Thursday, July 9, 2009

Pimco Is Missing From Treasury's PPIP

The U.S. Treasury Department, the Federal Reserve and FDIC announced the start of the Public-Private Investment Program, commonly known as PPIP, yesterday.

Other than the drastic shrinkage of the whole scheme from $1 trillion when it was announced in March to mere $40 billion (the government putting in $30 billion, private investors $10 billion), curiously missing was the world-largest bond manager, Pacific Investment Management Co., commonly known as Pimco.

Here's from Bloomberg:

U.S. Treasury Opens Distressed-Debt Program Without Pimco (7/9/09 Bloomberg)

"The U.S. plan to help buy as much as $40 billion in assets from banks got started almost four months after it was proposed and without Pacific Investment Management Co., the world’s biggest bond manager and an early supporter."

"... Pimco, which in March announced plans to apply, said it withdrew its application in June because of “uncertainties” about the initiative’s design."

Other than that, Bloomberg or Pimco doesn't elaborate on the reason why Bill Gross' s firm decided to withdraw.

Pimco manages $756 billion in assets. It is possible that the scaled-back PPIP program is too small for them to participate. But it is also possible that Mr. Gross doesn't quite trust the government. I remember reading this at Pimco's site back in early April [emphasis is mine]:

"Shake hands with the government is and has been our motto although the contractual certainty of a government handshake may now be questioned in an increasingly number of marginal areas."

This is a change of tone coming from Mr. Gross. This is the guy who said back in January;

"Still, future policymakers must confront the reality that is, not the one that should have been. And investors must do likewise, casting aside personal philosophies for a clear-headed view of the future horizon. PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks, and senior bank debt; Aaa asset-backed securities such as credit card, student loan, and auto receivables. These have been well-advertised PIMCO strategies over the past 6 months but there are others in clear sight. An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities. Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well – unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2½% 10-year Treasury cannot."

And I believe his firm was extremely successful in doing it - buying these securities before the government did, and sell them essentially to the government at higher prices.

Now, after seeing what this new government under the new president has done so far, Pimco would rather stay away, at least for now.


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