From The Economist (16/01/2003):"(...) PIMCO, an asset manager specialising in bonds, recently attacked the credit-derivatives market as a place where insiders use private information to bet against companies' credit quality. (...)"http://www.economist.com/finance/displa ... 1537500Any comments?endriux

My gut tells me that Bill Gross does not like the new kids on the block making waves in "his" pool. For most of the big-name paper that he's exposed to, there was so much supply that you couldn't manipulate the market through funded trading - it would take too much money. Now, guys like Gotham can make a billion-dollar bet against MBIA for 2-3%/year. People can scrounge up the $20-$30MM a year to put on the trade because you're getting 40x 'leverage'. This is causing the bond price vols to rise in a significant way. The hitch for PIMCO is almost surely that crederiv is not in their investment mandate, so they can't fight fire with fire. Instead, their buy/sell triggers are getting picked off a lot faster than they used to. So, Bill can't take his sweet time during his yoga sessions to make up his mind.Something else to add here is that it's easier for hedge funds to short bonds than to go long synthetically because of the counterparty risk. In the Gotham bet, if they're playing for three years, they are on the hook for maybe $75MM tops, but if they go long they could really end up owing the whole billion dollars. Obviously it's easier to take credit risk of a major investment bank than the other way around. The ultimate result is that Mr. PIMCO has been in the news way too much. It's his way of pushing the bond market around with even less funding. Their call on Brazil is the best example of this. I'd thought that the call on GE was another one of those things. Certainly GE has some of the same kind of risk as MBIA, but they also have more assets than anybody. So if he pushes the price down with the free advertising he was getting at the time, he could get in at what I think is a pretty attractive price. It's still true that you can raise an incredible amount of hell with crederiv. When I saw the full details of the Gotham report - i.e. all the reasons they decided to bet against MBIA - I was actually a little underwhelmed. Maybe they could not say exactly what they wanted to say, but a lot of their comments were really for sensationalizing their story. You can't compare MBIA's leverage figures with Ford's. It's a different business. But the CDS market is thin enough that if you really did line up everybody on your side, you could sway the bond prices enough to make the rating agencies nervous. After Enron, there is much less leeway for them to act - they have to look at the market now. Unfortunately, I think the Gotham bet can't work for more-or-less the same reason. The failure of a company this big would have such massive consequences that it will not be allowed to happen. So somebody picks up the phone and says not to take away the AAA, unconditionally. My point is that you can't blow up the really big companies through CDS bets because of another kind of insider manipulation.

Thanks kr, for your useful and clear point of view!endriux