• 04 Sep 2008 at 3:05 PM

Bill Gross: Bring Out The Bazooka

Institutional buyers have no more appetite for the debt or preferred equity of financial companies, the manager of the world’s biggest bond fund said in an interview with CNBC’s Erin Burnett. Bill Gross, who manages the $130 billion Pimco Total Return Bond Fund, added that he didn’t expect retail investors had very many funds left to make further investments either.
After the interview Jim Cramer and Burnett speculated that Gross was trying to force the hand of Hank Paulson, who was authorized by Congress to use federal money to bail out government chartered mortgage giants Fannie Mae and Freddie Mac but has held back. If Fannie, Freddie and other financial institutions find themselves unable to raise money, the Treasury may believe it has to begin the bailout.
Gross this morning called for an even broader bailout of the housing market, calling on the Treasury to use funds to bail out mortgages as well as financial companies. And he seems to be betting on that bailout, saying that Pimco finds distressed mortgages an attractive investment.
Combined with word from HSBC that wealthy individuals are moving into cash and away from both stocks and bonds, this could put enormous pressure on the Treasury to act. Paulson colorfully explained that the authority to bail out Fannie and Freddie could be enough to forestall their collapse by saying that if you carry a pistol you might have to use it but if you carry a bazooka you probably won’t.
Gross seems to be saying that it’s time to take out that bazooka.

Bond Giant Pimco Sits Out Citadel Sale

citadelgraphic1.jpgThe world’s biggest manager of bonds decided not to buy into a $500 million debt offering by the Chicago-based hedge fund Citadel, according to the Chicago Tribune. The Newport Beach-based Pacific Investment Management Co. told the Tribune that it couldn’t “get [its] hands around” the hedge fund’s business. And that’s likely because Citadel’s business is trading and investing, and it is very secretive about its investment strategies. The memorandum describing the offering revealed very little about Citadel’s strategies (although you can be sure people are still combing through it hoping to turn up something useful).
From the Tribune:

With the tremendous amount of cash looking for new investments, issuers have been able to secure looser terms in bonds than with banks, said Jim Cusser, a portfolio manager at Waddell & Reed in Kansas City, Mo., who isn’t planning on purchasing the Citadel bonds.
“The bond market is a little less prudent than banks are,” Cusser said. He also noted that hedge funds are already highly leveraged. “It looks like we may be piling leverage on leverage.”
The sale shows that “credit markets are pushing limits,” said Mark Kiesel, an executive vice president who oversees $50 billion in corporate bonds at Newport Beach, Calif.-based Pacific Investment Management Co.
Pimco, manager of the world’s biggest bond fund, didn’t buy the Citadel debt, Kiesel said.
“When you don’t like the business, and you can’t get your hands around it, no spread is enough,” he said

Citadel sells $500 million in notes [Chicago Tribune via DealBook]