According to Reuters yesterday, legendary bond investor Bill Gross suspects the U.S. Treasury and Federal Reserve are engineering a “bailout” for U.S. mortgage giants Fannie Mae and Freddie Mac, which will likely involve the sale of preferred stock upon approval by government officials. From the Reuters piece:

“This is a bailout by any other name,” Mr Gross, chief investment officer at Pacific Investment Management Co, known as Pimco, told Reuters in an email.

Mr Gross said he expected both mortgage companies to sell preferred stock to the Treasury or the public — probably the Treasury — once the authority is approved by Congress and the President.

“This will be consistent with Secretary Paulson’s desire to not bailout stockholders but to maintain the creditworthiness of both companies and in the process support the economy and the housing market,” he said.

Mr Gross, who manages the $US130 billion Pimco Total Return Fund, said while this does not explicitly guarantee the bonds of Fannie Mae and Freddie Mac, “it tells the market that the government will not allow them to fail.”

Source:

“Pimco: US actions a bailout for Fannie, Freddie”
Reuters, July 14, 2008

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