Pimco’s Gross: Fannie, Freddie Mortgages ‘Excellent’

Let’s call this a bit of counter programming to all of our negative coverage of Fannie Mae (FNM) and Freddie Mac (FRE):

Bill Gross, who manages the world’s biggest bond fund, said it’s not possible for government sponsored mortgage-finance companies Fannie Mae and Freddie Mac to raise capital without the Treasury Department’s support.

"Let’s be blunt: to the extent the Treasury suggests they’ll never have to use their authority, that’s a sham,” said Gross of Pacific Investment Management Co. "It’s fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don’t think that’s possible.”

Freddie Mac said on July 18 that it intends to proceed with a $5.5 billion capital-raising plan it announced in May that will include both common and preferred securities. Pimco wouldn’t buy the companies’ stock without the Treasury’s involvement, Gross said, in a Bloomberg Television interview from the firm’s headquarters in Newport Beach, California.

Treasury Secretary Henry Paulson is pushing Congress to authorize the Treasury to purchase equity stakes in Fannie Mae and Freddie Mac and expand government-backed credit lines to them amid concern that they don’t have enough capital to weather the worst housing slump since the Great Depression. Freddie Mac shares have tumbled 74 percent this year and Fannie Mae has dropped 65 percent. The companies make money by guaranteeing mortgage-backed securities they create out of loans bought from lenders and sell to investors worldwide.

Mortgage-backed bonds issued by Fannie Mae and Freddie Mac are “an excellent buy” compared with debt of the agencies, Gross said.

Bill Gross, who manages the world’s biggest bond fund at Pacific
Investment Management Co., talks about Treasury Secretary Henry
Paulson’s plan to rescue Fannie Mae and Freddie Mac, the outlook for
U.S. home prices, Federal Reserve monetary policy and the bond market.

click for video

00:00 Passage of GSE rescue plan is "critical."
01:03 Recapitalization of Fannie and Freddie
01:49 Fannie and Freddie mortgages are "excellent."
02:55 Government’s GSE model "has to be amended."
03:54 Outlook for the U.S. housing market, prices
04:58 Capital-raising efforts by Fannie and Freddie
06:00 Rate hikes by Fed would be "wrong approach."
07:17 Treasuries and TIPS; measures of inflation
09:23 Relationship of credit turmoil, home prices
10:36 Investment in bank debt; U.S. dollar value
12:53 "Inappropriately" valued U.S. Treasuries

Pimco’s Gross Says Fannie, Freddie Need Treasury
Kathleen Hays and Sandra Hernandez
Bloomberg, July 21 2008

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What's been said:

Discussions found on the web:
  1. rational commented on Jul 22

    When a company buys back its own stock, it is generally retired, thus reducing number of outstanding shares of that company. Does the same apply to Treasury’s purchase of fannie and freddie stock? Would Treasury retire that stock, in essence providing capital to these agencies with tax payer money? Or would Treasury hold on to that paper and attempt to sell it later when the agency’s health improves and markets are more receptive to their stocks?

  2. fallon commented on Jul 22

    Geez-posting at 3:30am…? Is that EST?

    Wachovia and Washington Mutual report tomorrow (today) and it will be interesting if their Alt-A losses (which are expected to continue 3.8 Billion plus combined) will roll into how the market further views the Alt-A (and lower) “assets” held by Fannie and Freddie.

    Or will Wachovia and Washington Mutual benefit from the trend toward rewarding easily met low expectations = chasing bad money with good.

    How about Wach Mac and Wash Mac? Are not Wachovia and Washington Mutual too big to fail?

  3. JustinTheSkeptic commented on Jul 22

    When is Mr. Market going to spank all these people for their obfuscation of the truth? I thought the market doesn’t like uncertainty? Can anyone here remember a time that was more uncertain than today? Or does a stuttering Bush and Paulson provide everyone with a feeling contentment?

  4. Mike in NOLa commented on Jul 22

    Wachovia posts $8.9B loss.

    The important question: Did it beat expectations?

    WRT to Pimco and GSE’s: I suppose I should just join the dark side and buy Pimco bond funds. When I needed a place to put some of my wife’s IRA, I specifically avoided any funds w/ exposure to Fannie and Freddie even if they had very good returns. PIMCO had lots of GSE’s and is making out like bandits. I don’t know that they are bandits, but Gross does know how to play the crony capitalism game as well as anyone.

  5. Mike in NOLa commented on Jul 22

    Looks like Congress is looking into capping pay of the bigwigs at Fannie and Freddie. Lawmakers Move to Curb Fannie, Freddie Pay

    This is clearly just to make giving them our money sound better. There should also be a ban on GSE’s contributing to campaigns, but the venal politico’s would never do that; giving the GSE’s our money to lobby with is too sweet a deal.

    Sometimes it’s a shame bills of attainder and ex post facto criminal laws are illegal. I think some could be passed after the next elections.

  6. zackattack commented on Jul 22

    Gross talks his book too much to be allowed on television.

  7. Jim Haygood commented on Jul 22

    “Pimco wouldn’t buy the companies’ stock without the Treasury’s involvement, Gross said.”

    It’s the proverbial “business-government partnership” at work. GOTTA LOVE IT — unless you’re the hapless third party not represented at the table — the taxpayer.

    If Congress wants to buy shares in Fannie and Freddie, let’s stop paying them in cash, and instead pay them 500 shares of FNM and 500 shares of FRE per month. Embrace risk, you intrepid solons — it’s a beautiful, bipartisan thing.

  8. John commented on Jul 22

    As zackattack say Gross does tend to talk about his book but then to be fair that’s what he’s closest too, has ingested all the analysis on, etc. That said I’ve always found him a pretty fair judge of the state of play. And surely he’s broadly correct in his summation of the situation here.

    Paulson/Congress have to get the bailout done

    F/F are not going to be able to raise equity in the open market without Treasury participation.

    Most of their mortgages probably are good.

    The bonds are totally secure because at the end of the day all this govt activity has been dictated by the need to protect the bondholders and maintain the supply of housing finance credit.

    Does anyone really disagree with Gross on any of this?

  9. m3 commented on Jul 22

    “Lawmakers Move to Curb Fannie, Freddie Pay”


    why aren’t these CEOs fired!?!?

    a pay freeze? you gotta be shitting me!!!

  10. larster commented on Jul 22

    The statement “most of their mortgages are proably good” scares me. In all probability most could mean 50.1%.

  11. eh commented on Jul 22

    Mortgage-backed bonds issued by Fannie Mae and Freddie Mac are “an excellent buy” compared with debt of the agencies, Gross said.

    What’s the difference?

  12. gaius marius commented on Jul 22

    i actually thought the most interesting thing gross said was that treasuries are not priced properly.

    GSEs are becoming treasuries, and therefore do represent a terrific deal — so long as the backing of the treasury remains.

    but intimating that treasuries should be yielding higher indicates that gross thinks investors are insufficiently compensated for inflation at current yields (which is the same as saying that there is insufficient sovereign default risk premium).

    that is interesting in and of itself — but the next question would be why? why are yields so low?

    one answer could be flight to quality — fair enough. but another could be that the market is seeing past commodity price inflation to credit destruction and collapsing money supply. i wonder if gross has fully discounted this possibility.

  13. katman commented on Jul 22

    why is it, ever since this financial collapse started , I have had this strange aching feeling around my posterior orifice?

  14. John commented on Jul 22

    Judging by your comment a mouse in the trash can would scare you. Are you seriously suggesting that 49.9% of F/F portfolio is trash? Most unlikely I would have thought. None of us know of course which is the problem but given the criteria they had to meet I’m going to bet that, as Gross and commonsense tells us, most of it ie.90%+ is good. F/F are ridiculously over leveraged and never should have been allowed to get to these ratios. That with the consequent collapse of confidence and hence curtailed ability to raise new capital is the basic problem here. Gross exaggerations about about the quality of the paper they are holding doesn’t enhance cred when critiquing some of the more fundamental flaws in the govt’s approach to the rescue. What is it with nihilism around here.

  15. christopher commented on Jul 22

    Gross must scared sh–less over a GSE failure, and it wouldn’t surprise me if he was putting in some calls to DC himself to make sure this gets done. China, and India might have the most to loose with a GSE failure.

  16. John commented on Jul 22

    Mr Gross does not strike me as someone who scares easily. There isn’t the faintest chance F/F are going to renege on their debt which is why Gaius Marius above is correct in saying their debt is better than Tbills at the moment. I’m bound to say reading some of the comments here there almost seems to be a wish for F/F to fail as if it will satisfy some desire for schadenfreude or something. The failure of F/F would be a f%$#@ total disaster for wall street AND main street. If someone can provide me with some reasons other than adherence to abstract doctrines for why it would be a good thing I’d be interested to hear them. The only winners in a failure would be vulture funds.

  17. steve commented on Jul 22

    Gross has been complaining about the “Shadow banking system” in his blog for ages so he’s well informed – AND if he’s caught up in this mess he DESERVES the losses he’s going to get, he saw it coming.

  18. Brooke commented on Jul 22

    These CEO’s need to be held accountable, and the practice multi million dollar packages for executives needs to be curbed, at least for now. The constant bailing out of companies is making investors local and foreign lose faith in America.

    There’s an interesting take on this situation at http://www.wallstrip.com/2008/07/21/fannie-mae-and-freddie-mac-fnm-fre/

    I’m not sure where I stand on this issue in the longterm.

  19. lunatic_fringe commented on Jul 22


    A 10% loss on F&F debt works out to over $500 billion. How much of that do you want to pay?

  20. Christopher commented on Jul 23

    I’m of the belief that F/F should either be nationalized or privitized and made to fend for themselves. I’m NOT into socialzing losses and privitazing profits. IMO the least worst option is for F/F to fend for themselves. Politics (Domestic/Int’l) be dammed.

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