Sunday, June 21, 2009

Bill Gross Another Government Bailout Profiteer

Devin Leonard of NYT does a great job exposing the conflicts of interest money manager Bill Gross of PIMCO is operating under as he cashes in on the government bailout:
A frequent complaint is this: Why is the Federal Reserve paying Pimco to buy mortgage securities on its behalf, when the firm is already a huge buyer and seller of the same bonds?...No one, of course, has actually accused Pimco of theft. But there is a larger question: Whose interests is the firm looking out for in the bailout? Money managers, after all, have a legal obligation — a fiduciary responsibility — to put the interest of their investors before anyone else. Even Mr. Gross acknowledges that Pimco’s interests won’t always be aligned with those of the government...

He says he assumes that Pimco traders working on behalf of the government don’t talk to their peers trading for Pimco’s own accounts. Then again, he said he doesn’t know for sure what happens after hours...

His mood brightens when he talks about how much money Pimco could reap by participating in the Geithner [PPIP] plan. No wonder: the terms are deliciously favorable for participants selected as fund managers. Money managers like Pimco would be expected to raise at least $500 million from their clients. The Treasury would match that with taxpayer dollars. Then Pimco and the Treasury would create a jointly owned fund of at least $1 billion that would buy distressed mortgage bonds.

Government largess doesn’t stop there. The fund will be eligible for low-interest financing from both the Treasury and the Fed that analysts at Credit Suisse First Boston estimate could be as high as four times the total equity in the fund. So if Pimco ponied up $500 million, the fund that it manages could borrow $4 billion.

Pimco would then negotiate with banks to buy their wobbly mortgage-backed securities. Mr. Gross says that some of these securities pay an interest rate as high as 14 percent and that even if default rates were 70 percent, Pimco and the government would still make a 5 percent return after covering their negligible borrowing costs. That means the government-Pimco partnership could make at least $250 million in a year on a $5 billion investment fund. Of that amount, Pimco would get $125 million — a 25 percent return on its original investment.

But here’s the part that makes Mr. Gross salivate. If things go badly, the government is responsible for repaying all that debt...Pimco is proud of its partnership with the government. Mr. Erian points out that the firm’s executives have been members of the Treasury Department’s Borrowing Advisory Committee (along with many other Wall Street executives) for years. Its current representative, the Pimco managing director Paul McCulley, says part of his job is to ingratiate himself with officials at the Treasury and the Federal Reserve so Pimco can better understand impending policy decisions. He boasts that he is on a “first-name basis” with both Mr. Geithner and the Fed chairman, Ben S. Bernanke.

Pimco apparently covers all bases in its attempt to be on a first name basis, Gross currently has Alan Greenspan on his payroll at Pimco.


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