first majestic silver

Bill Gross Should Be Ashamed Of Himself

September 24, 2008

I just got the chance to read the op-ed penned by Pimco's Bill Gross in this morning's Washington Post. Wow, have you read this mess?

He did get one thing right, and he backed up his math well enough: the government could potentially make some money on this plan by buying up securitized debt instruments at deeper discounts than they should otherwise be trading. But that actually points to a key, lynchpin part of the problem: mark-to-market accounting is undoubtedly preventing many free-market speculators from purchasing such securities today due to what it would immediately do to their balance sheets. Thus, government may get to scoop up this paper at a deeper discount than is warranted due to its own accounting rules! Ay, yi yi.

Other than that, some lowlights from the truly Gross editorial:

"Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors..."

Actually, it ran amok because political leaders pushed Fannie and Freddie into the subprime arena, followed by Greenspan's ultra-low interest rate policy. When he had the Fed Funds rate at 1% and the market put the 10-year Treasury near 4.5%, it was modern American history's steepest yield curve in percentage terms. Thus private industry, which exists for one reason--to maximize profits-- had a D.C.-created incentive to lend to anyone with a pulse. And it did.

This doesn't excuse the shoddy lending practices some in the industry engaged in-- nor the home buyers who willingly participated, yet somehow remain unindicted co-conspirators-- but Gross seems to blame the market, with government's fault being merely one of a lack of oversight. Going on, he writes:

"Democratic party earmarks mandating forbearance on home mortgage foreclosures will be critical as well."

How, exactly, will the Depression-era solution of a foreclosure moratorium aid credit markets? Tell a lender he has no recourse should a borrower stiff him and let's just see how much he'll lend.

"If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed."

Again blaming free markets, not government.

Going back to his math on how the government might actually make money on the deal: if he's so confident in his thesis, why not lobby Washington to fix its accounting rules so Pimco and its more than $800 billion in assets can back up the truck and buy the paper itself?

Chip Hanlon


Delta Global Advisors, Inc.

The President of Delta Global Advisors and the founder of Green Faucet, Chip Hanlon is regularly featured in the national media for his global economic viewpoints and is a contributing writer for Real Money, the subscription service from Previously, Hanlon has served as the C.O.O. at Euro Pacific Capital, as the President of Unfunds, Inc., and as Vice President of Investments and Syndicate Manager with Sutro & Co.

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