CA Renter, I get your point, but Gross has been advising Paulson regularly recently, and is not a pig the Lehman/Bear/ML sense. PIMCO is a very conservative investor compared to the leverage ratios and risks the I-Banks took in this cycle.

His theory of potential profit is not that out of the question. The government is going to be hold lots of paper out of this, likely bought at a significant discount (he thinks 65 cents on the dollar). As recently as 12 months ago, these were trading at close to par value. Many of the loans in question are actually paying and 65 cents on the dollar is building a lot of non-performance into the model.

BTW, Merrill recently sold $30B at 22 cents, which is almost laughable. If the true value of those CDOs is 22 cents on the dollar, then our economy is in a whole lot more trouble than $700B, because it’s builing in over a 50% foreclosure rate (especially when the cost of money on the $700B is via T-Bills). You can’t show me a market today that’s at a 50% foreclosure rate, even across the the worst of this asset class.