“It may be distasteful but we need to put more money in the banks.”

From Bloomberg:

"Pimco’s Gross Buys U.S. Debt for First Time in Year (Update2)

By Dakin Campbell and Neil Unmack

Jan. 16 (Bloomberg) -- Bill Gross, manager of the $132 billion Total Return Fund, increased holdings of U.S. government bonds for the first time in a year after missing most of the biggest Treasury market rally in 13 years.

Pacific Investment Management Co.’s co-chief investment officer held 9 percent of the fund’s assets in U.S. government bonds and so-called agency debt as of Dec. 31, up from minus 4 percent a month earlier, according to the Newport Beach, California-based company’s Web site. Treasuries gained 14 percent last year, outperforming all other asset classes, according to Merrill Lynch & Co. indexes.

“If we had our druthers, if we went back 12 months and we had known then what we know now, it would have been all invested in Treasuries,” Gross said in a Dec. 10 interview on Bloomberg Television. Mark Porterfield, a Pimco spokesman, said the firm doesn’t comment on fund holdings.

Gross’s Total Return Fund, the world’s largest bond fund, rose 4.8 percent in 2008, ranking in the top 12 percent when compared with similar funds, according to Lipper. It has ranked in the top 1 percent over the last decade.

As he added to the government debt holdings last month, Gross sold mortgage-backed bonds( INTEREST RATES HAVE COME DOWN ), sending the fund’s holdings of the securities down to 62 percent from 81 percent a month earlier, data on the Web site show.

Municipal, Inflation-Protected Debt

The last time Gross bought U.S. government securities was December 2007. In the first 11 months of 2008, Gross’ fund held negative positions in Treasuries and debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system.

Gross has been urging investors to anticipate which assets will benefit as the government struggles to boost the economy. Last week he recommended municipal bonds, inflation-protected Treasuries and debt the U.S. government plans to buy. In the past six months, Gross bought senior bank debt, agency mortgage securities and preferred shares in financial companies, all before the government did the same.( GOOD TIMING )

The fund is still “underweight” U.S. government debt compared with its benchmark index, the Barclays Capital U.S. Aggregate Index, which holds 38 percent.

To contact the reporter for this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Neil Unmack in London nunmack@bloomberg.net."

William Gross has a simple strategy. Buy what the government is going to buy before the government buys it, because the price will go up when they do. Of course, if he then advises the government to go out and purchase these acquisitions, then it looks like conflict of interest and collusion, which is why Pimco should not be buying any financial assets for the government. As I've said, I'd trust Gross before anyone else, but even he is simply too problematic for me.

This is my problem with the Bank Of Crap. If Paulson bought Toxic Assets when they went down, after the government changed the terms of TARP, that tells me that the Toxic assets were PRICED TOO HIGH, not unable to be priced. And if Gross buys assets knowing that government intervention sends the price up, then that's what will happen with the Toxic Assets.

Consider this from Felix Salmon as well:

"TARP Datapoint of the Day

The CBO has done the hard work of marking to market all the assets purchased with TARP funds, including preferred stock in various banks. It concludes that today's mark-to-market value of the $247 billion spent in 2008 is just $183 billion, and that the government essentially used the TARP to subsidize( LOSE ) the US financial system to the tune of $64 billion last year. This table comes from the full report:

This table gives the best indication yet of where Treasury's subsidies are really going. The recapitalizations account for half the total subsidy, but in a sense they're cheap -- a subsidy rate of just 18% -- since they're 72% of the total outlays.

In contrast, the $20 billion of emergency funds which went to Citigroup constituted a government giveaway of $5 billion -- a 26% subsidy rate. And the subsidies for AIG (53%) and the auto sector, including GMAC (63%) were higher still.

I would very much like to be able to see the breakdown of the subsidies within the capital purcahse program -- presumably the subsidies to strong banks are much lower than the subsidies to weak banks, but it would be great to see them itemized.( YES )

I look forward to Treasury telling us, before it spends any more TARP funds, what kind of subsidy rate( LOSS ) it considers acceptable. There's a total of $453 billion in TARP funds not spent in 2008; if those too have a subsidy rate of 26%, that's equivalent to government expenditure of another $118 billion. To put that number in perspective, the market capitalization of Citigroup and Bank of America combined is just $55 billion. Isn't it about time we just nationalized them?"

I'm not going to go on about Nationalizing the banks. The point is too obvious, as Salmon points out. But, once again, how much money might the Bank Of Crap lose? It's scary. Now this, from Real Time Economics:

"WSJ Interview: FDIC’s Bair Fleshes Out( IT OUGHT TO BE FLUSHED OUT ) ‘Aggregator Bank’ Idea

Federal Deposit Insurance Corp. Chairman Sheila Bair spoke with The Wall Street Journal’s Damian Paletta about some of the options regulators are considering to target the assets weighing down banks.

WSJ: There has been some discussion about the federal government creating an “aggregator bank( A BANK OF CRAP ),” which would be a facility that could buy troubled( TOXIC, ETC. ) assets from financial institutions. How would it work?

Ms. Bair: “The idea here is that the aggregator bank would buy the assets at fair value. Some are concerned that you’d have to mark the assets down to purchase them( YES ), but I think it could help provide some rational pricing, actually, for the market in some of these assets because we don’t have really any rational pricing right now( YES ) for some of these asset categories.

The idea would be to set up a facility, it could be structured as a bank( A NATIONALIZED BANK ), to capitalize it with some portion of the TARP funds. Financial institutions that wanted to sell assets into the bank could also perhaps take part of their payment as an equity interest in the aggregator bank to provide an additional cushion. If you sold $1 of assets into the bank, you would get 80 cents in cash and you would get 20 cents in an equity interest in the bank. So that would be an additional cushion against loss.

With a combination of private equity contributions plus tarp capital, I think you could leverage that into some fairly significant volume to purchase assets.”

WSJ: What would the aggregator bank do with the assets?

Ms. Bair: The aggregator bank could use multiple tools. It might want to hold some of the assets. It might make sense to just hold them for a while. You might want to securitize some of them. You could do a covered bond issue. I think there are lot of different strategies that could be used to get these assets back into the market.( AGAIN, NO SPECIFICITY. )

WSJ: Why do regulators think it’s important to do address the assets?

Ms. Bair: I think everybody agrees it’s important to provide some troubled asset relief, because I think it’s key to getting private equity capital back into banks. They need to have some certainty about what the tail risk( IT'S A CONTINUING CALLING RUN, WHICH NEEDS TO END. BY THE WAY, LETTING IT GO ON SEEMS LIKE A VERY BAD BET. ) is on some of these assets. By doing the insurance wrap or providing a bank to just get them off the balance sheet complete( SOME KIND OF GOVERNMENT GUARANTEE, WHICH IS THE ONLY THING THAT CAN STOP A CALLING RUN. ), I think that would help us get some private capital back into banks.”

WSJ: What is the status of talks? Are they at a hypothetical stage?

Ms. Bair: It’s beyond hypothetical( WHAT THE HELL DOES THAT MEAN? ). I think(?) all of the agencies are committed to coming up with a program for troubled asset relief. We’re vetting the various different structures, the pros and cons(?) of those. I think(?) we would all like(?) to have something in place in the not too distant(?) future. I’m hoping(?) the decision making on it would be(?) fairly(?) quick. It has been discussed(?) for some time(?). So I think(?) we are nearing(?) the point to make a decision. But it’s complicated(?). We want(?) to make sure we get it right.” (YIKES )

Now from Bloomberg:

"Obama Financial Rescue May Revive Effort to Resolve Bad Assets
By Robert Schmidt and Rich Miller

Jan. 17 (Bloomberg) -- President-elect Barack Obama is likely to back a bank-rescue effort that combines fresh capital injections with steps to deal with toxic assets clogging lenders’ balance sheets( KEEPING THE CALLING RUN GOING ), according to people familiar with the matter.

Obama’s economic team will use another portion of the $350 billion remaining from the Troubled Asset Relief Program to help homeowners avoid foreclosure. It may also assist cash-strapped cities and states that are having trouble selling bonds, the people said.

This week’s sell-off in financial stocks and the continuing decline of the U.S. economy put pressure on Treasury Secretary- designate Timothy Geithner and Obama’s economics chief Lawrence Summers to unveil a comprehensive program. Without a radical new effort, soaring credit losses could prolong and deepen a recession that is now more than a year old.

“We have a deteriorating real economy( PROACTIVITY RUN ) and deteriorating financial sector( A CALLING RUN ) feeding on each other,” said Raghuram Rajan, a former chief economist for the International Monetary Fund who’s now a professor of finance at the University of Chicago. “It may be distasteful but we need to put more money in the banks.”

An Obama adviser, who declined to be identified, said the incoming administration has yet to settle on a plan for using the TARP money to aid financial institutions.

Regulators are advocating a government-backed “bad” or “aggregator” bank to acquire hundreds of billions of dollars of troubled securities now held by lenders. Treasury Secretary Henry Paulson and Federal Deposit Insurance Corp. Chairman Sheila Bair praised such an approach yesterday, backing up comments earlier in the week by Federal Reserve Chairman Ben S. Bernanke.

Praise From Paulson

“A lot of work has been done on an aggregator bank” and other ways of using the $700 billion financial-rescue fund to “go further when it comes to dealing with illiquid assets,” Paulson told reporters in Washington.

An alternative would be to provide guarantees( AT LEAST THIS, YES ) for the assets while they remain on the banks’ books. The Treasury, Fed and FDIC took that approach yesterday when they provided a backstop of $118 billion for Bank of America Corp. The company also received a $20 billion capital infusion.

“Moving these problem assets off banks’ balance sheets may open the market to new capital, both to purchase the troubled assets and to recapitalize the banks,” said Brian Olasov, a managing director at the McKenna Long & Aldridge law firm in Atlanta. “Credit won’t flow in material ways until bank portfolios are cleansed and collateral values are re- established( THE CALLING RUN ENDS ).”

Deepening Recession

The U.S. economy showed further signs of buckling under the weight of the credit crisis, according to reports yesterday. Consumer prices fell 0.7 percent in December, capping the smallest annual increase since 1954, the Labor Department said. Industrial output shrank 2 percent, and the capacity-utilization rate slid to 73.6 percent, according to the Fed. A private survey showed consumer sentiment little changed in January.

Obama is set to take office on Jan. 20 and his advisers have been working to craft a comprehensive blueprint for overhauling the bailout. Summers, speaking to business executives on a recent conference call, said that the new administration wanted to have its financial recovery plan work in tandem with the $825 billion economic stimulus it proposed.

Summers, according to one person on the call, said Obama would have a significantly different approach to implementing the TARP.

New Approach

Paulson and Bernanke sought to end a series of ad-hoc interventions with financial companies last September, by urging lawmakers to approve the TARP legislation. While the initial proposal was to use the rescue funds to purchase illiquid assets, Paulson instead bought stakes in banks.

The Obama administration’s “principle advantage over Secretary Paulson is that they are not acting on an ad-hoc basis( GOD YES ),” said William Sweet, a partner at the Skadden, Arps, Slate, Meagher & Flom law firm in Washington who represents financial institutions.

The Senate Jan. 15 approved the release of the second half of TARP.

A Bernanke-led oversight panel issued a report yesterday calling for Treasury to “continue to take actions under the TARP to stabilize financial markets, help strengthen financial institutions, improve the functioning of credit markets and address systemic risks, given the disproportionate consequences that instability of the nation’s financial institutions and markets may have for the broader economy.”

Price Tag

While Summers told Congress Obama’s Treasury would use between $50 billion and $100 billion for a mortgage modification program, a good chunk of the rest of the funds could be used to buy the illiquid assets from banks. The FDIC, which has authority to take “any action” with insured deposit-taking firms deemed necessary to counter “adverse effects on economic conditions or financial stability,” could also play a role.

“We think by leveraging TARP funds in this way, you could have a significant capacity to acquire troubled assets,” Bair, who is set to stay on under Obama, said. Officials could “require those institutions selling assets into this facility to contribute some capital cushion themselves.”

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net. Rich Miller in Washington rmiller28@bloomberg.net"

Here again, no pricing details.