Did Derivatives Cause Bond Fund Giant, PIMCO's $2 Trillion Divorce?

American Thinker ^ | 02/28/2014 | Chriss Street

[SeekAndFind]

The Wall Street Journal on February 25th published a story about December’s messy corporate divorce between Bill Gross and Mohamed El-Erianas, co-Chief Investment Officers at Pacific Investment Management Company (PIMCO), the world’s largest bond fund with almost $2 trillion in assets.  The article focused on the prickly personality of Gross and foul language complaints by El-Erian during a period of stress last summer when the firm was suffering market losses and clients were withdrawing billions.  But despite a carefully crafted image of a traditional conservative bond manager for “serious” money, PIMCO has magnified returns by making trillions of dollars in high-risk derivatives bets.  From personal experience and the firm’s latest financial filings, PIMCO’s leveraged derivatives empire could eventually crash and cause massive pain.

In December 2006, I was sworn in as the elected Treasurer of Orange County, California.  Twelve years earlier, I helped Barron’s Editor Alan Abelson write the exposé on Orange County’s secret use of leveraged derivatives to triple the interest return from their $6 billion short-term investment fund.  The article revealed huge hidden losses that forced the County to file the largest municipal bankruptcy in the history of America on the same day.  From 1996-1998, I assisted in the financial restructure of the OC’s public pension plan.  Warren Buffett would later describe derivatives as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”After devastating losses of $1.7 billion and criminal prosecutions; in my wildest imagination I could not imagine Orange County would ever be invested in derivatives again.