It was plain to see in the financial news between 2009 and 2012 that there was a list of nations that investors expected to default on their debts. The initial list started with Greece and Spain, to be followed by Ireland, Portugal, Italy, then the United States. The list was so well-known it was abbreviated in headlines as PIIGS, with the United States an implied but unstated postlude. Cyprus was a late addition because of its exposure to Greece. There were moments during this period when it seemed as if Pimco’s founder and investment officer Bill Gross was the man keeping the list. He bragged about the way his funds cashed out of the respective sovereign bonds at just the right time, but what he didn’t say is that the funds managed at Pimco are large enough that they could single-handedly cause a panic in a country’s bonds. It must also be said that is is possible that Gross’s involvement in the European sovereign debt crisis was more hype than substance — analysts at Pimco might merely have been accurately tracking the trillions gambled on Wall Street against the countries on the default list. But it is hard to dispute Pimco’s involvement in the Cyprus default at least, as a Pimco report used by the central bank showed the country to be insolvent in an economic analysis later revealed to be bogus. It was that report that may have inspired the bank run that forced Cyprus to seek a European bailout, and the errors in the report led to a much larger bailout than was plausibly needed. In short, without Pimco, there would not have been a sovereign debt crisis in Cyprus.
Whether Pimco was leading or following the assault on sovereign debt in Europe, it was a strategy that paid off handsomely for its bond funds, up to a point — a point that was reached roughly when the Ireland collapse failed to appear on cue. Gross’s returns have been lackluster in the last couple of years, and there have been massive outflows from Pimco’s funds, causing concern not just at Pimco but around the financial sector. The company’s top executive mysteriously left around the beginning of this year, just this week explaining that he had realized he was working too hard at Pimco.
And now, this morning, in news that stunned Wall Street, Gross too is out — not quite fired by the company he founded, but invited to leave over “fundamental” (if cryptic) differences in business strategy. There are reports that Gross had been looking for a new job since last week. The shakeup obviously raises far more questions than it answers, and Wall Street analysts still don’t know what to make of it. The movement of funds out of Pimco is likely to accelerate in the next few days, and most analysts don’t expect much of that money to follow Gross to his new post at Janus on Monday. There could be unfamiliar turbulence in the markets next week as fund managers sell some assets and buy others in a series of hard-to-predict adjustments.
Another shakeup: BNP Paribas today named a new chairman, Jean Lemierre, to replace Baudouin Prot, who is resigning. The resignation is seen as a reaction to the bank’s recent U.S. guilty plea for money laundering and the associated $9 billion penalty.
Charged: Five at Deutsche Bank who made false statements in a legal proceeding. The bank made statements exaggerating a customer’s financial distress, possibly contributing to the customer’s bankruptcy in 2002, then made false statements about its actions with respect to that customer in a subsequent court hearing.
Settlement: U.S. Bank will pay $48 million to credit card holders who paid for credit protection services that the bank didn’t deliver. The bank will also pay $9 million in penalties.