Bill Gross Issues Ultimatum: GSEs Keep Government Guarantee Or Else

In an interview with the FT, Pimco's Bill Gross flatly warned the government, in advance the housing finance conference that will begin deciding the fate of the GSEs next Tuesday, that unless Fannie and Freddie bonds retain their government guarantees, he would cease purchasing GSE debt. On the other hand, Gross may have overplayed his card: he already took the government for the proverbial ride, loading up the flagship TRS fund with GSE debt in early 2009 and riding the surge higher for the entire year, then selling virtually everything: TRS has just 16% of its $234 billion in AUM in mortgage securities as per the latest Pimco Fund update. Nonetheless, the Newport Beach bond pundit's warning is a clear shot across the bow indicating just who is the primary force in GSE decision-making, right after the Treserve.

More from the FT:

The Treasury currently backs the debt of Fannie Mae and Freddie Mac, which in spite of ballooning losses are propping up the housing market by buying or guaranteeing new loans. Some conservative politicians and policy experts have suggested that the agencies should be privatised and the government’s involvement curtailed.

Mr Gross, the co-founder of the Pimco and manager of its $3.4bn Total Return Fund, said such a move would, in effect, cause him to withdraw from the market.

“Without a government guarantee, as a private investor, I’d require borrowers to put at least 30 per cent down, and most first-time homebuyers can’t afford that,” said Mr Gross, who will be one of the most prominent private sector participants at the August 17 conference.

While PIMCO is certainly entitled to its opinion as a private institution, his statement effectively confirms that any attempt at GSE reform is a wash. It also reaffirms our concerns about monopolies in the market, whether it be Pimco in the bond market, BlackRock in ETFs, or Goldman in everything else. The three firms can pretty much singlehandedly shut down the market if there is some policy decision they disagree with, as they control all three key critical verticals in capital markets currently. As such, it behooves the next administration (speaking of washes) to cast a long hard look into mitigating monopoly threats presented precisely by funds such as Pimco which control over $1 trillion in AUM, as well as every other firm that could use the same Mutual Assured Destruction card we have all grown to know and love as part of the financial crash, only this time proactively instead of reactively.