Private Investor Backs Geithner's Plan

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Bill Gross, co-chief investment officer of Pimco, says the Treasury Department's plan aimed at taking toxic assets off of bank balance sheets is a win for the government, U.S. taxpayers, private investors and, potentially, the banks that will be selling the toxic assets. He says the plan looks like a good program to not only to clear bank balance sheets, but also to give a shot in the arm to the U.S. economy.

ROBERT SIEGEL, host:

And now we are going to hear from someone who not only has good things to say about the Geithner plan, but is eager to put his money where his mouth is. Bill Gross is the co-chief investment officer of Pimco in Newport Beach, California. As of the end of last year, Pimco had more than $700 billion in assets under management. Mr. Gross says he wants to buy into the Geithner plan.

Mr. BILL GROSS (Co-chief Investment Officer, Pimco): This is a triple win for the government, for the U.S. taxpayer and for private investors, as well as potentially for the banks that'll be selling these assets. So that it all depends, so to speak, in terms of the clearing price and the amount of loans that are transacted. But it looks like a good program to not only clear bank balance sheets, but to give a shot to the U.S. economy going forward.

SIEGEL: You would look upon these securities that you could buy under this program as being as safe and secure as Treasury bonds, Treasury bills?

Mr. GROSS: Well, no. They are toxic assets. They are the famous subprimes of the world, but they will be bought at prices of 40, 50 and 60 cents on the dollar to reflect that risk and the potential higher yields going forward.

SIEGEL: Let me ask you about something which you just said. They could go for 40, 50, 60 cents on the dollar, that's a pretty big spread there. How will you figure out whether one of these securities is worth bidding 44 or is worth bidding 60 cents for?

Mr. GROSS: It all depends on the assumptions for defaults, the assumptions for foreclosures, delinquencies, the geographical location of the loans, lots of things filter into a complicated equation that these old investment models that failed us in the past are being used for in terms of future analysis.

SIEGEL: Are you at all concerned that if Pimco were to buy these securities and discovered that indeed it has gotten such a good price that it made very good money on them over the next couple of years, that the Congress would come back and tax your earnings or tax the bonuses that are paid out of that money?

Mr. GROSS: No, we're not concerned. We have assurances, public assurances now from Tim Geithner and others that this particular program will not be subject to those provisions.

SIEGEL: One thing I don't understand is this, though. I understand how this would be a win for a fund manager like Pimco, if it became involved. I understand how it could be a win for a bank that could get some toxic securities off its books that have been holding it back, how is it a win for taxpayers if the taxpayers are indeed paying for the difference of what these are said to be worth and what they really might be worth?

Mr. GROSS: Well, they're not. You know, the taxpayer basically is putting up 85 cents on the dollar, which is a risk. But the taxpayer is also participating 50-50 in terms of any upside profits. And I think that's a big difference, relative to what we've had in the past.

SIEGEL: So that question of the right price is very central here.

Mr. GROSS: Oh, I think it is. And to that regard there's no reason why a Pimco would pay a too high of a price and subject itself to a 100 percent loss, you know, for its own clients and so the trust would be in the private market that these things clear at the right price going forward at the highest yield possible and that the return comes down to the bottom line for not only for them but for the American taxpayer.

SIEGEL: Since indeed these are toxic assets - these are not Treasury, these are not ordinary Treasury bills. Is there any down side at all for Pimco here or you guarantee that you just can't lose a nickel on these things?

Mr. GROSS: Oh no, there's a 100 percent down side. It's true that the government is putting up 85 cents on the dollar and that the private investor is putting up perhaps five to fifteen percent, but that entire portion is at risk to the extent for instance that a loan goes down from 50 cents to 45 cents or less, then, you know, the potential for a private investor to be entirely wiped out so to speak at least in terms of the market is there.

SIEGEL: You couldn't lose more than 100 percent of what you put in at the beginning, could you?

Mr. GROSS: No. Private investors are limited to 100 percent. There is a backstop so to speak on the part of the government that provides, of course, a foundation but it doesn't suggest that a private investor is moving into this at a risk free basis. Definitely they can lose 100 percent of their money.

SIEGEL: Bill Gross of Pimco, thank you very much for talking with us.

Mr. GROSS: You're welcome Robert, thank you.

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