Bill Gross

He's one of my all-time heroes.

new_york_times:http://www.nytimes.com/2008/09/25/business/economy/25pimco.html

By EDWARD WYATT
Published: September 24, 2008
NEWPORT BEACH, Calif. – One of the many concerns expressed on Capitol Hill this week about the Treasury Department’s $700 billion rescue plan was how to keep the Wall Street firms that helped to create the crisis from making a killing if they are hired to help contain it.
management of the assets of the bailout fund.

William H. Gross, the manager of the country’s largest bond mutual fund, has a solution for that: He is offering to do it free.
“We have a large and brilliant staff that can analyze and has analyzed subprime mortgages that can help the Treasury out,” Mr. Gross, the co-chief investment officer for Pacific Investment Management Company, said Tuesday in an interview at the company’s headquarters here. “And I’d even be willing to say that if the Treasury wanted to use our help, it would come, you know, free and clear as long as every other firm would do the same.”
Mr. Gross explained his offer – which he later repeated, without the caveat about other firms following his lead – as a philanthropic one. With Pimco’s $830 billion under management, “we make fees aplenty,” he said. “We’d like to be recognized for the way we’ve seen this crisis coming, and for the way we’ve talked about what’s required.”
For more than a year, Mr. Gross, whose investment expertise has earned him a net worth estimated at more than $1 billion, according to Forbes, has played the role of the financial markets’ Cassandra. Beginning in July 2007, he warned that subprime mortgage crisis would get far worse before it got better. Other sectors of the financial markets, he predicted, also could seize up if the Federal Reserve and Treasury did not do something to keep markets liquid.
But Mr. Gross and Pimco have also attracted criticism, most recently when it became clear that his Pimco Total Return fund earned more than $1.7 billion on the day the federal government bailed out Fannie Mae and Freddie Mac.
Mr. Gross had been loudly advocating for such a move for more than a year, at the same time that was moving more than 60 percent of his fund’s assets in government-agency bonds. The shift in investment strategy began in earnest shortly after Pimco hired Alan Greenspan, the former Federal Reserve chairman, as an adviser earlier last year.
Mr. Gross said there was nothing wrong with that advocacy because Pimco had no official role in formulating the plan to rescue Fannie Mae and Freddie Mac.
“We had a role on CNBC,” he explained, “in that every time we were asked, or I guess every time that The New York Times would call, they would say, ‘What are you doing?,’ and we would say: ‘Well, we want safe, agency-guaranteed mortgages. We don’t want to take a lot of risks in subprime space.’ ”With the liquidity crisis extending into virtually every sector of the investment markets, any firm in a position to advise the Treasury on its rescue plans would have potential conflicts of interest, Mr. Gross said.
“There’s fewer of them here than anywhere else,” he added. “Simply because we saw the crisis coming and we don’t have much of this paper.”
The Pimco trading floor is less like the cacophonic pits that cable news channels usually use to illustrate stories about financial market turmoil, and more like a library. The sound of clacking keyboards often drowns out the low murmur of conversation among portfolio managers. Mr. Gross, a lanky 64-year-old who practices yoga and who sometimes speaks so softly that co-workers lean toward him, as if on an E. F. Hutton commercial, drifts around the room, an unknotted pale blue Hermès tie draped around his neck like a scarf, his gray and brown hair extending down over his ears, a style reminiscent more of the 1970s than today.
Pimco’s headquarters building sits on a bluff overlooking the Pacific Ocean, where on a clear day the view extends westward beyond Catalina Island, which sparkles like a jewel in the midday sun.
The windows on the Pimco trading floor, however, where Mr. Gross spends most of his time, face in the opposite direction – eastward, toward Wall Street and Washington, two arenas where Mr. Gross and his firm carry outsized influence.
That is why some investors might be keen to hear Mr. Gross’s thoughts about the Treasury’s rescue plan. He favors broader relief for homeowners and others weighed down by unmanageable debt and recommends that foreign banks should be allowed to take part in the program. But he also argues against any measures that would try to restrict executive compensation.
“I don’t even know if it’s legal,” he said of attempts to limit executive pay. “And so I think that complicates the situation. That’s not to defend those that are making big checks, but I don’t think it should be attached to this.”
Mr. Gross is also skeptical of proposals to have the Treasury take ownership stakes in banks that sell troubled assets to the government.
Buying a pool of subprime mortgages is not like buying part of a company, he said. The Treasury will own something – the mortgages themselves, which if they pay the right amount for those loans, could earn the Treasury a return of 12 to 13 percent.
“So that’s 100 percent equity in these pools they’ll be buying, and they can take capital gains on them because they own them and all the capital gains will accrue to the Treasury,” he said. “There’s tons of equity here. It’s just that it’s very difficult for American taxpayers to understand.”
The key, of course, is price, which is where the Treasury’s adviser would come in. Much of the opposition to the plan has come from a misunderstanding that the Treasury would buy troubled mortgage bonds for their face value, Mr. Gross said.
On the contrary, Mr. Gross said he would advise the Treasury to pay something closer to 65 or 60 cents on the dollar for the mortgage bonds.
“If the price is right, the Treasury’s going to make money,” Mr. Gross said. “They made money on Chrysler. They can make money on this.”
Mr. Gross also advocates allowing foreign banks to take part in the Treasury’s program to buy troubled assets – a necessary step to keep markets liquid. “Foreign banks have branches here in Newport Beach, they have branches everywhere. And so to discriminate in terms of ownership would again cut off your nose to spite your face. It’s these foreign branches that are lending money to the American public.”
Even if the Treasury’s $700 billion program is approved and carried out under the management of the most selfless investment professionals, that is not likely to solve all of the financial sector’s problems. Asked his view of the economy here and abroad over the next year, Mr. Gross responded simply: “Not pretty.”
“There will definitely be a prolonged period of either slow growth or recession for 12 to 18 to 24 months,” he predicted. “We’re not going to get out of this easily or scot-free. It’s just gone too far to now turn around quickly and to move into a positive growth mode.”
In the meantime, a surge in regulation of the financial sectors will be unleashed, probably an inevitable result of the meltdowns and rescues of recent months. “Twelve to 24 months down the road, all of these high-flying investment banks and banks will be re-regulated and downsized,” Mr. Gross said.
“They won’t become arms of the government, but they will supervised and held on a tight leash. And in addition to the slow-growth-slash-recession that I talked about, what the American economy and the American public can look forward to is a substantially different private sector than what you saw before.”
The greater regulation should draw people back to the investment and financial markets and away from what seems to be their current strategy – stuffing their cash in a mattress.
Even Mr. Gross admits that he has been at times reluctant to commit.
“We were offered this morning a six-month sizable piece of Morgan Stanley,” he said Tuesday. “Here’s the surviving investment bank that just last night got equitized or bailed out by a Japanese bank. We were offered a sizeable piece of a six month Morgan Stanley obligation at a yield of 25 percent, O.K.?”
Pimco didn’t buy the bonds, however, “because we thought we could get it even cheaper,” Mr. Gross explained. “That’s where the fear builds in and makes for totally illiquid markets. Where no one trusts anybody; no one trusts any price. There’s a total lack of trust and confidence in the markets. And that’s what a market depends on.”