"And I don't like the way that Pimco's Bill Gross is trying to paint this as some kind of win for the little people"

Here's Felix Salmon:

"Fragmented Bondholders

During the Great Moderation, institutional fixed-income investors had boring, if lucrative, lives. They'd buy paper, clip coupons, and make money. Now, however, faced with a stream of high-profile defaults, they're going to have to start justifying their former paychecks by getting down in the trenches with the distressed companies they lent money to, and negotiating hard to maximize their eventual payout.

Or not. The biggest bond investor of all, Pimco, has resigned from the investor committee negotiating with General Motors, despite being one of GM's largest bondholders. And I don't like the way that Pimco's Bill Gross is trying to paint this as some kind of win for the little people:

"We're just not good committee members," Bill Gross, Pimco's co-chief investment officer, said in an interview yesterday from his Newport Beach, California-based office. "We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it's best that we simply look at the situation from afar as opposed to from inside."

Of course bondholders will represent their clients' interests in negotiations. No one's expecting anything else. But that doesn't mean they shouldn't talk at all. Creditor committees exist for a reason: they allow companies and their creditors to gauge which solutions are likely to be mutually acceptable, and move on past a debt restructuring to a period of profitability and growth. After all, neither company nor creditor likes it when bonds are in default, and they both have an interest in ending that state of affairs as soon as possible.

Interestingly, the news of Pimco's resignation from the GM committee arrives just as Ecuador announces that it has managed to find a bank to advise it on its own debt restructuring: Lazard. The last time that Ecuador defaulted, back in 2000, the country evinced very little interest in meeting or negotiating with its creditors, and Ecuador bondholders were furious. They set up the Emerging Market Creditors Association, or EMCA: a forum where the biggest holders of emerging-market bonds could get together and try to force countries to come in good faith to the negotiating table.

And who was the co-founder of, and single largest bondholder within, EMCA? None other than Pimco's very own Mohamed El-Erian. Back then, El-Erian fought hard for the right of bondholders to sit down and negotiate with distressed debtors; now, he seems happy for Pimco to unilaterally resign from such negotiations, citing vague reasons about just not being good on committees.

EMCA no longer exists, which is a shame, since it's needed now more than ever, in the wake of Ecuador's default and as emerging-market bond spreads price in a massive wave of further defaults in the future. But maybe that's symptomatic of a broader problem: bondholders compete against each other, to see who can get the highest returns, and are never very comfortable when they try to cooperate. Which means that they fragment -- as the GM bondholders just did with Pimco's departure from the negotiating table -- and leave debtors in a more powerful position.

Clearly, Lazard wasn't scared enough of its buy-side clients to refuse the Ecuador mandate. What that says to me is that bondholders don't have teeth these days. You'd think that Pimco would be worried about that state of affairs, but evidently not."

Here's Bloomberg:

"By Caroline Salas and Kathleen Hays

Jan. 21 (Bloomberg) -- Pacific Investment Management Co., manager of the world’s biggest bond fund, resigned from an investor committee negotiating with General Motors Corp. to exchange debt for shares.

The decision by Pimco comes about a month after it reneged on a Dec. 15 agreement to join bondholders in GMAC LLC’s $38 billion debt swap. The 10-member GM bondholder committee overlaps with the GMAC group, including San Mateo, California- based Franklin Resources Inc. and Fidelity Investments of Boston, said a person with knowledge of the situation who declined to be identified because the members haven’t been publicly announced.

“We’re just not good committee members,” Bill Gross, Pimco’s co-chief investment officer, said in an interview yesterday from his Newport Beach, California-based office. “We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it’s best that we simply look at the situation from afar as opposed to from inside.( GET IT. HE HAS NO INSIDE INFO. )”

The withdrawal means Pimco may gain less information from other investors or have a smaller influence in talks with Detroit-based GM, which needs to cut two-thirds of its $27.5 billion in unsecured public debt. GM is negotiating with the committee of creditors as part of a government bailout of the biggest U.S. carmaker.

Reducing Debt

GM is attempting to reduce debt to avoid bankruptcy as the economy sinks deeper into a recession. Pimco’s resignation from the committee may not hamper GM’s restructuring given that GM Chief Executive Officer Rick Wagoner said last week it was too early to say how GM would work with creditors to win their assent in slashing debt.

GM’s 77-year reign as the world’s largest automaker ended after it said today that 2008 sales fell more than 11 percent to 8.35 million vehicles. Toyota Motor Corp. recorded a 4 percent drop to 8.92 million. GM’s U.S. sales fell 23 percent last year, outpacing the 18 percent industrywide decline. The company has posted about $73 billion in losses since the end of 2004, the last time it recorded an annual profit.

Pimco pulled out of its agreement with a committee of GMAC bondholders to swap their debt for as little as 60 cents on the dollar. The exchange allowed Detroit-based GMAC, the main lender to GM dealers, to convert to a bank and obtain federal aid. GM sold a 51 percent stake in GMAC to a group led by New York-based private equity firm Cerberus Capital Management LP in 2006 for $7.4 billion.

Government Blessing

The decision by Gross, 64, initially raised concern the swap would fail to meet government requirements that 75 percent of the bonds be tendered. Without Pimco’s participation, 59 percent of the bonds were exchanged. Pimco is a unit of Munich- based Allianz SE, Europe’s largest insurer.

Pimco bet correctly that GMAC would get bailed out anyway because the government wouldn’t allow the lender or GM to collapse. The value of the firm’s holdings soared as much as 83 percent, to 80.5 cents on the dollar.

Members of the GMAC committee “probably felt shortchanged and rightly so,” Sean Egan, president of ratings company Egan- Jones Ratings Co., said in an interview from his Haverford, Pennsylvania, office. “There’s a variety of reasons why the other creditors would have cause for being upset with Pimco.”

Gross said he “can understand” how other committee members would be upset( YES ).

“All members of the GMAC deal basically agreed with each other that each member was able to, you know, go their own route in terms of decision making, so the fact that Pimco did I think would not have been an abrogation of the agreement,” he said.

Bullying Creditors

Gross told the New York Times last month he wouldn’t tender because Cerberus was trying to bully creditors to reduce their claims by as much as half. Gross told the Times he wanted Cerberus to put more money into GMAC. Pimco owned more than $340 million of GMAC debt as of Sept. 30, according to regulatory filings and data compiled by Bloomberg.

Such committees often negotiate with troubled borrowers to obtain the best terms in a restructuring for bondholders, who get repaid after banks and ahead of shareholders in a bankruptcy.

“The advantage of being on a committee is you can help guide the firm and have an active voice in the firm’s future,” Egan said. The disadvantage is holders on the committee may have trading restrictions imposed if they gain access to insider information( YES ), he said.

Pimco’s Holdings

Pimco is among the biggest holders of GM bonds, behind Franklin, Capital Research & Management Co. and Fidelity, Bloomberg data show. Pimco owns more than $138 million of the debt, according to Bloomberg data based on regulatory filings in September. Its largest holding is 39 million euros ($50 million) of GM’s 1.5 billion euros of 8.375 percent bonds due in 2033, according to Bloomberg data.

Those bonds, part of a $13.5 billion sale of dollar-, pound- and euro-denominated debt in 2003, closed today at 16 cents on the dollar to yield 51 percent, down from 73 cents on the dollar a year ago, according to Bloomberg data.

GM’s bonds have gained 1 percent on average this month, compared with a return of 4.7 percent for high-yield, high-risk securities, according to Merrill Lynch & Co. index data. On Jan. 12, analysts at JPMorgan Securities Inc. cut their recommendation on GM’s bonds to “hold” from “buy.”

Bonds rated below BBB- at Standard & Poor’s and less than Baa3 at Moody’s Investors Service are considered high-yield, or junk. GM’s senior unsecured debt is rated C by Moody’s, the lowest grade, and CC by S&P. As recently as 2005, the company had investment-grade ratings.

GM shares rose 3 cents to $3.53 in New York Stock Exchange composite trading today.

Beating Peers

Gross’s Total Return Fund, which outperformed 99 percent of its peers over five years, rose 4.8 percent in 2008, Bloomberg data show. Its peers, government and corporate funds, declined an average of 8 percent last year, according to Bloomberg.

The government provided $6 billion in aid to GMAC. Cerberus and GM must divest most of their ownership under the accord. GM received $4 billion in government loans last month through the Troubled Asset Relief Program after saying it would run short of operating cash by the end of 2008. It’s due to get an additional $5.4 billion this month.

With the release of the second $350 billion in TARP funds, approved by the Senate on Jan. 15, GM is scheduled to get $4 billion more in February. The automaker has to restructure its business and present a progress report to the Treasury Department by Feb. 17. The TARP program was originally designed to purchase bad mortgage assets, then later expanded to inject capital directly into troubled companies.

To contact the reporters on this story: Caroline Salas in New York at csalas1@bloomberg.net; Kathleen Hays in New York at khays4@bloomberg.net"

Here's my take on Salmon's blog:

"Let me take a stab at Pimco's decision. They are widely perceived to have taken a risky bet on the GMAC bonds and won out. Of course, this can also look like collusion, since Pimco is buying MBSs for the Fed, among other things. The GMAC business might someday be investigated because, among other things, I believe that Snow works for Cerberus. Even though I like Pimco and am a big fan of Gross, I suggested that they excuse themselves from the Fed deal as this big win on GMAC would bother some people.
Now, the reason that Gross gave for his GMAC position was that he was protecting his clients,so he held firm. He can hardly change his position now, and then win big again. It will look very bad.
Personally, I believe it makes good sense to bet on government intervention these days, and so Gross was smart with GMAC. But this entire GM and GMAC business has a real downside if it smells funny, so that I believe that Gross has to be consistent from here on in.

By DonthelibertarianDemocrat Posted: Jan 21 2009 2:15pm ET"