The confession season

October 16, 2011

By Matthew Goldstein and Jennifer Ablan

The year is not yet over and already the confessions are starting to roll in from some of the biggest U.S. money managers.

Bill Gross, manager of the world’s biggest bond fund, sent out a “mea culpa” letter late Friday to his many mom-and-pop investors, saying he’s sorry for putting up such bad numbers this year. Mea culpas from Pimco’s guiding light and the self-styled “bond king” are rare, largely because his Total Return Fund has long been one of the industry’s top performers.

But this year has been a tough one for Gross, who guessed wrong by betting heavily against U.S. Treasuries, which have turned out to be one of the biggest out-performers of 2011. The fixed income guru, who helps manage more than $1.2 trillion at Pimco, wasn’t farsighted enough to foresee a flight to Treasuries prompted by events like the European debt crisis, the battle over the U.S. debt ceiling and the general anemic state of the global economy.

Gross positioned his firm’s flagship fund for modest economic growth and that move left him putting up a “stinker,” as he says in his letter (hat tip to Dealbreaker.com). So, as things stand right now, the Pimco TRF fund with $242 billion in assets, is up only 1.06 percent year to date, compared to 3.99 percent gain for the benchmark BarCap U.S. Aggregate Index.

As we’ve reported, Gross now has repositioned his mammoth fund for zero economic growth. He’s levering up to buy longer-dated bonds with higher-yields and betting that a weak economy will keep interest rates low for a good long while. The way things are going that would seem to make sense. But as we know in the markets, timing is everything.

Gross wasn’t the only big name investor who had to eat some crow last week. John Paulson, the famed hedge fund manager, in a conference call with investors on Oct. 18 acknowledged that his big stock bets on a economic recovery in the U.S. haven’t panned out. He told his wealthy flock he needs to do a better job hedging exposure in the future.

Paulson, who made billions betting on the collapse of the subprime housing market, is this year’s poster boy for bad performance in the $2 trillion hedge fund industry. One of his main funds is down 47 percent for the year and several others are down more than 30 percent as well. Overall, four of his funds are listed as top losers on HSBC’s closely-watched weekly ranking of world hedge funds.

Expect other hedge fund managers putting up poor numbers this year (see Bill Ackman, David Einhorn and Lee Ainslie) to also send out “sorry” messages to their investors later this year.

Paulson’s confession, however, was overshadowed by a somewhat defensive statement he issued after the conference call, in which he blasted the ongoing Occupy Wall Street protests. In the letter, the billionaire manager likened his firm to a small business. He talked about the more than 100 people his hedge fund has hired and all the millions of dollars in taxes he and his employees have paid.

He said it’s wrong for anti-Wall Street protestors to vilify business and in particular, the “top 1 percent of New Yorkers” who pay over 40 percent of all income taxes. But Paulson made no mention of the roughly $5 billion personal payday he had in 2010. Nor did he acknowledge that  the average salary of his employees far exceeds the average salary for the “99 percent” of other Americans.

Paulson’s statement raises doubt  about whether the Occupy Wall Street protests, which are gaining steam in the U.S. and across the globe, will succeed in eliciting confessions from the heads of the world’s biggest banks and other financial firms that played a role in bringing about the greatest financial crisis in decades.

To date, some bankers and Wall Street executives have expressed sympathy with the frustration voiced by the protesters over the lack of jobs, income stagnation and being weighed down by too much debt. In private, according to The New York Times, some bankers are far more disparaging of the protesters.

But whether it’s offering tacit public support, or private criticism, the only thing the banking community has been loathe to accept is much responsibility for the financial crisis. And bankers certainly have been  unwilling to address the fact that the $11 trillion debt burden faced by U.S. citizens is untenable.

Simply, put U.S. consumers owe too much mortgage, consumer and student loan debt. Or as Bruce Springsteen says, these are “debts no honest man could pay.”

Earlier this month, we wrote about how a growing number of economists and even some institutional investors are seeing the need for some meaningful debt reduction–mainly mortgage reductions– to fix the economy. Others are calling for a full-scale debt Jubilee–or debt forgiveness–to get consumers out a deep whole. That’s because without the consumer, the U.S. economy and world economy will like sputter and creep along for years.

But the bankers have been largely silent on the issue of significant debt reduction. And until there’s some true confession from Wall Street about its role in the financial crisis and a real solution for moving beyond the fallout, there’s a good chance the protests will keep on going.

 

3 comments

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Good article – though, I worry that you are becoming infected with too much sympathy for the “Occupy Wall Street” protests (whose basic premise against greed and inequality is quite correct); in that here for the first time in recent memory is a Reuters news article advocating large-scale debt forgiveness WITHOUT also mentioning “moral hazard”.

We (me and my young family) just finished paying off all our debts (incurred partly through other peoples faults and failures; but we still took responsibility for them because they were legally our debts and were against our name) – paying these debts off was very difficult and involved a lot of sacrifice but the sense of achievement and freedom at having done it is absolutely amazing. We were following our financial position day-by-day on line-graphs, watching the debt numbers go down as we worked and saved! When you’re in debt, every dollar saved is a dollar closer to freedom.

Should we have waited a bit longer, spending like there was no tomorrow, waiting for the government to step in and save us from ourselves??? So that we could go and do it all again; whilst laughing at our thrifty neighbours from the window of a nice car???

Who exactly is going to pay for this debt jubilee anyway? The pensioners with savings, who are no longer able to work? Or the obscenely under-taxed billionaires like these fellows you mention, who are riding on everyone else’s steam and don’t even care to acknowledge the fact (as though their personal talent is 5 million times greater than another man’s hard work)?

Posted by matthewslyman | Report as abusive

$2 trillion in hedge funds, $1.5 trillion in corporate cash holdings and another $1.5 trillion in expatriated corporate profits does nothing for the economy.

Posted by OFA7 | Report as abusive

matthewslyman — Kudos to you and your family for being
personally responsible for yourselves and not stealing from others to do it!

Congress will never increase taxes for the wealthy because they would feel it too much and they do exactly as
their lobbyists tell them to!

Posted by wallingtonlives | Report as abusive