Bill Gross Explains Why The Housing Ponzi Must Go On, Or Else Society, Nevermind Pimco, Will Suffer

Tyler Durden's picture

In his latest letter, Pimco's Bill Gross explains why neither he, nor his fund, are some bloodthirsty vampire squid, monopolizing the bond market: all he wants is the greater social good, which can only be perpetuated by endless government subsidizes of the housing ponzi. What follows is truly entertaining: "Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields – 300–400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy. And why do I and PIMCO support this view? Is it some self-interested, money-making plot to allow us to dominate the bond market? Hardly. Any investor would recognize that it’s better to have a 6 or 7% yield instead of 3–4%, so it would be better for PIMCO to let the Administration flood the private market with non-guaranteed, private mortgage product and let us vultures feast on the pickins. No, the self interest rests on “Que” Street. If the housing market continues to be government dominated, then the points from originations and the fees for private insurance would all of a sudden disappear. The vested interest lies on Wall Street, not Newport Beach or Main Street." Of course, should the government go cold turkey on the housing ponzi, we leave it up to our readers to conclude what would happen to Pimco's over $1 trillion in rate exposure: here's a hint - a 300-400 bps drop in prevailing spreads will mean game over for the magnanimous Mr. Gross overnight. So yes, what's good for everyone (even as nobody really cares about rates with pretty much everyone paying down, not raising debt), just happens to be very, very, very, very good for Pimco. q.e.d.

From PIMCO:

Mr. Gross Goes to Washington
  • Americans now know that housing prices don’t always go up, and that they can in fact go down by 30%–50% in a few short years.
  • Having grown accustomed to a housing market aided
    and abetted by Uncle Sam, the habit cannot be broken by going cold
    turkey into the camp of private lending.
  • Private mortgage lenders will demand
    extraordinary down payments, impeccable credit histories and
    significantly higher yields than what markets grew used to over the past
    several decades.

I’ve
had a lot of high perspiration “Right Guard” moments in my life,
although I futilely try to live by Gillette’s 1984 advertisement of
“never let ‘em see you sweat.” External composure during times when
others around you are losing theirs is a quality that leaders are
presumed to require, so I walk like a man and talk like a man, while all
the while a little boy inside me is screaming, “Run!” The only time I
ever remember totally losing it, though, was when I reached the head of a
reception line for Bill and Melinda Gates, nearly 10 years ago. “Nice
to meet you, Mike,” I said, and my armpits needed a full can and then
some for the rest of the evening. Last week was an equally challenging
situation as I ventured back to the Treasury in Washington D.C. which,
considering how often we’re painted as powerful Washington players, was
my very first official visit of any kind in over 35 years at PIMCO. I
sort of saw myself as a modern-day Jimmy Stewart – a Bill Gross, instead
of a Mr. Smith, going to Washington, but with the same populist spirit;
no filibusters or anything, but an idea or two on how to benefit Main
as opposed to Wall Street, in the ongoing housing crisis. And who could
possibly object to helping the little guy, I thought? Wrong! Just like
Oz isn’t Kansas, Washington D.C. isn’t Newport Beach or Des Moines,
Iowa. There were lots of powerful people there – special interest groups
who said their home was in neighboring Chevy Chase or Arlington, but
that they all worked at a place called “Que” street. Remembering my high
school Spanish, I innocently asked if that began with a “Q,” and one of
the lobbyists gathered around my circle rather dismissively said, “no,
it’s a single letter and it’s between J and L in the Greek alphabet.”
Shortly thereafter they all drifted off, presumably to find a more
informed but less entertaining source of conversation. I guess they must
have taken French in high school or maybe I hadn’t used enough Right
Guard that morning, but at least in my defense, I hadn’t called any of
them “Mike.” My image as a leader presumably was still intact, although
my intelligence was in question, a not too uncommon condition in
Washington, I might add.

Later that morning, in front of cameras from my favorite
television station, C-SPAN, I exercised (exorcised) my leadership role
in proposing a solution for the resolution of Fannie Mae (FNMA) and
Freddie Mac (FHLMC) and the evolution of housing finance in the United
States. I proposed a solution that recognized the necessity, not the desirability,
of using government involvement, which would take the form of rolling
FNMA, FHLMC, and other housing agencies into one giant agency – call it
GNMA or the Government National Mortgage Association for lack of a more
perfect acronym – and guaranteeing a majority of existing and future
originations. Taxpayers would be protected through tight regulation,
adequate down payments, and an insurance fund bolstered by a 50–75 basis
point fee attached to each and every mortgage. Seemed commonsensical to
me. After all, Fannie and Freddie had really blown up because of the
private/public nature of their charter, which incentivized executives
and stockholders to go for broke with the implicit understanding that
Uncle Sam would be there as a backstop should anything go wrong. If you
eliminated the private incentive and provided a tighter regulatory
watchdog, we would have no more “liar loans” or “no docs” and a much
sounder foundation for future homeowners and investors. The
private market, to my mind, had really lost its claim as the most
efficient and judicious arbiter in this particular case. Markets and
private incentives without proper guardrails were as threatening to a
sound economy in the 21st century as too much regulation and government
ownership proved to be in the 1970s.

In addition, my argument had a practical/market-based logic to
it. Ninety-five percent of existing mortgage creation over the past 12
months were government guaranteed. The private market was nowhere to be
found because they charged too much. It was the cost of private
origination and securitization, perhaps more than any other factor, that
justified government involvement.
Prime, but non-conforming,
mortgages (jumbos, insufficient down payments) were being purchased by
PIMCO in the hundreds of millions of dollars every week, but at yields
of 6, 7, and 8%. If that was the risk/reward tradeoff, compared to FNMA
and FHLMC yields at 3.5–4%, how could policymakers pretend that the
housing baton could be quickly and cost-effectively passed back to the
private market? Few, if any, could afford a new home at those interest
rates. If you were a believer in the dominance and superiority of
private markets, how could you deny the signal that markets were sending
– that the risk was too high given the substantial losses of recent
years?

My argument for the necessity of government backing was
substantially based on this commonsensical, psychological, indeed
sociological observation that the great housing debacle of 2007–2010+
would have a profound influence on homebuyers and mortgage lenders for
decades to come. What did we learn from the Great Depression, for
instance: Americans, for at least a generation or more, became savers –
dominated by the insecurity of 20%+ unemployment rates and importance of
a return of their money as opposed to a return on their money. It
should be no different this time, even though the Great R. is a tempered
version of the Great D. Americans now know that housing prices don’t
always go up, and that they can in fact go down by 30–50% in a few
short years. Because of this experience, private mortgage lenders will
demand extraordinary down payments, impeccable credit histories, and
significantly higher yields than what markets grew used to over the past
several decades.
Could an unbiased observer truly believe that
housing starts of two million or even one million per year could be
generated under the wing of the private market? In front of Treasury
Secretary Geithner and the assembled audience, I said that was
impractical. Let me amend that to “ludicrous.”

Policymakers not only have to consider the future “flows” of
new mortgage originations, but the existing “stock” of mortgages already
created. FNMA and FHLMC either own or have guaranteed $4.5 trillion of
the $11 trillion mortgage market now on the books. As the Treasury
contemplates the “transition” from Agency conservatorship to either
public or private hands, how could private market advocates reasonably
assume that pension, insurance, bank, and PIMCO-type monies would
willingly add nearly $5 trillion of non-guaranteed, in many cases
junk-rated mortgages to their portfolio? They would not. We are in a
bind, folks. Having grown accustomed to a housing market aided and
abetted by Uncle Sam, the habit cannot be broken by going cold turkey
into the camp of private lending. The cost would be enormous in terms of
yields – 300–400 basis points higher than currently offered, crippling
any hopes of a housing-led revival to the economy.

And why do I and PIMCO support this view? Is it some
self-interested, money-making plot to allow us to dominate the bond
market? Hardly. Any investor would recognize that it’s better to have a 6
or 7% yield instead of 3–4%, so it would be better for PIMCO to let the
Administration flood the private market with non-guaranteed, private
mortgage product and let us vultures feast on the pickins. No, the self
interest rests on “Que” Street. If the housing market continues to be
government dominated, then the points from originations and the fees for
private insurance would all of a sudden disappear. The vested interest
lies on Wall Street, not Newport Beach or Main Street. Try explaining that
to commentators intent on returning to a free market ideology that
continues to serve monied interests in the high style to which they are
accustomed, but denies a commonsensical, more tightly regulated
government alternative for millions of current and future American
homeowners. Jimmy Stewart I’m not, and I won’t be going back to
Washington anytime soon. If I did, though, I’d want to visit those guys
on “Que” Street. “K pasa?” I’d say, and then I’d ask if they slept well
at night.

William H. Gross
Managing Director

[someone forgot to add Supreme Protector of the People and Viceroy of Newport Beach]

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bugs_'s picture

Nationalize PIMCO.

Too Big To Tell Us What To Do.

SWRichmond's picture

Nationalize PIMCO.

Hasn't the Fed already been turned into "Bad Bank" by buying up MBS?

william the bastard's picture

Here is the single best "deconstruction" of the housing market I may have ever read. Its by David Stockman, Reagan's Dir OMB now a Priv Equity fund mgr:
http://tinyurl.com/38a3r9a

Needless to say Stockman is not a fan of the current "house of games"! 

anarchitect's picture

Nah, just pull the feds out of the mortgage sector and let this fucker take his lumps.

Something Wicked This Way Comes's picture

I didn't fall for that BS tax credit. I am not falling for these asking prices. In most markets, housing must fall 25% additionally before anyone can even contemplate buying. The banks for obvious reasons, (booking losses, no incentive to sell, tactical defaults) are aiding this misconceived notion that the housing market is healthy.

Joe Homeowner got some sodomy. Not it's time for the banks to step up and get a share. I am sick of government intervention into a free market.

So I am just sitting chilly, renting. Hoping to get in 25% cheaper at a stone cold 4% just before my worthless dollars collapse and become unusable.

SheepDog-One's picture

Even with an $8,000 'credit' the prices are still FAR up in bubble land! Hey man dont worry about paying 25% less, real soon you can just move into any house you feel like for FREE!

Eternal Student's picture

The idiots who fell for the tax credit have probably lost more money due to the lower interest rates than $8,000. I've heard some of them whining about wanting to refinance already. Only they can't, because loan officers want to see a "seasoned" loan history of at least six months.

I feel somewhat sorry for them. But I've grown less sympathetic with these speculators, as that's what they are.

traderjoe's picture

Whining already...not enough free money and/or handouts/bailouts. 

Of course, with $8k back and a 3.5% FHA down, most of them probably got into their house with no/little money down. 

Wash, rinse, repeat. 

RSDallas's picture

Eternal,

These people are not speculators.  They are in fact far from it.  They the purest definition of the American middle class.  Are they ill informed and naive?  Yes.  That's why the government was able to hook them into buying a home.  Speculators?  No, definitely not.  

Eternal Student's picture

Sorry, I have to respectfully disagree. I've debated too much with them to be convinced otherwise. The mad dash for the cash last October and April (when the tax credits expired) just cinches the argument, IMO.

Naive? Yes. Middle-class? Certainly. But that doesn't make most of them any less of a speculator.

If they were putting 20+% down, then I'd be more agreeable on this. But leverage to the max is simply speculation, no matter whether it's a sophisticated investor or a naive one.

redpill's picture

The more prices fall, the more people are underwater, the longer it will take for them to ever be able to sell the house they are in to buy another one.

 

HelluvaEngineer's picture

The whole damn real estate market is about to lock up or already has.  People can't sell at these levels (or don't want to), and you'd be crazy to buy right now.  No one has the money to buy up all the foreclosures (try to finance one.)

 

Stalemate.

Eternal Student's picture

Right. This is a natural step in the progression of a crash. Sellers want last years prices and buyers want a bargin. The forces are on the buyers side, and eventually the sellers will be forced to give in. Mish had a pretty insightful summary of the standard steps in a housing market crash, and we're pretty much at the beginning.

All bets are off though if the Fed decides to blow another bubble, like they tried last year. They just might put off the implosion for another 6 months. My guess though is that the Fed will have a smaller effect now, since Corporate and State Bonds need the money as much as Housing does. We shall see; the fat lady hasn't sung yet, but she's waiting in the wings.

DaveyJones's picture

The fat lady has gorged on bon bons and that rush of air is not her voice.

Incubus's picture

bring on the fat woman.  I love big women.

 

..aah... maybe I'll deliver on those promises of love another day.

Jeff Lebowski's picture

Agreed. 

For those that hope for the housing market to fall another 25% to buy in, be careful for what you wish for.

When it does, people like me will be that much further underwater, and will strategically default.

Almost Solvent's picture

The time will come when everyone strategically defaults.

Even the governments.

It's only a matter of time.

First ones to quit win the most.

jakoye's picture

We're not hoping for you to suffer, but just see the housing market as oversupplied and overpriced.

It's not personal, it's just a consequence of the bubble. The Gubbmint's intervention is actually making things worse, as it's only putting off the time of recovery.

jakoye's picture

Excellent! Though my real name is "Joe", there's no "Homeowner" attached to it. Like you, I'm enjoying the life of a renter, without all the underwater/bankruptcy/repossession worries of a bunch of dem homeunners.

Rent, bitchez!

PS: I was talking to a girl online, trying to romance her a bit, and she practiced the 20 questions on me. One of 'em was "Do you own a home?" "Alright, another gold-digger", I thought! But I answered her just for the humor, telling her "No". She immediately wound down the conversation, saying she didn't want to go out with an "irresponsible" guy who didn't own a house. Read a newspaper lately, honey? :)

MarketTruth's picture

There are no homeowners...

..stop paying the liability of ever-higher taxation rates on that land/structure and see who really owns it.

The people are waking up to this fact, and thus, makes no sense to own with all the liabilities of taxation, insurance, constant upkeep, etc. at this point in time.

dussasr's picture

In most jurisdictions landlords pay a higher real estate tax than homeowners.  This tax is ultimately borne by renters. So, assuming that one needs somewhere to rest at night the tax preference would be to own rather than rent.

It has always been ironic to me that the liberals trying to stick it to the evil landlords are just hurting the less fortunate renters. 

giddy's picture

...only two questions are required 1) do you cash-flow... 2) do you put the seat down... 

Eternal Student's picture

Ahem. The second question only gets asked if the answer to the first one isn't completely satisfactory.

traderjoe's picture

And of course, did she own a home? 

Homeownership will go down as one more fad perpetrated on the American people by the realtors, banks, homebuilders, and local politicians (real estate taxes). And of course, the corporations want debt-slaves who can't say no to working on a Saturday for some useless project. 

ColonelCooper's picture

@ Something Wicked:

The area I live in was "bubbled up" far less than average.  (rural)  Prices are back to around where they were when I built in 1999.  You know, back when you had to have a real down payment, income, and decent credit???

The biggest problem is that supply is inflated so badly, that realistic value has a long way to go down before it becomes reasonable.

If they wanted to put stimulus dollars to work effectively in an effort to mend the housing market, they should have bulldozed a few million single family units.  Prices would be back to a reasonable level and the surplus would be gone. /sarcasm.

TooBearish's picture

Rosenberg on Lost Money midday saying US in a depression on bubblevision no less...

bonddude's picture

Doug Kass still buying more BAC on today's

capitulation because yesterday's capitulation

wasn't really capitulation. Oh, and he says

Rosie's wrong.

AccreditedEYE's picture

He destroys his credibility in such an open fashion. I used to respect him... now I don't know what kind of crack he's smoking.

Village Idiot's picture

Fuck Pimco, I want to go out and purchase some income producing property on the cheap. Give me some numbers that work in Newport Beach.

theoakman's picture

Bill Gross is one of the most pathetic bond managers ever.  Most insiders beg for government welfare behind close doors.  Gross does it out in the open.

bugs_'s picture

LOL Gross does it out in the open LOL +1

mikla's picture

+1

He's big, so he's throwing his weight around for advantage (to get free taxpayer money), since that's always worked in the past.

The funniest thing is that it's so obvious he's being dishonest -- he can't deleverage from his zero-percent-return treasuries and toxic mortgage crap, and a spike in mortgage rates will decimate his holdings -- vaporized -- with no value and no ability to get out of those positions.

He's so screwed.  Of course, his investors were screwed the moment they gave him their money.

hound dog vigilante's picture

Gross can do his begging out in the open because he/PIMCO are a virtually monopoly that shares the same fate w/ Fed, Treasury, TPTB.  In this sense, Gross is no different than Geithner, Bernanke, Summers, et al.  Gross is part of the same propaganda operation... these guys take their orders from the exact same people.

In a very real sense, PIMCO is the Fannie & Freddie of bonds... 100% private profit, 100% public risk.

 

DaveyJones's picture

well said, but as things go to hell, more high placed folks private and public will be doing it out in the open

Forbes's picture

The man is positively an idiot. Who would give him $20 to manage. He's so unfamiliar with Washington that he doesn't know that a series of streets are named after letters in the alphabet? 

Quoting Gross: "The private market was nowhere to be found because they charged too much." Too much? Compared to what? Presumably the correct price is one subsidized by taxpayers.

Wow...

traderjoe's picture

Oh, he knows the streets in Washington. This was a lame copy of Buffett's "ah-shuck's, I'm on your side" schtick. 

Hasn't been officially to Washington in 35 years? He's on the side of Main Street? 

Oh, doesn't his fund charge a front-end load - for a bond fund?

docj's picture

The man is positively an idiot.

Not hardly - it takes some pretty good smarts to be able to extort the amount of money from Uncle Sugar this criminal has been able to extort.  Legally.  And in the open.

Forbes's picture

Yeah, you and traderjoe are right, it takes a cunning and creative mind to play the "aw shucks" bit for the Main St. rubes, and go to DC to lobby regulators and politicians to keep the extend and pretend merry-go round running--all with "geez, it's just common sense" retort.

The whole "Que" St. story was gag inducing though... 

Breaker's picture

That'll fix things. I'd like it if Barak were investing my money. 

Cut to white house budgeting scene: "Hmmm. Andy Stern says he needs a new Rolls--couple million there. And we haven't funded much global warming research today. That's a good investment . . . . Did these people really just give us this money? That's great."

SheepDog-One's picture

The bubbles must continue to be blown faster and higher, or else the crooks might get upside down! Cant have THAT! So govt reverse Robin Hood steal from the poor to give to the ultra-rich must continue forever!

centerline's picture

What the hell?  Reduce banking and investing to normal careers with modest returns?  No more rock star lifestyles?  We just can't let that happen.  It would be anarchy I tell you.  

tahoebumsmith's picture

Without the mortgage tools like option arms and alt a creativity this market has no where to go but down. The incomes in America don't support the prices so sales will continue to plummet and prices will drop accordingly. Not rocket science, just reality. With so many people losing their credit ratings the problem will only escalate. All the sales over the past year were one and dones, people buying foreclosures and no move up sales generated. The market is completely saturated and if you add in the shadow inventory we are pretty much done for a long time. So hoping real estate will bring us out of the abyss is like the oxymoronic thought of a jobless recovery.

HelluvaEngineer's picture

This tool is officially pissing me off.  Time for him to be a greeter at Walmart or something productive.

Internet Tough Guy's picture

So sick of Gross' pathetic priapetic purile pusillanimous pandering .

We need a better class of robber baron; JPMorgan gave out dimes on the street to urchins. Gross just writes long-winded self-deception.

Widowmaker's picture

Here come the wolves trying to put on sheepskin.

"Im a victim, Im a victim, spare a quarter point?  Look, I'm a consumer too."

Village Idiot's picture

I'm sure this is common knowledge, but...

 

fannie and freddie require a borrower to have FOUR active tradelines (credit card, auto loan, etc.) in order to qualify for a loan.  What a bunch of horseshit - "Sorry, but you need to be in debt to get a loan."

 

Yes, I recognize that active credit demonstrates future ability to pay. there are other ways of establishing credit risk for a stupid fucking home loan, btw.

DonnieD's picture

Didn't know that. Backdoor stimulus at it's finest.

Fannie: You want this home loan? Go open a Nordstrom credit card, take out a line of credit at the Hard Rock and buy a GM, then we'll talk.