Yesterday, Bloomberg’s Sree Vidya Bhaktavatsalam reported that Pacific Investment Management Co., which was founded by legendary investor Bill Gross and is the biggest manager of bond funds, is actively seeking as much as $5 billion to purchase mortgage-backed debt, according to two investors with knowledge of the matter. Bhaktavatsalam wrote:

The Distressed Senior Credit Opportunities Fund will invest in “senior” and “super-senior” securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private. Senior debt is first to be paid off in a default…

The new Pimco fund, dubbed Disco, will focus on commercial loans as well as residential debt that doesn’t carry explicit government guarantees or the implied backing of securities issued by companies such as Fannie Mae or Freddie Mac, the investors said. It also will seek investments in securities backed by home-equity, credit-card and auto loans, they said, and can invest in debt secured by collateral outside the U.S.

The Disco fund has a 15-month investment period and a 5-year life. It will be jointly managed by Pimco’s credit teams in the U.S. and Europe, the investors said.

Bloomberg Bhaktavatsalam also noted in the piece:

Gross’s Total Return Fund advanced 9.4 percent in the past year to beat 99 percent of competing bond funds, according to data compiled by Morningstar Inc. in Chicago. The fund had 61 percent of its assets in mortgage securities as of June 30, up from 53 percent a year earlier.

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“Pimco Seeks as Much as $5 Billion for Distressed Debt (Update1)”
Sree Vidya Bhaktavatsalam
Bloomberg, August 27, 2008

According to the Wall Street Journal this morning, the world’s largest bond fund company Pacific Investment Management Company (PIMCO) favors agency mortgage-backed securities instead of government debt. PIMCO was founded by legendary bond investor Bill Gross, who serves as chief investment officer of the California-based investment firm. Min Zeng wrote this morning:

Despite the woes rocking mortgage companies Fannie Mae and Freddie Mac, bond-fund company Pacific Investment Management Co. continues to favor agency mortgage-backed securities over government debt.

Steve Rodosky, head of Treasury and derivatives trading at Newport Beach, Calif.-based Pimco, said the unit of Allianz SE prefers agency mortgage-backed securities, or MBS, the so-called pass-throughs sold by federally chartered firms, over debentures of the two companies as well as Treasurys as they provide more attractive yields.

“The best opportunities in the markets are in high-quality agency MBS,” Mr. Rodosky said in an interview Thursday. “You are getting a collateralized piece of paper at a significantly wider spread.”

The Journal’s Min Zeng noted:

Pimco’s flagship $129.56 billion Total Return Fund increased its mortgage-bond holdings last month to 65% from 61% in June, according to the data from the company’s Web site. In contrast, the fund continued to shed government-debt holdings, including Treasurys and agency debt last month for the seventh straight month. The fund is the world’s largest bond fund and is run by Bill Gross, the company’s chief investment officer.

Source:

“Despite Fuss, Mortgage-Backed Bonds Have Fans”
Min Zeng
Wall Street Journal, August 22, 2008

Legendary stock investor Warren Buffett appeared on CNBC’s “Squawk Box” this morning. Reuters’ Jonathan Stempel and Euan Rocha covered the event and wrote:

Warren Buffett said the U.S. economy is unlikely to improve before 2009, and there was a “reasonable chance” that Fannie Mae and Freddie Mac shareholders would be wiped out though the companies themselves are too big to fail.

The “Oracle of Omaha” touched on a number of topics, including:

Credit Crisis

Referring to credit deterioration, Buffett said, “Right now the situation is still getting worse, and I would say that I don’t see any early end to that.”

U.S. Economy

He also said Federal Reserve Chairman Ben Bernanke “does not have any magic wand” to bolster an economy facing weak growth and mounting inflation. “In my judgment it won’t be any better five months from now,” he said.

U.S. Stocks

Buffett said U.S. stocks are broadly “more attractive” than they were a year ago, adding that Berkshire has no currency bets against the U.S. dollar.

U.S. Mortgage Giants

Fannie and Freddie shares have plummeted as speculation grows about a government bailout of the companies, which own or guarantee almost one-half of U.S. mortgages. Shares of both have fallen more than 90 percent in the last year.

“They’re too big to fail,” Buffett said. “That doesn’t mean that the equity can’t get wiped out, and it almost has. In a practical sense, as institutions, they don’t have any net worth.”

Buffett forecast that “you’ll see some action fairly soon” to support the companies, but that he has not been approached to assist in any bailout. He said “nothing is going to happen” to investors in the companies’ insured mortgages or debt, but “the equity and preferred stock is another question.”

Transcripts of his “Squawk Box” appearance can be found here at CNBC’s “Warren Buffett Watch.”

Source:

“Buffett sees economy weak into ‘09”
Euan Rocha, Jonathan Stempel
Reuters, August 22, 2008

PIMCO’s Bill Gross appeared on CNBC yesterday and talked about the U.S. housing crisis. According to Gross, home prices will go down another 10 to 15 percent. He also discussed troubled American mortgage giants Fannie Mae and Freddie Mac:

CNBC: Bill, is your assumption that Fannie and Freddie will both have stocks priced at $0, and they will get some sort of a federal bailout?
GROSS: Well, I think so. At three and four dollars per share, respectively, at the moment, in effect, the market is valuing both of these companies at zero. I mean, these are perpetual options at these prices, you know, with three to four dollar prices that effectively use a strike price of zero for the common stock. So at the moment, that’s what the market is saying.

CNBC’s Erin Burnett asked the founder and chief investment officer at PIMCO what an investor needs to hear from the U.S. government to restore confidence in Fannie and Freddie. Gross replied:

They need to hear not only that they’re willing to stand behind Fannie and Freddie but that their money is going to do that. And, in terms of the amount, 15 to 20 billion per institution in the form of preference or preferred stock that hopefully will be at the same level of the existing preferred stock… Yes, we need 15 to 20 billion per institution coming in at the preferred level.

You can view the 7 minute 2 second CNBC segment here.

Source:

Bill Gross Interview
CNBC, August 20, 2008

Reuters’ Jennifer Ablan reported yesterday that legendary money manager Jeremy Grantham recently acquired distressed debt for his personal portfolio. Ablan wrote:

The allure of moribund mortgage bonds and corporate debt has grown so strong that Wall Street’s biggest money managers are picking over their carcasses…

Even influential investor Jeremy Grantham said he has doled out money to three such funds for his personal account. “A well-managed distressed fund will no doubt do very well and will have great opportunities,” Grantham, chairman of global investment management firm GMO, said in an interview.

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“Big money managers bet big on distressed debt”
Jennifer Ablan
Reuters, August 7, 2008

PIMCO founder and chief investment officer Bill Gross told Bloomberg that he thinks the U.S. government will have no choice but to prop up mortgage giants Fannie Mae and Freddie Mac. Bloomberg’s Shannon D. Harrington and Kathleen Hays wrote yesterday:

Bill Gross, who manages the world’s biggest bond fund, said the U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac to help shore up their capital.

“By the end of the third quarter, the preferred stock in Fannie and Freddie will be issued, the Treasury will have bought it,” Gross, co-chief investment officer at Pacific Investment Management Co., said today in an interview on Bloomberg Television. “We’ll be on our way toward a joint Treasury-agency combination.”

Gross adds to a growing chorus of investors and analysts predicting U.S. Treasury Secretary Henry Paulson will need to use his newly won power to prop up Freddie and Fannie. Freddie posted a second quarter loss that was three times wider than analysts estimated and said credit losses doubled in three months, heightening concerns it may not be able to weather the worst housing slump since the Great Depression.

Source:

“Pimco’s Gross Says U.S. Will Rescue Fannie, Freddie (Update2)”
Shannon D. Harrington, Kathleen Hays
Bloomberg, August 6, 2008

It appears the “King of Bonds” likes debt issued by U.S. mortgage giants Fannie Mae and Freddie Mac. Bloomberg’s Daniel Kruger wrote yesterday:

The fastest inflation in 17 years and a fourth straight quarter of U.S. profit declines are turning debt sold by Fannie Mae and Freddie Mac into the favorites of the world’s biggest bond investors.

Pacific Investment Management Co., T. Rowe Price Group Inc., RiverSource Institutional Advisors and U.S. Bancorp’s FAF Advisors, which oversee more than $1 trillion, say the government’s decision to stand behind the beleaguered U.S. housing finance companies and their yields compared with Treasuries make the bonds a buy. The Senate approved legislation on July 26 allowing the U.S. to inject capital into Fannie and Freddie. President George W. Bush plans to sign it into law.

“We like it,” said Bill Gross, who oversees the $128 billion Total Return Fund, the largest bond fund in the world, for Newport Beach, California-based Pimco. “This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we’re close to that point.”

Source:

“Mortgage Debt Least of Bad Bets as Investing Sinks (Update2)”
Daniel Kruger
Bloomberg, July 28, 2009

Billionaire investor George Soros spoke to Reuters recently in a phone interview and painted a grim picture when it comes to the outlook for mortgage giants Fannie Mae and Freddie Mac, the dollar, and the larger U.S. economy. Reuters’ Jennifer Ablan wrote this morning:

“This incident (with Fannie and Freddie) is not the last one,” Soros told Reuters in a phone interview, adding the year-long global financial market turmoil represented “the most serious financial crisis of our lifetime.”

“Freddie Mac and Fannie Mae have a solvency crisis not a liquidity crisis,” said Soros. “There’s no problem in their borrowing. And in fact, insofar there is a problem, the Fed is there to provide the liquidity.”

That said, both Fannie and Freddie are “extremely leveraged,” he said. “The deterioration in the housing market, the foreclosures are going to cause losses which exceed their equity,” said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.

The former partner of Jim Rogers added that problems with the greenback would continue as well. Soros told Reuters:

I think the dollar is vulnerable because the economy is going into a recession and the actions of the authorities do involve the accumulation of debt. There is various ratios by which the creditworthiness of a country’s assurances are deteriorating.

The ongoing credit crisis is taking a toll on the larger U.S. economy. The Hungarian-born investor said:

It is an idle dream to think that you could have this kind of crisis without the real economy being affected.

Soros believes the options available to Ben Bernanke and the Federal Reserve are extremely limited. From the Reuters piece:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said.

However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession.

“Therefore, his options are limited — he is boxed in,” Soros said.

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“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

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

Looks like billionaire hedge fund manager Eddie Lampert thinks the U.S. housing bust is almost over. According to the Wall Street Journal this morning, Lampert has been acquiring shares in beaten-up home builders, mortgage lenders, and a home-improvement retailer. The Journal’s Gary McWilliams wrote:

Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.

ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments.

McWilliams also noted that Lampert, who is also the chairman of Sears Holding Corp., added to his holdings of home-improvement retailer Home Depot. His hedge fund now owns about 22.7 million shares (valued at $590 million), up from 16.7 million shares in 2007.

Source:

“Lampert Puts Money On Housing Rebound”
Gary McWilliams
Wall Street Journal, June 12, 2008