Tags: bailout

Gross: Taxpayers Will Make Money on Bailout

Wednesday, 24 Sep 2008 09:13 AM

Bond guru Bill Gross figures a big, government bailout of the banking system, correctly managed, could make back up to an 8 percent return for U.S. taxpayers.

What's more, the bailout is absolutely necessary, Pimco's founder and chief investment officer writes in an op-ed in The Washington Post.

It will take something as big as Treasury Secretary Henry Paulson's plan to spend upwards of $700 billion, perhaps more, to unfreeze our credit markets and prevent much bigger problems in the lives of millions of ordinary Americans.

"Critics call this a bailout of Wall Street; in fact, it is anything but," Gross maintains.

"The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks, and the delicate balance between production and finance is given a chance to work its magic."

Gross figures that the problem assets will go for 65 cents on the dollar and earn between 10 percent and 15 percent for the Treasury. Once you count in financing costs, the "positive carry" for the holders — the taxpayers — should be between 7 percent and 8 percent, he says.

Gross offers one big caveat: Washington cannot fix this quickly or brutally. It will take time. And it will take a carefully managed process like the Resolution Trust Corporation, which dug the country out of the savings & loan crisis of the late 1980s, to do it right.

"My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that," Gross says.

Washington should be careful, yes, and allowing some homeowners to stay in their homes, that is, to avoid foreclosure, is critical. But now is the time, Gross says.

"The need for speed is clear," Gross says. "In this case, there really are weapons of mass destruction — financial derivatives — that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards."

Politicians are spending the week tearing into Paulson's plan to buy troubled bank assets backed by mortgages.

Some in Congress are already asking for stock warrants, the right to take stakes in the banks the public rescues. Taxpayers deserve a slice of the upside, argue some.

"Right now the price of admission (to the proposed Treasury program) is zero. It's not inappropriate to demand that if they benefit from this transaction in the future ... that they will share that benefit with the taxpayers who made the benefits possible," said Sen. Jack Reed, D-R.I., on Tuesday.

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Bond guru Bill Gross figures a big, government bailout of the banking system, correctly managed, could make back up to an 8 percent return for U.S. taxpayers.What's more, the bailout is absolutely necessary, Pimco's founder and chief investment officer writes in an op-ed in...
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2008-13-24
Wednesday, 24 Sep 2008 09:13 AM
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