Yesterday afternoon on CNBC Bill Gross, the Co-chief Investment Officer and Founder of PIMCO, was asked a question from Dylan Rattigan: “What position do you feel most the most confidence in?”

Gross responded:

“Well, the one we are most confident of is the one which we label 'the Fed’s umbrella'. We want to buy securities that are safely protected by the Fed’s umbrella – that’s banks and that is investment banks that have come now under the “guarantee”- so to speak - of the Fed window. Primary dealer and bank credit securities, loans and hybrid preferred’s yielding 8% plus are our favorite types of security in this type of environment. Certainly not 2-3% yield Treasury securities.”

Gross’ comments echo those of his Co-chief Investment Officer Mohamed El-Erian who, in this week’s Barron’s states “If you are a bond holder, you want to be ahead of a recapitalization.”

And both quotes are consistent with PIMCO’s recently released Secular Outlook, which offers:

“Expect [PIMCO] to search for value in the realignment of the financial system that is heavily influenced by regulatory-induced de-risking: The regulatory reaction serves to clip part of the tail risk of institutional failure but at the cost of an unambiguous decline in the expected return on capital—a phenomenon that will tilt relative value in the direction of bond holders and away from equities.”

While the newspapers have been filled with columns focused on the “moral hazard” associated with bailing out the shareholders of firms like Bear Stearns (BSC), Gross and his colleague have brought out into the open the long-time hidden issue of moral hazard for bank creditors.

Looking back at history, bank creditors of troubled “too big to fail” financial institutions have consistently been granted some form of “protected” status. In the bailout of Continental Illinois, for example, the FDIC even went so far as to protect all of the Bank’s depositors and general creditors, regardless of the $100,000 limitation on deposit insurance.

In our latest crisis, “too big to fail” has been replaced by “too entwined to fail” thanks to the complex and concentrated web of derivatives transactions among the world’s largest banks. While generally collateralized, derivative transactions rank on the same level as senior debt. So “default” extends well beyond traditional third party creditors and now includes other major financial institution counterparties. And for an industry intensely predicated on trust, the current entanglement has created a binary outcome – All succeed or all fail.

PIMCO, and I'm sure with the counsel of its most notable advisor – Alan Greenspan – is betting that “All succeed” thanks to the Fed’s newly expanded umbrella. And given the extraordinary means by which the world’s central banks have provided liquidity, it's hard to argue against that position.

But a few words of caution:

First, I think it's important to recognize that the number of firms under the umbrella is very small. For example, as reported last week by the FDIC, 98% of all US bank derivatives are with seven firms – JPMorgan (JPM), Citigroup (C), Bank of America (BAC), Wachovia (WB), HSBC (HBC), Wells Fargo (WFC) and Bank of New York (BK). Add the major investment banks to this list and you are probably talking about 12, maybe 15, firms max. Everyone else is outside in the rain.

Second, if you are going to play “under the umbrella”, realize that you're playing against firms like PIMCO which are far larger than you – and whose future actions regarding these securities are likely to become far more influenced by the implications of those actions to other securities which it holds.

Third, recognize that Congress may have other thoughts regarding your “protection”. While it may not seem clear yet, I believe that we're just at the beginning stages of what is likely to be a five year process of “allocating” losses among all participants in this crisis – from homeowners, to bank shareholders, to mortgage originators etc. Call me crazy, but it seems highly unlikely that bank creditors, who gladly provided more and more funding at tighter and tighter spreads to increasingly leveraged financial institutions will go unscathed. Sure bank spreads have blown out, but even at their widest levels, it hardly seems like bank creditors have yet borne their fair share of loss.

Fourth, while I can appreciate PIMCO’s perspective on the likely “protected” status of bank level senior debt securities, I'm not sure yet if I'll buy into “protection” for holding company senior debt, let alone holding company subordinated debt or hybrid preferred securities. With relatively few derivative transactions executed at holding company levels, “too entwined to fail” seems far less certain to me.

What I sense is behind PIMCO’s confidence in purchasing hybrid preferred securities is that even if it means blistering dilution, all of our major financial institutions can be recapitalized. To me that remains a big “if”.

Finally, with the “Fed umbrella” now officially out of the bag and out in the open, the situation begs the question “What’s the difference between the “too entwined to fail” firms and Federal Agencies like Fannie Mae (FNM) and Freddie Mac (FRE)? To be clear, before all is said and done, I expect there will be a whole lot more to write about “public” shareholder organizations with “government guaranteed” debt.

If I've learned anything over 25 years in financial services, “de-leveraging” and “de-risking”, while simple in concept, are hardly easy in execution.

And while PIMCO suggests that it may be “nothing but blue skies” buying bank securities, might I suggest that while the Fed’s is nice, you might want to pack your own umbrella.