The Bond King

From Mary Child's "The Bond King", on Bill Gross and Pimco.

Making the Turn

Pimco wasn't alone in seeing the crisis ahead; there were smart people in messy corners of the mortgage market biting their fingernails and staring at their Excel spreadsheets and their Bloomberg Terminals. Some people knew.

But it's not enough to know. Knowing is hardly the battle. The tricky part was that they all still had to make money in the meantime. Money managers aren't paid to hold on to cash and wait. If they sit in cash, refusing to take risks to generate returns, then their clients tend to take their money back and avoid paying the fees. If Cross and his team were going to act on their hunch that disaster was coming, they had to figure out how to navigate the period between knowing a thing would happen and its coming to pass.

Gross decided to trust the chorus of Ivascyn, Simon, McCully. Pimco would bet against the market in a big way.

Frontrunning the Fed

"Pimco's view is simple, shake hands with the government", Gross wrote in an Investment Outlook. Sure, the United States had a "Ponzi-style economy" now, hd become a "bailout nation", and that was troubling... he said, "Make them your partner by acknowledging that their checkbook represents the larget and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy; only, do it first.

If the house always wins, become the house.

Whatever the government touched was becoming gold. So, whenever Pimco got visibility on what the government might need to buy, it could easily pick up the spread between not-gold and gold. This sometimes meant driving up the price of what the government was going to buy. Front-running the government's trades and pocketing a markup would cost U.S. taxpayers, but would benefit Pimco's clients.. And, delightfully, it was perfectly legal.