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This is really not great.

PIMCO, one of the world's biggest managers of bonds,

1) wants to buy more mortgage-backed securities dating from the financial crisis

2) Wants to buy mortgage securities backed by Fannie Mae and Freddie Mac.

theglobeandmail.com/investing/inve…
As for the first one, fine, PIMCO is allowed to make as many bad investing decisions as it wants.

There are arguments for and against investing in old mortgage-backed securities, the major one being:

How will PIMCO find a sucker to take those bonds off its hands later?
The second one is way more problematic.

Mortgage-backed securities backed by Fannie Mae, Freddie Mac and Ginnie Mae are called "agency MBS."

They are not like other securities. They used to be implicitly backed by the US govt. Since the bailouts of 2009, that became explicit.
Let's repeat:

If anything goes wrong with Fannie Mae and Freddie Mac securities,

the people who own them will no doubt get bailed out by the US government.

So why is that a problem? (Besides that bailouts are intrinsically problematic).
If PIMCO, a huge bond buyer, says it is going to buy Fannie and Freddie bonds, other people will buy them too.

Why?

-PIMCO is big enough to make a market

--PIMCO has just declared itself a buyer, so others know they can buy and then sell them to PIMCO
Which means: PIMCO's déclaration that it's going to buy agency MBS is going to kick off a LOT of fuckery in the agency MBS market. A lot of demand, a lot of jockeying for position.

Normally this would be the usual market nonsense but these securities are *backed by the govt.*
Which means whatever fuckery PIMCO kicks off right now in its "search for attractive yields," it is now playing on taxpayer's turf.

Don't like that! NOPE!
There is ugly history here. It took years to get Fannie and Freddie back on their feet after the last financial crisis.

They essentially had to be nationalized. The US Treasury cut out all shareholders -- people who bought the stock -- and claimed all profits for taxpayers.
What's wrong with that? Well actually a few things. Some of those shareholders were hedge-fund goons, sure, but a lot were widows and orphans who were told that Fannie and Freddie were safe stocks that paid excellent dividends. Those people lose their income streams.
When I was reporting for the Wall Street Journal, I fielded a lot of calls from distressed older people wondering what they would do without their Fannie and Freddie dividends -- quarterly payments that shareholders received, like a regular income.
A short summary of all that here:

blogs.wsj.com/deals/2008/07/…
And the hedge-fund goons were super-mad about it! They sued and lost. The profits stayed with the US Treasury.

theguardian.com/money/2014/oct…
But shareholders are easy to screw over. Equity (stock) is worthless in a crisis; it loses value in a crash, it gets wiped out in a bankruptcy.

Bonds and other debt securities, however, always get paid out in a crisis. It's a bond! A bond - a promise. MBS falls under this.
So if something goes wrong with Fannie and Freddie MBS - agency MBS - because PIMCO got bored and wanted to invest in that market, the government would likely have to clean up whatever mess.

This may not happen. Lots of crises are avoided. But it *could* happen.
To take this further, @kbaker6 points out the reason this was all a problem before: If you have a big buyer in a market -- like PIMCO buying agency MBS -- that provides huge demand. To meet demand, mortgage lenders will find ways to gin up supply.

Nothing has happened yet -- and it could be averted -- but this is not promising at all. Absolutely hate to see it.
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