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What Happened to Bill Gross? Author Details Bond King's Rise and Fall

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What You Need to Know

  • Mary Childs discussed her new book on former Pimco CIO Bill Gross at the Morningstar conference.
  • Gross was a pioneer in trading bonds, which had long been a buy-and-hold market.
  • The resignation of Pimco CEO Mohamed El-Erian was destabilizing for him, Childs says.

The year 2014 was “annus horribilis” for Pimco bond manager Bill Gross. It’s when he began “unraveling” and his bond realm came crashing down, said Mary Childs, author of the new book, “The Bond King: How One Man Made a Market, Built an Empire, and Lost it All,” who was interviewed at the Morningstar annual conference.

She discussed details of his fall from his castle fortress, Pimco, in Southern California.

“Things were going off the rails for him at Pimco, but no one knew on the outside,” she told Todd Trubey, Morningstar senior manager research analyst. “His CEO [Mohamed El-Erian] had quit earlier in the year, which was incredibly destabilizing for him.

“I talked to [Gross] before [this], and he was reflective and seemed fine,” she said. “But when he took the stage at [Morningstar’s annual 2014 conference], he was wearing sunglasses and discussed the plot of ‘The Manchurian Candidate.’ Everyone wondered what was going on. Looking back, things were unraveling for him, and as the summer went on, it got worse.”

In her recently released book, Childs, who was a beat reporter covering the bond market for Bloomberg at the time of Gross’ rise and fall, recounted vignettes about the good and bad of Bill Gross, trying to educate the reader on the bond market along the way.

At 6:29 a.m. on Sept. 26, 2014, a few months after the Morningstar appearance, the bond king quit Pimco.

“We call it abdication day,” Trubey said. Childs said it “was a rough day for me, I had just gotten a root canal the day before.”

In writing the book, “I knew it would be dramatic,” she said. “I [just] didn’t realize how it would affect me.”

What really surprised her in researching the book was the Pimco executive committee emails that went back and forth. “I thought professional people who wear suits were grown up,” she told the audience. “But they never grow up,” she said, adding that Gross’ pettiness in the emails was surprising but something everyone might understand.

The Beginning

The events related in the book were a combination of “King Lear,” “Game of Thrones” and “Real Housewives of Orange County,” Trubey said. He pointed out that Gross and bond trading grew up together.

“The old way of bond investing was buy and hold,” Childs said. “Many insurance companies lined them up, but when Bill came along, he showed how during high inflation it eroded [bond values],” she said. “He was in the right time and right place.”

Recounted were the developments in the bond market, such as the new Ginnie Mae contract with its “secret lever.” It allowed Pimco to do a “low-key” corner on the market and demand physical delivery, she said. She also mentions “Russian floaters” used to collateralize trades — which wouldn’t necessarily work now, but back then they did.

Gross really made his name during the financial crisis in 2007. He saw the extreme “Big Short” trades as risky and kept the company out of them, even as his fund performance fell below peers for the first time. However, they did bet against mortgages, which, as Trubey said, “went very, very well for them. When things did turn, Pimco was able to buy back securities at a steep discount.”

One reason, Childs said, was that Pimco was far more comfortable in the mortgage market, and “things really did work in their favor; they were smarter, they structured [the trades] very well.”

The End

But “peak Pimco” did not last all that long, Trubey said. When did Gross’ focus shift to internal politics, rather than competition outside the firm, Trubey asked.

When El-Erian left in early 2014, Gross, who according to Childs had largely focused on his trading, now turned to internal company politics, she said. It began with The Financial Times’ article on El-Erian’s resignation, stating it was due to friction within the company. That and the subsequent Wall Street Journal article “planted the seed in Bill Gross’s mind on who is doing this, who is leaking” inside information, she said. “And he was never able to get rid of that [concern].”

Shortly after, Gross left Pimco and went to Janus, and the market had high hopes. Trumbey pointed out that Janus stock was up 40% when Gross joined the company.

What happened? Trumbey asked.

Childs noted that because Gross was gunning so hard, “he lost sight of his own risk management” principles and “all the things that led to his great track record.” She added that “the main thing is his vision was clouded by the emotional stuff” in leaving Pimco.

Since Gross left Pimco, the Total Return fund he once managed has had $150 billion in outflows and is now at $62 billion, Trubey said. And it is in the 39th percentile of its Morningstar category, Trubey said, asking Childs how she thinks it has done.

“They’ve done a remarkable job of holding it together,” she responded. “They have surprised people on how stable it’s been.”

When asked by the audience if she knows how Gross felt about her book, she said there were some facts he didn’t like. Also, he had put out his own book before hers was published, leading her to note, “ever front-running.”