While I knew PIMCO was mas­sively influ­en­tial dur­ing the finan­cial cri­sis, I did not real­ize a mutual fund shop could poten­tially be thrown in with banks as "sys­tem­at­i­cally impor­tant" insti­tu­tions.  But con­sid­er­ing just how many bonds they own, I guess it makes sense.  Obvi­ously, Mr. Gross is not happy with this poten­tial sit­u­a­tion, as it would come with more cost and oversight.

But if push comes to shove and there is some sort of bond dis­as­ter down the road, I am sure the Fed would just do QE8 and tar­get all PIMCO's portfolio.

Lengthy story but some snip­pets below via Reuters:

• He is the man who made bond invest­ing sort of sexy – and now he may pay the price.   Over more than three decades, Bill Gross, co-founder of asset-management giant PIMCO, has made so much money for clients that he has become the barom­e­ter by which other bond traders are judged. His West Coast perch, pre­scient calls on the U.S. econ­omy and devo­tion to yoga only added to the mystique.
• But the very recipe that enabled Gross to dom­i­nate his indus­try may now be con­spir­ing against him.  He's com­ing off his worst year in the busi­ness after mak­ing a huge bet against U.S. Trea­suries that back­fired. Last year, for the first time in nearly two decades, investors pulled more money out of PIMCO's flag­ship fund than they put in.
• More trou­bling, U.S. reg­u­la­tors are now con­sid­er­ing whether PIMCO should be deemed a "sys­tem­i­cally impor­tant finan­cial insti­tu­tion" – that is, too big to fail, and thus sub­ject to tighter reg­u­la­tory over­sight. The con­cern: The jug­ger­naut man­ages so much money for pen­sion funds that it could ham­mer the econ­omy if it ever went under. The firm has dou­bled in size to $1.36 tril­lion in assets since the col­lapse of Lehman Broth­ers in 2008.
• The firm is lob­by­ing hard to fend off the "sys­tem­i­cally impor­tant" des­ig­na­tion, accord­ing to reg­u­la­tory dis­clo­sures. Like other finan­cial firms, it also objects to impend­ing rules that could make some of its deriv­a­tives trad­ing more costly.
• Indus­try ana­lysts also won­der whether PIMCO's $250 bil­lion Total Return Fund, the world's largest bond fund, is such a behe­moth that Gross some­times has to swing for the fences to gen­er­ate the kind of returns investors have come to expect. Because PIMCO's flag­ship fund relies heav­ily on deriv­a­tives to bet on bonds, some ana­lysts say it's unnec­es­sar­ily com­plex and poten­tially at risk should one of its trad­ing par­ties fail.
• Gross dis­misses con­cerns about PIMCO's girth. He says the firm isn't "lev­ered," or mak­ing bets with bor­rowed money, in the way that failed play­ers like Bear Stearns or Lehman Broth­ers did. The asset man­ager is using only client money to trade.  "It's not like we are a deposit insti­tu­tion and there'd nec­es­sar­ily be a run on the bank because they thought the bank was going to fail," Gross said in an inter­view. "'Too big to fail' is depen­dent upon tens of thou­sands of clients" aban­don­ing ship at once, and it's "hard to believe they'd want out at the same time."
• The debate over PIMCO's cen­tral­ity to the finan­cial estab­lish­ment is a turn­about: Up until the finan­cial cri­sis, the 67-year-old Gross was largely seen on Wall Street as a West Coast out­sider and a bit of a loner.  But dur­ing the cri­sis, scared investors piled into his funds. Pol­i­cy­mak­ers from the Fed­eral Reserve and Trea­sury Depart­ment turned to PIMCO to help with a raft of pro­grams meant to res­cue the finan­cial sys­tem. That helped forge closer ties between the firm and the gov­ern­ment and raised PIMCO's pro­file even more with investors.
• "The con­cen­tra­tion of bond-market assets in a few firms, which some could argue to be sys­tem­at­i­cally risky, is not of those firms' design, but rather stems from their suc­cess," says Joshua Ros­ner, man­ag­ing direc­tor of Gra­ham Fisher & Co., an adviser to insti­tu­tional investors.

Dis­clo­sure Notice

Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

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