Pimco CIO William Gross Talks The Treasury Plan & Toxic Assets
Monday, March 23, 2009
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SUSIE GHARIB: Our guest tonight says the Treasury's plan to deal with toxic assets is quote a win-win-win and he intends to take part in the program as both a buyer and manager of troubled bank assets. He's William Gross, founder and chief investment officer of Pimco, the world's largest bond fund company. Hi, Bill.
WILLIAM GROSS, FOUNDER & CHIEF INVESTMENT OFFICER, PIMCO: Hi, Susie.
GHARIB: Bill, you've been very upbeat about this plan right from the announcement this morning. Why do you think it's going to work?
GROSS: Well, I think it will work because the government is subsidizing the process. I mean, the credit markets are delevering and have been for a long time at a rapid rate which means credit is being destroyed. And basically our economy is operating with two or three pints of blood less than it should be in terms of a normal body. This puts money back into the economy by taking toxic waste off of banks balance sheets and allowing them to lend more money to the new economy.
GHARIB: Now not everybody looks at it this way from some of the hedge fund managers I talked to and private equity people. They're concerned about putting money into this fund or investing into it because they feel that the government is going to be micromanaging them. Do you have any concerns about that?
GROSS: Oh, I don't have concerns about that. I mean Secretary Geithner came out and publicly suggested and said that the provisions that are being applied in terms of excess compensation for AIG and the like will not apply here. So we don't have any particular complaints or reservations about that at all.
GHARIB: Another prickly area is pricing. The banks are going to want to sell these assets as, at as high a price as possible and the private investors are going to want to buy them at a low a price as possible. So there is a big gap. Could that pricing issue derail the plan?
GROSS: I think it's still a problem. We're just going to have to find out, probably in 30 to 60 days when all of this comes together. I mean the banks up until this point for a typical loan have wanted $0.70 or higher, the private market in terms of buyers have wanted $0.40 or lower and that a huge gap. What this financing does though, this leverage, this availability of money at 1 to 1 1/2 percent financing, in other words, the ability to borrow money at a cheap rate, what that does is make it possible for the 40 percent price to move up to $0.60 or $0.65 and still be on a comparable basis. So buyers and sellers have moved much closer together based upon this particular plan.
GHARIB: All right so if the buyers and sellers finally can work something out, how soon do you think that this could get the credit flowing in the economy?
GROSS: Well, it will take some time. You know, I mentioned it will take 30 to 60 days to implement or to begin to implement this particular plan. And then once the toxic waste so to speak is cleared off the balance sheets if it is, then you know, the new lending will begin and that will take six to 12 months. So this not a situation by any means where the U.S. economy or the global economy is out of the woods. We expect further deterioration in terms of unemployment, further deterioration in terms of economic growth but this is a major step to cushion that process.
GHARIB: But today President Obama was saying that he sees glimmers of hope in the economy and last week we also got some very optimistic comments from Fed chief Ben Bernanke. Are you beginning to see a turn at all in the economy?
GROSS: Not yet. You know, I think that's still six to 12 months out and I think ultimately Susie that when the economy does turn, that those that are expecting it to turn and to move back up to normal levels, to levels of growth of 3 to 4 percent, unemployment rates back to 4 1/2 to 5 percent, that they are sadly mistaken. We are moving to what we call a new normal which reflects a very subdued level of economic growth and a very subdued rate basically of growth for economic assets and financial assets.
GHARIB: Just have a little time left and I hate to leave it on a down note. But worst-case scenario, what if this Treasury plan doesn't work? What does that mean for the economy and for reviving the financial system?
GROSS: Well, if it doesn't work, it means that the basically the $5 trillion hole that Pimco estimates that the U.S. economy has to fill back in, that the Fed, the Treasury, that the fiscal stimulation plan in terms of the budget deficit has to fill in, it means that that would be a tremendous, tremendous effort going forward. Basically this program has to work.
GHARIB: All right, I hope you are right about that. Thank you so much for coming on the program, Bill.
GROSS: Thank you, Susie.
GHARIB: My guest tonight William Gross, founder and chief investment officer of Pimco.
