Is Pimco’s Bill Gross Losing His Touch

February 19, 2012 by staff 

Is Pimco’s Bill Gross Losing His Touch, 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 PIMIX

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.

Industryanlysts 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, someanlysts 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 firms 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.

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