Putting Pimco Into Plain English

ALEX CHADWICK, host:

And we're going now to NPR's Chris Arnold, who covers business for NPR News. Chris, we want to ask you help us interpret a little bit of what Bill Gross had to say. And let's begin with terminology. Leverage, levering, de-levering. I know that business people know what de-levering means. What does it mean to the rest of us?

CHRIS ARNOLD: People understand what leverage is. I mean, if you've got a giant rock in your backyard, and you're trying to lift it up, and you go get a two-by-four, and you can pry it up, you know. Since the time of the caveman, you know, people have done stuff like that. Financial leverage is the same thing. It's just borrowing money is the two-by-four. By doing that, you're able to lever up your profits.

And an easy way to think about that is, you know, this is not a good idea, but, you know, you could go to a casino and use a credit card to gamble, you know, and you're not really gambling with your money. You can make a lot of money because you can take, you know, $5,000 off your credit card or something. But you can also lose a lot of money that you don't have, and that's what was basically going on on Wall Street. A lot of these firms were levered 30-to-one, which means they were on the hook for 30 times more money than they actually had.

CHADWICK: So, de-levering is paying up all your old debts?

ARNOLD: Basically, yeah. You know, these firms owe a lot of money that they are having trouble paying, and, you know, that's why we're seeing the government come in and give them cash, you know, to help with that situation.

CHADWICK: Capitalism changed forever, Bill Gross says. Get used to smaller returns. I guess any returns right now are good returns.

ARNOLD: Yeah, with the Dow falling 500 points in a day, you know, all the time, you know, recently, you know, yes, things are sort of a mess. I think what he's talking about there as far as capitalism being forever changed, I think he's talking about the days of unregulated capitalism in the markets, you know, hopefully will be over. Again, this situation where there were so many big companies taking such unreasonable risks, and there was no regulator overseeing this and saying, this is crazy, you know. They were creating securities that even the firms themselves didn't really understand. The idea that this many banks could get into so much trouble without a regulator intervening, those days may be over.

ALEX COHEN, host:

Chris, this idea that Pimco and maybe some other firms might be helping the government determine the value of some of these bad mortgage assets, what have you been hearing about that?

ARNOLD: What's going on there is, there's basically this giant tangle of securities. I mean, I was just talking about it, these complicated securities that different investors bought into that nobody really understood. And, you know, that's one reason these firms got into so much trouble - is they didn't understand how much money they were really on the hook for here. The government's going to buy up a lot of this stuff now, at least that's one of the plans. And it has to be very careful about how much it pays for these securities because if it overpays, you know, the government could lose a lot of money, and, you know, Pimco, Bill Gross is an expert at kind of figuring out how much stuff like this is worth, so he could be very helpful.

COHEN: A lot of what the government is doing now has to do with opening up credit markets. Can you just kind of remind us about what exactly it is that they're doing and how well it's working?

ARNOLD: The credit markets, basically, are sort of a plumbing of the economy. And money flows through the pipes and goes to all kinds of businesses and banks, and lately, that's been frozen. So, companies are opening the faucet, and no money's coming out. We're starting to see that change there. The government's done a bunch of different things, these direct equity injections into banks is helping.

On Monday this week, the government said it would back up money market funds in a way that it hadn't before and help them raise money if they need it. Those funds have $3 trillion in them, and hopefully, now, we're seeing some signs that that money is starting to flow back out into the system, and that would be a very good sign for the economy.

COHEN: NPR's Chris Arnold, thank you.

ARNOLD: Thank you guys.

COHEN: Stay with us on Day to Day from NPR News.

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