After reading this special report from Reuters, I kind of feel like an idiot. It’s another outrageous story of the incestuous relationship between the financial industry and the government, but it kind of looks like Gross was openly discussing it, and I really was not aware that this was happening. Blatant conflict of interest, IMHO.
“Pimco’s winning bet unfolded like this:
* In December 2008, the Fed hired Pimco, along with three other big Wall Street firms, to implement enormous purchases of agency MBS to keep interest rates low and spur the U.S. economy.
* Over the next few years, Pimco repeatedly invested heavily in those same securities – far more than other big investors, even considering its size.
* Pimco’s mortgage plays in 2009 and 2012 – when Fed buying was heavy – handed the firm and investors in the Total Return Fund a gain of $10 billion, excluding net investment flows, according to Reuters estimates.
There is no evidence of illegality or impropriety in Pimco’s actions. Pimco says that it kept its employees who were helping the Fed at arm’s length from those investing for its funds, and that its bond-buying bet was conceived before the Fed’s program was begun. The Fed says it implemented and enforced strict controls over the trading done by the firms.
For their services to the Fed in 2009, Pimco, Goldman and BlackRock were paid $11.2 million apiece, according to a 2011 U.S. Government Accountability Office report. Wellington was paid $26.6 million under an extended contract to March 2010. From then on, the New York Fed, having gained expertise in buying agency MBS, managed its own trading desk.
In November 2010, the Fed announced a second round of bond buying, known as QE2. This time, the central bank said it would buy $600 billion in longer-term Treasury securities.
Pimco didn’t do as well in its bets on the much-bigger Treasury bond market as it did on agency MBS.”
So, they made tons of money when they were both buying for the Fed and buying for their own fund, but not so hot when they no longer were doing business for the Fed also. Nothing to see here.