Author Mary Childs discusses Bill Gross' legacy and the evolution of bond investing through the lens of bond giant Pimco.
Our guest this week is Mary Childs. Mary is a cohost and correspondent for National Public Radio's Planet Money. Previously, she was a reporter at Barron's magazine and before that, a reporter at the Financial Times and Bloomberg News. She received her bachelor's degree in business journalism from Washington & Lee University. Mary is the author of a new biography about the iconic Pimco bond fund manager, Bill Gross. It's called the The Bond King: How One Man Made a Market, Built an Empire, and Lost It All. We spent this episode delving into the book with Mary's help.
Background
Planet Money podcast
The Bond King: How One Man Made a Market, Built an Empire, and Lost It All, by Mary Childs
Pimco Total Return Analyst Report
Early Life and Career
Beat the Dealer, by Ed Thorpe
“The Strange Billionaire Who Revolutionized the Bond Market,” by Greg Rosalsky, npr.org, March 15, 2022.
“Bill Gross Made the Bond Market What It Is Today,” by Mary Childs, barrons.com, Feb. 8, 2019.
Psychology and Motivations
“Gross Friendly to Fannie and Freddie,” by Bloomberg News, investmentnews.com, Oct. 31, 2011.
“Pimco Shook Hands With the Fed—and Made a Killing,” by Reuters, cnbc.com, Sept. 27, 2013.
“Special Report—The Twilight of the Bond King,” by Jennifer Ablan and Matthew Goldstein, reuters.com, Feb. 9, 2012.
“Announcing the Morningstar Fund Managers of the Decade,” by Karen Dolan, Morningstar.com, Jan. 12, 2010.
“Fall of the Bond King: How Gross Lost Empire as Pimco Cracked,” by Mary Childs, Bloomberg.com, Dec. 2, 2014.
“Inside the Showdown Atop Pimco, the World’s Biggest Bond Firm,” by Gregory Zuckerman and Kirsten Grind, wsj.com, Feb. 24, 2014.
“Pimco Dissidents Challenge Bill Gross in ‘Happy Kingdom,’” by Mary Childs, Bloomberg.com, July 8, 2014.
“Gross: Economy Can’t Survive Much Higher Rates,” keynote presentation at the Morningstar Investment Conference, Morningstar.com, June 25, 2014.
Gross’ Departure From Pimco
“Exclusive: Pimco’s Gross Declares El-Erian Is ‘Trying to Undermine Me,’” by Jennifer Ablan, reuters.com, March 6, 2014.
“5 Years Later: Pimco Total Return,” by John Rekenthaler, Morningstar.com, June 26, 2018.
“Pimco in the Post-Gross Era,” by Eric Jacobson, Morningstar.com, Dec. 26, 2017.
“Gross Loses Pimco Power Struggle With ‘Stunning’ Exit,” by Mary Childs and Alexis Leondis, Bloomberg.com, Sept. 26, 2014.
Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.
Christine Benz: And I'm Christine Benz, director of personal finance and retirement planning for Morningstar.
Ptak: Our guest this week is Mary Childs. Mary is a cohost and correspondent for National Public Radio's Planet Money. Previously, she was a reporter at Barron's magazine and before that, a reporter at the Financial Times and Bloomberg News. She received her bachelor's degree in business journalism from Washington & Lee University. Mary is the author of a new biography about the iconic Pimco bond fund manager, Bill Gross. It's called the The Bond King: How One Man Made a Market, Built an Empire, and Lost It All. And we spent this episode delving into the book with Mary's help.
Mary, welcome to The Long View.
Mary Childs: Thank you for having me.
Ptak: Well, thank you so much for being here. What was your goal as you embarked on writing the book? And was that still the goal by the end?
Childs: Yes, the goal did stay the same. I came from covering credit markets at Bloomberg News. I spent four years doing that at Bloomberg and really loved the credit markets and writing about credit markets. And I had this sense that they were poorly understood in the mainstream, and that that was this egregious omission and that I was sent to rectify that in some way. And by luck, it just ended up that I was covering Pimco at the moment that all of this stuff went down that you can read about in the book.
So, the goal of bringing some bond market education wrapped in the guise of this entertaining and wild narrative, that was always the mission, and I think that stayed the same. But the narrative shape of the book did change substantially because things kept happening. I thought that the book would end in 2014, the narrative would end in 2014, and it would be, “Bill Gross went Janus; it was this big surprise, the end.” But it took me so long to write this book and to do all the research necessary that people had time to just keep doing stuff. So, Bill Gross, added on a couple events that became journalistically impossible to ignore. I ended up having to change the ending about 400 times and I was like, OK, it's going to end in 2017; OK, 2019; OK, 2020. I couldn't stop updating it. I'm glad that it's finally in print so I can now stop. But, the true mission of it was always that bond market literacy and wanting to communicate that and say, this world isn't as scary as you think it is. It's molded by jargon, but it's still accessible. We can get over the bridge.
Benz: And the book does that really well, I think. It explains bond investing, bond trading, but it also manages to be wildly entertaining. So, we wanted to talk about Bill Gross, obviously, the pivotal figure in the book. He cooperated in some of your reporting, but he stopped cooperating at a certain point. Can you discuss that?
Childs: He was super open and helpful. And he's a mediagenic guy, famously mediagenic, as you can read in the book and also just observe in decades of media appearances. And he was super nice about sitting down with me and opening up about his life and his investing instincts and what made him the way that he is. My fact-checker sent him a list of questions, and you can really see the bones of the book in those questions, of course. So, it's, here are the basic facts that are in the book, and you can see the facts that didn't make it in and the facts that did. And in the end is great, because I think it's really wonderful that he wrote his own book and he published it two weeks before mine, which is sort of funny, but also probably helped me, frankly. And it's not every day that you have source material also published, like this trove of his own perspective, and you can kind of line it up against my book and compare and contrast and say, OK, this part clearly is what Bill thought and just see where things deviate. I think it's really an interesting study journalistically. So, he was super helpful and cooperative, but in the end did want to have control of his own narrative in this way. And I think that's wonderful. And he wrote his own lovely autobiography, and I think it's a great outcome.
Ptak: Had he cooperated in recent years, what parts of the story could he have helped fill out more?
Childs: I think the events of the later years that did end up being the things that people remember. To some extent, this is recency bias, of course. But he's had these big disputes with—he had a very ugly divorce and he's gotten into this protracted battle with his next-door neighbor. And I think in both cases, they're not the things that he wants to be remembered by and talked about. He wants to a philanthropist; he wants to be this great investor, this legendary figure in investing. And this has changed the tone a bit. And a lot of it has surprised me, frankly. So, of course, I would ask him about those things, and he is so reflective that I think were we really chatting again, I think he would absolutely tell you what he was thinking. He is very open. But at the same time, he doesn't want talk about that stuff, because it's not what he wants to be known for. It's not what he wants to keep going on about. He wants to change; he doesn't like that aspect of his reputation now. And so, I think, even if he would get on the phone right now, which frankly, I haven't called him. I haven't really tried. Sometimes there's a point at which you want to give people space. But I do think that he wouldn't really want to get that into it because he wants those things to go away, which I get.
Benz: You talk about Gross' early life and his career. You note that he wasn't a wunderkind as a student, and he kind of stumbled his way to what eventually became Pimco. In fact, you could argue that he took an interest in handicapping risks and trading bonds literally by accident. Can you talk about that accident he had and how it arguably altered the course of his career and his life?
Childs: That's well put. So, he got in a car accident. And I shouldn't laugh because it was very serious, and it was a very bad car accident, his senior year of college, and that put him in the hospital. And he ended up just bedridden and, in his boredom, picked up this book by Ed Thorp, Beat the Dealer, which described methods for counting cards and beating the dealer. And he found it really interesting. And he was a little bit like, “Is this even for real?” So he starts practicing counting cards, hand after hand, playing basically against himself in his hospital bed. And he's like, “All right, this kind of works.” He goes to Vegas, he takes—famously, this is part of his legend—he takes $200 to go to Vegas and counts cards for ages, for three months, and for long, long days, seven days a week, which, I'm exhausted thinking about it. And, that's his real first foray into learning to feel risk, into the Kelly Criterion and into knowing how much to bet at a given time and to knowing what the odds are and when to lean into the risk and when to lean out. And I think that that was very formative, both in his investing instincts and his appetite for risk, and in knowing that he could have a system that would beat the market, that would enable him to beat a system or a machine. And then, it also became so foundational to his legend. So, this was a huge part of how he advertised himself and how he positioned himself, and it was super effective and memorable. People really love this story. So, it was an accident that got him there, but it ended up being really formative.
Ptak: Pimco had humble beginnings. It was Gross and about $5 million, if I'm not mistaken. Can you talk about how the firm got off the ground and took shape in those years?
Childs: Absolutely. So, Pimco at first was just truly a corporate shell. The original shell that they created was for asset management, and it was Pacific Equity, which is so funny in retrospect. But basically, this life insurance company had hired a consulting firm to tell them where they should be pushing next. And they were, like, “You should do asset management.” So, they had built this shell as sort of a gesture at that. And they're like, “We're going to figure this out later.” And then Bill Gross, he meets with this guy in the area who is evangelizing about trading bonds, which is this radical idea at the time. And he convinces his boss to allow him and this one other guy to manage a small portfolio within that corporate shell. And this is the kind of apocryphal beginnings of Pimco. And it's funny because it is such a random little corporate shell. Saying that Bill Gross and the two other cofounders cofounded Pimco is sort of itself a revision of history where the word “founding” is not at all the meaning that we think it is in popular culture, I feel like. We're like, “That means they were the people that started it, right?” There were a lot of people involved and Bill Gross was one of them and among them. But there are definitely people who take issue with that.
So, there was this bureaucratic and anticlimactic beginning where they were allowed to take a stab at trading bonds, and Pacific Mutual was cool with it—I think they were tenuously cool with it. But it was remarkable that an insurance company would be into this kind of risk-taking. Bonds served a purpose for them, and it was a very conservative and well-articulated purpose. So, this was a really radical thing that they got to do.
Benz: Let's talk about that popularization of Total Return as a bond strategy. It seems odd that the concept of trading bonds for Total Return, income plus capital appreciation, didn't really take off until the 1970s. You discuss Bill Gross literally clipping coupons early in his career. Why did it take that long for bond trading to catch on?
Childs: It's such a good question because it seems so wild to us now that this would not be a market, would not be an asset class, which I would say just illustrates the influence of Bill Gross and his cohort. But I think it was partially that insurance companies and other financial institutions had a very specific need for bonds. Bonds filled this specific purpose of being an exact and predictable flow of money so you could just match it against incoming liabilities, and you would feel great about this schedule that you had. I don't know, that's comforting, right? And you can sleep at night. And the idea of trading those away and losing that beautiful matching little ladder that you built, that's so sad. Why would you do that? Why would you add risk into this thing that's working perfectly? So, obviously, to some extent, we always resist change as a people, as a society, whatever. But in another sense, we maybe resisted change here because it was working. It was low risk. It was steady-Eddie. We all felt good about that. And it was fine. So, I think it seems obvious to us now. But at the time, I think they had a system that was working and good, and the urgent need for trading bonds came in when inflation really started messing things up.
Ptak: Who was Gross trading against in the earlier days? There had to be others out there who were trading bonds like he was?
Childs: Yeah.
Ptak: So, who were they and why was he able to get the better of them?
Childs: I think it was slow-going at first. I think there were not quite as many. Howard Rakov, the guy who was going around evangelizing about trading bonds, was certainly one of the earliest and he was an endearing figure in Bill's life and is. And there were other people—there's Occidental Life Insurance in L.A. and Lehman was doing this. There were people here and there at various other places that also got the bug. Among them soon enough, is Larry Fink, of course. And people at regional banks and other life insurance companies would get this same idea, maybe because Howard Rakov called them and said, “You should be doing this with me.” But, it was a small band at first.
And why was he able to get the better of them? It's a good question. I don't know. I think that he wasn't able at first. The track record in the early ‘70s was not super stellar. And there's this corporate urban legend where the management would come around and be like, “You got to figure this out. This operation has been losing money. You need to get your profits together, so we can justify having this; we're going to shut it down.” And that went on for five years of the operation. So, I don't think it naturally made immediate sense and that Bill was outsmarting them from day one. But he did prove by especially the early ‘80s that he was pretty sharp at this and better than most.
Benz: You chronicle Pimco's culture through the years in the book, and very few women figure into the story of Gross' and Pimco's rise. The firm was dominated by male portfolio managers and senior leaders through much of the period that you chronicle. But there was one woman who played a very big role in Pimco's success, and you do talk about her in the book, especially in the earlier years. Can you talk about Pat Fisher?
Childs: Can I ever? So, this is like a tiny soapbox that I built for just myself. I don't know what I think is going to happen. But I think that Pat Fisher was so instrumental to the founding and creation and shaping of Pimco and to its success. There's a lot in fixed income, and especially in mortgage-backed security investing that is really detail-oriented and very gnarly. And Pimco grew out of this insurance company. So, to a large extent, they already had the systems in place to do principal versus interest and accrual accounting and various other complicated things that apparently banks, and other asset managers back then, were just not up to speed on. There's this one trade that I talk about in the book, where it's a pretty complicated mortgage trade, and it ends up with underlying mortgages being delivered. And Pimco has to call the banks. Pat Fisher calls the banks to be, like, “Do you mind sending the interest? Do you mind sending that payment down? Thank you.” Just because the systems didn't exist yet. And there are so many examples where Pat Fisher later probably did this, where she manually seems to have connected pipes between the banks where they didn't do XYZ thing, and Pat Fisher was like, “Why don't you do this?” She had a ranking system that she created within… She ran operations at Pimco, I should say that, and trade execution and settlement. And there was a sense in the early days that everybody wore different hats, and those hats kind of rotated. So, the official titles changed at times. At one point, she was running the cash desk.
But she would rank the banks against each other in trade execution, efficiency, all of these different metrics. And the banks got wind of it. I think she may have informed them of it. And they're like, “Wait, what are we ranked on?” These are competitive people. So, of course, immediately, Pimco's execution improves. Because they're all like, “No, I'm going to be number one.” “No, no, no, no, I'm better than Merrill.” So, Pat had figured out to game everybody's psychology and get the best execution for Pimco. And there are countless ways, in my view, that this shows up. But getting that good execution, having efficient operations, and a frictionless trade experience with your counterparties, with your clients—all of this is critical in making your fund be a serious place, where your clients and your investors and your counterparties all take you seriously and want to do business with you. If people think you're a joke because you can't get your trade straight, you're not going to get business. So, yes, I think that this is under-counted across asset management, this kind of back-office operation. But, in my mind, in my heart, Pat Fisher is a cofounder, yes.
Ptak: I wanted to change gears and talk about Gross and his psychology, some of the motivations that drove him. You tell the story of how he would ask interview candidates to choose between money, power, and fame. In his mind, and I think he's on record beyond the book saying this, the correct answer was fame. Do you think he sought fame because it was harder to obtain than money but maybe less taxing than amassing power where he’d have to build durable personal relationships?
Childs: I really love this question because I think the idea of power being tied to relationship-building is so interesting. And fame, you're at a remove. Power, you have to influence people and directly interact with them and change their minds about things and pressure them or whatever. Fame, they just know about you. There's no actual relationship. There's a canyon between you and the audience, which I think makes a lot of sense for Bill Gross and feels emotionally resonant.
I love that you think making money is easier than being famous. I think TikTok might disagree with you. But that does make sense. He has talked about this to me and to many other people. It sounds like the driving force for him was fame because he associated it, he wanted it to fill in this hole, this sense that he needed to be loved, where he has sort of equated fame with love. And he attributes this need for love and for that proxy and fame, he attributes that to a very cold Canadian upbringing that his parents didn't really hug him a lot and he didn't have a deep relationship with his father and that there was just a lot of coldness, not a lot of sugar in his childhood Kool-Aid, is I think how he put it. So, he says that he wouldn't argue with the end result; he wouldn't change how things happened. And certainly, there are a lot of metrics that would agree with him. But, it sounds like the engine was created in those early days where he needed some kind of affirmation and love and just wasn't getting it.
Benz: Delving into his background and his psyche, in your reporting, did you find that there was a time in Bill Gross personal or professional life when he was truly happy? Or has there always been sort of a restlessness as far as you could tell?
Childs: I think both. When I spoke with his childhood and lifelong best friend, he definitely remembers moments of sitting on two chairs, looking out at the ocean, and feeling content. I think he did have moments of happiness and of being content. But those were snatched from the jaws of defeat. What is that saying? I'm not doing it right. Something like that.
Benz: I think that's right.
Childs: Anyway. So, he definitely had moments where he was content and happy, but they were stolen from the greater arc, which was indeed this restlessness, this need to keep pressing and to outcompete everybody else to show everybody else and to just win, win, win forever. I think insofar as you can be that relentless and that dogged and steal those moments of happiness? Absolutely, he did that. But I do think that you're right—the kind of overarching theme is one of relentlessness and restlessness.
Ptak: Gross clearly thought of the Street is competition. You talk in the book about how he despised paying anything more than the bare minimum to execute and always seemed to think he was getting ripped off. But were there others who he fixated on as potential threats and rivals, maybe beyond people he worked alongside?
Childs: I think he viewed anyone reducing the final pile of money as a problem, as a threat and as something that needed to be addressed. And that can be pencil-pushing corporate bureaucrats within his own firm, for example, or he might be looking down the street at Jeffrey Gundlach in L.A. I know that Jeffrey Gundlach's returns were annoying Bill Gross at one point where he was watching for years as Jeffrey's notoriety and fame and investing records started to catch attention. And that, I think, watching someone with really good returns come up like that, that's something that really would get stuck in Bill Gross’ craw. So, yes, absolutely, it's kind of equal-opportunity-threat perception. So, anyone—that could be a broker, or it can be the Street, or it can be any asset-management firm that is doing well or encroaching on their space. One of the things that kept him so intensely focused in the market was this feeling that anyone could catch up to him at any time, and he couldn't let that happen. So, yes, all—the narrow answer being Jeffrey Gundlach, but the bigger answer being everyone.
Benz: Besides popularizing total return bond investing, can you talk about some of the other big innovations Gross made or at least popularized as a bond trader? Seemed like a recurrent theme in the book is Gross and Pimco being ahead of the curve on a lot of aspects of running bond money.
Childs: Love that you said curve, because yes. But I do think there are a bunch of different things that were very keen and innovative. They were really early to a lot of different financial products. I feel like whenever a new technology or social media platform comes up, I'm like, “Oh, God, do I have to?” And that's me aging. That's me, rejecting modernity and progress—and not that every new app is progress. But I'm just like, no, I don't feel like changing. That's not the right attitude if you want to generate outperformance and stay alive.
So, I think, Bill Gross, Pimco, Chris Dialynas, a lot of these, they were very good at jumping into those new products as they came up. And a really good example of this is financial futures. He was able to convince a lot of these commingled fund clients and a lot of these very conservative pension clients to allow futures in their portfolios before anyone else was doing that and before people were comfortable, frankly. There was a lot of, I think, cajoling and coaxing to get these clients on board and to their benefit financially. But there are a couple of true innovations that I think Bill Gross… There are market inefficiencies that he and Pimco spotted and that they were able to exploit for so long.
So, one of these that I've talked about is the arbitrage between cash and cash equivalents, where instead of just holding cash against a position, they will go into cash equivalents and just buy short-dated, corporate floating, just totally fine Campbell Soup three-month, nothing problematic here, or they will go a little further down the risk spectrum and just find something. And those extra basis points over time really can add up. Back in the day, I think there was something in the Treasury futures contract that had an implied repo of less than Libor.
But there was a structural factor in Treasury futures for a long, long time that allowed them to basically exploit and capture this little tiny carry basically, and over a very long time that added up to a lot of outperformance. And there was a similar one in mortgage-backed security bonds, which they traded on a forward basis and had another implied repo rate, which was less than Libor. So, if you just bought them and then rolled them and then kept the cash in those safe cash equivalents again, that's just basically free money. Of course, it can go sideways, so, it's not free. But that idea was functionally spotting these, not so much flaws, in contracts, but just little tiny opportunities, things you can just snap up that little difference and do that every day until someone closes that little loophole or whatever—the market inefficiency gets traded away because other people get wise to it. Those were true insights and true innovations, I think. And I think that that's a lot of what you see—their enthusiasm for futures and other derivatives, their enthusiasm for the mortgage market, their willingness to take more credit risk. These were things that did contribute to outperformance. So, I do think that spirit of being willing to take more risk and also embrace new products really helped to build that outperformance.
Ptak: I wanted to ask you about another thing that you could argue is an innovation that he ushered in, which was expressing himself in pretty unguarded ways in his monthly commentary. And relatedly, he could be pretty uninhibited in those commentaries. So, my question is, do you think he, in a way, got off on being able to say whatever he wanted, that it reinforced how much sway he had, and that no one could edit Bill Gross?
Childs: Absolutely. You're right, that this was both an innovation and also just delighted him. And I don't think anyone has really ever edited Bill. I think you might be able to move a comma in an investment. I don't even know if you can do that. But it very much depends on who we are talking about. But I think that unguarded tone—that really folksy, accessible, those stories were really weird sometimes, and you're like, “Wait, did you mean to the publish this?” But we all read them. We all read them, and we all talked about them. And that absolutely fed this image of Bill Gross and this myth and legend of Bill Gross, which got him on TV more, which helped to coax more client assets in. I think, in some ways, financial asset management, we didn't have that many celebrities. We have Peter Lynch, Warren Buffett, sure. But I feel like the thing here is Bill was a really early influencer before we had the words to describe it like that. And I think that he realized the power of this super early on. I think his first investment outlook, if you read it, it's a story, but it's not embarrassing or weird. It's just a regular story. I think the one I'm thinking of is a pretty early one, where he is talking about going to the dentist, and it's just regular. It's not like as extreme as some of the later ones where his cat is watching him get out of the shower, and he's like, why are you looking at me so closely? Or when he thought that automatic flushing toilets had a camera and they were watching him somewhere. These are oddball and captivating. People love it. So, he figured that out pretty fast and just went with it to his great benefit.
Benz: Thinking about those investment outlooks, I think as an outsider looking in, one could have said, “Is anybody giving him feedback?” Could they have made this better, more digestible? And a question is, did the wildly unscripted nature of his investment outlooks, did that hint at what was going on in Pimco's culture that truly there weren't people pushing back on him?
Childs: Yes, I think that's right. And to some extent, your cofounders eventually fall away, you're left by yourself with all these random kids that you hired over the years. I think there's a world in which had there been more adults in the room that he respected and trusted, maybe he would have taken their input. Yes, I think the tone of those investment outlooks and the fact that no one could really touch them, definitely underscores the degree to which he was kind of acting unilaterally a lot.
But that being said, it worked for so long, who's to say when it stops working? How do you know when it stops working? And you can see him struggle with this in 2014, where he's doing what he thinks he's always done, and interacting in the same basic way that he thinks that he's interacted the whole time and it's not working quite as well. It's not working right. The outcomes are not showing up. And I think in part that's because as we age, things around us change and we don't always know the right exact moment, or to your point, maybe he hadn't been able to get that feedback that he needed. There weren't those people around him that he trusted and respected and could listen to at that point. And I do think that's right.
There was a story that Pat Fisher told where if he would get mad at her for some corporate, something or other—she would hire people and he was mad about it—and she would have to be like, “Bill, you approved that, and we talked about it.” And he'd be like, “Oh, yeah, sorry, sorry.” But she also had this thing where when he was all worked up at her and angry, she would just touch him on the arm, and he would come back to earth. And who can do that? Can you imagine doing that to Bill Gross? I'm not going to do that. So, I feel like that was the picture in the ‘70s, in the ‘80s, and where they all knew each other so well and had been in the same room and small, small office for so long, and it was like a very familial feeling. And all that had kind of fallen away by 2014, and I think he was a bit unmoored.
Ptak: I think we want to come back to some of those dynamics in the culture of the firm and some of the specifics around Gross' departure. Before we do that, I wanted to spend a little bit of time on some episodes that you chronicled in the book that really relate to Gross and Pimco's power. One pivotal episode that you cover relates to Pimco's buying up Fannie and Freddie debt and then Gross calling publicly for a government bailout of those entities, which eventually came. At the time, critics said it was an illustration of Pimco unfairly benefiting from its position and its megaphone. Is that fair, in your opinion?
Childs: That's a great question. It's one of those things where it's so open to interpretation to me. Of course, they would be lobbying for this. It was what they believed. It was what they believed needed to happen for the safety and stability of the financial system. And yes, it was to their great benefit. It was absolutely how they were positioned. But they were positioned that way, because they believed it and thought that it was the thing that was necessary for the safety… So, there's this loop that I think is hard to get out of where, especially in money management, you put your money where your mouth is because you believe it, but then you talk your book, because you believe it, and so on.
So, I think it's fair that maybe we should re-examine the way we've built these structures. I'm not saying I necessarily have better ideas, but it does seem a little untoward that an enormous money management firm can have so much sway over the outcome of government policy and in norm... Everybody who has a mortgage was basically affected by this. There's this lawsuit where the City of Richmond, California, was trying to help underwater homeowners, and these homeowners had bought their house, their house was worth way less than they had paid for it. And so, they're paying into the void. But the void is to the mortgage-backed securities investors. And Richmond, California, wanted to basically revalue those homes and say, “Why don't we just reset at the market rate now using eminent domain? The government can just hit the reset button.” And obviously, all of the mortgage-backed security community was like, “No!” Everyone who invested in mortgages was like this would undermine the entire mortgage market. How would people get a mortgage ever again if suddenly the rules changed like this?
And, of course, they persevered. Richmond, California's plan did not go through—it was a radical plan, for sure. But at the same time, this kind of creativity, we just don't really allow it. We seem to really like our structure where these mortgage investors, they call the shots. If they say, “Hey, you're going to have to make explicit that backing of Fannie and Freddie,” that ends up happening. And then, if they say, “I'm so sorry, you can't eminent domain these properties, because then we'll never buy mortgage bonds again, because we'll be scared.” The Richmond, California, plan goes away. And you can see why these things happen. They make sense. Maybe we like our mortgage bond market. Maybe a 30-year fixed-rate mortgage that I can refinance at any time for no cost is a really great product. And I shouldn't argue with the end user that happens to benefit massively from that arrangement. But it is a little troubling, isn't it, that there's this very symbiotic relationship?
Benz: We wanted to talk about the relationship between Pimco and the power center in Washington. At various points in the Bill Gross era, Pimco was accused of being too cozy with Washington. You talked about Neel Kashkari joining Pimco after running TARP, and Greenspan working there as a consultant after leaving the Federal Reserve Chair. So, what does the Pimco story say about the revolving door between business and the regulators of that business, in this case, the financial-services sector?
Childs: The revolving-door aspect of you can serve in DC and help to regulate these markets and be the watchdog; you blow the whistle on these bad actors that are abusing the rules and regulations. And then, 10 minutes later, when you're feeling a little, like your time in Washington is up, you can get a job at those places. It feels very structurally flawed. It certainly looks as though you might be going soft on people if you then end up working for them moments later for enormously, exponentially larger salaries than you made in DC.
Again, it's a troubling structure that we just have gotten a bit comfortable with. There was a big uproar post-financial crisis and around the time of Occupy where I feel like we talked about the revolving door all the time. And it crops up sometimes I feel like where people are mad at Tim Geithner every other six months or something. But it is just random, like fatigue. We have a lot of things to be mad about. But it's one of those things where Pimco really made this a selling point, this coziness with Washington, like, “We're the first port of call.” Well, BlackRock kind of is. “But we have these relationships with the government and the quasi-government, and this is a great thing for us. Invest with Pimco.”
And then, I think, when the tone started to shift, it became a lot more uncomfortable to have that relationship and to taut those relationships, where you're like, “Yeah, we did hire the former Fed chair. No, yeah, yeah, we did do that.” And I think it's hard to say what the net benefit is. And from a branding perspective, I certainly am not a marketing person, and I couldn't tell you. But it seemed like they wanted to say we have the greatest minds, and everybody wants to come work with us. But then, the tone is just like—so, you're saying you’re just paying Alan Greenspan, who used to create basically the dynamics of the markets that you invest in? And you're saying that out loud? Are you sure? I don't know, it's just the tone shift.
Ptak: I wanted to shift gears and talk about Gross' departure. It's come up during our conversation, but maybe we can burrow in on that event and talk about Mohamed El-Erian. Though he didn't cooperate in your reporting for the book, El-Erian figures prominently in the story. He quit over Gross’ antics and Gross was consumed by bitterness afterward. Why did that partnership fall apart, in your opinion, and how culpable was Gross for that?
Childs: OK, two quick just slight nuance, because I have to. Mohamed El-Erian ended up obtaining a copy of my manuscript before publication somehow and did participate by sending notes. He had notes that he sent through a lawyer, which I greatly appreciated, and of course, incorporated the ones that I could, and I think it made the manuscript richer for it, because, of course, I wanted his views and experience represented. And then, secondarily, I think that he would tell you that he did not quit because of friction with Gross. It was to spend more time with his family. But your question stands, and I will answer it now.
I think the dynamic between Bill Gross and Mohamed El-Erian, in many senses, was doomed just structurally. And I mean that in two ways, the first way being personality structure. As human beings, they're just really different. They have different sensibilities about managerial vibes; they have different investing strategies and debate strategies and interpersonal dynamics. Everything I think about them is different in how you interact with them and how they see the world. And then, structurally, Mohamed El-Erian came in as co-CEO and co-CIO, and Pimco had never had someone straddle those different sides of the business before. It had always kept very clean the division between business, investing, and client, and that was on purpose. They made that part of their branding thing to consultants, to clients. They were like, it's a three-legged stool. And here's Mohamed El-Erian being two legs, and that was just unusual and weird. I think, when Mohamed El-Erian came on board that second time in 2007 as Co-CEO and Co-CIO, there was this bump in the relationship at that moment where Bill Gross and Bill Thompson felt kind of uncomfortable with that dual role. And they were like, “I don't know, I don't know.” But they were excited about him and were like “He needs to come in and we need somebody to be Bill Gross' heir apparent; we got to do this anyway. Let's do it.”
But it was the seed of mistrust, I think, this little, tiny grain of sand that just got stuck in there. And I think I've come to the view that the relationship was a little bit doomed from that moment. And then, of course, those interpersonal dynamics being so different—Bill and Mohamed are sending each other these passive-aggressive emails by 2013, and you know how it feels to receive one of these and your blood just turns white. We have all been there. But they had really different styles. And I think, yes, a lot of maintaining that relationship should have fallen to Gross and his inability to reconcile with Mohamed was for sure to a very large extent his own fault. Every bilateral relationship is our own responsibility to maintain and the other parties. But his job was never to manage people, and he was always supposed to be structurally insulated from having to deal with a lot of these things.
And I think, if you look at Bill Thompson's time as CEO, there's the story that actually didn't make it in the book—which I'm so sad—where there was this very tense moment in a meeting where Bill Thompson is giving a presentation. And Bill Gross is getting annoyed about something, and he makes a snarky crack at Bill Thompson. He says, “You're a regular Gray Davis,” the former governor of California. There's this silence in the room, where everyone's like, “Oh, God, what's going to happen?” And Bill Thompson just laughs. And there's this way in which Bill Thompson could defuse Bill Gross that allowed him to keep going. He could just keep rolling forward, because it would just roll off his back. He's just going to continue on. It was funny. We're all fine here. He was really positive. And for whatever reason, Mohamed El-Erian was just not built in the same way. I think there was more of a cumulative effect of all of the infractions and annoyances and all of the slights and snarks. And where Bill Thompson could just roll forward, I think Mohamed was like, “I'm so done with this.” So, yes, of course, definitely some of the blame falls to Bill for not maintaining or being able to maintain that relationship, but I do think that he was surprised by having to.
Benz: You chronicle that Pimco Total Return had a couple of tough years toward the end of Gross' tenure there, 2011, 2013. With the benefit of hindsight, do you think that Total Return got too big for Gross to manage, and was that one of the reasons that performance moderated? It seems like the introduction of the ETF potentially provides a lens to help answer that question.
Childs: That's interesting. The ETF is a little clouded to me with the odd lot thing where they leaned a little bit on this strategy where they would buy odd lots that then got marked up in the pricing system automatically to the price of round lots, which were always going to be higher. And that helps to kind of artificially inflate performance in that ETF. So, and the benefit of a strong start in your track record is actually quite hard to shake. My mind is clouded by that on trying to compare those two. But I do think this idea that Pimco Total Return was too big, it was still a great time in bonds. So, if you're going to buy all of the bonds that there are, for a very long time, that would just work. That's mostly fine. And this is what people would say, “Oh, it's just beta.” And of course, I would disagree that there were some alpha-generating strategies alongside that. But I think the idea were they too big to outperform, or too big to maneuver is sideways in bonds. I think he was actually more able to anchor new issues better because of that size and get better execution, treat the Street the way he did, and wring extra basis points out of them because of the size.
I can't explain the 2011 Treasury call. It's one of those, like, he must have really thought that he had an insight, that he had the odds in his favor. Because this is kind of an unusual call for him to say, “The Fed is reducing its supportive measures, and there's going to be a Fed-shaped hole in the market. And I think I'm going to sell all my Treasuries.” That's an enormous and very contrarian call. And it's pretty shocking in the context of his personality and his sense of risk-taking and all of the things that we know about Bill Gross. So, I'm a little confused about the motivation on that one and what was going on in his head. And then, I think he apologized. He got back on the horse. And the rest of 2013 didn't seem as flagrant of a deviation from his risk-management style. His time at Janus also was kind of a deviation for his risk management. But to me, it's not so much a question of size as I don't know what happened in 2011. And then, I think in 2013, from the moment that he left Pimco and started managing this new fund at Janus, and the moment of his retirement, interest rates went up. So, it's my untested theory that many of his strategies worked best in a falling-rate environment and that in that time period, he either didn't get the true odds of his longer-term strategies that gain a little basis point here and a basis point there. He didn't have the time for that to really show its benefit, but then also I think he was gunning too hard at Janus. So, very long-winded answer to say I don't think it was size, but I do think that of course that's part of it, and maybe the size informed this--a little bit of hubris maybe where he was like, I'm going to take a big swing here.
Ptak: Wanted to talk about Pimco's culture. You describe it in pretty unsparing terms in the book. What was it like, in your opinion, if you just had to explain to the layperson who maybe hasn't read the book, what was Pimco’s culture like during this period of time where Gross reigned over the firm?
Childs: People have said they were aggressive bullies. I think different groups were different also. If you were in a nice pocket of the client-facing there, you could have had a nice experience. But the culture on the trade floor was so intense and so competitive, and also silent, just dead silent. No eye contact, everyone's silently clacking their little keys and emailing each other things, and everybody's aggressively CC’ing each other. And it's a blame-seeking framework in there, where you're trying to figure out whose fault is this trade. There was one partner that people called The Riddler because you could never pin him down on an answer and then he was never wrong, which I love. But I think that this culture sounded like it was super toxic. I'm very glad that I did not work there personally. They did not offer to hire me, I should be clear. But I'm glad that I didn't work there.
But it was intense, aggressive. You would go to Investment Committee, people would cry sometimes because people were picking at each other, or somebody would fixate on one point or your presentation had the wrong numbers on the page and you would get kicked out. And no one would stand up for you. You're going to get torn to pieces and everyone's just, like, “Oh, I don't know him.” And that's the way it was. It sounds like the predominant culture was one of no friends. Like, no friends on the trade floor. Of course, a lot of them loved this culture. So, to them, it is friendly, especially some of the old guard where they were so aggressive to each other--literally cut one guy's fancy new tie, because they were like, “It's ugly, we don't like it. We're doing you a favor.” And doused him with bug spray. All these things that I would categorize as just classic bullying. Just mean behavior. They're like, “No, no, it's good fun.” But is that what fun looks like? Is that fun? So, a small asterisk, that some people like this. This one person emailed me and wrote, “I would take issue with your characterization that we were mean and bullies.” He goes on a bit, and he's like, “We really chewed people up and spat them out, and it was great.” And I'm like, I think you're saying the same thing that I said. We just think about it differently. And that's fine. That's fine. We can all have opinions. But it sounds like it was rough.
Benz: Pimco had a very difficult time in 2014-15, big outflows. But since then, it has been able to gather assets, net net, into its funds. What lent the firm that resilience, do you think, after Gross left?
Childs: I think they focused really hard on just keeping it together. And there was a real sense of, we're not going to let everyone take advantage of us, and that super competitive, intense culture that Bill Gross built, that he shaped, is still very much alive and well. And I think that was very, very acutely relevant in the 2014 period, where in the wake of his departure, all these hedge funds thought that they could take advantage and trade against Pimco--hedge funds and others. And I think everyone expected this wave of redemption and Pimco would have to sell, and all the money would flood out. And clients were like, “Well, I knew Bill Gross was going to have to leave eventually. I kind of know these guys. I run this fund. It seems fine. I'm just going to wait it out and just see what happens.” A lot of clients did pull their money, and a lot of clients stayed. So, I think once the dust settled, and Bill was actually gone from the firm, which to some people removed this overhang--these management transitions are so hard to achieve gracefully. We're seeing that across financial services, and I think everywhere. It's kind of like, oh, good, we resolved this issue that we were going to have to resolve eventually. So, if you already trust the management team, and you have this concern that's just been allayed--it sounds a little insensitive, but I think a lot of clients were like, “OK fine. I'm in, I'm saying.” And they do have a track record and a strong brand. So, I think that contributes a lot to that resilience. Bill Gross, I think, to his disappointment, built this very, very strong firm that did end up being really resilient.
Ptak: And you could argue they couldn't have done that without talent and a deep bench, which seems a bit contradictory because while there were a few figures that Gross seemed to take under his wing, he doesn't come across as someone who had nurture talent. If anything, it's maybe the opposite. Given that, how did the firm, in your opinion, manage to identify and cultivate the talent it did through the years, that talent helping to sustain the firm after Gross departed?
Childs: They would probably point to the compensation and the partnership structure. And they, I'm pretty sure, would point to that, where you can achieve these great riches if you stick around and are invested in the firm, and they have shadow equity that can be very lucrative and beneficial. So, to some extent, it's that. They pride themselves on being a meritocracy and being super smart and thought leaders and all these things. And I think to some extent, that's effective.
So, I think the combination of it is a strong brand, one of those fixed-income managers that we all know and talk about and listen to what they say. So, if I'm in fixed income, and I get a job offer from Pimco, I'm not going to not consider it. And I know about the compensation structure there. That would be maybe potentially compelling. And it is that trade-off, especially, when Bill Gross was there, you know that you're making this agreement to experience what one source called “wire brushing” by Bill Gross and the culture--the overall predominant culture there. But you get compensated for it. You get literally compensated for it. And that's the deal. That's what you're agreeing to, and you know that. So, it attracted this certain type of person who was like, OK, I'm willing to take that deal. And I don't know that that so much has changed necessarily after Bill. I think that there are still a lot of talented people that are motivated in this way and that see this trade-off and agree to it.
Benz: We want to talk about some of the conclusions that you lay out toward the end of the book. You talk about staying too long and a crucible of toxicity, as you call it, and insecurity and the long-lasting corrosive effects on the mind. Can you summarize some of the other key takeaways for you as you think about your long work on Pimco and Bill Gross for this book?
Childs: It's interesting that line that you highlight. I've talked to some people still at Pimco, and I don't know if they're just saying this, because they're talking to me. I don't know if they would say this to other people. But they're like, “I wonder how my mind has changed since I've been here. Do I actually have perspective? Have I been corroded?” And I'm like, “I love that you're thinking about that.” To catalyze that kind of reflection is… I didn't dream of that.
But I think some of the other things that I learned—I feel like I witnessed a lot of score-settling and incredibly petty behavior from people that we expect to be grownups. And of course, this underscores to me the fact that we never grow up. That's a myth. And fine, OK. I spent a lot of years wondering if this extreme pettiness was a precondition to accruing massive wealth. If I have to be that competitive and that single-minded and that petty in order to become a billionaire and totally able to lose sight of bigger pictures and just hyper focus on that. Is that a preexisting condition? Or do we only know about the pettiness because the people who display it, that I'm thinking of at least, are rich enough to really flex, to put it on display and make headlines.
And then, the thing that I think I learned from Bill Gross and from some of the other game-theory people, stats people in this book, there's this refreshing sense that if Bill Gross trusts you and respects you, he can come to the table the next day in this relationship with you totally fresh. He's not going to remember that you had a bad trade. If he doesn't trust you, he will never forget it. So, that's a different bucket, though. But this ability to stick to your structure, to stick with your idea of the world and just trust that you know what you're doing, I find that really admirable. It took me so long to write this book, and I probably should have given up a hundred times. But Bill Gross was out there not giving up. There's something really admirable to me about this ability to show up fresh and say, OK, I'm keeping at it. My strategy works. It didn't work yesterday, but today it's going to work, because overall, it's a good strategy, and I'm going to keep at it. I really liked that—that unshakable confidence is really, really admirable.
Ptak: Well, we're glad that you stayed at it. We really enjoyed the book, and so appreciate you discussing it with us. Thanks so much for this conversation and all the insights that you shared with us.
Childs: Thanks to you. I really appreciate. It was really fun.
Benz: Thanks so much, Mary.
Ptak: Thanks for joining us on The Long View. If you could, please take a minute to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
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