Friday, January 9, 2009

Gross Wins 'Game of Chiken' Shunning GMAC Debt Swap

Jan. 9 (Bloomberg) -- Bill Gross’s decision to back out of a $38 billion bond swap for GMAC LLC debt is paying off for his Pacific Investment Management Co. investors now that the U.S. government has bailed out the auto and mortgage lender. Pimco, manager of the world’s biggest bond fund, reneged on a Dec. 15 agreement to join an investor group participating in GMAC’s debt swap and ignored warnings that bankruptcy might follow. While holders led by Dodge & Cox accepted as little as 60 cents on the dollar to reduce GMAC’s debt, the bonds Pimco kept soared as much as 83 percent, to 80.5 cents on the dollar, after GMAC won approval to become a federally backed bank. Gross, whose fund beat 99 percent of its peers in the past five years, won a bet that the U.S. wouldn’t allow Detroit-based GMAC to fail because its car loans were needed to prop up General Motors Corp. The government approved GMAC’s conversion to a bank on Dec. 24, giving it access to the Treasury’s $700 billion rescue program even though the debt swap didn’t get the 75 percent participation required by the Federal Reserve. “It was a game of chicken,” said Sean Egan, president of bond ratings firm Egan-Jones Ratings Co. in Haverford, Pennsylvania. “Some investors benefited whereas others were harmed. They were harmed because they relied on information that was provided by the federal government, which proved to be inaccurate.” GMAC’s $797 million of 7.25 percent notes maturing in 2011, which Pimco owned as of September according to data compiled by Bloomberg, rose to 80.5 cents from 44 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Holders who tendered those notes for cash got 70 cents on the dollar.

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