If Congress approves the $700 billion bank bailout the Bush Administration is trying to force on the country through the threat of an economic mushroom cloud, the plan would not be carried out by career public servants. As in the war in Iraq, much of the grunt work would be contracted out to private companies. This raises the question: who will be the KBR or the Blackwater of the Big Bailout?
If William H. Gross has his way, the role will be played by his Pacific Investment Management Company, known as Pimco. Gross (photo) has been shamelessly promoting his firm as having the expertise and experience for the challenging job of using public money to buy up securities that in many cases may be nearly worthless.
When Pimco’s name first surfaced earlier this week, it appeared that the firm was trying to cash in on what would presumably be a bonanza of brokerage and asset management fees. Perhaps recognizing that this amounted to crisis profiteering, Gross gave an interview to the New York Times in which he offers Pimco’s services on a pro bono basis: “If the Treasury wanted to use our help, it would come, you know, free and clear.”
Is this one of the most selfless acts ever committed by a profit-making company, an egotistical play for personal glory, or a spectacularly audacious marketing ploy?
Gross can afford to be generous. His firm earns hefty fees each year managing portfolios (focusing on bonds) worth more than $800 billion for its clients, who are mainly “high net worth individuals” and institutional investors such as pension funds, university endowments and foundations. According to the Forbes 400, Gross has a personal net worth of some $2 billion.
The reason Gross’s offer may be taken seriously is that for the past year or more he was warning of the dangers of the subprime mortgage crisis while many in the financial world were trying to cover up the magnitude of the problem.
That’s all well and good. But it is also the case that Pimco is up to its neck in the crisis. Despite Gross’s concerns, the firm loaded some of its bond funds with mortgage-backed securities (MBS). Last May Pimco spent $2.6 billion to purchase the MBS portfolio of the Israel’s Bank Hapoalim. After Gross published a column last year in which he in effect called for the kind of rescue now being considered by Congress, blogger Mike Shedlock noted Pimco’s MBS exposure in a post titled “Bill Gross Wants PIMCO Bailout.”
This is the first of the problems with Pimco’s noble offer: it might not be so noble. PIMCO would in effect be helping to bail itself out. And perhaps also its parent, German financial conglomerate Allianz Group, which earlier this year wrote down the value of some $1.8 billion in asset-backed securities.
And that leads to the second problem: conflict of interest. Could Pimco, or any money manager for that matter, avoid the temptation to structure its purchases on behalf of the Treasury in a way that benefits its own private clients? The temptation might be even greater if the firm were not earning fees.
Even Gross’s friends are worried. Today’s New York Times piece quotes Luis Maizel of LM Capital Group as saying: “If you put this in Bill’s hands, Pimco is going to come out great, and I don’t know that the government will.”
Sounds like something you might say about the performance of Blackwater or KBR in Iraq.