Bond Manager Says Don't Bail Out Subprime

Atteberry also notes that Los Angeles real estate prices fell about 30% in the early 1990s, when the real estate bust was made worse locally because many defense contractors closed down. The local economy survived and recovered, he says.

And then comes the emotive issue: the bailout.

Gross argues the federal government should spend between $200 billion and $400 billion of taxpayers' money to "save" homeowners in trouble.

Atteberry's heterodox question: Why?

"We are not living in 18th century England," he says with exasperation. "These people aren't going to get thrown into debtors' prison." Instead, he points out, the homeowners who cannot meet mortgage payments will probably end up renting.

"They may even rent the same house they currently own," he says. The bank, after all, will need a tenant if it cannot find a buyer.

His second point: Many of those homeowners now in trouble are, almost by definition, those who have the least equity in their homes in the first place. They have big mortgages and high loans to value. So exactly whose "equity" are we really rescuing -- their's, or that of some billionaire hedge fund holding the paper?

And there is the issue of moral hazard -- the idea that unless people bear the consequences of behaving imprudently, they will continue to behave imprudently. "You have to ask yourself the question, why should the federal government bail out someone who made a bad decision as an adult?" asks Atteberry. "How do you cure excesses? The surest way I know to cure excesses is for the party to lose real money."