Oh, you can bet politics were involved.... and those who played their cards right made a killing. Miller just happened to be the fish at the table this time around. (You know that old poker saying: “If you’ve been sitting at the table for an hour and still don’t know who the fish is... then the fish be you.”)
When it comes to reading the tea leaves, Bill Gross was the true virtuoso. He’s the guy whose fund made $1.7 billion in a single day off the Fan and Fred bailout... even as Miller and Legg Mason lost their shirts.
How did Gross do it? He loaded up on debt rather than equity. Gross knew full well that while the Fannie and Freddie stockholders would get screwed, the bondholders would be saved.
Let me explain a little more…
Bill Gross (a.k.a. “the Bond King”) is the manager of the Pimco Total Return fund, a whopping monster of a bond fund with more than $130 billion in assets.
Over the first six months of the year, Gross had moved more than 60% of his fund -- close to $80 billion -- into mortgage debt. What did Gross know that Miller didn’t? He knew that, come what may, mortgage-backed bond holders would have to be bailed out, no matter what... because of the global politics of who else owns that mortgage debt.
For example, guess who was sitting on a massive $15-20 billion pile of FNM and FRE debt as recently as June?
The Bank of China.
They’ve sold off a good chunk since then, but that’s just one Chinese bank -- and just the tip of the iceberg as far as Chinese financial institutions loading the boat.
Last year, according to Reuters, China on the whole had accumulated as much as $376 billion worth of U.S. “agency” debt -- meaning the bonds of federal-related outfits like Ginnie Mae, Fannie Mae and Freddie Mac.
The upshot is, Treasury Secretary Paulson was happy to make an example out of equity investors like Miller, who knew they were taking a big risk in pursuit of a big return.
But no way, no how was Paulson about to blow out the holdings of one of America’s top creditors (China).
By some estimates, China has now amassed as much as $1.6 trillion in foreign reserves, with more than two-thirds of that parked in U.S. debt instruments (agency debt, treasury bonds and so on). Burn those guys in a bailout plan? You’ve got to be kidding. Fiscally speaking, that would be like shooting ourselves in the foot with a machine gun.
So Gross had a pretty good lock on the situation. He knew it was sharp to align his interests with China’s. And to further ensure a positive outcome, the Bond King took every opportunity by ranting and raving from his soapbox -- a mighty big soap box -- about how government should be on the lookout for mortgage holders, and how letting mortgage owners suffer would be a travesty.
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When news came out that the Fannie and Freddie debt holders would indeed be kept whole (as China demanded and Gross knew would happen), the value of those debt holdings soared, giving Gross a $1.7 billion pop in the value of his fund.
It was a bailout done right in the sense of protecting the players that mattered... and making an example of the ones who didn’t. (Whether it was right in moral or strategic terms is a whole other kettle of fish.)
The lesson? If you’re going to play the game for ultra-high stakes, you have to know the players at the table and what they’re about. Gross did. Miller didn’t.
On a related note, these thoughts of conspiracy and backroom dealings got me thinking: Where is the plunge protection team?
We’ll dig into that question next week... and I’ll share my controversial thoughts with you in full. (What, us… controversial? Nah!) In the meantime, if you have any thoughts on the PPT or their doings, feel free to send ‘em my way:
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