U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says (Update3) By Jody Shenn 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. ``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.'' 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 reluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world's biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year. 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 homeprices are down more than 15 percent. 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. `Mom and Pop' Gross cast a bleaker view for the prospects of the world's financial markets than in previous notes to clients. The fund manager has previously called on lawmakers to support housing with legislation passed in July that allows lenders to forgive some of homeowners' debt and then refinance them into government-insured loans. Pimco, a unit of Munich-based Allianz SE, is seeking to take advantage of declines in home-loan bonds. The firm is raising as much as $5 billion to buy mortgage-backed debt that has plunged in value, according to two investors with knowledge of the matter. The Distressed Senior Credit Opportunities Fund will invest in securities backed by commercial and residential mortgages, said the people, who asked not to be identified because the fund is private. Paulson Rescue Treasury should support not only mortgage finance providers Fannie Mae andFreddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' by subsidizing rates on home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said. U.S. Treasury Secretary Henry Paulson arranged a rescue package for Washington-based Fannie and Freddie of McLean, Virginia as concern escalated the government-chartered companies didn't have capital to withstand the housing slump. Treasury pledged to pump unlimited debt or equity into the companies should they need it. As Fannie and Freddie, banks, securities firms and hedge funds shrink, yields on all debt assets will rise compared with benchmark rates and volatility will increase, Gross said. The declines will end once sellers have depleted their assets and sufficient capital has been raised, Gross said. Unless ``new balance sheets'' emerge, prices of almost all assets will drop, even those of ``impeccable'' quality, he said. `Anorexic' Appetite The extra yield demanded on Ginnie Mae's 30-year, current- coupon mortgage-backed securities over 10-year Treasuries has climbed to 1.75 percentage points, from 0.87 percentage points at the start of last year, according to data compiled by Bloomberg. Bonds guaranteed by the U.S. agency are backed by the U.S. government. Spreads on 2-year AAA rated bonds composed of federally backed student loans have climbed to 0.95 percentage points over benchmark rates, from 0.01 percentage points below, Deutsche Bank AG data show. ``There is an increasing reluctance on the part of the private market to risk any more of its own capital,'' Gross said. ``Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.'' Home Prices The decline in home prices hasn't been seen since the Great Depression, Gross said. That drop translates to an even bigger decline in overall wealth as the effects ripple through markets, Gross said. Home prices in 20 of the largest U.S. metropolitan areas fell 15.9 percent in June from a year earlier, according to an S&P/Case-Shiller index. Fannie and Freddie 30-year fixed-rate mortgage bond yields, which influence the rates on most new home loans, have probably risen 75 basis points because of the waning demand, Gross said. A basis point is 0.01 percentage point. The Pimco Total Return Fund returned 9.8 percent in the past 12 months, beating 97 percent of its peers in the government and corporate bond fund category as of Sept. 3, according to Bloomberg data. The returns are 5.76 percent annually over five years. Pimco has about $830 billion of assets under management. About 61 percent of Gross's holdings were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or Ginnie Mae, according to data on Pimco's Web site. ``In a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand,'' Gross said. To contact the reporters on this story: Jody Shenn in New York atjshenn@bloomberg.net WASHINGTON (AP) -- The number of newly-laid off workers seeking unemployment benefits jumped unexpectedly last week, the government said Thursday, reversing three weeks of declines. The Labor Department reported that new applications for unemployment insurance rose to a seasonally adjusted 444,000, up 15,000 from the previous week. Economists had expected claims to drop to 420,000. The increase indicates that the slowing economy is taking its toll on the job market. Many economists consider claims above 400,000 to be a sign of a weak economy. Initial claims stood at 320,000 in the same week last year. The four-week moving average fell slightly to 438,000, down 3,250 from the previous week. The number of people continuing to receive unemployment benefits also rose slightly to 3.44 million for the week ending Aug. 23, up 6,000 from the previous week. That number doesn't include people who have exhausted their regular benefits and have requested extended assistance under an emergency program. While Thursday's figure is below the six-year high of 457,000 reached in late July, economists attributed some of that increase to an outreach program by the Labor Department to notify individuals about the availability of extended benefits. Congress approved the extra benefits in June. But several economists have said the distortions from that program have likely faded. A Labor Department analyst also said the figures don't include any impact from Hurricane Gustav. The unexpected jump could foreshadow more bad news Friday, when the Labor Department reports monthly unemployment numbers. Economists expect the department to say that employers eliminated 75,000 jobs in August, which would be the eighth straight month of job cuts. The department is also expected to report that the unemployment rate rose to 5.8% from 5.7% in July. Increased unemployment can crimp consumer spending as laid off workers and those who fear for their jobs cut back on their purchases. That, in turn, can further weaken the economy. Concerns about that spread to the stock market Thursday. Wall Street headed for a lower open after the jobless claims data. Oil prices advanced for the first time this week, which also weighed on investors. While the U.S. gross domestic product grew at a healthy 3.3% clip in the April to June quarter, many analysts expect the economy to slow and possibly contract later this year, due to rising unemployment and slowing economies overseas. Separately, this summer saw the highest level of job cuts in six years, according to a report released Wednesday by job placement consultancy Challenger, Gray & Christmas. Employers eliminated 377,325 jobs in the May to August period, the firm said, up from 249,197 in the summer of 2007. GMAC Financial Services (GMA) said Wednesday it will lay off 5,000 workers as part of a plan to scale back its mortgage lending. GMAC is majority owned by private equity firm Cerberus Capital Management LP while General Motors Corp (GM, Fortune 500). holds a large stake. Meanwhile, Freightliner LLC, a heavy truck subsidiary of German automaker Daimler AG, said last week it would cut 100 jobs.
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.Jobless claims jump unexpectedly
New applications for unemployment insurance rise to 444,000, a figure worse than expected by economists; number doesn't include impact of Hurricane Gustav.
Thursday, 4 September 2008
More news of weak labor market expected
Summer saw high level of job cuts
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