Thursday, September 4, 2008


Cliffs Notes version:

"This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.

Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it's primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.

New balance sheets? Is this now some Deloitte & Touche metaphor? Hardly. What I mean, what our blackboard and our Investment Committee point out is that to ultimately stop this asset/debt deflation, a fresh and substantial new source of buying power is required. This became all too obvious as the Treasury's attempt to entice additional capital into Freddie and Fannie came up empty. Yet this same dilemma is and will continue to confront all highly levered institutions in the throes of asset liquidation. Without a new balance sheet, their only resort is to sell assets, which in many cases leads to further price declines, or ultimately debt liquidation/default.

A Depression-era bank robber named Willie Sutton once said that the reason he robbed banks was because “that's where the money is.” Illegal for sure, but close to an 800 SAT score for logic if you were in the business of stealing other people's money. And now, while some will compare current government bailouts to Slick Willie, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.

The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise."

William H. Gross
Managing Director



Blue said...

M3 ceased issuing a report on how much money the FED lends outside of the discount window. No one really knows the exact figure only that it of epic proportions this year. Totally off the chart.

3/4 of the market is owned by financial institutions, hedge funds, and pension funds. The rest of us account for 1/3rd. That 3/4 has to take any and all profits right now in order to have liquidity. We're facing a massive de-leveraging in the market of what has been built up post 9/11.

Ignore the last paragraph rant, the rest of this is worth reading:

Market Monk said...

Bill Gross is a piece of shit. He is asking for a bailout .. his bailout. He willfully decided to try to catch a toxic falling knife and is now asking the Government (you and I by the way if you are too stupid to realize that) to bail him out.

Take no pity on this man nor his company.

The Government has no place in making homes "affordable". I only need to site one example. The cost of DVD players. If you want one (or two) in every home do you prop up the price pay for them? Of course not, you do everything possible to make them cheaper.

Then why does the government think keeping home prices (and the loans made against them) high is the "thing" to do? It's because the pigmen (bankers) need them to remain high. It has nothing to do with helping the common man afford nor stay in his home.

I'd better stop now before I blow a blood vessel.


Anonymous said...

market monk. i I agree with you 100%. the government has this fixation that they must make homes affordable. they could have made them affodable back in 2004 by raising rates to slow down the speculation in houses. the nornal trend was going so far to the upside and they just let it go. now it really is a shame. the millions of us who own homes now cant even sell them. fortunatly i dont need to move but i feel for all the normal people who didn't get involved in the housing fiasco and now are penalized. what a shit government we have had for the last 8 years. i'd better stop also. before i throw this fucking computer! damn it!

raja said...

super blog keep it up

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