Pimco leaves Wall St. asking why it nixed toxic-asset plan

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

Photo: Bill Gross. Credit: Pacific Investment Management Co.

Comments

[rhjohnson]

I had pimco in my 401k, and all it ever did was lose money

[steve kindel]

Just speculation on my part, but given that there is no real price-setting mechanism for PPIP, it will be a crapshoot for any of the firms investing. Each of the firms is still going to have to depend upon its pricing committee -- which means guesswork -- and with millions more mortgages going into the can everyday, it will be difficult, if not impossible for even the most talented pricing committee to set a purchase price that has a chance of being accurate. Conventional auction systems won't work either, because in a Dutch auction, everyone has to take the lowest price, so the Treasury would get shafted, and in a numerical auction, there are too many mortgages, so you'd have to bundle them, which is part of what caused the problem in the first place. PIMCO is the smarter firm for pulling out.

[Michael Snyder]

In the real world this is called extortion & it's a felony. If you're a Wall St banker/broker, it's called business as usual.

The real "subprime" crisis has very little to do with "fog test" home loans. (fog the mirror & you get the loan) The real problem is in the way these loans were packaged & repackaged, then leveraged to infinity in a still unregulated completely opaque financial derivatives market.

Personally, I don't believe there's enough "stimulus" this side of a waterboard to persuade these institutions to get off of the funds they've been hoarding as they watch Rome burn around them.

Since George Jr. removed limits on ownership of media outlets within any given market the Fourth Estate has degenerated to the level of the WWF. What passes for news is at best entertainment & at worst pure propaganda. Since "we the people" are dependent on a competent press to keep up informed we have been at a huge disadvantage as formerly credible outlets have degenerated to tabloids.

Economist & politicians have the bad habit of ignoring the laws of physics, particularly those relating to the conservation of energy/mass. If those concepts are not integrated into our financial paradigm we will continue this downward spiral.

The bottom line in my ranting is simple; I'm sick of billionaires reaching into my blue collar pocket to maintain their lifestyle. As a Contractor, if I screw up, I pay the price. There's no bailout & if I don't complete my obligation(s) I could be posting bail.

Where's the level playing field?

[mr.bilko]

You have to conclude that banks have been data mining their mortgage holdings looking for the ones that set off warning flags. A realistic reason why Pimco declined is that banks will keep their prime loans on their books and attempt to jettison the mortgages that have been flagged as suspect.

[Anthony H]

Although there are various possible reasons, I think it is entirely likely they were "encouraged" to withdraw. It was reported by Bloomberg earlier this year that PIMCO has such substantial holdings in this space that it would gain a very self serving role if it could help re-price the market. Their short press release, with no further information forthcoming, seems to me like Washington might have "made a suggestion" and this is PIMCO's way of complying.