Tags: mortgage | crisis

Gross: Fannie, Freddie Depending on Treasury

Friday, 25 Jul 2008 02:18 PM

Bill Gross, who manages the world's biggest bond fund for Pacific Investment Management Co. (Pimco), says Fannie Mae and Freddie Mac will be helpless without assistance from the Treasury Department.

"Let's be blunt: to the extent the Treasury suggests they'll never have to use their authority, that's a sham," Gross tells Bloomberg News.

"It's fallacious to suggest that the agencies could issue capital, preferred stock without the co-participation of the Treasury. I don't think that's possible."

Treasury Secretary Henry Paulson has urged Congress to let the Treasury buy an ownership stake in the two companies and to increase government-backed credit lines.

Paulson and others are concerned that the worst housing meltdown in 70 years leaves the two companies without enough capital to survive.

Freddie Mac officials say they will go ahead with the $5.5 billion capital-raising plan announced in May. That offering includes common and preferred shares.

Gross says his company, Pimco, won't touch Fannie or Freddie's stock without backing from the Treasury.

Meanwhile, he says, mortgage-backed bonds issued by the finance companies "are an excellent buy" compared to the debt of the companies themselves.

"It's basically the mortgages where many buyers have stood aside, including central banks and sovereign wealth funds," Gross says.

"Not only do you have the agency guarantee, but you have the mortgage to back you."

In Pimco's $128.8 billion Total Return Fund, managed by Gross, eight of the top 10 holdings were Fannie-Mae-backed mortgage securities as of March 31. That's according to the latest data available, as compiled by Bloomberg.

Pimco says mortgage securities accounted for 61 percent of the fund's holdings as of June 30, up from 53 percent a year earlier. So clearly Gross is putting his money where his mouth is.

Total Return produced annual gains averaging 4.7 percent over the past five years as of July 18, beating 84 percent of its peers, Bloomberg calculates.

Gross also maintains that the bonds of "high-quality banks," such as JPMorgan Chase, Bank of America, and Wells Fargo represent "very attractive" plays at current yields.

He sees housing prices dropping another 10 to15 percent in the next year, keeping the Federal Reserve from raising rates.

"To suggest that the Fed should raise interest rates in the face of a significant asset deflation, a significant housing deflation is certainly the wrong approach, to put it mildly," Gross says.

Boosting rates now, with joblessness on the upswing "would be tantamount to raising interest rates in the mid-1930s" amid the Great Depression, he says.

On another issue, Gross sees record budget deficits pushing the dollar down against emerging market currencies. "Three years hence, we will see a $1 trillion deficit to support the U.S. economy," Gross predicts.

"That's a lot of paper, and a lot of compression downward of the U.S. dollar against most other currencies."

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Bill Gross, who manages the world's biggest bond fund for Pacific Investment Management Co. (Pimco), says Fannie Mae and Freddie Mac will be helpless without assistance from the Treasury Department."Let's be blunt: to the extent the Treasury suggests they'll never have to...
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2008-18-25
Friday, 25 Jul 2008 02:18 PM
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