Greed and Fear
on July 25, 2007

Bill Gross runs PIMCO, the world’s largest government bond managers with assets of nearly $700bn. In a new commentary, he pulls no punches about what he sees as the ‘gluttony’ of the super-rich amongst the private equity and hedge fund elite. He also takes aim at the lenders who, in his view, have been ‘too meek and too passive’. He sees the end of the era of cheap debt financing, and with it the boom in M&A that has sustained equity markets in recent years.

Bill Gross writes a very informative newsletter each month on the PIMCO website. This month’s issue pulls no punches, as he takes on the key issues of the role of private equity/hedge funds, and whether the US sub-prime mortgage crisis will affect the wider economy.
Gross’ view is that ‘wealth has always gravitated to those that take risk with other people’s money’. And he adds, in response to the debate about the low tax rates paid by many private equity people, that this is ‘especially so when taxes are low’. He takes aim particularly at Kenneth Griffin of the Citadel Group, who apparently claimed that if taxes rose ‘I would not be working this hard’. Gross terms this a ‘pretence’, given that Griffin took home over $1bn last year.
He also goes on to make a serious point about the emerging problems in the US sub-prime mortgage market. Many commentators and central bankers take the view that this is an isolated event, with no wider repercussions. Gross completely disagrees. And as someone who manages $700bn of funds, his view is worth considering.
His argument is that lenders have been too soft in recent years, and the sub-prime fiasco is the catalyst for change. Until recently, he argues, ‘lenders were giving away money!’ (his emphasis). Now, he says, the period of cheap financing has ended. In fact, he adds, the shock will be profound. ‘Rarely, if ever, have they (the Federal Reserve) raised yields by 150 basis points in a month and a half’s time as has occurred in the high yield market’.
He advises readers to watch closely what happens this week in the major debt financings due for Chrysler in the US and Boots in the UK, as his belief is that this will demonstrate that the ‘world has suddenly changed’. Gross is clearly calling a top on the era of ‘cheap financing’ that has driven so much M&A activity in chemical markets, as elsewhere.
And, of course, on a wider perspective, we all know that market sentiment swings between greed and fear. So if Gross’s call is right, and ‘greed’ has peaked, then ‘fear’ must be round the corner.

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