WASHINGTON — Bill Gross, a co-founder and co-chief investment officer of Pacific Investment Management Co., endorsed full nationalization of the government-sponsored enterprises on Wednesday, arguing their functions should be consolidated into Ginnie Mae.
"Pimco advocates 100% public finance with government guarantees that are protected by adequate down payments… and sufficient insurance premiums," Gross said as part of a panel discussion of GSEs hosted by the Treasury Department.
Gross cast doubt on other options, which range from privatizing to the GSEs to returning them to their former hybrid public-private model, suggesting they won't work.
"We should consolidate all of the agencies into one true Ginnie Mae, a government national mortgage association — one agency," he said. "We are skeptical of other public-private models currently being considered, discussed today, because they're more expensive primarily, resulting in higher mortgage rates and therefore favoring Wall Street as opposed to Main Street."
Gross said several options would essentially create "clones" of Fannie Mae and Freddie Mac.
"Private mortgage insurance, for instance, is untrustworthy and comes at a very expensive costs going forward," Gross said. "We need one national agency with sufficient backing, down payments and guarantees going forward.
During the conference, Treasury Secretary Tim Geithner did not endorse a particular option, but reiterated his support for some type of government role in the housing market.
"I believe there is a strong case to be made for a carefully designed guarantee in a reformed system, with the objective of providing a measure of stability in access to mortgages, even in future economic downturns," he said. "The challenge is to make sure that any government guarantee is priced to cover the risk of losses, and structured to minimize taxpayer exposure."
In his remarks, Geithner did reject returning Fannie and Freddie to their previous structure before they were seized by the government two years ago.
"It is not tenable to leave in place the system we have today," he said. "We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support. We will not support a return to the system where private gains are subsidized by taxpayer losses."
He also rejected Republican arguments that by delaying action on GSE reform, the Obama administration has caused deeper losses at Fannie and Freddie.
"The losses that Fannie and Freddie face right now are the result of mistakes made in the years leading up to this crisis," Geithner said. "They are the result of loans purchased and guaranteed in the years before the crisis, not the consequence of the actions by the GSEs since 2008. There is nothing we can do to decrease the significant loses Fannie and Freddie incurred ahead of this crisis. All we can do is to minimize the risk that they get worse."
