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Op-Ed: It's Raining Money - Worthless, Worthless Money Minyanville Staff Sep 18, 2008 1:50 pm |
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Exactly as Lil’ Wayne repeatedly advises you to do in the song’s chorus, planning ahead and being prepared is always the best course of action. If the weather report tells you there's a 90% chance of precipitation, you'll obviously want to grab an umbrella before you leave the house.
Bill Gross of PIMCO executed this strategy by acquiring mortgage debt several months ago, presumably around the time that he noticed rainclouds forming on the horizon.According to a Financial Times article published in May of 2008 “Mr. Gross said his decision to raise exposure to mortgage debt in recent months was based on the government’s implicit guarantee of Freddie Mac and Fannie Mae.” [Emphasis added.]
Clearly, Gross expected that the implicit guarantee would eventually become explicit, and the risk premium priced into mortgage debt due to uncertainty over whether Fannie and Freddie might be allowed to fail would disappear once the bailout was announced and the rain began to fall.
Unfortunately for Gross, this strategy blew up on him the next 2 times he tried it, as PIMCO is reportedly one of the biggest losers on Lehman bonds and also took a hit betting on AIG.
2. Do a Rain Dance
In ordinary circumstances, such a dance might involve a pole and high heels, but when the audience is Paulson and Bernanke, the dance might take the form of a witty and entertaining investor newsletter. We again turn to Bill Gross to see it in action.
As Kevin Depew explained in Five Things, Gross took the world stage in his September Investor Outlook. In a toned-down version of Jim Cramer’s “They know nothing!” rant, he pleaded for “policies that open up the balance sheet of the US Treasury.”
In other words, make it rain.
Still, don’t underestimate how difficult it is to perform such a dance. Lehman’s demise has shown us that Paulson and Bernanke won’t settle for just anything, so expect to see some amazing acrobatic feats in public posturing as other ailing firms scramble to please the duo.
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