Pimco leaves Wall St. asking why it nixed toxic-asset plan
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Why did bond titan Pimco suddenly pull its application to join the Treasury’s long-awaited program to buy toxic mortgage securities from banks and other investors?
The government on Wednesday named nine money managers for the program, and Pimco wasn’t among them -- even though the firm’s well-known bond guru, Bill Gross, was in the New York Times just last month detailing how the program structure ‘puts the odds in your favor’ as an investor in the securities.
The idea behind the so-called Public-Private Investment Program, or PPIP, is to combine government and private capital, and government loans, in new investment funds that will provide a source of buy-and-hold demand for toxic mortgage securities that banks and others may want to jettison.
Shortly after the Treasury’s announcement Wednesday Pimco put out a short statement, saying that ‘as a result of uncertainties regarding the design and implementation of the program, PIMCO withdrew its application to serve as a manager for the PPIP in early June.’
Because Pimco wouldn’t elaborate beyond the statement, it triggered a torrent of speculation about the specific reason or reasons why it dropped out.
The idea of ‘uncertainties’ in program design being a barrier seemed an odd excuse. Why wouldn’t the same ‘uncertainties’ have troubled the other big firms that signed up, include BlackRock Inc. and Oaktree Capital Management?
Here’s one idea making the rounds on Wall Street: Despite its prowess as a bond investor generally, Pimco may have stumbled badly with its initial foray into buying troubled mortgage-backed bonds in 2007. That could have fueled concerns internally that the firm wouldn’t be able to raise from investors the minimum $500 million seed capital required for a manager in the PPIP under the Treasury’s rules.
That might seem hard to imagine for giant Pimco, but here’s what Bloomberg News reported on April 6:
The first fund set up by Pacific Investment Management Co. to buy troubled mortgages lost 33% since opening at the onset of the credit-market crisis in October 2007, according to an investor. The $3-billion Pimco Distressed Mortgage Fund LP fell 25% in the fourth quarter of 2008, said the investor, who asked not to be identified because the fund is private. The Pimco fund’s return was reported April 3 by online publication Private Equity Hub. ‘When Pimco got into distressed mortgages in 2007, no one really knew how bad things would get,’ Geoff Bobroff, president of Bobroff Consulting Inc. in East Greenwich, R.I. said in an interview. ‘What will be impacted is their ability to raise new capital.’
The Bloomberg story also said Pimco was trying to raise $3 billion for a new distressed-securities fund.
Maybe Pimco would have had investors breaking down the doors to invest with it in the PPIP. We can’t tell, because the firm just doesn’t want to say more about any aspect of the program or about its decision to drop out.
‘No additional comments with be forthcoming beyond this statement,’ it said.
-- Tom Petruno