For a long time, bond investing was considered a sleepy backwater. You bought a bond and just clipped coupons as you waited for it to mature. But then Bill Gross discovered that bonds could be traded. He founded Pimco and proceeded to make a lot of money from bond investing, sometimes in controversial ways. Bloomberg Opinion columnist Matt Levine co-hosts this special episode of Odd Lots with Mary Childs, who’s just published a book on Gross called, “The Bond King: How One Man Made a Market, Built an Empire and Lost It All.” We discuss some of Pimco’s most famous trades, whether Gross was a good investor and his legacy to the world of bonds. Transcripts have been lightly-edited for clarity.
Points of interest in the pod:
On Ginnie Mae futures, one of Pimco’s most interesting trades — 05:25
On the role of Pimco’s size in its success — 09:13
What made Pimco successful — 10:36
Whether Gross failed to adapt — 11:42
On Pimco’s cash-equivalents — 13:30, 16:56)
Why Gross didn’t make more in 2008 — 14:12
On Bill Gross as a manager — 20:28
On reporting out the book — 23:04
What drives Gross, plus bonuses — 26:42
How Wall Street values portfolio managers — 33:48
Pat Fisher and the role of women at Pimco — 35:53
What Pimco is like right now — 39:35
What Bill Gross is doing right now — 41:41
On Bill Gross’s investing legacy — 43:30
Tracy Alloway: (01:09)
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. My co-host Joe Weisenthal is away. However, I have a replacement co-host for this very special episode, we're going to be joined by Matt Levine. He is of course, a columnist over at Bloomberg Opinion. Matt, welcome to the show.
Matt Levine: (01:28)
Thanks for having me.
Tracy: (01:30)
So I have been covering bond markets for many, many years now. And when you're covering bond markets, it feels like at one point in time, there was no as scape from a certain bond investor. And that was a guy called Bill Gross. If you were covering bond markets at one point or another, your path would cross with Bill Gross’s in some way. It was either something he was doing or something that he had said that you would inevitably have to write up. And I don't know if you feel the same way Matt?
Matt: (02:06)
Oh yeah. I mean, in particular he would write these monthly investment outlooks that were always both widely covered because they were the outlook of an important bond investor about the bond market. But also because he began them with embarrassing personal anecdotes and you'd read them and be like, did this professional investor really just say that? And every, every month he would top himself.
Tracy: (02:28)
This guy in charge of Billions of dollars worth of people's money, did he actually just write several hundred words about his cat and things like that?
Matt: (02:36)
His cat watching him in the shower, I think was the classic.
Tracy: (02:39)
Yeah. Okay. So Bill Gross loomed large in financial journalist imaginations and over the bond market. And then of course we all remember in 2014 when he actually left the company that he had founded, which is Pimco and that just exploded into the headlines. You remember that?
Matt: (02:59)
Oh yeah. He went to Janus, which I think to this day remains a joke on Financial Twitter. When anyone leaves a job, they, we say that they went to Janus.
Tracy: (03:07)
That's [laughing], sorry. That's exactly right. Okay. So when Bill Gross left Pimco, there were all these questions swirling around both the man and the strategy and the company. And I remember writing at the time that there were still all these unanswered questions around who Bill Gross was, what he was actually doing at Pimco. And I guess someone stepped up to try to answer all those questions. And I am very, very pleased to say that today we are going to be speaking with Mary Childs. She is of course the co-host of NPR’s Planet Money podcast, and also the author of a new book. It's called “The Bond King: How One Man Made a Market, Built an Empire and Lost It All.” And it's been many years in the making and I'm thrilled to have her on the show. So Mary, welcome to Odd Lots!
Mary: (04:00)
Thank you so much for having me. I'm excited to be here.
Tracy: (04:03)
So one of the things that always struck me about Bill Gross, and maybe this is why, you know, you sort of took an interest in the story, but when people think about bond investing, they normally think about, well, you buy a bond and you hold it to maturity and it's really boring. But the thing about Bill Gross, and you go into this in some detail in your book, is that he was doing really complex things in the fixed income world. You know, his funds were full of derivatives, full of futures, swaps, lots of repo transactions, things that you wouldn't necessarily think of when about traditional plain vanilla bond investing.
Mary: (04:43)
Definitely. And you're exactly right. That's one of the main reasons why I got interested in this in the first place. I feel like there is this misconception that, oh, my bond fund is managed by like some dork in Boston who doesn't do bananas stuff. And that's just kind of not the case, you know? So many of our retirement dollars do go to Pimco and end up doing very exciting things. And yeah, there's so much room to look into, you know, what Bill did and the kind of extremely complicated trades that he put on and the trade structures that I just find it really kind of, it's interesting, both because of that misconception, but also just by virtue of being really elaborate and smart and fun trades.
Matt: (05:25)
So one of the most fun trades, and I feel like we could spend the whole Odd Lots on this because it's like very Odd Lots-y -- in like the mid eighties, he did this trade on Ginnie Mae futures that basically broke that market forever. Can you describe that in enormous detail for the Odd Lots listeners? I know my audience.
Mary: (05:44)
Yeah. This is my favorite trade. Basically there was this futures contract that, I think was, you know, extremely popular in like 1980-ish and people were trading it with a lot of assumptions. You know, the mortgage market’s gnarly, very few people feel like they actually like can get into the particulars and the details. And then kind of expand that into the way these things should be traded perfectly, like a lot of people trade on models that they got from someone else or whatever. And I think in this case, Pimco just really read into the details of the contract, you know, they heard that it was flawed, but they read into it and they were like, wait, this is really flawed. There were two kind of separate parts of it. Two trades basically where one trade relied on the ability to demand physical delivery and one trade relied on the fact that this contract had the option for a perpetual. So you could ask for it to be converted into a perpetual security that paid you 8% forever.
Matt: (06:41)
Why did it have that? That makes no sense.
Mary: (06:44)
I know. So I tried to talk to the guy who built the contract and he was kind of like, ‘No, it's a great one. Love that one. Bye.’ Which I understand. But I think, you know, they were trying to make it attractive and rates were high at the time. So I think there was some sense of like trying to entice people to play in this market in the first place, because again, mortgages were pretty poorly understood. I mean, there is a real explanation, but also they were still figuring stuff out, you know, like these were new contracts and this is kind of a new frontier. So trying to find out what would work. It was a little bit of trial and error.
Tracy: (07:16)
So what exactly did Pimco do in this situation? So you have this new contract and this seems to be a bit of a hallmark of Pimco’s strategy at that time, but they actually read all the terms, did all their due diligence and research, and basically figured out a way to make lots of money out of it.
Mary: (07:35)
That's exactly right. So they basically realized that the market was, you know, trying to account for the negative convexity of mortgage-backed securities that, you know, would show up in these Ginnie Mae bundles. But what they weren't accounting for was the kind of optionality and the fact that if you accrued enough of the underlying, the cheapest to deliver, there just weren't that many in the world and rates had started to go down. So there were gonna be fewer and few, right? So Pimco realized this kind of before anyone else, and they amassed a huge position in these contracts. And then they demanded physical settlement of the futures, which is to say, they were like, give me your cheapest to deliver Ginnie Maes.
Tracy: (08:10)
Right. And they didn't have to demand physical settlement, right? They could have just let the futures roll off?
Mary: (08:15)
Exactly. And that was what everyone kind of expected everyone else to do. So part of what they were playing with here is expectation, is everyone else's normal behavior. And Pimco seems to always find that there's just a little bit extra performance if you don't act normal.
Matt: (08:28)
The trade is just like, these futures are priced assuming that you deliver the cheapest to deliver security. And they bought so many futures that they sort of at stripped the cheapest to deliver and like they were getting much more valuable securities.
Mary: (08:42)
That's exactly right. So yeah, they would go to these people, you know, the counterparties and say, give me your, you know, I'm settling now. Please give me all of the, you know, cheapest to deliver that you have. And the counterparty would be like, oh, we don't have enough. You have more than we can satisfy. And they would have to hand over much more valuable Ginnie Maes just to satisfy the delivery, the settlement. So basically, yeah, Pimco was able to outsize the market, which is actually something that you'll see later. You know, they do this trade in different kind of flavors over the years.
Tracy: (09:13)
So this is something that I've been thinking about a lot. And I've thought about a lot over the years, you know, I said earlier that Pimco and Bill Gross loomed large over the market. And that is literally true. They were such massive investor that at times it seemed like their success was sort of mixed up with their size. How much of Bill Gross's strategy, and the success that he enjoyed, how much of that came from simply being bigger than everyone else?
Mary: (09:43)
I think that's such a good and astute question because people often get that backwards where they're like, oh, did he underperform because he was too large for the market. And you're right that it actually was an asset. You know, I guess in equities, it's harder to who maneuver or something, but in bonds, it definitely can be an advantage, especially in, you know, anchoring a new issue bond as it comes to market, you're gonna get more of the allocation. And those basically always outperform, you know, pop when they hit the market.
So I think it's hard to say how much of the outperformance was due to size. I’m thinking of this paper that two researchers did in 2019, that kind of teased out the reasons for Bill Gross and Pimco’s outperformance over the decades. And that was one of their kind of grab bag items. You know, they were like, this is not something that they were able to strip out as a factor, but it's basically present throughout Pimco's Total Return’s history, where they were always a bit big for the market and for the mortgage-backed market.
Matt: (10:36)
What were the big factors?
Mary: (10:38)
So it's interesting. There are three main ones that those researchers found and it actually aligns pretty well with what a source told me, gosh, five years ago, because I've been working on this for too long, that there were only four things you needed to know to do well at Pimco. There are four things that Pimco does -- long duration, the curve (focusing more on like the four, five year part), going long credit and short vol, that's it. And, you know, short vol means selling volatility and finding other ways to kind of embed optionality and leverage in your kind of everyday life, if you will.
Matt: (11:12)
And avoid buying options too, right? Like one thing that he says in some of the outlooks is that he like doesn't want to pay up for bonds with a lot of complexity, because optionality is not worth anything to him.
Mary: (11:22)
Right, right. He wants to be selling it, not buying it because he realizes that people want to sleep at night and he doesn't care. Like everyone else wants the optionality. And unless he can get compensated over and above, it's in contrast to the Ginnie Mae where there was a lot of optionality, but it was stuff that they exercised. They don't want options just to be able to do it. They wanna actually do it if they want them, you know?
Matt: (11:42)
So he, like, he was the Bond King, he had a great run for decades. And then he left to go to Janus. You know, I think it would be fair to say, did not continue to have a great run [there]. So when you, when you list those factors, it's like long duration, long credit, you know, short vol that describes a sort of placid market of generally declining rates, that's a strategy for a placid market of generally declining rates, which is kind of what he had for like 30 years. Did he just miss a regime change? Was he like a really good investor for like a particularly long bond bull market? And then he couldn't adapt, you know, what's going on?
Mary: (12:17)
I think to some extent, yes. And there's this famous -- at least to me -- investment outlook from April, 2013 where he asks, am I a great investor? No, not yet. Because he was basically seeing the same thing that you are, that he'd had a long bull market to invest in. He'd done really well over that period, but he felt that he was pretty untested -- he and all of his peers. And you know, when he went to Janus, it's hard to say, because over the longer term, you know, interest rates are lower now than they were then, or they, you know, were lower now than they were then. So they moved around a little bit. But from his start date at Janus through his retirement date, you know, actually did interest rates did go up. So I do think you're right. I think that over that period, over his long career, he did have the benefit of a bull market. And yes, his strategies, I think, did perform better in that environment, you know, like buying credit, focusing on duration, like all of these things absolutely perform better when you have the wind at your back. Cash and cash equivalent arbitrage kind of, is that an abuse of that word? Are you upset?
Tracy: (13:18)
I think it's okay. This is a safe space.
Mary: (13:20)
You're allowing that? Okay. Thank you.
Matt: (13:21)
It's all arbitrage. Everything’s an arbitrage.
Mary: (13:24)
There's a colloquial arbitrage and then a real one. And I'm using the colloquial.
Matt: (13:27)
This is just to take more risk, which is kind of an arbitrage.
Mary: (13:30)
Thank you. I'll accept. But basically, you know, when they had a position that required cash, required them to hold cash against it. A lot of their competitors would be like, okay, cash, great. I shall hold cash. And Pimco was like, okay, great. And cash equivalents, what do you mean? You know, what does that mean exactly. And they would go as far as they humanly could, to the extent of risk taking in that cash equivalent bucket. So that means, you know, [holding] short-dated corporate floating notes and making sure that they're getting every last potential basis point out of that cash equivalents bucket where everyone else is just getting whatever cash is yielding and not sweating it, not kind of going that extra marginal mile to get the extra basis point.
Matt: (14:12)
I love that. He’s like this renowned bond investor who becomes a billionaire. And at the end of like a bunch of the years in the book, you know, when he's outperforming the market, it's like he had a blowout year in 2008, he saw the crisis and no one else did, he outperformed his peers by 35 basis points.
Mary: (14:32)
Okay. It was 2 percentage points in the year that you're think of.
Matt: (14:35)
Two percentage points, but this is like in 2008 where, you know, John Paulson has like quintupled his fund or whatever, right? Like people who called the crisis right, you know, the sort of stereotype is that they like started with a little bit of money, ended up billionaires. But like Bill Gross started with trillions of dollars and added like 2% to it. How should we think about that performance? I don't know. It's just fun.
Mary: (15:00)
The fundamental thing that I think you're hitting on there is the structure of the trade, where a lot of the people that were, you know, Big Short-type crisis callers, they structured trades more on time, where if they had messed up the time horizon, and some of them did and didn't make it into the kind of pantheon, the whole trade wouldn't work. So a lot of that was extremely risky. So the Pimco view was, yeah, we think this thing's coming. We have no ability to say when exactly. And we're gonna structure a longer term trade around this, where they both pulled back on risk, going into the crisis and then were able to scoop things up when things were healing. You know, everyone else was selling at a discount because they were panicking and they hadn't had the same foresight, Pimco was able to buy those assets at an extreme discount and then outperform for more years. So if you look over the longer time horizon, and this is also in Dan Ivascyn's fund in Pimco Income, where you see that they not only did well stepping back and not taking the same risks as everyone going into the crisis, but then in the years after. So it's more of a cumulative over many years, but also, yeah, it's just mutual funds. You're gonna have less exciting, or you're supposed to have less exciting, you're not supposed to have a blowout like that.
Tracy: (16:14)
Just on that point, here’s a slightly weird question, but do you think that Bill Gross either knowingly or perhaps by accident mis-sold what bond investing actually was? Because I remember in the early 2000s, you know, he was talking about this idea that if you do it the right way, you can get stock-like returns on, on bonds, which are supposed to be safer. And the way you do it is you use lots of volatility-selling strategies and you use lots of leverage and things like that is that. Is that what bond investing should be, or is there inherently, you know, a discrepancy between in stocks and bonds and the returns that are possible there?
Mary: (16:56)
I love that. I think there's probably, you know, he always got this ding, I think, where people called him a hedge fund manager in a mutual fund wrapper. And I think that's probably true. You're exactly right. I kind of wanted my bond funds to be managed by a dork in Boston. Like I'm trying to state calm here. I don't necessarily want you to be doing like, one guy told me that the consultants used to call this Gross cash. They're like, I don't know what you're doing with this cash and cash equivalent stuff and Lambda cash and all these other strategies that they used. It was like, it's working. So I don't mind, but I'm like, whatever you're doing this like weird magic in the market, like, thank you, great. I'm not gonna look too close to. And I'm sure, you know, they're all fiduciaries, everyone looked closely. I'm sure they did that. But there is an element of like not examining it when it's working and it worked for a long time.
You know, it was obviously to your benefit for a very long time. But at the same time, it’s like, is this good risk that we're taking? Is this what I want to be doing? This is kind of funny to me where like the cash equivalent thing, there was apparently a pretty robust debate at times about whether or not Russian floaters should count in the cash equivalent bucket. Saying that right now, today, feels bananas, right? Like that shouldn't be a conversation. But in other times you can imagine that that's like, that's probably fine. That's probably fine. We can get away with it. And is that what you want as a mutual fund investor? Like with your retirement money? You wanna get away with Russian floaters? I don't know.
Matt: (20:28)
I feel like it's Odd Lots. We should talk about the bond market, but like your book is partially about the bond market, but it's also a lot about like the human drama of Bill Gross's overthrow. His character is sort of like, he's a genius investor who is not good with people. And he works at this institution where he's not the CEO, he's the chief investment officer. He makes the trading calls and someone else is in charge of management. And yet his managerial style is sort of what pervades the place and what ends up, I think, getting him ousted. How can you, you know, have that guy run your investments and not drive everyone crazy?
Mary: (21:09)
Yeah, I think, I mean, it worked for a long time in part because there were people in the CEO position that Bill trusted and respected. And if that's the case, he kind could allow them to do their job and manage people and make executive choices. And he wasn't really gonna interfere. He might like snark around a little bit and give them the silent treatment for hiring too many people or whatever, but he's not gonna, he generally let them do their jobs. And I think that's, part of it is, you know, in the seventies and eighties and nineties, this was a bit easier because a lot of the people came up with him and were his peers and he respected them. And then when you get Mohammed El-Erian in the door, you know, there are multiple reasons why that relationship didn't really work out.
One being that their personalities are just so different and their managerial instincts and investing instincts are so different. One reason being that, you know, Bill, you know, there's this sense that Mohamed at the 11th hour asked to be co-CIO and co-CEO, you know, he was supposed to just be kind of Bill's heir. But I think, you know, having someone in that role who he mistrusted was probably to some extent, always gonna be a cursed outcome. If you're able to keep the lanes clean and able to let him just do his job, yes, it creates this culture. But I think you, I think they were able to now navigate around that culture for a long time. There's an open question as to whether that would've been successful -- even with the optimal chief executive -- in today's climate, where we've done a lot of kind of renegotiation of what we ask from our employers. But yeah, I think it's a matter of like respect and trust and allowing people to give each other space.
Matt: (22:47)
Is Pimco like nicer and chiller now?
Mary: (22:50)
Hahaha. No.
Matt: (22:52)
Not even a little?
Mary: (22:52)
I think it's safe to say no. They were kind of trying to project that for a while. And I asked folks on the Street and I asked people inside and they were like, no. No, if anything it’s worse. So I don't know, take that as you will.
Tracy: (23:04)
So just on that note, I mean, reading your notes as an author, and there's a very funny, but also disturbing anecdote about the rumors swirling around you as you reported out this book for many, many years. But one of the things you talk about is this idea of the toxicity of that work environment kind of rubbing off on you as you interview all these people who all have agendas, who all want to tell their own versions of the history. What was that like?
Mary: (23:37)
I don't know if this happens to every reporter, but I feel like when I talk to a particularly paranoid source, I come away just totally rattled. Like I internalize a lot of their anxiety and paranoia and it just stays with me and these people, the people I talked to for this book were largely all like that. I mean, there were some exceptions -- people who had got out with their head on straight and retired and whatever, but to a very large extent the people that I dealt with were very competitive, very petty, very score-settle-y. And one thing that I kind of didn't appreciate the magnitude of, but like a lot of people, the events of 2014 messed up their profit sharing, even if they were retired, you know, they had this kind of profit sharing slice of Pimco and because of the ridiculousness of 2014, you know, Mohammed El-Erian leaving, Bill Gross leaving, it hurt the kind of forward profits for the firm.
And people were really mad because it affected, you know, the payments that they expected to get. So there was a lot of financial anxiety that came to bear as well, which is like funny, because you know, I'm a public radio journalist, so that contrast was a bit sharp at times. Matt knows this story, there was one person's wife who was like, so what are you gonna do with the proceeds from the book? And I was like, um, eat them? Like I don't understand. I didn't have a day job at the time. It was literally my, and let me be clear, you know, this comes in in chunks. So I was living on not a lot of money and, and she was like, well, if you need suggestions for charities, just let me know.
And I was like, thank you. I do know of charities personally, but I appreciate the offer and I will consider it. But yeah, there was definitely, I don't know. That insecurity can rub off on you for sure. Like I'm not unfamiliar with rumors. You know, I was in a sorority. It felt very familiar to me, but it was also so unsettling because I'm just there to do a job. I'm not trying to hurt anybody. I'm not trying to take sides, which they all always thought. I'm not trying to like pick favorites. I don't have a dog in the fight. I just wanna tell the truth.
Matt: (25:40)
In the sort of like fight over pushing Gross out, everyone was kind of using the press where like, you know, Gross was obsessed that his enemies were leaking to the press about him. And then he would call into TV shows or call reporters and say things that in hindsight were really embarrassing. Was that fun?
Mary: (26:00)
I, yeah. I mean, it's tough because as you know, I hate being a conduit. I really hate when my entire role in a situation is simply conduiting someone's thoughts. Obviously as a journalist, that happens a lot, but I like to be able to use my brain and participate and you know, weigh things myself and come to a judgment. You know, I like to be kind of an active participant in my job. So to some extent it was, it's really annoying to be used as a tool for score settling. And I think it's interesting because it's so not that emotional, it's so not that, look, I just don't have a team. And that seems very hard for a lot of people to grasp.
Tracy: (26:42)
Do you feel like after finishing this book, you have a better handle on what drives people like Bill Gross and some of the other executives at Pimco? So I know you talk in the book a lot about Gross emphatically said he wanted to become famous. He wanted to become a very, very famous bond investor and obviously he wanted to get rich and he seems to have been very successful at doing that. And then you have a lot of money involved for the other executives. I think towards the end of the book, you talked about one of the bonus pools being something like $520 million?
Mary: (27:10)
Between just Gross and El-Erian, yeah.
Tracy: (27:13)
Yeah. Which, I mean, you know, half of 500 million, I'm sure will motivate anyone, but given all this revenge-seeking and some of the behavior that you wrote about and that we witnessed in 2014 and years after that, what do you think drives these people?
Mary: (27:31)
Hmm. I think it's instructive to look at Bill's behavior without the money management, you know, since his retirement. There's this, I get this sense that he digs in and he's put it that he doesn't back down from a fight. He can get entrenched in these bilateral, I don't know, I don't wanna say wars, but you know, in a dynamic, in a relationship where he can't seem to find a graceful exit and I mean that -- who among us, right? Been there -- but it is this kind of, you know, you wish that, that people can find an exit and you wish that people can kind of graduate beyond this kind of allowing themselves to get locked in a dynamic like that. But I do think it is competition. It's competitiveness. It's trying to prove to someone else that you're the real deal.
Mary: (28:23)
That's something Bill said a lot. And Bill will tell you, he did this throughout his life. You know, this is true in the eighties when he got divorced and was trying to date and he always wanted to prove to the last person that they missed out on a good deal. There's something so normal about that. But at the same time, the scale of the competition gets so mind boggling when you start adding zeros and get to 500 million for one year, like, yeah, it absolutely becomes ridiculous, but it's, those numbers are actually meaningless to them, you know? Except in a relative sense, compared to the person that they're locked in a terrible relationship with, you know?
Matt: (29:03)
Yeah. I mean, I've like written and talked about this, but one of my favorite things in the book is like, as matters are coming to a head, you know, Bill Gross calls a meeting and he like obsessively charts the seating plan and puts the people he's mad at, like, not at the main table. And then they get all mad. And I love the idea that like these people like right, the number of zeros in their paycheck has sort of lost its meaning. And they're just in the same, like, sort of micro status battles as everyone is all the time. And like, if they're not sitting at the right table, then they're just mad and like, that's what is motivating them more than, you know, the hundreds of millions of dollars they're making.
Mary: (29:42)
Yeah. You put it, when we had our chat at McNally Jackson, you had a nice turn of phrase where you were like, they just wanna be treated like adults. And they feel like they're being treated like children. And I think that's so true. Like, the degree of childlike behavior among people that we trust as fiduciaries and not that they were like, you know, not that that makes you godlike or beyond reproach, like of course fiduciaries are human beings, but there is something a little disorienting about that.
Tracy: (30:08)
There's a former Pimco manager who messaged me right before we started this chat saying that he literally, he liked Bill Gross, but he used to speak to him like he was a one year old, was the way he put it. And they got on apparently
Mary: (30:22)
Amazing. I have so many guesses as to who that is, but no, sorry.
Tracy: (30:25)
I think you probably know, but just going back to a point that Matt made as well about, you know, Bill Gross's managerial style, there was an option that did come up towards the end of his tenure at Pimco, the idea that well, maybe they remove him from all the managerial stuff, put him even in a different office and just give him some money and let him invest and not have to deal with people. Because clearly he didn't like it. And he was arguably not very good at it. Why couldn't that happen? Why wasn't that an option?
Mary: (30:58)
I think by the time that idea was being batted around, it was just too late. Like they had by that point a year of trying to negotiate an exit for Bill and trying to figure out the best path forward. And it seems like they were just so out of step with each other and by they, I mean Bill Gross and the rest of Pimco management, where Bill would come to the table and say, Hey, I'm ready to step back. Let's do this and this and this. And they would say, oh great. When can we do it? And then, you know, he would, according to, you know, my sources, he would flip flop and say, oh no, I don't want that. I never wanted that. And this happened in a bunch of different kind of iterations and in different ways.
And, you know, one example that's a little bit famous among people that I talked to is the time when he agreed to meet with a mediator for his relationship with Mohammed El-Erian. And basically he, everyone says, oh, Bill agreed to this. Okay, fine. We're gonna schedule this. They found a mediator. They started to put it on the calendars and Bill's like, I never agreed to this. And Bill says, you know, people hear what they want, but I truly, to this day, maintains that he never agreed to it. And I agree with him that people hear what they want, but there is this sense of like, okay, but eight people heard you say yes to this and wrote it down. And you know, at a certain point we have to try to move forward. By the time the idea was being battered around that they could maybe just give him a pile of money, a little side car as they called it, and let him just play with the money, play in the market, be happy, be over there and not bothering anybody. It was almost as though, I think this is kind of his characterization, but it's almost as though his presence was just too toxic, that it was too upsetting to even have him in the building. But basically that they couldn't, they felt like they couldn't trust him anymore to agree to this plan and stick to it and carry it out. That it would still be more drama, more chaos, more moving the goal post.
Matt: (32:44)
One implication of the book is that although he was not the CEO, he was to such a degree, the star performer that he could, he like had soft power. Anyway, like at some point he tells El-Erian I'm Secretariat. You don't bet against Secretariat.
Mary: (32:56)
Yeah, I think it's interesting because in the beginning, you know, they made such a big deal about the three legged stool of the co-founders being equal. But the two other co-founders kind of fell away and only Bill was left and there seems to be this kind of institutional slant where the portfolio managers are the most important where, you know, if you're a client person, you serve the portfolio manager, if you're execution, everything revolves around the performer. So I'm not sure, you know, it does sound like everyone was a bit more collegial back in the day. I mean, still with the same kind of joking that I don't think I would be able to tolerate, but they, but I'm not sure, you know, it seems like towards the end. Yeah. There was this extreme tilt that made him the leader and made people wanna be like him and act like him. And certainly he set the tone, you know, you can't, if Bill Gross says no noise on the trade floor, there's gonna be no noise on the trade floor.
Matt: (33:48)
Do you think that's true elsewhere in the financial industry? It seems so like ingrained that the person running the money and making the investment decisions is the most important person and the person like doing investor relations or managing HR is subservient to them. But like, is that how it works everywhere? Because, you know, I go back to like Bill Gross’s outperformance by like 50 basis points, right? Meanwhile people were raising trillions of dollars, right? Maybe those people were raising trillions of dollars were actually quite good at their jobs.
Mary: (34:21)
No, I think you're exactly right. And I think this is sort of like …
Matt: (34:24)
And there are other like, you know, big financial institutions where I'd be like, yeah, the investor relations people there are really important given the performance.
Mary: (34:30)
Completely. There are good IR people and bad IR people. I think that's completely true. And that's underappreciated. And I have some views on this, given that that's typically where you would find women in the financial industry. You know, for many reasons as to why that has turned out to be the case and for, you know, and I think that also kind of feeds why we think of it as, I don't know, it's kind of a chicken and egg problem, but I have this argument that Pat Fisher should be -- you know, this is a woman who ran operations at Pimco -- and I strongly believe, this is just me, no one one else is making this case but me, probably -- I shouldn't say that maybe, someone out there is making the case, but I have this strong belief that Pat Fisher should be counted as a co-founder.
She ran operations at Pimco. And I was just talking to a guy who used to work there, who, you know, doesn't know this theory of mine, but he was like, yeah, you know, Pimco was so strong in operations and trade execution. And just if your botching every third trade and calling Goldman and saying, shoot, I'm so sorry, do you mind? Goldman's gonna not look to your trades. You know, they're gonna stop trading with you as much. They're gonna be like this person doesn't know what they're doing and Pimco wasn't that. And that, you know, there are a hundred different times that I do this in the book, but Pat Fisher helped to build the thing that made the company run seamlessly. And that is so underappreciated because it's back office. And again, I think there's some sexism in there and, you know, we've built a world in which there's this like hegemony of portfolio managing .
Matt: (35:53)
Or like, you know, in the book, there's this scene where Bill Gross blows up at the woman who runs product. And says you're introducing products that the portfolio managers didn't approve and she's like, that's actually not true. But like, you know, when I think about giant financial, like giant asset managers, I think more about product than about portfolio management. I think like, you know, the person who's like we've introduced a meme-themed ETF. That's how they get the money. It's not by like outperforming by 10 basis points. And I'm sure I'm exaggerating here, but like that job of figuring out like what sort of wrapper people want things in seems like at least as important as like outperforming 72% of other, you know, investment grade bond managers.
Mary: (36:35)
I think that's true. Because if you look back, you know, at products that they were selling in like the forties, they're not that different. Like everything is the same. In the process of reporting this book, I talked to a pension manager who had overseen the AT&T pension fund and he was like, yeah, you know, I remember being in a helicopter, like looking at a mall that we were thinking about buying. And then I had a passive strategy and I was like, wait, what? You were doing a barbell in the seventies, like where was I on this? I just wrote this article about how people are doing a barbell. And it was like a new thing to me. Like did I just wake up? Have people been doing this the whole time? And yes, like this is, we put new names on them and we find more tax efficient strategies or whatever. But to a large extent, it's the same stuff repackaged. And you know, as a person picking funds, you're kind of like, I'm clever. I wanna pick the thing that's cool right now. I love a meme. Let's do this, you know,
Tracy: (39:35)
What is Pimco like right now? Because of course they had this exodus in 2014, they lost, I think one of their few senior women, uh, they lost one of their few senior persons of color in the form of Mohammed El-Erian. Clearly Bill Gross's focus was on the Total Return Fund and what was going on with his portfolio management. But as you and Matt just laid it out, products were becoming more and more important. There was more and more of a tilt towards getting even more passive, as low cost as physically possible. Has PIMCO changed much?
Mary: (40:15)
I'm sorry to report that I don't think they've changed much. I don't think it's, you know, I think they are working on it much like a lot o, asset managers, financial firms are trying to figure out what's gone so awry and why they simply have so few women and people of color, like so weird. From what I'm hearing, it’s not really going swimmingly. I think it was last year that there was a letter from 21 current and former female employees saying, you know, we've experienced discrimination here at Pimco. And I think at the beginning of 2021, PIMCO had never had a black partner. Never. Not one. They just simply couldn't find one. And I just find that beyond disappointing, right? It’s so troubling, because if you think through what … You know, they think it's a meritocracy. So what does that mean?
Like if you take that further, if you go to the like logical extension of that, I just, it's indefensible. And I don't think, I don't know. I think there's this kind of, obviously we're having a broad, you know, pan-industry reckoning with what we do at work and how we feel about work and what we bring to work and, you know, what's allowed at work. And I think that's especially acute at a place like Pimco, because those old school Wall Street cultures that are so tough and so exclusionary are, they just look real bad right now. And to a large extent, I think it's just not tenable anymore.
Matt: (41:41)
Meanwhile, Bill Gross has a book out. He’s keeping busy.
Mary: (41:47)
Beautiful segue, Matt. That was really nice.
Matt: (41:48)
He’s got a book out. He got a suspended jail sentence for playing the Gilligan’s Island theme too long. Like, has he, is he having a reckoning with any of this? Like, do you think he's been introspective about like the last few years and about your book?
Mary: (42:07)
It's funny. Yesterday, I had my first interaction with Bill in over a year. I had tweeted the Planet Money story that we did, Planet Money episode that we did about, you know, the Bond King. And he replied to my tweet with a link to his book, which is just stellar marketing, and so on brand. But I do think so. It's interesting. I have always kind of thought of him as a reflective person, as introspective as a bit self-aware, you know, to a point who among us, but I was talking to a colleague who covered Treasuries for ages, and he was saying that it was a performative self-reflection or self-awareness. That actually Bill is, it's part of that facade, that persona that he would put on. But actually there isn't that much real soul searching, which I don't know. I mean, he's been, you know, in his book, he talks about his ouster in, you know, a recent interview with the FT.
He talked about his ouster and what he did wrong, and he definitely has thoughts. So it's hard to, it's hard for me to gauge how much of that is truly internalized and like from the heart, but he does seem to find fault with his behavior and that he, you know, thinks he maybe should have done things differently, which probably we can all agree. But yeah, I don't know. He's been busy. He's been, you know, feuding with his neighbor, writing this book, publishing it two weeks before mine and replying to tweets.
Tracy: (43:30)
What do you think Bill Gross's legacy in terms of the bond market or investing actually is?
Mary (43:33):
Hmm. Two answers. From a pure investing standpoint, I think it is seeing these market inefficiencies, these factors that he identified and was able to wring outperformance from for decades. So those were true insights and I do think that that is, you know, he is the Bond King in that way, and helped to bring about this revolution of active bond trading. And then the second answer would be kind of, it's hard to say if a world without Bill Gross would have the same cultural shape that the bond market would look the way it does. And then that everyone would act the way they do in the bond market. You know, Pimco is certainly on the sort of extreme of behavior where they're harder on the Street than everyone else, they're cutthroat. They're a little meaner, they're whatever. I don't know that everyone like necessarily is quite as acerbic in dealing with their Wall Street coverage. But I do think that it was a model. It was a way, you know, people looked to him as a role model. That he's like on TV talking about his securities and talking his book and people are like, that is so cool. That’s amazing that he can do that. The Beach does something and everybody follows. And that was absolutely, you know, that degree of influence is certainly widely admired and emulated, you know, aspirationally emulated,
Tracy: (45:22)
Mary Childs, thank you so much. The book again is “The Bond King: How One Man Made a Market, Built an Empire and Lost It All,” and you should definitely check it out.
Mary: (45:31)
This was so fun.
Tracy: (45:33)
So Matt, obviously that was a fun conversation. And I know you've been sort of involved in the production of this book and acting as an advisor on a lot of the content and just, I guess, providing emotional support to Mary, because it sounds like she needed a lot of it given the personalities involved, but one of the things that I find really interesting about that, well, one of the things I keep thinking is that Bill Gross was sort of born out of the 1970s, early 80s, when you finally got a lot of interest rate volatility, which made bonds more interesting. And which then gave rise to bond kings like him and a few others. And I kind of wonder if the period that we're entering now, if we're gonna see the same sort of birth of a new asset class or a new group of investors with a slightly different strategy who come out of it really successful.
Matt: (46:27)
Yeah. I think that's possible. I do think that one thing that that is true about Bill Gross is that he came up at a time when it was sort of hard to be a famous investor. And he ended up running like a mutual fund, which was sort of how you became a famous investor in the seventies and eighties. And, you know, like certainly there was a lot of volatility in 2008 and the people who became famous out of that were hedge fund managers. And I feel like that's where the action is for the foreseeable future, is like people who can make really kind of bold, concentrated bets rather than running, you know, trillions of dollars for like households and pensions. It feels like that's where the celebrities are minted these days. I can't imagine that going back, you know, but certainly there will be celebrities minted out of this, you know, out of, out of today’s volatility.
Tracy: (47:15)
Yeah, but probably not your average ETF manager or something like that. But that was the other thing that I was thinking about was this idea of whether or not the way Bill Gross ran a bond fund was the sort of gold standard of running a bond fund. Because when you listen to Mary talk and describe, you know, his strategy or the secrets of Pimco's success -- going long credit, buying duration, selling volatility, treating Russian forwards as cash equivalents. I mean, if you think about someone doing that over the past month or two, it's just a recipe for disaster. And so you get that question once again, whether or not Bill Gross was lucky that his period of being at the helm of a very large investor coincided with very low interest rates and a period of generally low volatility or whether there was something else there.
Matt: (48:09)
Yeah. But it's hard to know because it's not like it's not like he was born to sell volatility. It's like he came to a reasoned conclusion.
Tracy: (48:15)
He identified the right strategy for that environment.
Matt: (48:16)
Yeah. And like, he wrote notes saying like, this is how we expect the next 10 years to go. And so this is why we're going to, you know, be structurally short volatility. And he was somewhat able to adapt, right. I mean, he ended up not doing as well in a higher rate, you know, sort of different environment than he did during the sort of long bond bull market. But it's not like he just sort of set it on autopilot for 30 years that it happened to work out.
Tracy: (48:43)
That's true.
You can follow Mary Childs on Twitter at @mdc and Matt Levine at @matt_levine.