The Tragedy of Bill Gross
NPR’s Planet Money host Mary Childs has written a
biography of Bill Gross and PIMCO, the investment firm he founded. Fresh out of
the UCLA Anderson School with a newly minted M.B.A., Bill Gross was hired to
work as an investment analyst in the sleepy bond department of Pacific Mutual
Life Insurance Co. It was there where Gross comes up with the then novel idea
of trading bonds for total return, rather than holding them till maturity.
As the concept takes hold in the inflationary 1970’s,
Gross begins to outperform other bond managers and he attracts a swath of
institutional investors as PIMCO is spun out of the life company. By 2000 Gross
is a star money manager and 70% of the company is acquired by Allianz, a German
insurance giant.
Gross makes his bones by using futures, options, and
all sorts of derivative instruments. He generated super returns in 1983 by
arbitraging the difference between the futures price of GNMA securities and the
underlying cash market where he cornered the market on the cheapest to deliver
security. Yes, I know this is arcane bond market stuff. In 2002 Fortune
Magazine names him the Bond King.
Later in that decade Gross was way ahead of the curve
in predicting the mortgage melt down that was to come. He sent his people out
to pose as home buyers to get a better understanding of the deteriorating
underwriting standards for mortgages which led to a stellar year in 2007.
Gross then brings back Mohamed El-Erian from Harvard
Management as his co-chief investment officer. Never mind that El-Erian’s
international bond fund suffers from horrid performance. Of a sudden Gross became
paranoid as El-Erian appears to be a rival. He became erratic and his
performance suffered. So much so, that in 2014 his very own executive committee
stages a palace coup and ousts him. He goes down hill from there and in 2016
his wife of 40 years divorces him.
Childs is very good at explaining PIMCO’s culture.
Unlike the boisterous trading floor at sell-side firms and many buy-side firms,
PIMCO’s trading floor is silent. There is no chatter among the traders; they
communicate by email. As a product of the sell-side culture, the quiet trading
floor seems outright weird.
My criticism of Childs’ book is that she leaves out
quite a bit and makes a few big mistakes. In order for trading strategy to be
successful you need counter parties willing to trade. At the same time Gross
was starting out a revolution was taking place on Wall Street. Mortgage
securities were being invented by Salomon Brothers’ Lew Ranieri and First
Boston’s Larry Fink. Over at Drexel, Mike Milken was bringing into being the
high yield bond market that enabled leveraged buyouts which had the effect of
converting investment grade corporate bonds into junk overnight. Thus, the days
of buy and hold were over and active trading became the norm in the fixed
income market. Simply put Childs leaves out the milieu Gross was trading in.
Childs cites the reason for Pacific Mutual’s move to
Orange County from downtown Los Angeles to Newport Beach in Orange County as
lower rents. That is wrong. The real reason is that the WASP power structure in
Los Angeles was losing relevance in the post-Watts riot era. The ascendant
Black-Jewish-Latino coalition was taking over leaving less room for the power
barons especially Asa Call, its CEO, at Pacific Mutual. She also characterizes
Orange County as “barren strip mall desert,” which is so far from the truth.
Only a snobbish east-coaster would make such a comment.
Nevertheless, aside from my comments above and aside
from my view that her book takes on the feel of a very long magazine article,
Childs offers up an interesting history of a finance titan in his time and
place.
For the full Amazon URL see: The Tragedy of Bill Gross (amazon.com)
