Bond Fund Goliath Pimco Hires Head Of Government's $700 Billion Tarp Program; Citizens Pick Up Your Slings!

03/18/2010 05:12 am ET | Updated May 25, 2011
  • Raymond J. Learsy Author, 'Ruminations on the Distortion of Oil Prices and Crony Capitalism'

There were two especially insightful articles the past few days. One was "Rob Johnson Explains Crony Capitalism" here on HuffPost. The other appearing was "Neel Kashkari's Quiet Path to Pimco" in the New York Times. The first giving a comprehensive and compelling overview of how crony capitalism is corrupting the financial system. The latter touches, ever so gently, on an example of the blatant favoritism and cozy dealings between government and the financial community.

The New York Times article was particularly disturbing. It dealt with the hiring of Neel T. Kashkari by Pimco's President Bill Gross. Pimco, a unit of Allianz, the insurance conglomerate, is the largest asset manager specializing in bonds in the United States, if not the world, having $940 billion under management.

Kashkari is a former Goldman Sachs banker who was summoned in 2006 by Treasury Secretary Hank Paulson, himself a former Goldman Sachs Chairman, to serve as his senior adviser and in October 2008 was deputized by Paulson to run the government's $700 billion Troubled Asset Relief Program (TARP),

According to the New York Times article "People magazine called Mr. Kashkari, a 35 year old man with a hawk nose and a shaved head, one of the sexiest men alive." I'm not making this up. But then again that certainly wasn't the reason he was hired by Pimco. Though it might have been preferable.

As the New York Times points out " Several Treasury officials said Mr. Gross had frequently been in touch with Mr. Kashkari and others in government about various initiatives. None of those officials or other officials suggested there was anything improper about those contacts". Or as the Times put it, "But even though Pimco was not a recipient of Government aid, Mr. Kashkari's career move raised eyebrows".

What was left unsaid was that in the world of crony capitalism, direct largess, though significant in the current flood of government bailouts, is not the only way of helping friends in need, or just friends per se. Sometimes information or a wink or two can do the trick just as well. The Times made mention of the $1.7 billion bonanza that Pimco cashed in when Mr. Paulson announced the government takeover of Fannie Mae and Freddie Mac. Interestingly, the Times reported that at the time, as part of his governmental responsibilities, Mr. Kashkari as well worked on the rescue efforts of Fannie Mae and Freddie Mac.

To define the issues involved permit me, at the risk of being more of a bore, to quote from an earlier post by me last year, "Gaming the Bailout: How Washington Continues Making The Saudi Arabia of Bond Funds Ever Richer":

In a troubling example of how access, power and influence over the government and media is literally lifting billions from the pockets of taxpayers, one need go no further than the incestuous relationship between government and a firm called Pimco. Those in the biz know Pimco well. You see Pimco is the largest bond fund manager in the nation. Peddling a reputation of being savvy and ahead of the curve (Pimco talking heads have almost daily access to the media, TV and Op-ed columns). The firm has purportedly steered clear of sub prime paper that has ensnared many others. Reputedly its investments are focused on high quality securities issued by government -sponsored entities.

Really? Well you see there was this billion dollar moment back in September 2008 before PIMCO turned tail on its reputed investment strategy of quality only, and made huge investments in quintessential junk, namely Fannie Mae and Freddie Mac subordinated debt. The subordinated debt carried a higher coupon and therefore was at significantly higher risk then that of the regular bond holders. Further, it represented but 1% of the companies' debt, hardly critical to the functioning of Fannie and Freddie given the disastrous straits they already found themselves.

As the situation at Fannie and Freddie worsened, investors in Fannie and Freddie reasonably expected a subordinated debt wipeout, or at the very least, a massive restructuring tantamount to a significant haircut. Yet Pimco piled in, loading up on the subordinated debt for pennies on the dollar. Certainly the beaten down status of Fannie and Freddie sub debt was far outside the purview of Pimco's broadcast purchase parameters, limited to high quality product. Why? Well, perhaps the following played a role:

-Gross's access to Hank Paulson, with whom he would confer regularly (please see
"Bailout Ballet: The New York Times Reports on Hank Paulson/Pimco's Bill Gross Pas De Deux" 9.26.08). According to Gross then, he was not out of line in pushing for a bailout from which Pimco would benefit outrageously because, as he would be quoted, "Pimco had no official role in formulating the plan, We want safe agency guaranteed mortgages. We don't want to take a lot of risk in subprime space." As though before the bailout, Fannie and Freddie subordinated debt was not the gorilla of subprime paper.

And then, as if it were a preamble to the outrage of the billions of taxpayer dollars being shelled out by AIG at 100 cents on the dollar, without thought of renegotiation or shared risk, the Fannie/Freddie sub debt was covered 100 cents on the dollar in its bailout by the Treasury. It thereby set the standard for covering Wall Street speculation and excess in all that was to come thereafter. Others could bet and lose, but Wall Street would be given a pass.

At the time the Wall Street Journal, with rightful outrage penned an editorial "Bailout For Billionaires", suggesting the Fannie/Freddie subdebt bailout enriched "some of the world's richest people and largest financial institutions." Both Pimco and Goldman Sachs were mentioned, as was a reference made to Hank Paulson's prior Goldman ties, "where Mr. Paulson used to work"

For Pimco it was the biggest one-day pay day in their history, an outrageous and unconscionable $1.7 billion dollars virtually lifted from taxpayers pockets to Pimco coffers.

As mentioned in the New York Times, Mr. Kashkari, as Mr. Paulson's deputy, worked on that rescue effort. Cause and effect, I don't know, I am not an investigative reporter. But what is so disquieting is that the most powerful bond fund in the nation, if not the world, would feel themselves so secure in its relations with government officials, so well pampered by the media, so wealthy in lucre and influence, so disdainful of the public at large that they could permit themselves to dismiss public perception and apprehension of revolving door cronyism and proceed to hire Mr. Kashkari.

It is incongruous at this time of massive public distrust of government and all that is being done to coddle the financial titans for a financial powerhouse the likes of Pimco, whose influence reaches every nook and cranny of the government and especially the Treasury Department, as well as those agencies dispensing Wall Street welfare, to hire Mr. Kashkari not for what he is but what it represents. Yes, there are the so-called non solicitation agreements attaining to certain parts of government, which the NYTimes pointedly addressed, "Kashkari brings a great deal of potential benefit to Pimco in terms of government knowledge and connections to both parties."

It is a slap at a public sated with examples of government handouts to the undeserving and the revolving door coziness perpetuated at public expense and detriment. It is an act of hubris orchestrated by a company that has benefited grandly through the public purse, betraying a callousness and gross disrespect for those footing the bill while millions of their fellow citizens remain unemployed. It is an exemplar of crony capitalism at its worst. It is long past time it comes to a halt!