The Bond King
(That's Bill Gross)
Mary Childs, now with NPR’s Planet Money, which I hate (NPR and Planet Money both), has an entertaining book about Bill Gross, who transformed the bond market and built one of its biggest firms, now known as PIMCO. (The book title keeps reminding me of “The King In Yellow” from the epic first season of True Detective.)
Some commentators praise the book for its grip on the mechanics of financial markets, though I found said grip pretty loose. And I’m no tycoon.
I was hoping the book would reveal how you can make money trading bonds. I’m smart, I thought. Maybe some of it could rub off on me. I could buy my daughter a house. No such luck.
The bond market is huge, bigger than the stock market, but bonds themselves can be complicated. Markets in bonds can be illiquid. One doesn’t easily bandy them back and forth, unlike shares of stock, which any rube can buy into. It is easy enough to buy into a fund that owns and trades the bonds. PIMCO runs a bunch of them and of course will take its cut of your savings.
Not to delay the lede, how did Gross make so much money? Childs is not very revelatory on this front. It seems to come down to, he was a really good trader. Well, thanks!
More to the point, his firm was basically a crime syndicate whose chief client was the U.S. Government, and ultimately, if unwittingly, you and I. In finance there is the expression “front-running.” It refers to the practice of finding out about transactions planned by others and making bets ahead of them. Thus if you hear the Gov is going to buy a ton of shares of General Motors, you buy ahead of it and sell at a premium. It appears that this is what PIMCO did in its capacity as participant in the Feds’ Troubled Asset Relief Program (‘TARP,’ remember that?) as remedy for the Great Financial Crisis of 2008.
TARP was run by a dude named Neel Kashkari. He was hired by Bush Treasury Secretary Henry Paulson, formerly head of Goldman Sachs, that Hillary Clinton fan club. Obama kept him in there until May of 2009. Thanks, Obama! Where did he go next? He went to work for PIMCO! Ha-ha! Later he thought he could be governor of California. In 2014 he got smoked, 60-40, by the 76 year-old Jerry Brown. Now he’s head of the Minneapolis Fed. Once you’re on the Up-Escalator of Life, it’s hard to fall back.
Childs recounts two more specific ways by which PIMCO prospered. One is by anticipating the collapse of the mortgage market. They were not the only ones to do so, nor the only ones to make big money from it. My buddy Dean Baker saw it coming too, but he had no apparent inclination to profit from it. Now he’s living in a log cabin somewhere out west. Those who had the will and the wherewithal to do so, they capitalized. Another Gross gambit was a fairly arcane scheme involving mortgage securities that I won’t get into.
Otherwise, PIMCO lied, cheated, and stole. Including from its own clients. This was spelled out in suits brought by abused former employees. Like a certain president, PIMCO fought off such legal assaults with ease. Every additional brief filed in a big, complicated case takes another slice off the adversary’s resources. It can go on forever. Note that even the Government’s pockets are not necessarily deep in such situations. The Gov has its own budget constraints, plus a raft of kibbitzers in Congress to deal with.
To me there is an important bit of political economy buried in this story. The Gov does not want to see big financial firms collapse, nor stock and bond markets collapse. It makes the hoople-heads nervous, among other inconveniences. We had a recent demonstration of this with Trump and his ‘TACO’ tariff antics.
At the same time, the Gov has enormous capacity to create wealth, out of thin air. It can print money and fill in cracks in the financial system as they open up. As it does this, there are many opportunities for slips between the cup and the lip. The finance boyz are there with bowls to catch the drops, and they add up. That’s PIMCO and the financial sector as a whole, in a nutshell. The result is obscene wealth inequality, mediocre labor standards, and sluggish economic growth. The first of these finances the politics that generate the other two. That’s where we are. Bill Gross and his co-conspirators put us here.
Gross’s ultimate personal degeneration, including mental breakdown, is just another sign of the character of those who ruled us. Before the current crop of reprobates.