Gaming the Bailout: How Washington Continues Making The Saudi Arabia of Bond Funds Ever Richer

To see how access, power, and influence over the government and media is literally lifting billions from the pockets of taxpayers, one need not look further than a firm called PIMCO.
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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 the 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 the subprime 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 their broadcast purchase parameters limited to high quality product. Why? Well, perhaps the following played a role:

-PIMCO's Bill Gross had almost unlimited access to CNBC, where he could lecture listeners and those in government about the systemic dangers of a Fannie and Freddie collapse, scaring us to the point of hiding under the covers. And never before the "rescue" of Fannie and Freddie was he asked by his CNBC interlocutors specifically whether a Fannie/Freddie bailout would benefit PIMCO in any way.

-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 say, "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 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.

But wait, don't go away, it continues. In the administration's new trillion-dollar Term Asset backed Securities Loan Facility (TALF), it claims it wants to partner with private investors. Well, put that wallet back in your pocket, you needn't apply. You see, the Treasury doesn't want your money. The only people they want to deal with are the likes of PIMCO and Goldman and three and four others. You see if you are big and powerful and hold political sway and have much of the press in your pocket you receive privileged access in the Beltway. As for the gang at the Treasury, one begins to suspect that Geithner and Summers are under the care of the same hearing aid practitioner as John Thain. The selected firms will be positioned to reap enormous profits, especially given their post position in the running, not to speak of collecting fees and profit sharing from all those others who want to participate. (WSJ editorial "Treasury's Very Private Asset Fund" and this not an April Fool's joke)

Last September the New York Times reported ("For Hire: Bailout Advisor" 09.25.08) that Bill Gross, who knows how to lay it on, volunteered, "If the Treasury wanted our help, it would come, you know, free and clear." Well, this is Bill Gross and PIMCO's moment. Does that mean returning to the Treasury all fees made from managing these assets and returning all appreciation accruing to PIMCO from those securities they bought in under the program?

CNBC, this is the moment to ask Bill Gross a few questions.

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