Pimco is a bond management firm which has come through this crisis almost unscathed. The monthly letters from Pimco are amongst the few must-reads of Wall Street. I have no reason to believe that Pimco has ever acted with anything but integrity.
A few days ago I posted about cumulative loss data at Fannie Mae and Freddie Mac. I pointed out that Fannie's credit on qualifying mortgages was consistently worse than Freddie's and asked for comments. One comment suggested – and I have since confirmed – that the main difference was that Countrywide largely originated for Fannie – and was Fannie's largest source of loans.
Given that they used the same sort of computer data as everyone else it is likely that they were at best aggressive in how they confirmed mortgagee income and employment. Its a culture thing.
And given that the losses at Fannie and Freddie now appear to belong to the US Government these guys were not nice to taxpayers.
The guys from Countrywide have started a new firm – Penny Mac – which will deal in scratch-and-dint mortgages. They clearly have some experience in the area. The New York times wrote a story which was – at least editorially – a little sickened by how guys that manage to cause the crisis are now profiting from it. The tone rings politically true.
The terms for the Geithner funds were written so that Pimco could (almost certainly) run one of the funds. Indeed the terms appear to be written in a way as to maximise conflicts of interest. This is a problem – because say $10 billion that Pimco puts up will give Pimco power to buy maybe $200 billion in bonds.
Pimco owns a lot of debt of large banks. If they were to use that $200 billion for say $80 billion of overpayment as suggested by Steve Waldman then they could make good their huge holdings of bank debt. They are conflicted. The conflict is large.
By contrast if the Countrywide guys are to put in the bulk of their personal fortunes they are not conflicted. (It would be almost everything they had – and they have no other remaining interests.)
The treasury should refuse Pimco's application and accept Penny Mac's if Penny Mac makes a decent submission.
Its an outcome that politically stinks. It will deliver a fortune to the Countrywide guys. It will sure play badly in the New York times.
But agency problems are at the core of how we got into this crisis – whether it be mortgage brokers with an incentive to say one thing and do another or whether it is traders who got paid huge bonuses when they lied about their mark-to-market profits or rating agencies who were paid by issuers of dodgy debt..
The Treasury should be writing the criteria to minimise agency problems – and instead they have written them to maximise agency problems.
This is not good.