PIMCo Took Large Lehman Loss, Gross Shrugs

Pacific Investment Management Co. (PIMCo) lost $3.4 billion on its investment in Lehman Brothers before its September 2008 collapse, the Wall Street Journal has reported.

The figure emerged from liquidation plans and investment disclosures filed in a federal bankruptcy court in New York.

PIMCo, the largest mutual fund in the world, bought billions of Lehman’s bonds over the course of about eight years, paying at or near their face value. At the time of Lehman’s bankruptcy, the firm held more than $4.5 billion of senior Lehman bonds.

After the bankruptcy, PIMCo sharply marked down the bonds on its books. Currently the firm holds the bonds at roughly 25 cents on the dollar.

Bill Gross, the legendary bond-investor and head of PIMCo, was dismissive of the WSJ’s report. On May 27, Gross pre-empted the WSJ story on Twitter by acknowledging PIMCo’s ill-fated investments in Lehman. Calling the story “old news,” Gross went on to mock the paper by accusing it of “Andrew Ross Sorkin envy.”

PIMCo manages $1.3 trillion in assets and, despite the Lehman losses, PIMCo’s 2008 investment returns were among the industry’s best.

“These holdings have long ago been marked to market,” a PIMCo spokesman told the WSJ.

Still, the losses represent a rare black eye for the fund and its vaunted chief. In July 2008 Gross claimed there was “close to 100% probability” that Lehman would avoid failure.

PIMCo is still locked in a bankruptcy battle with other creditors over the remains of the investment bank. Goldman Sachs, Deutsche Bank, and other financial institutions that are owed money by Lehman’s derivative unit are seeking to recover their losses at the expense of the rest of Lehman’s estate. PIMCo, allied with the hedge fund Paulson & Co and CalPERS, are hoping to take over Lehman’s bankruptcy plan and boost pay-outs to bondholders by billions of dollars.