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.

Update: Notwithstanding the fact that the only above-the-jump link in this blog entry was to the Bloomberg article I quoted, and notwithstanding the fact that I put the quotation in <blockquote> tags to make it quite clear that I was quoting another news source, I received the following nastygram this morning from Bloomberg:

I am in-house intellectual property counsel for Bloomberg L.P. and its affiliates, which together form one of the largest providers worldwide of financial news and information and related goods and services.

It has come to my attention that the recent, January 21, 2009 "Market Movers" blog article entitled “Fragmented Bondholders” includes a direct quote from Bill Gross which was obtained by Caroline Salas for Bloomberg News. As there is no attribution to Bloomberg News, there is an implication that the quote included in the Market Movers blog article originated with the author of the article. We ask that the article be updated with the proper attributions.

Now that you are aware of the issue, Bloomberg News expects a higher level of respect for the copyright law and greater editorial integrity going forward.

Regards,

Joanne St. Gerard

Does a direct link to the article in question really not constitute an attribution? How on earth can something which is explicitly tagged as a quotation from an outside source be read as an implication that I got the quote? Does Joanne St. Gerard ever read blogs? And why does she think that impugning my "editorial integrity" is a sensible way of initiating contact with me? I have no idea. But for the record, yes, the quotation in this article came from the Bloomberg article I linked to. I trust she’s happy now.