PIMCO Hemorrhaging $198 Million an Hour in Redemptions

PIMCO has acknowledged that $23.5 billion of investors’ cash was withdrawn last month. It is my estimate that at least $19 billion or more of the liquidations followed legendary Pacific Asset Management (PIMCO) bond manager Bill Gross out the door after he left the firm on September 26 to avoid being terminated.Despite having almost $2 trillion of investor cash under management according to the firm’s website, PIMCO appears to be bleeding-out at the rate of $198 million an hour over a four-day period.

PIMCO’s CEO, Douglas Hodge, said during a conference call that the firm is expecting and is ready for client redemptions. Most bond traders interpreted the statement to mean that PIMCO had set up emergency credit lines with banks or that its parent, German insurer Allianz, may possibly be working closely with the U.S. Federal Reserve’s Plunge Protection Team if the redemption rate turns into a waterfall event.   

The Wall Street research and investment firm of Sanford Bernstein estimates that in the short-term, between 10%-30% of PIMCO’s assets could be withdrawn, according to Bloomberg. But that would mean $200 billion to $700 billion of assets will be withdrawn, and that at least some of those assets are at risk for of distressed liquidations.    

As the former Treasurer of Orange County and a member of the $10 billion Orange County Employees’ Retirement Trust from 2006 to 2011, I recall that PIMCO managed $900 million of investment cash allocated to out fixed income investments. It is my belief that the County of Orange and all of PIMCO’s other institutional and retail investors believe that they could choose to direct PIMCO to liquidate their accounts and send them the cash in just a few days. 

That assumes that the investment positions held by PIMCO are highly liquid and will continue to be easy to sell.  But there has never been a single management that was forced to liquidate up to $700 billion in fixed income–not since Lehman Brothers bankruptcy that started launched the Financial Crisis. 

When Lehman Brothers tried to sell a large amount of illiquid fixed income positions in September 2008, their sales caused a waterfall event and set off a panic. The Dallas Federal Reserve estimated the economic loss from Lehman Brothers was between “$6 trillion to $14 trillion,” about the equivalent of “$50,000 to $120,000 for every U.S. household.”