Industry News

PIMCO chief: Subprime poised to take down economy

Bill Gross says risk management measures magnified disaster potential

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The manager of the world's biggest bond fund, PIMCO, says the mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) that helped fuel the housing boom dazzled ratings agencies with their "6-inch hooker heels." In a strongly worded commentary on the impact of the subprime lending crisis, PIMCO's Bill Gross says that the practice of slicing up such securities into various tranches of varying risk -- and the use of financial derivatives to help manage that risk -- only served to magnify the potential for disaster, not lessen it. Gross says that while problems with two Bear Stearns hedge funds that were heavily invested in mortgage-backed securities have been "papered over," the crisis in subprime lending threatens the entire economy, because "the willingness to extend credit in other areas ...  should feel the cooling Arctic winds of a liquidity constriction." The underlying collateral for MBS and CDOs are homes with mortgages ranging from risky subprime ARMs and...