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Bill Gross Pushing for MORE Bailouts for PIMCO Bond Fund

Interest-Rates / US Bonds Aug 24, 2010 - 11:39 AM GMT

By: Mike_Stathis


Diamond Rated - Best Financial Markets Analysis ArticleTwo years ago when Fannie Mae and Freddie Mac were collapsing, former Goldman Sachs CEO and U.S. Treasury Secretary Henry Paulson repeated the promise of “no more bailouts,” so as to calm worried Americans who feared they would be on the hook for hundreds of billions of dollars of toxic mortgages held by these GSEs. 

At the time, I discussed my opinion that Paulson was lying, and that both GSEs would be bailed out to the detriment of tax payers. When Washington approved this disastrous bailout, they accepted the ridiculous assurances made by Wall Street hacks like Paulson, Bill Gross and others that $150 billion of taxpayer funds would be sufficient to restore solvency of these lenders, helping to strengthen the housing market. 

Washington even claimed that taxpayers would make a profit from the deal!

I knew this would not be the case. Back in 2006, when I wrote America’s Financial Apocalypse, I discussed the data on the $10 trillion of new mortgages that had been underwritten over the past several years. Over $2 trillion of this amount consisted of sub-prime mortgages, while another $3 trillion fell into the Alt-A and option-ARM category.

I also discussed the fact that the credit rating agencies were rubber-stamping these toxic mortgages with AAA ratings in return for payouts from Wall Street. Finally, I detailed the risk of a meltdown of the multi-trillion mortgage-related derivatives market.

Let’s have a look at some excerpts from a book that very few even know about …

“What would happen if one or more GSE (i.e. Fannie or Freddie) got into financial trouble? Not only would investors get crushed, but taxpayers would have to bail them out since the GSEs are backed by the government. Everyone would feel the effects. With close to $2 trillion in debt between Freddie Mac and Fannie Mae alone, as well as several trillion held by commercial banks, failure of just one GSE or related entity could create a huge disaster that would easily eclipse the Savings & Loan Crisis of the late 1980s.”


“Furthermore, the GSEs have created very risky derivatives exposures for themselves and many financial institutions. As these debt instruments evolve into different products, less transparency and more uncertainty is created. Fannie Mae has taken about half of its MBS and pooled them into another security called a Real Estate Mortgage Investment Conduit (REMIC), otherwise known as a restructured MBS or Collateralized Mortgage Obligation (CMO). These mortgage derivatives are complex and considered very speculative. According to recent data, the total derivative exposure for all securities stands at nearly $300 trillion. However, it’s not known for certain what the net exposure is.”

Reference: Stathis, M. Chapter 10, America’s Financial Apocalypse. 2006.

In 2006, I realized up to $1.5 trillion could be lost by Fannie and Freddie. Two years later after Fannie and Freddie used tax dollars to delay insolvency, it was apparent to me that the $150 billion bailout was intentionally set at such a low level as a way to get it passed more easily. The real purpose was to open the door for more bailouts to come. As you know, we saw many more bailouts. As a result of the GSE bailout, taxpayers now own 80% of Fannie and Freddie.

From Chapter 10, America's Financial Apocalypse (2006)...

“From inflated appraisals alone, 10 to 15 percent of MBS securities or up to $1.5 trillion have been overvalued by conservative estimates. Combine that with the lack of transparency, questionable risk exposure and fraudulent practices by executives at Fannie and Freddie, and you have a disaster ready to strike.”

“Now combine that with over 10 million Americans holding interest-only and ARM mortgages, throw in a million or two job losses due to say the failure of Delta, Ford, General Motors, or some other large vulnerable company, and you could end up with a blowup in the MBS market. This scenario would devastate the stock, bond and real estate markets. Most likely, there would also be an even bigger mess in the swaps and derivatives markets, leading to a global sell-off in the capital markets. Needless to say, the dollar would take a huge dive and interest rates would soar to double digits.


“The real estate fallout will no doubt cripple smaller companies such as mortgage lenders, home builders, and home improvement stores. But it will also affect huge financial institutions such as Citigroup, Bank of America, Chase, General Motors (GMAC), General Electric (GE Finance), and Washington Mutual, depending upon the extent of their exposure. As well, if things get really nasty the credit problems could extend to the ABS market which would cause further devastation.”


“Combined with the fragility of the economy, it should be easy to appreciate the enormous credit risk the collateralized markets have generated. Depending on how, when and to what extent the real estate and credit bubbles correct, large aftershocks could ripple throughout America’s financial system, triggering a massive stock and bond market sell-off, as well as huge problems for Fannie Mae, Freddie Mac, and all other banks involved with ABS and MBS.”

“Based on today’s grossly overvalued housing prices, a 35 percent correction on average seems very likely. And in some areas, a 50 to 60 percent correction is possible. Most likely, it will take several years for the real estate washout to be completed. We can only hope that the MBS market doesn’t experience its first blow up since inception, but don’t bet on it.”

“Under normal conditions, anywhere from 25 to 30 percent of the U.S. economy is directly affected by the housing sector. However, due to exaggerated asset prices from the housing bubble, this share is significantly higher. Housing prices have up to two times the effect on consumer spending as they do on declines in stock prices. Consequently, if housing prices decline by 25 percent, the economic impact will be as if the stock market declined by 50 percent.”  


Reference: Stathis, M., Chapter 10, America’s Financial Apocalypse. 2006.

As you can imagine, virtually nothing that has happened over the past three years has surprised me, other than the incompetent response from Washington and the Federal Reserve. 

Given the warnings I was ready to issue (specific warnings and investment guidance which could have helped anyone up to 100% returns) you might want to ask yourself why the media has continued to ban me.

What was this advice? To short the mortgage, bank and homebuilder stocks, as detailed in Cashing in on the Real Estate Bubble (2007).

You should understand why the media has issued a widespread ban on me. The financial media doesn’t want you to have access to individuals who can truly help you make money and avoid losses because Wall Street buys the ads and pays for the commercials, which accounts for the majority of the media’s revenues.

In September of 2008, I reiterated my forecasts

“Despite attempts made by Greenspan and Bernanke, there is no way to avert the payback period that has been building for over two decades. Over this stretch, America has consumed much more than it has produced. As a result, both consumer and federal debt have ballooned to record levels. And now, the payback period is upon us.

The bailout buffet won’t end with Fannie and Freddie. There’s a lot more where that came from because the ‘Fed’s food court’ remains open, as does that of the U.S. Treasury.”


Two years later we see the reality. Indeed, the bailout buffet is alive and well. Meanwhile, Fannie and Freddie continue to reach new depths of the abyss. As defaults continue to soar, the foreclosure avalanche continues to grow. Despite the Federal Reserve’s $1.5 trillion purchase of toxic mortgages, the GSEs are once again staring insolvency square in the face. 

Even after countless subsidies and mortgage aid programs issued by Washington, nothing has helped the housing market. These tax payer subsidies have been a complete failure, as I predicted, adding more debt to future generations.

The only thing that’s surprised me is that Americans haven’t stormed Washington and demanded the resignation of every single one of these criminals (excluding Dennis Kucinich and Ron Paul). 

We know there’s always two sides to every trade. 

Taxpayers have been the losers in the deal. But who have been the winners? 

Although there have been many beneficiaries, the single largest beneficiary of the Fannie/Freddie bailout has been Bill Gross and the investors in his total return fund.  

Despite tax payer assistance totaling $150 billion, Bill Gross’ Total Return fund still hasn’t managed to perform exceptionally well. Much of the problem of course is due to the excessive fees charged by PIMCO, as discussed previously.

Why has there never been mention in the financial media of the excessive fees charged by Gross’ bond fund? Instead, all you hear from the media is praise for the “bond king.” 

The same is also true when the media interviews Alan Greenspan, Ben Bernanke, Timothy Geithner, and a long list of others who have caused American consumers and investors to lose much of what they had, from jobs and homes, to retirement savings and hope for their future.

By now, you should realize America’s corporate media monopoly is an accomplice to the theft of tax payer dollars, investment losses and the complete rape of the nation. 

Now, as Fannie and Freddie search desperately for another life preserver, Bill Gross has stepped up to the plate to offer another “brilliant” idea.

First, Gross has proposed that Washington completely nationalize the GSEs, guaranteed by taxpayer dollars. As the basis for his logic, he has stated that this will resolve the housing problem. Taken from a recent speech he gave to members of a special committee in Washington,

“The only way to bring housing back, and to create liquid, financeable mortgage finance going forward, would be to provide a government guarantee.”

The first point I want to make is that if Washington made the mistake of nationalizing the GSEs, U.S. taxpayers would be exposed to up to $2 trillion in losses, if not more. Of course, Gross is the single largest shareholder of Fannie and Freddie bonds, so he stands to gain from this seemingly unconstitutional proposal.

The second point is that Gross is misguided in his claim that nationalization would “bring housing back.” This is complete nonsense to anyone who has a reasonable grasp of the economy and housing market. The problem is that no one in Washington has an idea what’s going on.

While a total government bailout of the GSEs might initially create some improvements in the housing market, I’ll guarantee such improvements would be small and temporary because the fundamental issues are not being addressed. Meanwhile, up to $2 trillion would be added to the national debt. Is $2 trillion a fair price to pay for small temporary improvements to the housing market?

Housing prices will only be boosted when consumers have good jobs and sufficient credit to QUALIFY for mortgages. Right now, the U.S. doesn’t have much of either. Jobs continue to be shipped overseas due to Washington’s long-standing policy of enriching corporate America through unfair trade policies.

Meanwhile, the banking cartel continues to hoard the money printed by the Fed. Instead of making new loans, this criminal cartel is receiving capital at essentially no cost from the Federal Reserve and investing it in U.S. Treasuries.

This is the big banking bailout the media isn’t talking about, and it’s causing you to miss out on interest payments on your savings. The Federal Reserve is artificially holding rates down in order for the insolvent cartel to receive risk-free returns. This is nothing short of fraud.

Once tax payers have guaranteed the GSEs, Gross suggests Washington allow Fannie and Freddie mortgages to be refinanced at below-market rates, regardless of the loan-to-value. In other words, refinancing options would even be made available to homeowners with negative equity.

Gross claims this tax payer-subsidized refinancing wave would add $60 billion to the pockets of homeowners, which would boost consumer spending. He uses this as his selling point because he knows it’s a solution Washington wants to hear; a way to boost consumer spending by artificial means.

With many of the GSE mortgages set at around 6%, a refinance rate at say 4% would lower the investment returns of Gross’ GSE bonds. But Gross doesn’t mind taking a small haircut from these toxic investments in exchange for reduced credit risk.

The real kicker is that these bonds would be guaranteed like U.S. Treasuries. So for Gross, it’s like getting AAA-rated U.S. government bonds paying 4%. That’s a pretty good deal considering the 30-year Treasury is yielding 3.8%.

Ever since the mortgage meltdown commenced, Washington has acted consistently with irresponsible and ineffective responses to the real estate collapse and economic turmoil. Only once since the onset of the collapse has Washington raised the minimum down payment for FHA mortgages, from 3% to 3.5%.

Late last year, after the clowns in Washington began to realize the housing market was getting worse, politicians began to float a bill that would boost the minimum down payment for FHA mortgages to a “whopping” 5%.  In case you weren’t aware, the FHA is probably in worse trouble (in terms of the percentage of toxic mortgages) than Fannie and even Freddie. 

All throughout the housing bust, Washington has permitted the GSEs to lower standards for refinancings. For instance, in 2009 Fannie Mae started accepting mortgage refinancings for homes with a LTV of 125%.

The motivation underlying this highly dangerous strategy was not only to help homeowners with negative equity refinance at lower rates, but also to supply the GSEs with greatly needed cash. This has added significant risk to the 80% ownership of Fannie and Freddie held by tax payers. In fact, I would argue that it represents tax payer fraud.

I don't know about you, but if I was a mortgage lender, I sure as hell wouldn't want to hold these risky mortgages on my books. Try and see if you can find an independent mortgage lender willing to give you a mortgage refi at 125% LTV. Perhaps Washington has already instructed Fannie that it won't need to worry because tax payers will back the $5 trillion GSE mortgage pot by 100%.

Let's not forget that Franklin Raines (former CEO of Fannie Mae) was largely responsible for Fannie’s meltdown. Along with the help of Washington, Raines and Syron (former CEO of Freddie Mac) lobbied for looser loan restrictions, while maintaining dangerously low capital requirements. As millions of unqualified Americans were approved for GSE mortgages, Raines and Syron racked up millions of dollars in bonuses.

In addition, under Raines’ watch, Fannie committed $11 billion in accounting fraud. Today, Raines and Syron are much wealthier. Meanwhile, tax payers and investors have paid dearly for the criminal acts committed by these and many other men.

“Fannie and Freddie hold between 20 to 50 percent of the capital required by bank regulators for depository institutions holding mortgages. As of 2003, the GSEs had $1.6 trillion in combined assets, $1.4 trillion in retained mortgages in their portfolios, $1.5 trillion in outstanding debt, and $1.5 trillion in derivatives. In addition, outstanding MBS generated by the GSEs but held by third parties totaled $1.7 trillion.”

“Lack of congressional oversight and transparency with the GSEs has already resulted in mismanagement, fraud, and abuse of power. Only in 2003 did Fannie Mae finally agree to register under the SEC Act of 1934 due to mounting pressure from outside critics. It will now be required to provide annual and quarterly financial filings. But the damage has already been done. Recent investigations have forced Fannie to restate earnings to the tune of nearly $11 billion from 1998 to mid-2004. The SEC has fined them $400 million and the management is now being investigated by the Department of Justice. The SEC has a long track record of acting too little too late, and this could prove to be another example.”  

“Thus far, Fannie Mae was found to have misrepresented its risk position, acted irresponsibly, and manipulated earnings so company executives would receive huge bonuses. Fannie was able to meet earnings goals for all bonuses from 1996 to 2003. No doubt, these bogus numbers would have continued if they were not caught.”

“Given the lack of standards for traditional FRMs and interest-only ARMs, it seems odd that America’s home ownership is not closer to 90 percent. Think about a person who pays $600 per month for an apartment; he can get a loan for $200,000 and have lower monthly payments using an option-ARM. There’s virtually no limit to the different types of mortgage products that have been issued. If you want you can get a 1 percent interest loan (a negative amortization loan) reducing the monthly payment even further.”


Reference: Stathis, M., Chapter 10, America’s Financial Apocalypse. 2006.

As an early indicator of the kind of change Obama promised, in August 2008 Raines was reportedly hired by Obama's staff to provide the presidential candidate with solutions to the real estate collapse. Perhaps this explains why the real estate situation has gotten much worse since Obama took office.

And now, Bill Gross wants to add additional risk by proposing that Fannie and Freddie allow its mortgages to be refinanced at below-market rates, but only after tax payers are forced to guarantee the $5 trillion dollar pool of GSE mortgages. 

Gross doesn’t stop there. Using his clout to position him as a “voice of wisdom,” Gross has stated that without a complete tax payer bailout of Fannie and Freddie, he would not buy GSE-backed bonds unless new mortgages required a 30% a down payment.

Let’s examine Gross’ statements more closely.

First, Gross wants Washington to guarantee all Fannie and Freddie mortgages, and then allow every homeowner to refinance at below-market rates. Next, he states that without a complete guarantee of GSE mortgages from tax payers, he won’t buy any more mortgage bonds unless homeowners make a 30% down payment. 

Do you see the contradiction here? 

Gross is basically saying that it’s a very risky proposition to loan people money for mortgages, so he would insist on a 30% down payment. Alternatively, he wants tax payers to guarantee all of the previously issued GSE mortgages, then allow everyone to refinance at below-market rates.

It should be obvious that current outstanding mortgages are higher risk than any new mortgages that would be underwritten with Gross' 30% down payment (since credit standards are much higher now). So if current outstanding mortgages are even higher risk than Gross' 30% down mortgages, why is he advising that Fannie and Freddie allow homeowners to refinance them?  Because Gross wants to ensure his bonds have the lowest possible risk.

It should be clear that Bill Gross is once again trying to leverage his celebrity status as the “bond king” as a way to convince Washington to give his (relatively poorly-performing) bond fund another bailout.

Furthermore, Gross is trying to scare Washington into a tax payer bailout of the GSEs. He realizes Washington would never go for his 30% down payment requirement because very few prospective homebuyers have that kind of cash.

Gross is trying his hardest to intimidate Washington to go forward with a complete bailout of the GSEs, since that would transform these bonds into essentially risk-free investments. I don’t even think Gross would buy mortgages bonds tagged with a 30% down payment. It’s just a scare tactic.

Hey Bill, are you not capable of delivering nice fee-adjusted returns without the use of tax payer capital?  

Apparently not. If you compare annual returns from a basket of similar quality, similar maturity bonds to the returns registered by Gross’ Total Return fund since inception, you’ll find that the fund has underperformed. Why fork over 35% of your gross investment returns from Gross’ bond fund in fees when you can buy the bonds yourself? It doesn’t exactly take a genius to manage a bond fund containing 80% AAA-rated bonds. If Gross really wanted to boost the net return of his fund, he would slash the fund’s excessive fees.

Furthermore, if Washington was not so concerned with running a Ponzi scheme economy built on credit, they would pass a law making the minimum down payment for all mortgages at no less than 20%. 

Instead, Washington works with its criminal partner, the Federal Reserve, to ensure consumers spend beyond their means, while America relies on foreign nations to finance the majority of its debt.   

Aside from Gross’ obvious misaligned intentions, the so-called solution he offers fails to address the fundamental problems with the housing market; the lack of good jobs.

Gross is like his colleagues in Washington, and those they have chosen to consult with for remedies to the housing problem and economy. None of them have real solutions to the housing mess. This explains why the U.S. economy remains in deep trouble. If Washington wants solutions to this mess, they should start by consulting with those of us who predicted the catastrophe in detail.

Not only did Gross fail to see the meltdown coming, he didn’t even make wise investment decisions once the collapse of the GSE was apparent to even novice investors. If he had, he wouldn’t have bought Fannie and Freddie bonds in the spring of 2008. He would have waited until August.

I suppose when you can convince Washington to bail out your mutual fund, you don’t really need to be that good of an investor. The next time you hear the liars and hacks on the financial networks and print media refer to Gross as the “bond king,” you’ll know they aren’t telling you the truth. They’re fabricating an undeserved celebrity status in the same manner as they have done with Paris Hilton, Peter Schiff, Marc Faber, Nouriel Roubini, etc. And they create these illusions of celebrity so that you will tune in each time they interview these individuals. This is what drives ad and commercial revenues. It’s how the media makes money. Meanwhile, he audience never seems to benefit.

Although Treasury Secretary Geithner has stated that Gross’ idea of nationalization of the GSEs is out of the question, you shouldn’t pay much attention to that. After all, Paulson made similar statements only to flip-flop thereafter.

I suspect Geithner’s rhetoric has been crafted as a manner by which to reduce the momentum republicans have gained as the result of Obama’s failure to deliver on his promises of change.

Geithner has no idea how bad the housing problem or economy is, so he is likely to panic and give into one of Gross’ demands after the November election has passed. Either way, taxpayers stand to lose again. 

I think it’s safe to say that Americans are sick and tired of the same lip service from everyone in Washington. And if they are truly sick and tired of bailouts to corporate criminals, they should show it with action. Talk is cheap. 

I have just one question for the criminal idiots in Washington.

Why on Earth would you listen to the advice of a man who has already hoodwinked U.S. taxpayers, and stands again to benefit from his useless plan of nationalization? 

Moreover, why is the media airing this hack? 

Folks, I hope you see the finer details of this scam. The reality is that not only is Bill Gross trying to take more of your money, the media is magnifying the impact of his one-sided advice by airing what he has to say. You should be as outraged at the media in airing these hacks and idiots as you are with Bill Gross’ misaligned intentions. 

Mr. Gross, knows solution to the housing problem just as well as many others. The short-term solution is to let the markets figure things out. I’m sure there are plenty of investment firms out there willing to step in and carve up the GSE mortgage pie. Let the opportunists fight for the price of these securities on the open market. Tax payers have already suffered more than enough.

The longer-term solution to the housing debacle as well as the economy is to restructure U.S. trade policies so that America can compete fairly with the rest of the world. Doing so would necessarily revitalize manufacturing and production in the U.S., creating good, stable jobs; an absolute requirement for responsible homeownership.

Instead of consumers depending on Asia for cheaply-manufactured and hazardous products, Americans could consume goods domestically while fueling domestic job growth.

Instead of Washington depending on Asia to finance its debt, America would become a net creditor nation.

These aspirations are nothing new. It was the way America operated a few decades ago, when it celebrated the most robust period of economic growth and improvement in living standards in the nation’s history. 

For those of you who need a reminder of what’s going on in the U.S. economy, have a look here and here.

For those of you who are curious as to what happened to America, have a look.

It’s up to the people of the United States to reclaim their nation from the Washington mafia that has been disguised as a two-party democracy. This day will only happen once Americans realize their media industry remains as the most dangerous weapon of mass delusions.

Those who read America's Financial Apocalypse(2006) and Cashing in on the Real Estate Bubble (2007) were not only alerted to the catastrophe we see today, but were provided with SPECIFIC ways to profit that have yielded over 100% gains since then. 

If you want access to institutional-level research, analysis and investment guidance, subscribe to the AVA Investment Analytics newsletter today.

As you might imagine, this article (like most of my others) has been banned throughout the Internet. You aren't going to find it anywhere else for a very good reason. Everyone out there is committed to deceiving you for their own interests. Thus, you can help others by spreading this article all over the Internet.

Remember that this information will have no real impact unless YOU spread it around. The more people who come to realize the truth about the media liars and snake oil salesmen, the better chance things will come to an end.


By Mike Stathis

Copyright © 2010. All Rights Reserved. Mike Stathis.

Mike Stathis is the Managing Principal of Apex Venture Advisors , a business and investment intelligence firm serving the needs of venture firms, corporations and hedge funds on a variety of projects. Mike's work in the private markets includes valuation analysis, deal structuring, and business strategy. In the public markets he has assisted hedge funds with investment strategy, valuation analysis, market forecasting, risk management, and distressed securities analysis. Prior to Apex Advisors, Mike worked at UBS and Bear Stearns, focusing on asset management and merchant banking.

The accuracy of his predictions and insights detailed in the 2006 release of America's Financial Apocalypse and Cashing in on the Real Estate Bubble have positioned him as one of America's most insightful and creative financial minds. These books serve as proof that he remains well ahead of the curve, as he continues to position his clients with a unique competitive advantage. His first book, The Startup Company Bible for Entrepreneurs has become required reading for high-tech entrepreneurs, and is used in several business schools as a required text for completion of the MBA program.

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Books Published

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"Cashing in on the Real Estate Bubble"

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Mark Sivad
24 Aug 10, 19:51
Faucet has run Dry

No one has that amount of clout to push through another massive bailout at this time.

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