You incorrectly imply I’m unfamiliar with Gross’s writing. I’ve not only read his letters for some time, I’ve been commenting on them for years.

      And yes, his writing is clunky but often contains a memorable phrase. But his Right Guard comes is both puerile and in poor taste, and clearly IS to establish his bona fides as a average dude.

      And since when is it part of fiduciary’s job to bully the government for policies that favor them? Get back to me when you find statutes or court decisions supporting your claim.

  3. RueTheDay

    Well, strip away his arrogance and propensity to talk his own book, and he does still have a point. If you were to remove GSE guarantees from the mortgage market tomorrow, the mortgage market as we know it would likely cease to exist. The vast majority of credit-worthy borrowers would not be able to obtain a mortgage at any interest rate, and the very few super wealthy who could obtain mortgages would have to pay a significantly higher rate than they do today to obtain one.

    1. readerOfTeaLeaves

      I’ve found people to be far more creative and adept than you seem to assume.

      If the government didn’t guarantee mortgages, maybe we wouldn’t have so many overbuilt McMansion subdivisions. Maybe we wouldn’t have an entire industry jacking up the price of the underlying asset (ie, the house, condo, or office park) in order to cream higher fees.

      And maybe we wouldn’t have 30-year mortgages. Imagine people being expected to pay off a mortgage within 10 years — if that’s the expectation, that’s what they’ll do.

      But if they did that, the banksters would lose 20 years’ worth of ‘interest’ on every single mortgage, and since the banksters have more lobbying clout in Congress than the US public has, we’re stuck with a lunatic system of what is essentially lifetime servitude-debt to banks.

      Personally, Gross doesn’t come across like a ‘fox’ as I read this.
      He comes across as a viper.

      And I’m guessing that he’s the sort of self-centered viper who flatters himself that he ‘works hard’, when in essence his economic role is to extract wealth that IMVHO ought to be going to productive uses, rather than sending debt dollars to banksters.

      What economic value in the system can this guy claim to create?
      From where I sit, this guy is an economic parasite who wants all the rest of us to feel some kind of sympathy for him.

      I’d cross the street to *avoid* having to deal with him.

      1. djt

        Going to a 10 year loan would double the monthly payment roughly. So that cuts in half the house a person could afford. There’s a lower limit to the cost of construction; assuming free land, free installation of utilities, free titling, free inspections, free roads, etc, houses still cost about $75 per square foot to build.

        Not that there’s anything wrong with that, but most people would live in cramped cinderblock apartment blocks if 10 years was the longest loan term available.

  4. Bruce

    Actually he makes a terrible point. Mortgage rates were for decades in high single digits, and people bought houses. They just weren’t as expensive to buy.

    If the gvt subsidizes the interest rate it will be artificially low, which will keep housing prices artificially high. This creates massive structural problems on multiple fronts, the most serious of which would be the damage of a flash crash in bonds and resulting rate spike.

    Cmon people , if the economy only functions because mortgage rates can be held at 4% or lower, the economy ISNT FUNCTIONING.

    1. readerOfTeaLeaves

      Brilliant comment, and I wish that I’d read it before I left my previous remark.

      Absolutely on-target.
      If the economy only ‘works’ because of government acting as last-recourse for people who basically created a casino operation from ‘deriving’ layers of bets on subdivisions and strip malls, then how is that ‘innovative’ or creating real economic value and widespread productivity? It isn’t.
      Not that Gross is likely to admit that lamentable fact.

    2. i on the ball patriot

      Bruce said; “Actually he makes a terrible point. Mortgage rates were for decades in high single digits, and people bought houses. They just weren’t as expensive to buy.

      If the gvt subsidizes the interest rate it will be artificially low, which will keep housing prices artificially high. This creates massive structural problems on multiple fronts, the most serious of which would be the damage of a flash crash in bonds and resulting rate spike.”

      The government always “subsidizes” the interest rates.

      All rates are set (“subsidized”) by ‘government’ — because it is a hijacked government! A wider historical viewpoint. is required to see the past and present machinations.

      The real problem is aggregate generational corruption of government.

      The government was purchased by the wealthy ruling elite through graft and corruption to facilitate the creation of the FED in 1913. Since then the FED and the financial sector has always had a hand in further incrementally co-opting the government through graft and corruption and using it to set (“subsidize”) interest rates (and gain control of and create facilitating government institutions), to guarantee them PROFITS. That has been the plain Old Vanilla Greed FOR PROFIT dynamic. We are now in a new era of a Pernicious Greed FOR CONTROL dynamic.

      The higher mortgage rates you mention, with lower home prices, represent the transitional period from Vanilla Greed for profit to Pernicious Greed for control.

      The economy is not working for the people because the people do not control the government. The government IS working for the global wealthy ruling elite, because, through their central banks, they control the governments, as well as the militaries, corporations, and aggregate media propaganda machine. This is an intentional global herd thinning, a take down of the middle class, and creation of a war of perpetual conflict in the masses, to reduce global consumption. It is the wealthy ruling elite way of correcting the global resource problem of sustainability, a problem that has been caused by their misdirection of use of resources.

      The economy isn’t functioning by design.

      Shilly Billy is a tool in the globe’s greatest Ponzi scheme ever that is being perpetrated by the global ruling elite. He is running scared as he should be.

      Deception is the strongest political force on the planet.

  5. Conscience of a Conservative

    The banks, the government, existing home owners, real estate interests… all would not be prepared to deal with the reality of a government exit of the mortgage market which would not only mean higher rates(risk spreads) and lower LTV’s , but even lower real estate valuations due to buyers being denied access to the credit markets.

    Of course lower prices would help in making homes affordable for first time home buyers, but nobody will discuss that…

    1. Raging Debate

      Well stated CoaC. These kind of people are becoming irrelevant. How they hate that! No worries, they have forced all the little guys to become rather irrelevant with them that can no longer support this version of a rentier economy.

      Think about it, everyone went gaga over Thomas Friedman’s book The World is Flat. Celebrating that we have returned to the 13th Century of Feudalism when the Catholic Monarchy refused to acknowledge the world was round? That is the basic tenement of this entire crop of leaders. Preserve the power structure at all costs. Another historic lesson that men are not gods. I thought it was Ramses that figured that one out thousands of years ago.

      The billions only provide satisfaction if one aligns with his/her spiritual purpose or basic evolutionary human drive of making the world a better place. Bill Gross is acting like he is confused about the flat world he helped create. I don’t buy into ‘fear of the masses’ argument as i On The Ball Patriot contents.

      Interest rates are going to rise and their is nothing Bill Gross or anybody else for that matter can do about, unless of course America finishes going ‘Soviet’ completely. Going ‘Soviet’ usually is after hyperinflationary collapse though and not before.

    2. greg b

      “Of course lower prices would help in making homes affordable for first time home buyers, but nobody will discuss that…”

      For the 33% of people that would have a job! An equilibration like you are referring to would cause so many bankruptcies, layoffs and failures it wouldnt be a society worth living in.

  6. Samuel Clemens

    I first encountered Bill Gross’s line of reasoning many years ago in another context. Back then, however, it went by another name: “Soviet”. Today,the description, but not the substance, is different.

  7. Conscience of a Conservative

    Analysts from Goldman or others appearing on CNBC will undoubtably come up with dozens of reasons to explain why low rates make sense, but in the real world ultimately lenders want a positive real rate of return. They have the ability to invest in commodities, other currencies and understand how bogus the CPI is and that hedonistic and substitution effects are non-sensical ways to justify lower costs to the u.s. treasury when computing social security payments. It may not happen right away, but it’s only a matter of time before everyone demands an appropriate risk adjusted rate of return.

    Also can anyone not expect the government to attempt to monetize the national debt? Can’t wait for that to show up in borrowing costs…

  8. angry anoner

    “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.”

    LOL wonder where you got this er perspective on meetings and motives???

    This is too funny.

    And to think that he had to BACK UP his meeting trial balloon with SHOT HEARD ROUND THE TRADING ROOM missive.

    I have liked Bill Gross’ missives for awhile but I stopped reading because it was obvious his philosophy was wedded to his book of trades. He is much like a conductor that has become enchanted with the movement of his hand and forgets it’s the band that is playing the music.

  9. Ishmael

    Yves — direct hit on all targets. Gross many times has a writing style of a juvenile. It isn’t even humorous.

    Schwarzmann’s comments on taxing of carried interest makes me ill. Taxing carried interests at capital gains rates never made sense.

    Gross’s comments about the bond market are just about as self serving as you can get.

    We will never have a real economy until we allow housing to drift down to its real value. Until then the recession will continue.

  10. dr

    Bill of Pimco is just stating the realizations that the only investments vehicles that will survive in the next decade are those that have some implicit government backing better know as state capitalism.

  11. ECON

    It almost is worth a Depression to see how little the big capitalists really know through their deceptions. Bottom feeders all.

  12. CingRed

    Is this guy for real?

    “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.”

    Bill, in case you forgot, you can sell just about anything for the right price. The fact that deep discounts on the supposed junk-rated mortgages might mean less money for you is the only thing you could possibly be worried about. You know that the due diligence required to properly price the assets costs you money and it is so much easier to dispense with that formality by getting a government guarantee and shoveling the risk off to the taxpayers. Maybe you have a bit too much exposure to Fanny and Freddie in your portfolio and don’t want to take the haircut for your bad investment decisions. I don’t know what your game is but it certainly isn’t to protect me.

  13. CingRed

    I would agree completely if you would add just one word to your comment:
    Bill of Pimco is just stating the realizations that the only PONZI investments vehicles that will survive in the next decade are those that have some implicit government backing better know as state capitalism.

  14. Cynthia

    In his piece entitled “Appeasing the Bond Gods” (see link below), Krugman says that the apostles of austerity — sometimes referred to as “austerians” – think they are appeasing the Bond Gods by opposing any additional federal spending to help stimulate growth in the jobs market. But he goes on to say that Bill Gross, the top Bond God of them all, is deeply concerned that cutting off the stimulus spigot will cause whatever sorts of green shoots in the jobs market to shrivel up and die. So unless the “austerians” have got it all wrong about the Bond Gods, which I doubt, Bill Gross is merely trying to win the hearts and minds of us working stiffs by coming across as one of our most valuable advocates.

    http://www.nytimes.com/2010/08/20/opinion/20krugman.html?_r=1

  15. Tirumala Kollur

    “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 have public education and we are going to have public healthcare. This is paving the way to public housing in weird convoluted way.

  16. PhilB

    Yves:

    Good Call! Someone definitely is in need of some odor masking. The entire argument Bill proposes is full of smelly cheese holes.

    First: Bill says the govt would ask for 30% downpayments and 50-75 bps fee to go into an insurance fund. Well folks, if you ask for 30% down, due your homework and charge 50-75bos of insurance, the private sector would be there!

    Second: We must move away from having the Govt in the housing business. The continued incorrect and dangerous idea that we need to generate “wealth” by inflating assets is in large part the reason we are where we are today. The consequences and distortions are generational if not multigenerational.

    Maybe banks can stop trying to be hedge funds and get back to lending. If banks can pay you 0% on you deposit and lend to you on your home with 30% down payment at 5% plus 50-75 bps of insurance, seems like a good business to be in, maybe a bit boring, but thats what banks are supposed to be..boring! Not a Las Vegas casino…drinks complements of the tax payer.

  17. Bal Thakur

    We have not properly understood the import of Bill Gross. The housing market is the biggest driver of American Economy. The market credentials of average american has come down significantly and a lender will charge higher interest to mitigate his risks , which will result in higher EMIs. This will result in shrinking of mortgage market which will have deleterious impact on the economy and the economy will remain depressed for a longer period of time. By Public Sector character of originated mortgages, the credit quality of mortgages will significantly increase.

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