Bill Gross, manager of top bond fund Pimco, said on Sunday the U.S. Treasury and Federal Reserve are engineering a "bailout" for Fannie Mae and Freddie Mac and added that the ailing U.S. mortgage finance giants will likely need to sell preferred stock once approved by government officials.
"This is a bailout by any other name," Gross, chief investment officer at Pacific Investment Management, known as Pimco, told Reuters in an email.
Gross said he expected both mortgage companies to sell preferred stock to the Treasury or the public -- probably the Treasury -- once the authority is approved by Congress and the President.
"This will be consistent with Secretary Paulson's desire to not bailout stockholders but to maintain the creditworthiness of both companies and in the process support the economy and the housing market," he said.
Gross, who manages the $130 billion Pimco Total Return Fund, said while this does not explicitly guarantee the bonds of Fannie Mae and Freddie Mac , "it tells the market that the government will not allow them to fail."
Gross also said that substantial changes in regulation lie ahead for Fannie and Freddie, and if such changes are adopted " agency securities will begin to look more like Treasuries in terms of yield and credit quality, as will the mortgages that bear their name."
Pimco, a unit of giant German insurer Allianz, has about $812 billion in assets under management.