The Wall Street Earthquake

It would take Euripides, or Shakespeare at least, to tell this story. It’s an ancient tragedy that happened only last week, a story of hubris, passion and ambition set not in Athens or Verona but between California and Wall Street. Above all, it’s a story that is changing the face of one of the most important world markets.

Once upon a time, there was a king. His name was Bill Gross.

And they called him “the king of bonds.” He was the head of the world’s biggest investment fund, with more than $200 billion under his direct control, and with an aggressive name from the Schwarzenegger film “Total Recall.”

Many years ago, Gross had founded Pimco, a small company that, thanks to him, became a finance giant. From his office in Newport Beach, with a view of California’s blonde beaches, the great Bill and his Pimco controlled more than $2 trillion in pension funds, as well as company and small savings accounts, not just in the U.S. but throughout world.

For decades, Bill had a nearly perfect routine: he got up at dawn to fit in a couple of hours of yoga, got to the office by 5:30 a.m. and started making money for his investors and himself. Bill was always a difficult person — arrogant, explosive and often ill mannered — but his exceptional results became reason to forgive him of nearly everything. Excluding Warren Buffett, Bill Gross is the most successful investor of the last 40 years. He is also one of the richest: the fantastic performance of his funds has allowed Bill to accumulate a fortune of around $2 billion, according to Forbes magazine estimates.

Twelve days ago, the fairytale became a nightmare. A thin press release, like Bill’s yoga body, announced, “William H. Gross, world-famous investor, was acquired by Janus Capital,” a much smaller rival fund. The king of bonds was dethroned and defenestrated. For Wall Street insiders, the end of Gross’s empire was like the assassination of JFK: Let’s all remember where we were the exact moment when we read the announcement of Janus. I was on a not very deep MTA line, where my cell was able to catch a bit of a signal and transmit me the prophetic release.

It’s true that in finance, as in sports, there are no more “flags.” In a world that is by definition mercenary, superstars often go to those who make the best offers, going from one company to another. But Gross was more of a Franco Baresi than a Mario Balotelli: a key figure who had become synonymous with the company where he worked.

“Unbelievable, inconceivable, unimaginable,” was the on the spot comment of a Wall Street boss who knows Gross well. The causes of Gross’s shock decision are known by now thanks to, I must say, the reporting of my newspaper, The Wall Street Journal. When we looked behind the scenes at Pimco, we discovered a civil war between Gross and those who worked with him. Bill thought of himself as untouchable and behaved in such a way: deriding his equals, telling everyone to shut up because he needed to “think,” and alienating colleagues with whom he had worked for years. “I am Secretariat,” Bill said one day, comparing himself to one of the most famous winning American racehorses. “How do you not bet on Secretariat?”

Pimco stopped betting on Secretariat and the consequences are enormous. In the hours following Gross’s takedown, more than $22 billion were moved from Pimco’s funds, giving rise to a never before seen earthquake in the world of bonds. The prices of U.S. Treasury bonds, the largest and most important market on the planet, started bouncing like a yo-yo because Wall Street did not know how to interpret Gross’s move.

Rival investors got on their phones, computers and airplanes in order to attempt to convince the pension and savings funds to abandon a ship that had lost its captain. Pimco’s internal estimations state that hundreds of billions of dollars will leave the general Newport Beach neighborhood for unknown destinations.

When the storm dies down, we will find ourselves in front of a completely different landscape in the financial world. But not because of an economic crisis, a war or a natural disaster, but only because a brilliant and genius but very unpredictable man changed jobs.

The lessons are many: for the markets, the giants of finance, as well as us common mortals. For the latter, Gross’s fate proves the ancient adage that no one is irreplaceable, not even one of the greatest investors of all time. Markets should go through a long period of incertitude and then adapt to a new rule, in which a plethora of principles fight each other over the crown of new king of bonds. As one of Gross’s old colleagues told me, “Nothing will be the same anymore.”

And for finance stars both current and future, the last 10 days are a fundamental reminder of the limited power of fame, success and money. Centuries ago, the Roman generals who returned triumphant to the capital would be accosted by one of their servants who would whisper in their ear, “Remember that you must die.”

If you listen attentively, you will hear a similar whisper echo in the sunny beaches of Newport Beach and in Wall Street’s control rooms.

About this publication

Be the first to comment

Leave a Reply