Wednesday, June 27, 2007

Dear Bill Gross

I recently heard an interview you gave with Bloomberg Television. In that interview, you said that Moody's and S&P had been "fooled" in regards to ABS CDOs. I didn't hear, and I'm assuming this is because Bloomberg edited the program, who exactly did the fooling. Because I know you wouldn't make such an accusation without disclosing that PIMCO itself is a large issuer of CDOs. Perhaps Bloomberg's journalists aren't held to as high a standard of ethics as Chartered Financial Analysts such as you and I.

In order to correct this problem, I assume that you are currently calculating and will soon be releasing to the public exactly how much money you personally made from issuance of CDOs in your career.

Mr. Gross, you are the preeminent fixed income investment manager in the U.S., perhaps in the world, and you deserve all the respect which comes with that achievement. But when you go on television and deride practices when your firm was involved in same, it causes some viewers to question your veracity. By stating that you believe the ratings agencies were "fooled" in ABS CDOs, while at the same time, your firm marketed such products to the public, it certainly sounds as though your firm was doing the "fooling" and by extension, you were fooling the investment public.

Perhaps I have indeed misunderstood your statements. Perhaps you opposed CDO issuance within your firm but were unable to prevent it. If so, I sincerely apologize.

Accrued Interest


Chris said...

Ha! Good one.

Interesting that the fawning media didn't ask him about PIMCO's cdo's.

I wonder how many/if any of their cdo's wear 6-inch heels...err are mezz ABS?

Anonymous said...

tom, i got to disagree - i read Gross to mean that Moodys and S&P fell for a little financial razzle-dazzle - with complicated assumptions and reams of models (computer, unfortunately, though w knicks tickets thrown in) and said, "oh, yeah, that's AAA, sure, that looks good to me" I'm SURE in that regard he is totally on the $$.

Accrued Interest said...

Who is this Tom you speak of? I need the flashy thing from Men In Black so that my longer-term readers will forget my real name.

Anyway, I know you are right that was his direct point. But look, if S&P/Moody's were fooled into making certain tranches AAA/Aaa, then what's the harm? The harm is to investors who bot the things thinking they were legitimately AAA/Aaa. So the "fooling" was on the part of CDO arrangers.

Chris said...

The ratings agencies put some wordy disclaimers on their ratings that basically said don't rely on them when making investment decisions...i.e. do your own homework.

They're charging awfully big fees to attach some letters and their logos to these deals...letters (ratings) that they themselves say are essentially worthless.

What's the point of paying for ratings if the ratings agencies can't even truly analyze these deals?

So the dealers can sell them to investors that are required by investment policies to have certain ratings.

Caveat emptor.

The ratings agencies are just one in a long line of middle-men looking to get a drink from the ocean of liquidity sloshing through the financial markets.

They weren't fooled. They're just trying to make a buck.

Long live the middle man!

Chris said...

Quote in today's FT

"If every CDO [manager] was forced to mark to market their subprime holdings, it would be - well, I can't think of a strong enough word to describe what it would be," confesses a US policymaker.

Anonymous said...

"if S&P/Moody's were fooled into making certain tranches AAA/Aaa, then what's the harm?"

Now come on.

A statement like this goes a long way to revealng your biases. ;-)

Moody's claims to be "among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis."

It doesn't take a rocket scientist to figure out that instruments or tranches thereof whose value derives from some of the ridiculous mortgages that have been doled out over the last couple years are not likely to deserve the highest ratings, or are at least worth taking a serious and cautious look at.

You try to pin this whole thing on Bill Gross and ignore the ratings group, when the very purpose of the ratings group is to keep the Bill Grosses (and the much, much worse) in check.

Accrued Interest said...

If you read the whole comment...

"... what's the harm? The harm is to investors who bot the things thinking they were legitimately AAA/Aaa. So the "fooling" was on the part of CDO arrangers."

My critique of Gross is as follows. It is very hollow for a CDO arranger to wag a finger at S&P and Moody's, when it seems to me that the arranger is at least equal to blame. My post tonight will talk a little more about my view of the ratings agencies.

Anonymous said...

Thanks, I'll look forward to reading that.