Sean King

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Knoxville, Tennessee, United States

Wednesday, September 24, 2008

Bill Gross on the Bailout:

Gross, the chief investment officer of Pacific Investment Management Co., or Pimco, estimates the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar. That will represent a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 percent to 15 percent to the Treasury, Gross said.

"Financed at 3 percent to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 percent to 8 percent," Gross argued. "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 added.

I have great respect for Gross. His understanding of the workings of the debt markets is unsurpassed. So, I tend to think he's right on this.

Even so, I'm still concerned about moral hazard. Perhaps the estimated 35% loss to the seller of these assets is a sufficient disincentive? I don't know.

UPDATE> Gross' full article can be found here.

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