Monday, March 31, 2008

Bill Gross weighs in on recent Fed actions

Bill Gross sees the business model of investment banks changing rather dramatically and their leverage and subsequent profits will better resemble those of conventional banks. He also thinks that recent actions of the Fed will increase inflation.

Investment banks' invitation to borrow at the Fed's discount window will ``come with a price tag,'' Gross wrote on Pimco's Web site today. ``There seems no way that current reserve requirements for banks will not in some nearly uniform way be imposed on investment banks. Leverage and gearing ratios of securities firms therefore, will in a few years resemble those of commercial banks themselves resulting in reduced profitability for major houses such as Goldman, Lehman and Merrill Lynch.''... This ``will be costly, and bond spreads as well as stock prices should begin to reflect it.''

The Fed's direct lending to investment banks will also increase inflation, Gross said in his commentary. ``Because of this lender-of-last-resort operation, subsequent inflationary trends may have been fertilized because the debts that caused the crisis are now primarily in another private portfolio and not liquidated,'' Gross said. ``These debts have to be validated by policy makers through attempts to increase cash flows in the finance-based economy, which is another way of saying they are trying to reflate, which is another way of forecasting an increasing probability of higher inflation.''

source: Fed Rules to Cut Wall Street Profits, Boost Costs, Gross Says

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