On Sunday, The New York Times ran “Bill Gross of Pimco is on Treasury’s Speed-Dial,” a lengthy article on the cozy relations between PIMCO executives Bill Gross and Mohamed El-Erian and the Treasury Department. The piece had the confessional tone that is commonplace these days on the Times business page. To seek absolution for rapaciously self-interested actions, executives seem eager to tell all to Times reporters. Once the conflicts of interest and manipulation are out in the open, they lose their shock factor and can continue unabated.
The article traced the origin of PPIP to El-Erian, a much-hyped bond manager and emerging markets specialist. Although El-Erian’s plan for shedding toxic assets wasn’t adopted immediately, Treasury Secretary Timothy Geithner eventually warmed to it, and El-Erian and Gross helped shape it at every step. Now PIMCO appears first in line to benefit from the sweet terms they drew up for the government, should any bank ever decide to participate in the program.
Other instances of PIMCO domination are chronicled as well. The company beat back the Fed’s effort to reduce the value of GMAC bonds as part of a restructuring effort in November that would have given the government some security. Bill Gross opposed the plan for a simple reason: PIMCO owned GMAC bonds and didn’t want them to lose value. The outcome, through which GMAC bonds received a 100% government guarantee without any reduction, was shocking even to Wall Streeters well versed in power politics.
The Times conveniently failed to note another close tie between the Obama administration and PIMCO. El-Erian and Obama economic adviser Lawrence Summers share responsibility for the phenomenal collapse of the Harvard endowment. Summers hired El-Erian as head of the Harvard Management Company in early 2006. Through a combination of Harvard’s failed bet on interest rates that was personally dictated by Summers, disastrously-positioned derivatives and an emerging markets portfolio compiled by El-Erian, Harvard is now in the poorhouse for the first time in 400 years. The story is well-told in a recent Forbes article.
A recent ramification: Yesterday, Harvard announced the layoff of 275 workers, primarily in working-class and clerical positions.