"Pimco shook hands with the Fed - and made a killing"
From Reuters:
Special Report:
Through the second half of 2011, debate raged in financial markets
over whether the U.S. Federal Reserve would embark on a third round of
massive bond purchases, known as "quantitative easing," to shore up an
anemic economy. Pacific Investment Management Co wasn't waiting to find out.
The giant fund-management firm,
led by co-founder Bill Gross, started buying tens of billions of
dollars in mortgage-backed securities guaranteed by federally sponsored
agencies like Fannie Mae and Freddie Mac.
In the third quarter of 2011 alone, Pimco's flagship Total Return Fund,
the world's largest mutual fund, doubled its holdings of these
securities to $80 billion, according to a Reuters review of trading and
other data.
While Pimco was
building its hoard, the Fed, in a surprise move long before any word on
quantitative easing, said it would start buying more of the same kind of
debt, known in the trade as "agency MBS." The U.S. central bank would
acquire as much as $30 billion of the securities a month by reinvesting
proceeds from its earlier purchases. Prices rose.
As
2011 slid into 2012, Pimco started enjoying big gains on its agency
holdings. Even better, the Fed in September 2012 finally announced a
third round of quantitative easing, nicknamed QE3. To keep supporting
the U.S. housing market, it would buy even more agency MBS. Pimco's Total Return Fund posted billions more dollars in gains.
Pimco's winning bet unfolded like this:
*
In December 2008, the Fed hired Pimco, along with three other big Wall
Street firms, to implement enormous purchases of agency MBS to keep
interest rates low and spur the U.S. economy.
*
Over the next few years, Pimco repeatedly invested heavily in those
same securities - far more than other big investors, even considering
its size.
* Pimco's mortgage plays
in 2009 and 2012 - when Fed buying was heavy - handed the firm and
investors in the Total Return Fund a gain of $10 billion, excluding net
investment flows, according to Reuters estimates.
There
is no evidence of illegality or impropriety in Pimco's actions. Pimco
says that it kept its employees who were helping the Fed at arm's length
from those investing for its funds, and that its bond-buying bet was
conceived before the Fed's program was begun. The Fed says it
implemented and enforced strict controls over the trading done by the
firms....MUCH MORE
