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A Disillusioned Mr. Gross Returns from Washington

Famous PIMCO fund manager Bill Gross went to Washington last weekand admits in his September note to clients that moments like heading to the Treasury for the first time in his 35 years in the business had the “little boy inside me is screaming 'Run!'"

Bill Gross of PIMCO participates in a conference on the future of housing finance at the Treasury Department in Washington, DC.
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Bill Gross of PIMCO participates in a conference on the future of housing finance at the Treasury Department in Washington, DC.

The purpose of the visit to see Treasury Secretary Tim Geithner was, in Gross' own words “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 Street as opposed to Wall Street, in the ongoing housing crisis."

Unfortunately for Main Street, Gross says he found little support in Washington for his ideas.

"Just like Oz isn't Kansas, Washington D.C. isn't Newport Beach or Des Moines, Iowa," he wrote.

Gross proposed rolling Fannie Maeand Freddie Mac

and other housing agencies into one giant agency and call it the Government National Mortgage Association guaranteeing a majority of existing and future originations.

This solution recognizes the necessity and not the desirability of using government involvement, he said.

"Taxpayers would be protected through tight regulation, adequate downpayments, and an insurance fund bolstered by a 50- 75-basis-point fee attached to each and every mortgage," Gross said.

"After all Fannie and Freddie had really blown up because of the private/public nature of their charter, which incentivized execs and stockholders to go for broke with the implicit understanding that Uncle Sam would be there as a backstop should anything go wrong," he said.

"If you eliminated the private incentive and provided a tighter regulatory watchdog, we would have no more 'liar loans' and 'no docs' and a much sounder foundation for future homeowners and investors," Gross said.

"The private market, to my mind, had really lost its claim as the most efficient and judicious arbiter in this particular case," he added.

"My argument for the necessity of government backing was substantially based on this commonsensical, psychological, indeed sociological observation that the great housing debacle of 2007-2010+ would have a profound influence on homebuyers and mortgage lenders for decades to come."

Gross said he told Geithner and other Treasury officials that they would never get housing starts of 1 or even 2 million a year under the wing of the private market.

"I said that was impractical. Let me amend that to ludicrous."

"Having grown accustomed to a housing market aided by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending." Gross said. "The cost would be enormous in terms of yields (300-400 basis points) higher than currently offered, crippling any hopes of a housing-led revival to the economy."

This view is not self-interest and an attempt to allow PIMCO to dominate the bond market, rather an attempt to keep yields and therefore borrowing costs for home owners lower and not higher yields for bond investors, he said.

"It would be better for PIMCO to let the administration flood the private market with non-guaranteed, private mortgage products and let us vultures feast on the pickings," he said.

"If the housing market continues to be government dominated, then the points from originations and the fees for private insurance would all of a sudden disappear," Gross wrote.

"The vested interest lies on Wall Street, not Newport Beach or Main Street," he said. "Try explaining that to commentators’ intent on returning to a free market ideology that continues to serve the moneyed interests in the high style to which they are accustomed."

"Jimmy Stewart I'm not, and I won't be going back to Washington anytime soon," he concluded.