Pimco bond chief Bill Gross said he and other big investors are avoiding buying bank debt until the Treasury Department takes steps to shore up the financial system.
"We're sort of full," Gross said in a CNBC interview. "To be fair and not to talk out of school, we have clients, we have contacts around the world and basically they're sitting on their hands as well. They're full as well and we're waiting for something to happen. What that means basically is we need a balance sheet, we need somebody else's balance sheet. That means buying power."
Gross said Treasury Secretary Henry Paulson needs to inject $400 billion to $500 billion into the financial system. That would serve as a backstop for banks that are having capital problems due to the continuing collapse of the mortgage market and housing foreclosures.
Watch the video of Bill Gross and CNBC's Jim Cramer discuss the markets.
Accordingly, he said essentially the only debt he would take on is that from government-sponsored enterprises Fannie Mae and Freddie Mac, which buy mortgages on the secondary markets from the banks that issue them.
"We're trying to anticipate what government officials and policy makers will do, and if we're wrong, we're wrong, but you have to buy what they're going to be buying hopefully over the next several months," Gross said. "And that's to buy Fannie and Freddie mortgages which are triple-A, which are guaranteed, which are security-backed and that's the area that will benefit the most if something happens."
But Gross was skeptical over what will happen considering the current political climate.
"The Treasury is hindered," Gross said. "It's hindered by the upcoming election, it's hindered by the turnover in the administration in January, February, and again by the Republican orthodoxy that says leave things alone."