Gross Calls for White House Bailout
Bill Gross, the king of the American bond market, says a Federal Reserve rate cut is not the answer to the mortgage crisis. Instead, the billionaire credit-markets guru is asking President George Bush to rescue homeowners who can't pay their bills.
The call comes as Wall Street clamors for the Federal Reserve to cut its federal fund target rate to minimize the fallout from mortgage defaults. Gross said Thursday, however, that even a steep rate cut wouldn't necessarily clean up the mess because upward adjustments on adjustable rate mortgages would continue.
Many homebuyers took out adjustable-rate mortgages to take advantage of low interest payments for the first two or three years. When their rates reset higher after the initial period, those buyers couldn't handle the bigger bills. (See: "Home Foreclosures Rise In July")
The outspoken Gross called for help from the White House because of its history of bailing out financial failures: "Why is it possible to rescue corrupt savings and loan buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 Long Term Capital Management crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner?"
Gross said that there's a need for action because the continuation of high mortgage defaults will cause a housing bust with widespread effects. Over two-thirds of American households are homeowners, so a decline in home prices would likely have disastrous effects on consumer spending.
Gross is managing director of one of the world's largest fixed-income managers, PIMCO. Through savvy bond trading, he's accumulated a $1.2 billion fortune that makes him the 799th-richest person in the world. He's an avid philatelist and owns every stamp produced in the United States between 1847 and 1869.
A presidential bailout of homeowners who can't pay their mortgages would likely be a boon for the companies making the mortgages. Originators like Countrywide Financial, Accredited Home Lenders, and H&R Block, which has a subprime lending subsidiary, have been crunched by rising defaults. It would also benefit companies like Thornburg Mortgage that hold mortgages for investment.
