U.S. Must Buy Assets to Prevent `Tsunami,’ Gross Says

Jody Shenn
BLOOMBERG
Thursday, September 4, 2008

Sept. 4 (Bloomberg) — The U.S. government needs to start using more of its money to support markets to stem a burgeoning “financial tsunami,” according to Bill Gross, manager of the world’s biggest bond fund.

Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said in commentary posted on the firm’s Web site today. Since financial markets seized up a year ago as the subprime-mortgage market collapsed, the Standard & Poor’s 500 Index has fallen 13 percent and home prices are down more than 15 percent.

“Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,” Gross said. “If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.”

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The government needs to replace private investors who either don’t have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are growing reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world’s biggest banks and brokers are retreating after more than $500 billion in writedowns and credit losses since the start of 2007 and have raised $364.4 billion in new capital.

Yields on investment-grade corporate bonds, debt backed by commercial mortgages as well as credit cards reached record highs last month relative to benchmark rates.

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