not a bailout - Rescue Plan Will Make Money - Bill GrossShow Video Details ↓ Erin Brunette: Chief Investment Officer of Pimco, Bill good to see you. Bill Gross: Thank you Erin. Erin Brunette: And Bill I have said, I am not really being facetious and saying we've got dueling financial capitals here and now obviously in the Washington Post is where you chose to put your op-ed, not the Wall Street Journal. And your title, How Main street will Profit. I assumed you picked this paper and this audience because you're trying to help congress sell this to their constituents, right? Bill Gross: Well I think so and I think their constituents should be understanding of the fact that this particular proposal, this $700 billion bailout that some are suggesting is a Wall Street bailout is really a bailout for Main Street. It's the first program really where tax payers will benefit as opposed to potentially lose money and I'll be glad to explain why here in about 30 seconds if you like. Erin Brunette: Not even 30, how about 3. You finished your sentence and let's get to it. You actually walked through the math very clearly here. You set a price for assets and then... So let's start with that. No one else has been able to do it, so let's go here. Here's your math. Can you see the screen Bill or can you not see there? Bill Gross: I can as I turn to the right here, yes. Erin Brunette: OK, so you see mortgage value is $100. Let's say you got a house for $100 but now everyone is really worried you're not going to pay your mortgage so it's only worth, well that's your price there right? $65? Bill Gross: Yes. Yes. Erin Brunette: OK. Bill Gross: And that's an approximate price. Some trade at 80 and some trade at 20, but that's an approximate price that we've been able to determine over the past few days. That's where the market clears here for a relatively substantial size in the billions of dollars. Erin Brunette: Alright, so yield is really just your return. How do you get a return here of 10% to 15% gross? Bill Gross: Well, under relatively conservative assumptions, for instance. All of these bonds, these sub-prime mortgages that are being bought have coupons and yes they have foreclosures and yes they have recovery values. But we have estimated in terms of market value that at 65 cents on the dollar and with, for instance, a foreclosure rate of at least 20% and a recovery value of 40%, that means a home that was originally valued at 100 cents on a dollar now only returns 40 cents. So these are conservative assumptions so if bought here with a standard coupon at 65 cents on the dollar, the government, the treasury will be earning returns of 10 to 15 %. And your checklist, Erin, suggested that equity participation. This is an equity participation. The government will own these outright in terms of an equity participation and they will earn equity returns. Just one last point in terms of numbers... Erin Brunette: Yes. Bill Gross: $700 billion earning a spread between 3% where they can issue paper, in other words treasury paper, and buy it in the 10 to 15% range, the treasury is going to earn $25 billion a year in terms of the spread. This, as Warren Buffet said, is a lead-pipe cinch, if you buy it at the right price. Erin Brunette: Right, OK so Sammy would pay 65 cents. That's your magic number. Assuming your right on your conservative assumptions, the government makes 10 to 15%. And as we all know it's taxpayer money that we don't have right now so we go out and borrow it. Even after we pay off that debt, that's where we get to the bottom line which is the return rate for the American taxpayer is: each of you puts in $3000 and you're going to make 7 to 8% on that money. That Bill, might convince lawmakers to agree to this? Bill Gross: Right, I think it's very simple and obviously there are some earmarks attached to this. You know, we have executive compensation, you know we have the question of forbearance in terms of the existing mortgage pool that's outstanding. All of those are necessary to a certain extent although the compensation is a complicating factor. Nonetheless, the package really is a pro Main Street package. It's the first one and it's so relatively simple that it's frustrating to me and to others that know that these things can be bought at 65 or 60 cents on the dollar. Erin Brunette: OK, finally question Bill. There was a sentence in here that we just want to hit quickly. You said in your op-ed, in terms of who is going to manage the money, there is a lot of questions about that. You said there are a lot of disinterested firms, some not even based on Wall Street with the expertise to evaluate these complicated pools of mortgages. OK, I'm chuckling a little bit here because obviously you could be talking about Pimco. Here is my question to you. Would you expect, take a haircut, in terms of your management fee, just to be patriotic and say we'll manage this money at a lower rate to show that we're taking one for the team too? Oh, Erin you are a news breaker. Not only an haircut but Pimco would be the leader here in suggesting to the Treasury that we would work for no fee... Work for no fee, Bill? Bill Gross: You bet, if everybody else worked on the same basis. Erin Brunette: Bill Gross. Thank you very much. Really appreciate it. Certainly a patriotic statement there and I hope we got that picked up. Bill Gross is willing to manage that money for no fee. |