Bill Gross on nationalization, and why he's conflicted

In his most recent market outlook, Pimco's Bill Gross speaks out against nationalization:

Question: What do you think about nationalizing the banks?

Gross: I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.

But Gross is one of those creditors who doesn't want to lose any money. Pimco, in its 1Q09 Market Outlook, says it will retain a "substantial overweight" to agency mortgage-pass-throughs issued by Fannie Mae and Freddie Mac, because of expected government support "associated with the [government] conservatorship" of those entities.

So conservatorship is OK, nationalization is not. I'm not real clear what the difference is. But the current "conservatorship" policy keeps us in much the same boat that got us in trouble with Fannie and Freddie--socialization of risk, with privatization of the profits.

Bill Gross and his investors are privatizing the profits.