Pimco's Gross says GSE bailout likely, not imminent

NEW YORK (Reuters) - Mortgage-finance companies Fannie Mae and Freddie Mac are likely to be bailed out by the U.S. Treasury, but not anytime soon, Pimco's chief investment officer Bill Gross said on Wednesday.

"The election season and the relatively recent passage of the authorization argue for delay as long as possible," Gross said in an e-mail.

That delay, however, will be predicated on the notion that the government-sponsored enterprises, or GSEs, can continue to sell discount notes and term debt at "relatively stable spreads," said Gross, who manages the $130 billion Pimco Total Return fund.

The Treasury ultimately will be forced to buy a minimum of between $15 billion and $20 billion of preferred stock in each of the government-sponsored enterprises, he said. "Those purchases would require funds, of course, and would count against the deficit."

But Gross said if spreads continue to widen, indicating diminishing support from foreign holders, the Treasury would be forced to act sooner.

Fannie's and Freddie's credit default swaps on Wednesday reflected the likeliness of a government bailout soon, which would eliminate the value of the common stock but benefit the companies' bond holders.

The cost to insure Freddie Mac senior debt against a default with credit default swaps fell 18 percent to 40 basis points, or $40,000 a year to insure $10 million of debt for five years, according to Markit Intraday. Fannie's CDS also tightened about 16 percent to 40 basis points.

Conversely, Freddie Mac's stock slumped nearly 30 percent to $2.95, the lowest since 1990, and Fannie Mae shares slid more than 33 percent to $4.00, the lowest since 1988.

Freddie Mac's shares closed on Wednesday down more than 22 percent to $3.25, and Fannie Mae's stock settled on the day down 26.79 percent at $4.40.

"You know at $3 or $4 dollars per share...in effect, the market is valuing both of these companies at zero," Gross told CNBC Television on Wednesday.