Founders and The System:

The story of Bill Gross and PIMCO that I scooped in my last post appears to be abating,  for now anyway.

The spin, worked furiously by owner Allianz, the German Giant Insurer, was that the departure of Bill Gross, founder and long time chief, was the result of a ‘palace revolt’ that had been brewing for some time. In other words the board of directors, was reacting to unease among the ranks of management rather than, for instance, increased fund redemptions or, heaven forbid, falling profitability.

I find this explanation very difficult to swallow, because it flies in the face of the enlightened self-interest, that rules the conduct of business in most of the free world.

Bill Gross is, or was, an Ikon of the Bond World. He founded and built PIMCO into an institution, with enormous clout and his pronouncements could, and did, move markets. His concept of the Total Return Fund was quite brilliant and formed the core of thousands upon thousands of IRA Plans held by the ‘little guys’ who vote with their hard-earned money.

All of this brilliance came at a price. Like many clever people Bill, obviously did not suffer fools, and was likely wont to let others know his feelings. (rather like Steve Jobs at Apple) It may have been this trait that instigated the beginning of the end when Mohamed El-Erian, the popular second in command  at PIMCO,  left in a huff. But I doubt it, because the intransigence of the leader was not new, ( it had been going on for 20 years) and there was a great deal of money ar stake for all concerned. If I were a betting man I would look elsewhere, for the real reason for the upheaval, namely at the Federal Reserve Bank of New York.

Its one thing to chastise your co-workers, but quite another to take on the mighty Federal Reserve Bank of New York, as Bill Gross did in his very public spat with the US Treasury, run by a former powerful Fed Banker Timothy Geithner.

For those with short memories it was Bill Gross who rattled the cages of the bankers and the Treasury by forbidding his funds from purchasing Long US Treasury Bonds, because of a likely downgrade in ratings for the US Bonds by the Credit Rating Agencies. ( The united Sates Congress lacked the political will to put its house in order)

The Federal Reserve is an immensely powerful club made up of the regional reserve banks and the thousands of regional banks all over the US. Working with the US Treasury, The Federal Reserve Bank of New York can act alone, without any Congressional approval, to lower the boom on transgressors, whenever it feels that the ‘system’ is at risk. (If PIMCO as one of the largest bond funds in the world does not buy US Treasuries the “System’ might well be at risk)

By strange coincidence there is another example of this immense power on display in a New York court room as I am writing this post. This is the case of Hank Greenberg, former founder and head of AIG (American Insurance Group) who is suing the Federal Reserve Bank of New York, along with Timothy Geithner, and Hank Paulson, former Secretary of the Treasury over the terms of the bailout of AIG following the financial collapse of 2008.

There are some serious points at law in the case concerning the Fifth amendment and the seizure of assets under  the US Constitution and also the powers of the Fed under the Federal Reserve Act. Much more interesting is the sub-plot that the Fed acted improperly in favoring the large Wall Street banks in the payout on Credit Swaps issued by AIG against the credit of Sub Prime Mortgages.

In 2008 it was very obvious that AIG would not be able to pay out the full amount of the insurance coverage on sub-prime mortgages.  As in many bankruptcies, the creditors( The Wall Street Banks) would have to take a ‘haircut’ But defying the conventual wisdom this did not happen and, at the instigation of the New York Fed, the banks (Goldman Sachs et al) received one hundred cents on the dollar.

The reason given for this ‘special treatment’ is the same old cliché. It was done to save the ‘system’

And so you have it. Look no further This  banker’s ‘club’ is where the real power rests in the largest economy in the World. Whenever some untoward event occurs, you can be sure that the Bankers will close ranks and protect the ‘system’ ahead of all else.

Maybe this is where the saying “whats good for Wall Street is good for maintstreet”comes from.

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