Newport Beach, CA – Every day, Bill Gross, the world’s most successful bond fund manager, withdraws into a conference room at lunchtime with his lieutenants to discuss his firm’s investments. The blinds are drawn to keep out the sunshine, and he forbids any fiddling with BlackBerrys or cellphones. He wants everyone disconnected from the outside world and focused on what matters most to him: mining riches for his clients at Pimco, the swiftly growing money management firm.
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Mr. Gross, 65, has long been celebrated for his eccentricities. He learned some of his lucrative investing strategies by gambling in Las Vegas. Many of his most inspired ideas arrived while he was standing on his head doing yoga. He knows he has to be well dressed for client meetings or television — but instead of keeping his Hermès ties neatly knotted, he drapes them around his neck like scarves so he can labor with his collar open.
And with the collapse of Wall Street, Mr. Gross has emerged as one of the nation’s most influential financiers. His frequent appearances on CNBC draw buzz, as do his wickedly humorous monthly investing columns on the Pimco Web site. Treasury secretaries call him for advice. Warren E. Buffett, the Berkshire Hathaway chairman, and Alan Greenspan, the former Federal Reserve chairman, sing his praises.
“He’s a very individualistic person. He doesn’t come at analysis or investment judgment in the words, terminology or ambience that I have been used to over the decades,” Mr. Greenspan says. “That may be the secret of his success. There is no doubt there is an extraordinary intellect there.” Mr. Greenspan, it should be noted, now works for Pimco as a consultant.
Amid all of this, Mr. Gross and his firm are trying to shape the government’s response to the economic crisis. He is one of the most fervent supporters of the Obama administration’s plan to enlist private investors to help bail out the nation’s ailing banks and try to revive the economy.
That effort, known as the Public-Private Investment Program, or P.P.I.P., has gained little traction so far. But Mr. Gross has energetically defended its architect, Treasury Secretary Timothy F. Geithner, against critics like the New York University economics professor Nouriel Roubini and the New York Times columnist Paul Krugman — both of whom argue that the strategy is flawed and that it would be best for the government to temporarily nationalize so-called zombie banks to prevent a repeat of the Great Depression.
Such nationalization, Mr. Gross insists, would be an unmitigated disaster. “There are two grand plans,” he said this spring at a meeting of his firm’s investment committee. “One is the Krugman-Roubini plan. They think the banks have so much garbage they are beyond hope. The other side is the administration’s side. That’s the one we’re on. If the other side should ever gain credence, then we’ll have something to worry about.”
Mr. Gross is hardly a disinterested observer. Pimco, owned by the German insurer Allianz, is jockeying to be picked by Mr. Geithner to relieve the likes of Bank of America, Citigroup and other banks of an estimated $1 trillion in soured mortgage debt so they can start lending freely again. Mr. Gross calls the plan a “win-win-win” for the banks, taxpayers and Pimco investors.
The government is planning to announce soon which money managers will participate. A spokesman for the Treasury Department would not say whether Pimco would be one of them.
IN many ways, it is perfectly logical for the White House to turn to someone like Mr. Gross at such a time. Few investors understand the mortgage market better. As co-chief investment officer, he personally manages Pimco’s flagship, the Total Return fund, which has $158 billion in assets. As of the end of May, he had invested 61 percent of the fund’s money in mortgage bonds.
Mr. Gross has always been partial to mortgage bonds. And why not? He has done fabulously well with them. In an October 2005 letter to investors, he made one of the most prescient calls of the last decade, warning of the looming subprime mortgage crisis. Almost everybody ignored him. Today, they wish they hadn’t.
When the housing bubble burst and the financial markets fell apart, investors lost billions of dollars. Not Mr. Gross’s clients. Class A shares of the Total Return fund, for individual investors, were up 4.3 percent in 2008, or nine percentage points ahead of comparable bond funds, according to Morningstar; this year through Thursday, the shares were up 5.4 percent.
In the midst of an economic crisis, those numbers are impressive. So is the longer-term record: In the 10 years through Thursday, the fund had an annualized return of 6.42 percent, beating its benchmark by 0.54 percentage points, according to Morningstar.
That’s one of the reasons the government has courted him closely. Last fall, the Federal Reserve Bank of New York, run at the time by Mr. Geithner, hired Pimco — along with BlackRock, Goldman Sachs and Wellington Management — to buy up to $1.25 trillion in mortgage bonds in an effort to keep interest rates from skyrocketing.
Last December, when it was pressing Bank of America to complete its ill-fated acquisition of Merrill Lynch, the Federal Reserve also looked to Pimco for advice. According to recently released messages that Fed staff members sent one another that month, Pimco evaluated the two banks and concluded that Merrill wouldn’t survive without a capital infusion or additional government aid.
Today, Mr. Gross is eager to buy the same subprime loans he once refused to touch, as part of the Treasury’s distressed-asset initiative. After all, the thinking goes, if anybody can figure out how much all this debt is worth, it’s Pimco. But Pimco’s involvement in so many aspects of the bailout has made many other financiers and analysts uncomfortable. They say its proximity to the Treasury Department and the Fed may allow it to reap billions of easy dollars through federal contracts and preferential investment opportunities.
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? “That’s the equivalent of a no-bid contract in Iraq,” fumes Barry Ritholtz, who runs an equity research firm in New York and writes The Big Picture, a popular and well-regarded economics blog. “It’s a license to steal.”
You can read the entire story in today’s NY Times
I say we must hold hearings in Congress. Haul all these guys in front of the relevant committee and find out if this is “the equivalent of no-bid contracts in Iraq”. What’s good for the goose is good for the gander!
This is how all big business make big money, connections, bribes, and luck, Kol De’Alim Gvar
This “news” column from the New York Times is not news, not factual, not believable in any single sentence throughout the 5,000-word advertisement for Obama’s pal.
Nothing in it is factual exept that Obama is “using private money to bail out failing banks” —and even that is false because the word “using” should be the word “confiscating” or “taxing” or “stealing.” Let’s just call it what it really is.
Bill Gross is considered by most on Wall Street to be an eccentric genius who has produced demonstrable results for his clients. The government could do a lot worse than to look to him for advice how to get out of this mess. For one thing, unlike a lot of other big financiers who bear investigating, there has never been (before PIMCO’s involvement with the baIlout produced some sniping by critics) even the slightest suggestion that anything at PIMCO wasn’t kosher. This is unlike, say, Bernie Madoff (who had raised red flags for years among critics, unfortunately ignored by the authorities), Ivan Boesky, Michael Milken, Joseph Jett and James McDermott (each eventually indicted and convicted of insider trading and/or market manipulation), or even Carl Icahn or T. Boone Pickens (neither ever known to be doing anything illegal but getting checkered reputations as opportunistic “greenmail” corporate raiders). Or look at Donald Trump (again, no known illegalities, but his casino company has now gone bankrupt three times — call it “Chapter 33” — and his stock and bondholders are crying that they’ve been had). Gross, like Warren Buffett, is considered squeaky-clean.