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Strategies & Market Trends : Zeev's Turnips - No Politics -- Ignore unavailable to you. Want to Upgrade?

To: LTK007 who wrote (49577)	4/10/2002 12:35:56 PM
From: martin001	Read Replies (1) \| Respond to of 99280

=DJ PIMCO's Gross Says Rise Of Swaps Is Problem For The Fed By Michael S. Derby Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--After roiling markets last month with his criticism of General Electric Co.'s (GE) financial disclosures, Pacific Investment & Management Co. managing director Bill Gross has again taken a critical eye to the company's financial practices. But this time Gross's point was not so much to identify problems at GE itself, but to use the giant conglomerate as an example of the challenges that modern corporate finance methods are creating for the Federal Reserve. The head of the world's largest bond investment fund used his monthly investment outlook piece, published Wednesday, to highlight the now common practice among corporate bond issuers of using the swaps market to lower their immediate debt servicing costs. Gross noted that GE, one of many companies who undertake similar transactions, had argued it would only incur minimal costs in transferring a multibillion chunk of its commercial paper debt into higher yielding long-term debt because of its use of interest rate swaps. Such a transaction allows a company to swap its fixed rate interest payment stream for a floating rate stream, which is priced off the London Interbank Overnight Rate, or LIBOR, which is a short-term rate. Gross argued that the increase in the number of companies using this swapping strategy has increased American corporations' vulnerability to changes in short-term interest rates, creating something of a dilemma for the Fed. A "receiving fixed" - or "paying floating" - position in swaps loses value when interest rates rise. "Short-term rates are even more critical to the profitability of Corporate America - to the level of the stock market, to the growth rate of the American economy - than ever before," Gross wrote in his outlook piece. "Swaps hold no magic really - if short rates move up, one side loses while the other side gets paid." Gross notes that with some $43 trillion in worldwide swaps outstanding, corporations' appetite for derivatives "may serve to reduce interest rate costs in the short run, but increase exposure/risk in the long run." As a result, Fed Chairman Alan Greenspan "dare not raise interest rates too much or risk sinking the stock market and the economy once again," Gross wrote. He reckons that will limit the Fed to taking back only around its post-Sept. 11 interest rate cuts, lifting the funds rate to around 3%. And because the central bank's latitude to raise rates is limited, it may mean the economy may have to contend with higher levels of inflation than would otherwise have been the case. The extensive use of derivatives also raise the same bugaboo that drove the original GE criticism, namely, increased disclosure, Gross said. He said in a late March interview on CNBC that while "GE is one of the highest rated companies in the world," the troublesome part is "a matter of disclosure." -Michael S. Derby, Dow Jones Newswires; 201-938-4192; michael.derby@dowjones.com (END) DOW JONES NEWS 04-10-02 12:34 PM - - 12 34 PM EDT 04-10-02 -------------------- TAL News Server History: ADD : 02/04/10 12:34