Bill Gross’s Pimco seems to be at the heart of nearly every financial crisis nowadays. That’s because he’s manager of the world’s biggest bonds fund you say? Probably.
News today that Gross has guaranteed $760m of debt issued by AIG – you know, the insurer next in line in the credit crunch A&E ward and with only 48 hours to live.
This is also in Pimco Total Return Fund’s most recent SEC filing, from Bloomberg:
Pimco Total Return Fund, which oversees $132 billion in assets, backed the bonds by selling credit default swaps to investors that pay off if AIG defaults, according to a filing with the U.S. Securities and Exchange Commission last month. The fund had sold insurance on $7.7 billion of bonds, including $4.8 billion issued by financial-services companies, as of the end of June.
The swaps are part of Gross’s bet this summer that corporate bonds tied to certain companies will recover, as they’re too important for the US government to let fail. He’s been vindicated on Fannie & Freddie so far, making a tidy $1.7bn, but may have seen his gamble backfire when the Fed declined to save Lehman over the weekend.
The filing is from Aug. 29, which means Pimco’s position may have changed since then. If it hasn’t, then AIG’s fate will have big consequences, not just for wider financial markets but for Pimco as well.
As the CDS on AIG widens (as it has been doing, from 465bp on Sept. 9 to $3.05m upfront plus $500,000 annually, yesterday) Pimco has to write down the swaps. A bigger issue will be if AIG goes into credit default – triggering a mandatory cash payment by Pimco. Ouch.
If Bill Gross sees both his Lehman Bros. and AIG gambles backfire will that be the start of a more cautious Pimco?
One that doesn’t rely on Fed bail-outs, maybe?
Maybe.
Related links:
Fun with Bloomberg functions: Lehman bonds edition – FT Alphaville
Fannie & Freddie: A tale of two Bills – FT Alphaville