Capital Markets
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CS
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We knew several major media and entertainment stocks fell sharply, now we begin to see the formerly-unknown fallout
(29 Mar 2021) In the matter of a week, former high-flying media darlings Discovery (DISCA $42) and ViacomCBS (VIAC $46) saw there share prices slashed roughly in half, without any clear-cut catalyst. Investors saw that bloodbath unfold in real time, but something else was going on behind the scenes which was neither clear nor transparent. One family office group (FOG), Archegos Capital, founded by former Tiger Management analyst Bill Hwang, had amassed major stakes in both of these firms and a number of Chinese Internet ADRs. As the shares began to crater, margin calls began rolling in from Archegos lenders, primarily Credit Suisse and Nomura, forcing the FOG to sell shares—thus exacerbating the initial drop. Both of these foreign lenders warned of big losses after announcing that "a significant US-based hedge fund had defaulted on margin calls," causing the shares of each to drop around 13%. It is too early to tell just how much Archegos and its lenders have lost in this nightmarish downward spiral, but it will certainly be in the billions of dollars for each of the players. Of interesting note: Goldman Sachs, Morgan Stanley, and Deutsche Bank rapidly unloaded big blocks of shares last week which were tied to Archegos. In other words, they got out before incurring the losses felt by Credit Suisse and Nomura. The incident is especially troubling for Credit Suisse, which already faced massive losses from the collapse of UK investment partner Greensill Capital, and a reported February loss of over $1 billion stemming from a US court case over questionable securities. Here is what's most disturbing about this case: Neither Credit Suisse nor Nomura shareholders were wise to the banks' dealings with Archegos or the extent to which the hedge fund had leveraged its media holdings. This is due to an exclusion made for family office groups in Dodd-Frank legislation, exempting them from the the same level of SEC reporting with which non-FOGs must comply. Odds are extremely high that by the time the dust settles on this saga these rules will have been "amended." |
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Robinhood
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Robinhood users miss out on largest one-day point gain ever in Dow after system-wide failure. (03 Mar 2020) Robinhood, a trading platform we have called "Stock Candy Crush Saga," just suffered a major malfunction, and users want more than answers. On a day when the Dow rose 1,294 points, the largest one-day point gain in history, the platform suffered a system-wide outage which prevented any buy or sell orders from being placed. As could be imagined, users took to Twitter and other social media outlets to voice their outrage. More than venting anger, many are calling for a class-action lawsuit to recoup what they lost due to their inability to trade. That would be a hard case to win, as the system wouldn't even let users access their accounts, meaning no evidence exists of any trades that would have taken place. Something tells us there are more than a few lawyers out there ready to take the case, however. Obviously, Robinhood didn't exist back in 1999, but it sure would have fit in with the zeitgeist of the late '90s. And that is not a compliment.
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MS
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Morgan Stanley to buy E*Trade in all-stock deal valued at $13 billion. (21 Feb 2020) Just three months after the major announcement that discount brokerage firm Charles Schwab (SCHW) would buy TD Ameritrade (AMTD) for $26 billion, Morgan Stanley (MS $39-$52-$58) decided it had better get in the game—the $83 billion financial services giant will buy online brokerage firm E*Trade (ETFC $35-$53-$57) for $13 billion in an all-stock deal. With the acquisition, MS will pick up around five million retail customers, over $350 million in new assets, and—most importantly—get in the lucrative and growing online banking marketplace. The company had rolled out an online tool for smaller customers last year, which will be cobbled together with the E*Trade system. Clearly, CEO James Gorman aims to take on Schwab and Fidelity by making this move, but will it work? As could be expected, shares of E*Trade spiked nearly 28% immediately after the announcement, but they proceeded to fall about ten percent from the peak as investors began to digest the news. As for the acquirer, shares of MS were off about 6% in the two days following the release. Many larger shareholders were clearly underwhelmed by the move, especially with E*Trade retaining its name. Time will tell, but with the advent of fintech, it did feel as though Morgan Stanley needed to make a bold move. This leaves Goldman Sachs (GS) on the big banking side, and Interactive Brokers (IBKR) as the last major online discount brokerage not going through some type of recent or planned merger. Interestingly, it appears that management teams at both of these companies considered their own play for E*Trade, with both deciding against a move. We love Interactive's fiery founder and CEO, Hungarian-born Thomas Peterffy, and would like to see that company remain independent—and profitable.
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SCHW
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Charles Schwab announces plans to buy TD Ameritrade for $26 billion. (21 Nov 2019) Three years ago, $15 billion (at the time) brokerage firm TD Ameritrade (AMTD $33-$51-$58) gobbled up St. Louis-based Scottrade for $4 billion. Now, just a few short weeks after Charles Schwab (SCHW $35-$50-$50) jolted the industry by reducing commissions to zero—forcing everyone to follow, it appears that TD will be gobbled up by that firm. Going into the day, Schwab had a market cap of roughly $60 billion, with TD about one-third that size. This deal, which sent shares of TD up 25% at the open and Schwab shares up over 12%, makes a lot of sense. The zero commission proposition certainly hurt TD Ameritrade more than it did Schwab, and consolidation seems to be the norm in an industry being disrupted by new web-based entrants. Once combined, the new entity will hold about $5 trillion in assets, giving it tremendous leverage. This begs the question: what will now happen to $10 billion E*Trade (ETFC) and and $20 billion Interactive Brokers Group (IBKR)? Interestingly, the one loser in the industry on the morning of this news was E*Trade, which was down over 6% at the open. This is because most analysts expected that firm to be the target company for the next acquisition. It might make sense for Interactive to buy E*Trade, assuming the former doesn't wish to be a takeover target itself. Want to play the entire industry? There's an ETF for that: the iShares US Broker-Dealers & Securities Exchanges ETF (IAI $52-$68-$68).
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3G
Buffett KHC |
Buffett denies tension with 3G Capital, which is unfortunate for his legacy. (25 Jun 2019) Precisely four years ago, Warren Buffett teamed up with Brazilian private equity firm 3G Capital to take control of American icon Kraft and force it into a nebulous food products blob with Heinz, another company it gobbled up. The combined entity, The Kraft Heinz Co (KHC $27-$30-$65), has now lost 60% of its value since the draconian 3G rebranded it for investor consumption. This has led to stories of a growing tension between Buffett and his friends at 3G, though he strongly denies these reports. Time will tell—let's see if these "good friends" do another deal together anytime soon. It is hard to fathom that Berkshire didn't know the modus operandi of 3G: slash and burn costs at the expense of the human equation. That process may look good on a spreadsheet, but the unintended consequences of moving in like a bull in a china shop often doom the strategy.
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MS
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A broker would have to be nuts to join Morgan Stanley (in our humble opinion). (01 Apr 2019) It is known as the Protocol for Broker Recruiting, and it effectively allows brokers to leave one firm for another, taking basic information on their clients with them so that they can let investors know where they have gone. In 2017, Morgan Stanley (MS $37-$43-$56) sent shockwaves through the brokerage industry when it abruptly pulled out of the Protocol, sending a shot across the bow to brokers who were thinking of changing firms. The harsh legal filings against brokers leaving Morgan Stanley since the company exited the agreement, however, have been met with skepticism by judges. Most recently, MS attempted to get a temporary restraining order (TRO) issued against a two-person team who bolted for another firm. The duo managed nearly $300 million in client assets. Texas state district judge Bridgett Whitmore, however, wasn't buying the company's argument, and shot down the request. MS has since filed another claim with FINRA, the national regulatory body, to stop the team from contacting clients. Based on our experience, here's the real question to ask: would a broker or team of brokers have been able to build up the same book of client business had they been at a competing firm, or was it Morgan Stanley's unique corporate culture that allowed these brokers to build their book? To us, the answer is obvious: it was the brokers, NOT Morgan Stanley, that built the book of business. Morgan Stanley, in our opinion, should be ashamed of its draconian behavior. Then again, as a broker myself I might be a bit biased. I only hope that other brokerage firms fervently attack Morgan Stanley when that company entices brokers to join with them. Which would beg the question, why the hell would a broker willingly enter that kind of environment?
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BX
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Penn member Blackstone made a brilliant deal with Crocs investment. (03 Dec 2018) We talk a lot about corporate management—how a great CEO can allow a company to excel while a lousy CEO can drown a previously-strong company. In the asset management arena, few do it better than Stephen Schwarzman, the longtime CEO of Blackstone Group, LP (BX $30-$35-$41). A case in point is the company's $200 million investment four years ago in a struggling footwear company called Crocs (CROX). Back in early 2014, the maker of those ubiquitous, multi-colored rubber shoes needed some cash. Blackstone stepped in, making a $200 million investment in exchange for a 13% stake in the company, two board seats, and preferred stock which could be converted to common after three years at a price of $14.50/share. At the time, CROX was selling at $13 per share. Now, with Crocs selling at $29 per share, the company will buy back about half of those preferreds from Blackstone for $183.7 million—nearly equal to the asset manager's entire investment. Crocs CEO Andrew Rees praised the work of the Blackstone-positioned board members, saying that their strategic guidance had helped put them in the financial position to execute the buyback. Private equity deals take place every day, typically outside of the purview of the common investor. Owning shares of a company like Blackstone can give investors of every size a chance to see the inner-workings (or at least as much is required by the SEC) of a private equity firm. We own Blackstone Group in the Penn Strategic Income Portfolio. The company, by the way, has a 7% dividend yield.
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Greenlight
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David Einhorn's Greenlight Capital is floundering—and losing assets. One of the most useful habits an investor can develop is the study of the strategies and tactics of major hedge fund managers—both the ones they like and the ones they despise. While these individuals are typically reclusive, holding information close to their vest, securities laws and talkative clients almost always force a certain amount of useful disclosure. Take Greenlight Capital's founder David Einhorn, for example. When we think of the 49-year-old Einhorn, two images come to mind: seeing him seated at the World Series of Poker, and his famous shorting of Lehman Brothers stock in 2007 as he lambasted the company's "dubious" accounting practices. Einhorn is a deep value investor, searching out companies with squeaky-clean balance sheets and low multiples. Unfortunately for Greenlight, high-multiple growth companies have been strongly outperforming their undervalued cousins. The Wall Street Journal, along with a number of other news outlets, have been talking with Greenlight investors to get a sense of what is happening at the fund. While markets are flat year-to-date, Greenlight is apparently off nearly 19% thus far in 2018, losing almost 8% in June alone. The precise figures are unknown, but the fund has reportedly dropped from around $12 billion in assets under management in 2014 to under $6 billion today. That 50% drop reflects both investment losses and clients pulling their money from the fund. One of Greenlight's biggest holdings is General Motors (down 4% ytd), and one of its biggest shorts has been Netflix (NFLX, up 107% ytd). Bold moves, but unfortunately the wrong ones.
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AB
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AllianceBernstein says sayonara to high-cost New York, packs bags for Nashville
(02 May 2018) For over two generations, asset management firm AllianceBernstein (AB $20-$27-$28) has called New York its home. Now, citing the high cost of doing business in the city, it is packing up and moving—lock, stock, and barrel—to Nashville, Tennessee. In an open memo to employees, in fact, management cited Nashville's lower state, city, and property taxes as a major reason for the move. Other reasons cited were the shorter commute to work, and the large pool of talent in the area. Thanks to technology, more and more financial firms have been able to escape the shackles of the major metropolitan centers, heading for greener pastures and healthier bottom lines. |
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GS
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Despite big Goldman Sachs beat, shares fall
(17 Apr 2018) Ahh, the good ole days, when an earnings beat meant your stock went higher, and a miss sent shares lower. By all accounts, banking giant Goldman Sachs (GS $210-$253-$275) had a blowout quarter, beating on nearly every metric. Revenue generated from trading soared 31% year-over-year, and revenues overall spiked 25%. Earnings-per-share rose from $5.15 a year ago to $6.62 this past quarter—a 29% increase. So, why were the shares trading lower on Tuesday? A couple of reasons have been posited. First, analysts wonder whether or not this growth can be sustained. A second reason cited is that investors may be upset with the Goldman decision to hold off on stock buybacks over the next quarter, using their cash windfall on corporate growth plans instead. We're not the world's biggest GS fans, but that decision seems pretty reasonable to us. |
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Pershing
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Investors are clipping Bill Ackman's hedge fund wings
(05 Apr 2018) The man who viciously attacked ADP while investing heavily in losers like JC Penney's Ron Johnson and Valeant's J. Michael Pearson is now under attack himself, as investors hit him where it hurts—his wallet. The giant sucking noise coming from Bill Ackman's Pershing Square hedge fund is the sound of money fleeing, and fleeing rapidly. Penn Wealth member Blackstone Group (BX) has been pulling money from the fund, and Jamie Dimon's JP Morgan (JPM) removed the fund from its recommended list for client capital. After so many bad bets and public confrontations, Ackman's fund has now underperformed for three straight years, and 2018 is showing little promise for a turnaround. How bad is it? About two-thirds of the cash that could have been withdrawn by the end of 2017 left the fund. That leaves little on hand for Ackman to play with. Pershing Square Holdings, Ltd. currently holds about $3.9 billion in assets, and Ackman is reportedly cutting staff and not seeking new capital from investors. |
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ADP
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Hedge fund punk Ackman gets embarrassed in ADP board seat vote
(07 Nov 2017) Last month shareholders at Proctor & Gamble (PG $81-$86-$95) told activist bully Nelson Peltz to take a hike. At least that vote was close. On Tuesday, shareholders at paycheck solutions provider ADP (ADP $88-$111-$122) showed activist Bill Ackman the door, and this vote was not close. Despite ADP's respectable performance, Ackman demanded shareholders vote out CEO Carlos Rodriguez and a number of other board members, placing him and a few buddies on the board instead. When the dust settled, Ackman had received less than 20% support from shares outstanding. Talk about an activist on a losing streak. What's your next target Ackman, Apple? |
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Trian
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(14 Aug 2017) Taking a page from ADP's playbook, Proctor & Gamble CEO hits back at activist investor
It is refreshing to finally see. For years, we’ve watched as punk little billionaire activists run roughshod over publicly-traded companies, generally for their own personal gain (not for the general good of stakeholders). Now, the companies are beginning to fight back. Last week it was ADP attacking the smarmy Bill Ackman. Today, Proctor & Gamble (PG $81-$92-$92) set its sights on Nelson Peltz, the activist owner of hedge fund Trian Partners, who has been demanding a board seat. P&G sent a letter to shareholders saying that Peltz wants the seat to “satisfy his own agenda,” and that “change for the sake of change” is not a recipe for success. While Trian owns $3 billion worth of PG shares, keep in mind that this is a $233 billion company, so that amounts to just under 1.3% of shares outstanding. We believe shareholders will shoot down Peltz’ effort at the annual shareholders’ meeting on 10 October. |
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Pershing
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(10 Aug 2017) ADP CEO: Ackman a spoiled brat
Finally, a CEO not afraid to stand up to these punk little hedge fund managers who always claim to know what a target company needs, despite their own dearth of experience in that particular industry. We have written about Bill Ackman enough for readers to know our low opinion of the little blowhard. Now, ADP CEO Carlos Rodriguez is calling him to the carpet. ADP (ADP $85-$110-$122) is a very well-run business solutions firm. As for performance, the company has returned about 100% growth to shareholders over the past five years. Nonetheless, Ackman opened his gaping hole and demanded the replacement of Rodriguez and several board members, nominating himself and two allies to the board (his Pershing Square fund holds an 8% stake). Rodriguez not only asked investors to look at ADP’s performance as compared to Ackman’s Pershing Square (funny), but also called the activist a “spoiled brat.” We love it. For the record, Pershing has been losing assets under management ever since its JC Penney and Valeant debacles. |
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GS
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(18 Jul 2017) After earnings beat, analysts are calling for Lloyd Blankfein's head at Goldman Sachs.
This must be why CEOs get the big bucks. After Goldman Sachs (GS) released earnings showing a beat on the top line ($7.89 billion in revenue) and the bottom line ($3.95 per share profit), one would expect a spike in the share price and pats on the back to Lloyd Blankfein, the company's CEO since 2006. Instead, Wall Street is focusing on the 17% drop in trading activity, with many now calling for Blankfein to go. Highly respected (at least by us) analyst Dick Bove said that GS has "stagnated" in the 11 years under current management, underperforming its peer group as a whole. Bove went on, "The stock price is right where it was ten years ago...I don't know how they're getting away with it." We agree—and haven't owned GS in over ten years. |
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BX
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(22 May 2017) Blackstone seals $40 billion deal in Saudi Arabia. US aerospace firms weren't the only winners from President Trump's first overseas trip—private equity firm and Penn Strategic Income Portfolio member Blackstone Group (BX $22-$32-$32) also walked away with a whopper of a deal. The US company, along with Saudi Arabia's largest sovereign wealth fund, the Public Investment Fund, announced a new $40 billion vehicle which will be used to invest in, primarily, US infrastructure projects. Blackstone was up nearly 7% today on the news.
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(14 Mar 2017) Ackman ends Valeant bet, losing $4 billion in the process. The hedge fund manager we love to hate, Pershing Square's Bill Ackman, once told us that Valeant (VRX $11-$11-$54), the phony drug company he invested a mint in, could be on its way to $330 per share. Today, shares are sitting at $11 a piece, and he has exited the building. His total loss on the investment? Around $4 billion. He also predicted the Rube Goldberg machine posing as a biotech firm would be the next Berkshire Hathaway. Um, OK.
How Much has Bill Ackman Lost on Valeant Position?
(11 Nov 15) We have well chronicled the dirty cabal between Valeant’s seedy CEO, Michael Pearson, and hedge fund bully Bill Ackman. Now that Citron Research has blown the cover on the WorldCom-like company, our schadenfreude got the better of us: we wanted to figure out how much the goofy Ackman has lost on the trade.
Although Valeant’sVRX stock price has plummeted from $263 per share to $80, a 70% drop in a few months, that doesn’t mean that Ackman owned at the top. His Pershing Square firm does own close to 20 million shares, or a 5.7% stake, but when did he buy them?
The financial engineer (I use that term as a pejorative) disclosed his massive position in Valeant back in March, when the shares were going for about $200. This would equate to a $4 billion position. We know that Ackman didn’t sell, and has vociferously supported his partner in “crime,” which would mean that he now owns about $1.5 billion of Valeant stock; a paper loss of over $2 billion in less than three months.
Before we shed tears for the guy, let’s remember that he pocketed about $2 billion from the hostile takeover bid he and Pearson thrust upon Botox-maker Allergan. On the other hand, his net worth sits at just $2.6 billion, so he is definitely feeling the pain. While his hedge fund, Pershing Square, grew 40% in 2014, it is now down about 10% for 2015. So sad.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 44.)
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Blackstone Acquires Three Shopping Centers in Southern Europe
(12 May 15) Penn Strategic Income Portfolio (SIP) member BlackstoneBX announced that it has acquired three new shopping centers in Spain and Portugal.
The Almada Forum, located in Almada, Portugal, is the third largest shopping center on the peninsula, with 262 shops, 35 restaurants, and a jumbo supermarket. Forum Montijo, which is linked to Lisbon by bridges across the Tagus River, boasts 160 shops, 22 restaurants, and a movie theater. The third property is Espacio Leon, located in Northern Spain.
Blackstone, as highlighted in Volume 3, Issue 19 of the Journal, has transformed itself into the world’s largest real estate investment company, overseeing about $85 billion in real estate assets, and quickly closing in on the $100 billion mark in that division alone. Real estate analysts estimate that these three properties may be worth as much as €100 million each.
The Portuguese real estate market has been on fire as of late, with an expected 2015 investment inflow of €1 billion. Portugal had been on the short list (along with Spain, for that matter) of countries nearing financial disaster, but this year’s growth is expected to tick up to 1.7%. Nothing to throw a party over, but certainly not a contraction. Knowing Blackstone, they swooped in at just the right time.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 20.)
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Dan Loeb Trashes the Oracle of Omaha in Front of a Cheering Crowd in Vegas
(Th, 07 May 15) Daniel Loeb is one of those billionaire investors we always listen to attentively when we see his face on one of the business networks. As the founder and chief executive of Third Point LLC, a New York-based hedge fund, he has amassed a $14 billion portfolio with precision and skill. We find Warren Buffett, on the other hand, to be a holier-than-though blowhard who rambles on incessantly about his own personal and political beliefs (and no, Warren, we don’t believe your secretary is in a higher tax bracket than you) but imparts very little useful investment advice to his listening audience. Unfortunately, to the mainstream press he is untouchable.
That is why we so enjoyed hearing Loeb launch on the self-proclaimed “Oracle of Omaha” while speaking to a thrilled audience in Vegas last Wednesday.
On taxes: “He tells us all that we should pay more in taxes, then he does everything he can to avoid them.” On Buffett’s annual letter to shareholders: “I love reading his letters, and then contrasting everything he wrote with what he actually does.” On hedge funds: “I love how he criticizes hedge funds, yet he really started the first hedge fund (in Berkshire).” The audience loved it.
One of our major problems with Buffett, who finally got peppered with some tough questions at last weekend’s Berkshire Hathaway shareholders’ meeting, is his willingness to help foreign-owned entities gobble up America companies. Most recently, he helped finance the takeover of Kraft foods by Brazilian giant 3G. Previously, he helped the same firm takeover Heinz. 3G is known for its slash-and-burn policy with respect to gutting companies (and jobs) to squeeze every penny out in profits.
The moderator at the Berkshire event read an email to Buffett from a shareholder who questioned “3G’s brutal cost cutting moves,” and went on to ask if Mr. Buffett “no longer aspired to balance capitalism and compassion?” Ouch.
(Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 19.)
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When a Bully Becomes a Detriment to Stakeholders
(25 Feb 14) I will admit, there has always been something about Bill Gross, the so-called "bond king," that has rubbed me the wrong way. Having worked for a bully or two in my career, I developed a knack for identifying the "my way or the highway" mindset in executives. Unfortunately, these knuckle-draggers always seem to think that they are the best and brightest in any room they enter, and when they run a profitable enterprise their self-adulation typically runs amuck. Of course, they feign modesty to anyone watching, but that is just to help them rest assured that their rightful throne sits atop Mount Olympus.
Bill Gross founded PIMCO back in 1971, and he has a reputation of being a good fixed income money manager. His PIMCO Total Return Fund, in fact, is still the largest bond fund in the world, despite billions of dollars of liquidations last year. It is easy to be a leader when everything is going swimmingly. One's true mettle, however, is tested and gauged in the arena, when the lions are licking their chops and the buzzards are circling. As Gross' fund began losing value last year, investors began to panic and a record-setting $41 billion was pulled out before 2013 was done.
Mohammed El-Erian, PIMCO's 55-year-old CEO and co-chief investment officer, was slated to take over for the 69-year-old Gross when the latter ultimately retired. The stress of losing the assets, combined with Gross' hubris, changed all that. PIMCO is a tough place to work and, as one could expect, you need a tough skin to succeed at any top firm in the industry. That being said, petulant and bully behavior does not need to be tolerated. As Gross began to get into open arguments with staff members and El-Erian himself, the work environment descended. According to a Wall Street Journal report, at one point Gross quipped to his co-CIO "I have a 41-year track record of investing excellence, what do you have?"
It was also reported that Gross had little tolerance for dissenting views. That is not leadership, it is adolescent behavior. In the midst of the Revolutionary War, facing an outcome that was far from certain, General George Washington was known for intently listening to--and considering--the opinions of the officers under his command, no matter their rank and despite the opposing views. We cannot expect our corporate leaders to be on par with General Washington, but we can expect them to have a modicum of his humility. This story reminds us how important it is to review a firm's governance and corporate culture, in addition to looking at the financials.