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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?
*See this
and other short commentaries daily in my blog, Hanlon’s
Pub
**I
interviewed legendary investor, Michael Lipper, in my weekly podcast,
"Market Neutral," which you can listen to by clicking
here!
Chip Hanlon
President, Delta Global Advisors, Inc.
19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
A widely-followed market commentator,
Mr. Hanlon served as the C.O.O at Euro Pacific Capital prior to taking the
reigns at Delta Global. He had previously been the President of Unfunds, Inc.
and spent 7 years prior with Sutro & Company as a Vice President and the
company's Los Angeles Director of Syndicate Offerings.
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