Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
While I knew PIMCO was massively influential during the financial crisis, I did not realize a mutual fund shop could potentially be thrown in with banks as “systematically important” institutions. But considering just how many bonds they own, I guess it makes sense. Obviously, Mr. Gross is not happy with this potential situation, as it would come with more cost and oversight.
But if push comes to shove and there is some sort of bond disaster down the road, I am sure the Fed would just do QE8 and target all PIMCO’s portfolio. 
Lengthy story but some snippets below via Reuters:
- He is the man who made bond investing sort of sexy – and now he may pay the price. Over more than three decades, Bill Gross, co-founder of asset-management giant PIMCO, has made so much money for clients that he has become the barometer by which other bond traders are judged. His West Coast perch, prescient calls on the U.S. economy and devotion to yoga only added to the mystique.
- But the very recipe that enabled Gross to dominate his industry may now be conspiring against him. He’s coming off his worst year in the business after making a huge bet against U.S. Treasuries that backfired. Last year, for the first time in nearly two decades, investors pulled more money out of PIMCO’s flagship fund than they put in.
- More troubling, U.S. regulators are now considering whether PIMCO should be deemed a “systemically important financial institution” – that is, too big to fail, and thus subject to tighter regulatory oversight. The concern: The juggernaut manages so much money for pension funds that it could hammer the economy if it ever went under. The firm has doubled in size to $1.36 trillion in assets since the collapse of Lehman Brothers in 2008.
- The firm is lobbying hard to fend off the “systemically important” designation, according to regulatory disclosures. Like other financial firms, it also objects to impending rules that could make some of its derivatives trading more costly.
- Industry analysts also wonder whether PIMCO’s $250 billion Total Return Fund, the world’s largest bond fund, is such a behemoth that Gross sometimes has to swing for the fences to generate the kind of returns investors have come to expect. Because PIMCO’s flagship fund relies heavily on derivatives to bet on bonds, some analysts say it’s unnecessarily complex and potentially at risk should one of its trading parties fail.
- Gross dismisses concerns about PIMCO’s girth. He says the firm isn’t “levered,” or making bets with borrowed money, in the way that failed players like Bear Stearns or Lehman Brothers did. The asset manager is using only client money to trade. “It’s not like we are a deposit institution and there’d necessarily be a run on the bank because they thought the bank was going to fail,” Gross said in an interview. “‘Too big to fail’ is dependent upon tens of thousands of clients” abandoning ship at once, and it’s “hard to believe they’d want out at the same time.”
- The debate over PIMCO’s centrality to the financial establishment is a turnabout: Up until the financial crisis, the 67-year-old Gross was largely seen on Wall Street as a West Coast outsider and a bit of a loner. But during the crisis, scared investors piled into his funds. Policymakers from the Federal Reserve and Treasury Department turned to PIMCO to help with a raft of programs meant to rescue the financial system. That helped forge closer ties between the firm and the government and raised PIMCO’s profile even more with investors.
- “The concentration of bond-market assets in a few firms, which some could argue to be systematically risky, is not of those firms’ design, but rather stems from their success,” says Joshua Rosner, managing director of Graham Fisher & Co., an adviser to institutional investors.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
