June 7, 2011

PIMCO’s Bill Gross Loses Big on Lehman Bonds

Losses on certain Lehman bonds traded by PIMCO estimated to exceed $3.4 billion

Are chinks in the armor of Bill Gross’ reputation beginning to appear?

“I don’t think anyone can argue Bill Gross isn't a fantastic investor,” Morningstar Analyst Robert Goldsborough told us in April. “He has made some contrarian bets against the bond market recently, and you don’t bet against someone like [Gross].”

But analysis by The Wall Street Journal of Lehman Brothers’ liquidation plans filed in federal bankruptcy court reveals losses on certain Lehman bonds traded by Gross' firm, Pacific Investment Management Co. (PIMCO), that exceed $3.4 billion.

As the paper notes, Gross (left) buoyed his reputation during the 2008 financial crisis through well-timed bets on Treasuries and mortgage debt.

PIMCO is among the nation's largest money managers for mainstream Americans, both through institutional clients, such as pension funds, and mutual funds held in 401(k) retirement accounts. That means the Lehman losses hit ordinary investors who had put their money into PIMCO funds during the market boom.

The Journal notes that for PIMCO, much of the pain already has been felt. The firm sharply marked down the bonds on its books just after Lehman collapsed, crystallizing most of the losses. The firm currently carries the bonds at roughly $0.25 on the dollar.

"These holdings have long ago been marked to market," a PIMCO spokesman told the paper. Despite the Lehman losses, the company’s 2008 investment returns were among the industry's best, he said.

The 67-year-old Gross is estimated to be worth more than $2 billion and was recently named Fixed-Income Fund Manager of the Decade by Morningstar.

Under a best-case scenario, PIMCO's losses total $3.44 billion on senior Lehman bonds, according to The Journal's analysis. Those losses would total $3.84 billion under the wind-down plan least favorable to those holding bonds of Lehman's parent, the analysis shows. Some of the losses were likely offset by interest PIMCO earned on the bonds in the years before Lehman's bankruptcy.

PIMCO is allied with a group of distressed-debt investors and others led by John Paulson's hedge fund who are pushing for a recovery of as much as $0.254 cents on the dollar on their senior bonds. That is better than the two other plans under consideration and around where PIMCO has marked the bonds.

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