Bailout

: Calculated Risk

NY Times: Treasury and Bill Gross

By Anonymous (all)

From the NY Times: Treasury?s Got Bill Gross on Speed Dial

[Bill Gross'] mood brightens when he talks about how much money Pimco could reap by participating in the Geithner [PPIP] 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.

Pimco would then negotiate with banks to buy their wobbly mortgage-backed securities. Mr. Gross says that some of these securities pay an interest rate as high as 14 percent and that even if default rates were 70 percent, Pimco and the government would still make a 5 percent return after covering their negligible borrowing costs. That means the government-Pimco partnership could make at least $250 million in a year on a $5 billion investment fund. Of that amount, Pimco would get $125 million ? a 25 percent return on its original investment.

But here?s the part that makes Mr. Gross salivate. If things go badly, the government is responsible for repaying all that debt.

These low interest rate, non-recourse loans allow money managers to overpay for bank assets; essentially gambling with the taxpayers money. No wonder this makes Bill Gross salivate. The banks are winners. The money managers are winners (if a few of the gambles pay off). And the taxpayers are the losers.

Also, the article mentions Bill Gross and yoga:

Mr. Gross, 65, has long been celebrated for his eccentricities. He learned some of his lucrative investing strategies by gambling in Las Vegas. Many of his most inspired ideas arrived while he was standing on his head doing yoga.

I've attended the same yoga class as Mr. Gross a few times - hence Tanta's joke in this post: BONG HiTS 4 BILL GROSS!

Near the end of 2007, I was waiting for a yoga class, and some random guy walked up to Gross and asked him if it was time to buy distressed bonds (think Bear Stearns). Gross said "probably"! I almost said something, but then I realized maybe Gross didn't like that guy ... or didn't like being asked about bonds at a yoga class.

Full post as published by Calculated Risk on June 20, 2009 (boomark / email).