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Pimco's Bill Gross on modern finance: The 'unmistakable odor of Mammon'

February 2, 2011 |  8:00 pm

Billgross Pimco bond guru Bill Gross uses his monthly website column to say whatever he wants about markets, the economy and government policy, among other things.

That’s the privilege you can grant yourself after you’ve built a $1.2-trillion money management shop.

In his February commentary, Newport Beach-based Gross pretty much indicts the entire financial system for its failings -- although, not suprisingly, Pimco gets a pass.

Gross, 66, says modern financiers have terribly misallocated capital in the economy, including into their own pockets:

Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the  yellow brick road begins on Wall Street or the City. Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America.

Financiers have lost their high ground and, if truth be told, we began to lose it a long time ago when we figured out that money was more than a medium of exchange or a poor substitute for a store of value. We figured out a turbocharged way to make money with money and proclaimed ourselves geniuses in the process. Well, we’re not. We may be categorized as “opportunists,” to be generous, but society’s “paragons” and a legitimate destination for a significant percentage of college graduates? Hardly. To paraphrase Paul Volcker, the only productive invention to come out of the banking industry over the past generation was the ATM.

But wait, isn’t Pimco a huge player on this stage? Yes -- but:

Having been part of this process and even a member of the rogue’s gallery itself, I know one thing for sure: This is not God’s work -- it has the unmistakable odor of Mammon. PIMCO, while Mammonesque, is a company to be proud of. I can say with confidence that there are very few clients who have not benefited from our investment management over the years. Some of the rest of this industry, however, I’m not so sure of: rating agencies that perpetually fail at commonsensical quality judgments, bankers that make loans to subterranean credits and then extend the beggar’s bowl for themselves, and 80% of active money managers that underperform the market.

Finally, Gross returns to attacking favorite targets: governments and central banks (read: the U.S. Treasury and the Federal Reserve) that are running massive deficits and holding short-term interest rates near rock-bottom:

To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, “infects,” is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets.

Of course, Pimco has benefited from savers’ misery as many investors have shifted from bank accounts to bonds over the last two years in search of higher yields. And Gross vows that Pimco will
continue to have the “antidote” for what ails income-needy investors, once again stressing his strategy of largely avoiding low-yielding securities like U.S. Treasuries to focus on corporate bonds, emerging-market debt and other assets.

-- Tom Petruno

Photo: Bill Gross. Credit: Pimco