the firm has positioned itself in bank debt and related markets as you read

From Paul Kedrosky:

"The Monthly Bill and Paul Show at Pimco

It's time for the latest monthly missives from Bill Gross and Paul McCulley at bond mega-firm Pimco. Both are interesting pieces, as usual, so give them a read:

• Bill Gross pretends to testify to congress, and knocks down nationalization
• Paul McCulley on saving capitalist banking from itself

I've written here many times about how smart I think the Pimco folks are -- and McCulley's piece in particular is very good -- but do keep in mind how the firm has positioned itself in bank debt and related markets as you read. It doesn't necessarily make their views wrong, of course, but I remain a proponent of temporary "pre-privatization"

Me:
" To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.'

As I've said, this is the William Gross Position. The bondholders, shareholders, and bankers, are more important than the taxpayers. He's also telling, excuse me, testifying, to government what it should do. It's important to understand that he's not an insider. He's an outsider telling the government what to do. Free, as it were.

I respect William Gross. He makes some good points and raises some serious concerns, although most of them are rendered possible from the government's actions since September. But he misses the main concern: This is politically unpalatable. Unless the government actually makes some money from these deals, the whole enterprise will be seen as an economic and political disaster, in which the taxpayers were held hostage by some of the worst managers and investors in history. That's not an acceptable outcome.

If this turns out to cost billions of dollars, there will be a call to nationalize all banks, since we're stuck paying for them if they go bust. In that case, it would be better to have conservative functionaries running the banks than risk takers. They almost brought the country to a standstill.

The other points I have a hard time with. I can understand some investors fearing wipe-out, but surely others will be pleased that we've decided to stop throwing good money after bad. There is a larger picture, and it's the kind of country that we would like to have. I doubt that many of us want to live in one in which the banks, shareholders, and bondholders, of a few companies own us, and they are stuck along with the rest of us in paying taxes to insure these incompetents. Maybe I'm wrong.

The complexity argument is interesting. We can't handle it. A bunch of buffoons can run these banks, but we can't find anybody better. What does that say about our country. It's too complex for us, and these bozos are our best and brightest. Excuse me if I fail to believe such a scenario. One reason that Citi and AIG can't sell anything they own is because they're Citi and AIG. Toxic business partners and less than risk free to buy from. If they were selling gold, that would be the end of the gold market run.

What saddens me is that this is what we've come to. A country under of the thumb and propping up world class incompetents.