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How globalization changes capitalism, the economy and politics

Is Bill Gross inside the Government?

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Bill Gross is head of the World’s biggest bond fund, the Pacific Investment Management Company (Pimco). Pimco’s flagship is the the Total Return fund, which has $158 billion in assets, and is personally managed by the master investor himself. When other investors lost billion of dollars during the collapse of the housing bubble and the ensuing crisis on Wall Street the fund’s value managed to be about 10 percentage point ahead of comparable bond funds. Class A shares of his Total Return Fund were up 4.3 percent in 2008.

His frequent appearances on CNBC and endorsement from rivals on Wall Street and beyond, Alan Greenspan and Warren Buffet to name two, draws attention to Pimco. Gross’ monthly Investment Outlook does not only shine through its wit but also its incredible foresight attesting to his outstanding insight. He was among the few who warned of a housing bubble and imminent collapse in mortgage related investment back in 2005.

Today he is one of the few fund mangers still active in the mortgage backed security market. The Total Return Fund has 61 percent of the fund’s money invested in mortgage bonds. That makes him the government’s best friend of late. The Treasury is eager to clear the balance sheet of major financial institutions from soured mortgage investments and Bill Gross seems to be the man to do the job. He admits to occasionally shake hands with the government and of course expects a handsome return on his investments.

Gross is actively shaping the government’s policy in this regard. When in September 2008 Mr. Paulson then secretary of the Treasury announced the takeover of the mortgage giants Fenny and Freddy the value of the Total Return Fund rose by $1.7 billion in a single day. Some think Gross put pressure on the government and succeeded.

Gross also emphatically supports Treasury Secretary Geithner in his effort to sell troubled mortgage bonds to private investors. The Public Private Investment Program (P.P.I.P.) should help to clear troubled assets from the balance sheet of financial institutions and help avoid nationalization, something that ecologist and Nobel laureate Krugman and economist Nouriel Roubini have advocated. Pimco is supposed to get the go ahead from Geithner to relieve the likes of Bank of America, Citigroup and other banks of an estimated $1 trillion in soured mortgage debt.

Gross calls this a win-win-win situation for the banks, taxpayers and Pimco. Others call it a license to steal or the equivalent of a no-bid contract in Iraq. The New York Times uses the opportunity to look more carefully at Bill Gross and his close engagement with the government.

Here is how it works. Pimco would be expected to invest minimum $500 million from their clients. The Treasury would match it with taxpayer dollars. Pimco and the Treasury would create a jointly owned fund of at least $1 billion to buy distressed mortgage bonds. Both the Treasury and the Fed would provide low-cost financing for Pimco up to four times the total equity in the fund. The $500 million initial investment from Pimco could borrow as much as $4billion in low cost financing. This is the best part, if things go badly the government is responsible for repaying all the debt. Truly a win-win situation for Pimco.

Written by Alfred

21. June 2009 at 8:19 pm

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