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The New York Times did the country (and itself) a disservice Sunday when it printed all 5,000 words of Devin Leonard's piece on William Gross (see economist Rob Johnson's response at New Deal 2.0). I took the liberty of editing it. The results are below. As you will see, I have eliminated the following:

1. Gratuitous references to lawyer-ed Christmases designed to illustrate unimpeachable ethics,
2. Unrelated sentences that when put in juxtaposition serve to undermine critical facts,
3. Fawning,
4. Self-aggrandizing stories cloaked in self-deprecating ones,
5. Portrayals of a hard scrabble youth that include prestigious private schools and Las Vegas,
6. His wife,
7. His mother,
8. Quotes from Gross placed far enough apart as to hide their contradictions,
9. Quotes from people on the Pimco payroll including but not limited to those that refer to him as a "great American" and an "extraordinary intellect,"
10. Any and all references to yoga and/or headstands.

June 21, 2009

Treasury's Got Bill Gross on Speed Dial


Newport Beach, Calif.

" . . . with the collapse of Wall Street, Mr. Gross has emerged as one of the nation's most influential financiers. . . . Mr. Gross and his firm are trying to shape the government's response to the economic crisis. . . . "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."

. . . 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 . . . The government is planning to announce soon which money managers will participate. . . . 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. . . .

Money managers . . . 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, "We've been buying some mortgages this morning. That's our baby, so to speak. That's our bag.". . .

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.

"I don't drink beer with these guys; I have no idea what happens in the privacy of their own homes," he says . . .

His mood brightens when he talks about how much money Pimco could reap by participating in the Geithner plan. . . . 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.

. . . If things go badly, the government is responsible for repaying all that debt. . . .

. . . He . . . predicted in one of his monthly columns that the government would have to pump billions of dollars into the economy to avert a total collapse. At the same time, he and his Pimco team came up with an audacious plan: invest in bond sectors that Washington would be forced to support -- like government-backed mortgages guaranteed by Fannie Mae and Freddie Mac.

Mr. Gross whimsically calls this strategy "shake hands with the government."

. . . In a CNBC interview on Aug. 20, 2008, he argued that Americans were putting "their money in the mattress" because the government hadn't rescued imperiled financial institutions like Fannie and Freddie.

On Sept. 7, Henry M. Paulson Jr., then the Treasury secretary, announced that the government was taking over Fannie and Freddie. The value of the Total Return fund rose by $1.7 billion in a single day. . . .

. . . In the spring of 2008, Pimco's chief executive, Mohamed A. el-Erian, a former policy expert at the International Monetary Fund, floated a plan in Washington for a public-private partnership similar to the P.P.I.P. plan that Mr. Geithner later unveiled. . . .

. . . Lehman Brothers collapsed on Sept. 15. Mr. Paulson asked Congress to pass the Troubled Asset Relief Plan, better known as TARP, which would enable the government to spend $700 billion to buy mortgage securities from teetering banks. . . .

In the midst of the crisis, in October, Mr. Gross's friend, Mr. Buffett, wrote to Mr. Paulson suggesting a plan similar to the one Mr. Erian had been pushing. . . .

. . . Pimco had bet that the Bush administration would come to the rescue of the nation's banks and other financial institutions. So it bought a variety of those bonds, including those of GMAC, the financial division of General Motors.

In November, as the economy continued to weaken, GMAC asked the Fed for permission to become a bank holding company so it could receive TARP financing. The central bank granted GMAC's wish, with one caveat: GMAC had to swap 75 percent of its debt for equity, allowing GMAC to potentially buy back a big chunk of its bonds for just 60 cents on the dollar.

Mr. Gross balked at the arrangement because, as a GMAC bondholder, he would have been forced to take a big financial haircut. "We said: 'It doesn't look too good to us. We think we'll just hold onto the existing bonds,' " he remembered. Much to the amazement of many people on Wall Street, the Federal Reserve, which declined to comment, still allowed GMAC to become a bank holding company and the government later guaranteed all of its debt, meaning that Mr. Gross's GMAC bonds would be worth 100 cents on the dollar when they mature.

Mr. Gross is unapologetic about the outcome. "The government has a vested interest, and it's not necessarily aligned with Pimco's interest," he says.

. . . Pimco is proud of its partnership with the government. . . [T]he 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.

"We have a whole lot bigger profile now than we did years ago, but the fact of the matter is we've been doing the same thing in the last year that we've been doing for the last 10 years," Mr. McCulley says. "I'd like to think we're having some influence in the public policy arena. . . ."