Is Bill Gross Running for President?
Kurt Brouwer August 23rd, 2007
We think the world of Bill Gross as a bond manager and commentator on the world of finance. His commentaries are well worth reading and often prescient. We pointed out in, ‘Bill Gross Was Right‘ that he was right when he opined that the subprime lending mess extended much further than most of us thought. We also pointed out in ‘Bill Gross Turns Bullish‘ that he is in a bargain hunting mode now.
Now, based on his latest commentary, I’m wondering if he is contemplating a higher office than that of Wall Street oracle and bond fund guru. First, he points out a serious potential problem in the housing market [emphasis added]:
‘…But should markets be stabilized, the fundamental question facing policy makers becomes, “what to do about the housing market?” Granted a certain dose of market discipline in the form of lower prices might be healthy, but market forecasters currently project over two million defaults before this current cycle is complete. The resultant impact on housing prices is likely to be close to -10%, an asset deflation in the U.S. never seen since the Great Depression. Granted, stock markets have periodically retreated by significantly more, but stocks have never been the savings nest egg for a majority of Americans. 70% of American households are homeowners, and now many of those that bought homes in 2005-2007 stand a good chance of resembling passengers on the Poseidon - upside down with negative equity…’
He’s right, 2 million potential defaults is serious. And, falling home prices would shake things up a bit as we saw in the early 1990s. But according to Bill, the answer lies not in just cutting interest rates, but rather in direct presidential actions:
‘…The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions emblematic of the RFC, or perhaps to be more current, the RTC in the early 1990s when the government absorbed the bad debts of the failing savings and loan industry…
And, now he swings into real solid populist themes that have resonated with the American people for over a century:
‘…Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner?…
Not that I want to defend corrupt S&L buccaneers, but the S&L bailout was done to preserve depositors money, not that of the shareholders of the parent company of the various S&Ls. And, the government did not bail out the Long-Term Capital Management team. Those guys lost their shirts. Warren Buffett and Hank Greenberg stepped in to buy up LTCM’s assets when they were being dumped at fire sale prices. But let’s not let historical quibbles get in the way of soaring rhetoric. Now, Bill moves on to call out the president:
‘…Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC - Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?’
I think you can see where he’s going with this, right? Bill Gross for President. He’s got the whole package–business savvy, name recognition, plenty of money, lots of well-heeled friends, a political base in Newport Beach, California and, most of all, a strong platform. I think “Bail ‘Em Out Bill” has a nice ring to it, don’t you?
Hat Tip: MarketBeat Blog
Update: Bill Gross seems to have struck a nerve out there. His ‘campaign’ for homeowners’ relief has been picked up pretty widely in the media (see here and here).
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Good article. I have a feeling that either he is in trouble himself or he has already done his bargain shopping. Probably the latter.
You know, back around this time 7-10 years ago, people were up in arms over Subprime Credit Cards and how borrowers were heading for the bankruptcy courts in record levels. Well, a funny thing happened before 2005’s Bankruptcy Reform Act: the card issuers reworked their basic business model, making the end borrower take more of the risk in fees.
Currently, the delinquency rate for Subprime Credit Cards is LOWER than that of Subprime Mortgages. I say let the new holders of those newly cheap CDOs reap the eventual benefits of what has become a more reliable source of revenue than people give it credit for.
Brad–great point. I never thought about credit cards for high risk borrowers in the context of the subprime mess.
Most financial innovations get overdone at first and then once everyone figures out how they work, they become routine.
Jeopardy–Pimco Total Return is a great bond fund and it has done pretty well this year–avoiding the subprime troubles quite neatly.
Now, they are in fact doing some bargain hunting as we covered in the earlier post on Bill.
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