Tuesday, August 28, 2007
Bill Gross' bailout
I'm almost afraid to admit it, but I read in the New York Times (online) this morning the details of a story I heard about last week. Bill Gross, the world's designated bond guru, thinks that President Bush should design and implement a bailout for people who took out mortgages that they shouldn't have in the first place. Over the past two decades of hearing what Mr. Gross has to say and generally discounting it as being self-serving, it is important to say why this shouldn't happen at this point ( As an aside, his market position has afforded him a free pass to say whatever he wants. If he was an equity fund manager, long ago there would have been a Congressional investigation for market manipulation. But, since it is the bond market that most pundits don't understand or care about, Mr. Gross gets away with it. He is not an independent analyst and should not be treated that way). Mr. Gross cites the S & L bailout as precedent, calling them buccaneers. While that may be true, the reality is that the government had a legal obligation to bailout S & L's via the FDIC. He also cites LTCM. He should remember that it was the Fed that stepped in in 1998. They have done that here and probably will again. If the government comes in here now and re-structures these loans, then the appropriate advice going forward would be to wait a year for the market to forget, take out the largest mortgage you can get, and let the taxpayer take care of you if there is a problem. While it maybe painful in the short run, this period will help bring real estate values back to some semblence of reality.
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2 comments:
Gross is talking his book. He is either on the wrong side of the situation (unlikely) or he has recently made bets on investments with subprime exposure and is hoping to talk prices higher by suggesting a government bailout
The Fed will pratcice tough love (though it probably eases) as will the White House. Tis is typical vapor-ware, but the media loves it and Ma and Pa investor believe it.
The market is reassessing risk, but the panic has gotten too far. I like your HSBC vs CFC anaolgy, but it should be remembered that HFC was guilty of shady practices, not just unwise decisions.
CFC would probably survive without BAC, but Mozilo isn't taking any chances and BAC isn't stupid. Watch Rescap and WAMU, both of whome jumped in to subprime with both feet in 2006 when CFC was jumping out, for the next problems.
Also, look to Europe for the most damage from subprime. European banks were buying subprime backed CDOs like there was now tomorrow.
And now for something completely different.
For those who think Mr. Gross is a benevolent soul has found a way to save the economy consider this.
Most people who are having trouble paying their mortgages are no necessarily subprime borrowers (though they are the largest group). The people having the greatest difficulties are those with adjustable-rate mortgages and the inability to re-finance. Many of these people not only cannot afford to make payments at current levels, some could only afford payments at introductory rates.
Let's assume a borrower has a 4.00% intoductory rate. Now his rate in 7.00%. Is the government supposed to give him / her a fixd rate at 4.00%. If so, I want to re-fi my 6.00% fixd rate at 4.00%. A blind man could see the dangerous precedent this would create. This is why it will never happen no matter how loudly Gross and Chuck Schumer complain.
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