Pimco's Gross: Unclear why Fed moved Wednesday

NEW YORK Wed Mar 18, 2009 6:36pm EDT

NEW YORK (Reuters) - Pimco's Bill Gross said it is unclear what was behind the Federal Reserve's surprise decision on Wednesday to buy up to $300 billion in Treasuries.

The move came as the government prepares its latest efforts to resuscitate credit markets with a program aimed at consumer and small business lending.

But that program faces an uphill battle given the backdrop of public outrage over the fact that taxpayer money will be used to pay $165 million in bonuses for executives at bailed-out insurer American International Group.

As a result, the shock move by the Fed raises the question of whether the immediate effect of buying Treasuries was deemed necessary in the event these programs fail to produce credit market improvement as quickly as hoped.

"It's unclear whether today's policy changes by the Fed are coordinated with the Treasury," Gross, co-chief investment officer at Pacific Investment Management Co, told Reuters in an interview on Wednesday.

The uproar over AIG's retention bonuses are seen by many hedge funds, private equity and big money managers as significantly raising the risks associated with partnering with the government on its Term Asset-Backed Securities Loan Facility, or TALF, as well as the Treasury's public-private plan to buy toxic assets from ailing banks.

An irate U.S. Congress, fuming over AIG's bonus payments to executives after the insurer was bailed out three times using taxpayer dollars, are more likely than ever to change the rules of engagement -- possibly retroactively -- and that is unnerving money managers at hedge funds, private equity firms and banks on the eve of the long-delayed launch of the government's newest rescue efforts.

On Thursday, applications from investors are due to participate in the Treasury and Fed's $1 trillion TALF program.

Gross, who helps oversee more than $800 billion at Pimco, said the economy and, by extension, the financial markets "needed a substantial shot of adrenaline."

U.S. stocks surged after the Fed move which knocked bond yields down in their biggest one-day slide since the Wall Street crash of 1987.

"The Fed's balance sheet may approach $3.5 trillion -- nearly a 100 percent addition -- which will help substitute for the private sector's delevering over the past 12 to 18 months," Gross said.

The Fed assured markets that policy rates will be kept close to the zero line for "an extended period" of time.

"These actions are high-quality bond-friendly and dollar unfriendly," Gross said.

"To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate."

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