Cult and Culture in the Bond Kingdom

The story of Bill Gross and Pimco is told in The Bond King, a book by Mary Childs published in March of this year.  In the introduction, Childs writes that it “is not a comprehensive history of Pimco” (thankfully, since such a tome would be unwieldy), but it provides a well-reported look at a man and a firm that have been at the center of market action and industry competition for decades.

This is the first of three postings about the book, which are not intended to summarize it but to explore some of the implications of it for investment professionals and organizations.  The next one will deal more with the craft of asset management, by focusing on ideas and methods (and seminal market events) that were pivotal for Pimco’s success.  Then the final piece will address problems of due diligence and the difficulty of figuring out what’s really going on behind the façade at an asset management firm.

Organizational dynamics

All organizations are messy, even highly successful ones.  The Bond King recounts plenty of the drama at Pimco — and sets up essential questions about the nature of investment organizations and what it takes to win in the market made up of securities and in the one made up of managers.

Pimco was founded by a “three-legged stool” of leaders.  That’s in contrast to many new asset managers, which are dominated from the beginning by one person with a track record and perhaps some measure of fame.  But who can name the two other than Gross?

As the chief investment officer, he became the face of the firm and he got the credit for its success.  John Wooden, the legendary basketball coach at UCLA, said, “The main ingredient of stardom is the rest of the team,” but in the investment world (as in sports) it’s those stars who get the glory.  That external recognition reinforces their power within their organization.  Business decision making can easily become more concentrated and one-dimensional, especially as other key people leave over time.

For many firms that’s a fatal flaw, although in some cases the death is a slow one, happening over many years, while others seem to come out of nowhere.  When a person is more important than the firm, an imbalance exists that will resolve itself sooner or later.

This is how Childs characterizes Gross’s point of view as his reign at Pimco looked like it might be coming to an end:

No matter how much Pimco management wanted to rein him in, they couldn’t risk his quitting, not amid all the turmoil.  It would destroy the firm.  It was his trump card.

He saw “that Pimco was his, and Pimco was him.”

While those are Childs’s words, they capture the mindset at work at many firms.  In a New York Times interview, she said,  “A lot of these founder-led companies depend so heavily on the founder, and he or she can kind of act however they want.”

Culture

The book is a window onto the Pimco culture and, to a certain extent, the cultural norms of the investment industry.  Therefore, it serves as a platform for examining both specific and general questions about those norms, which will be revisited in the third part of this series.

There are many elements of culture.  The day-to-day work environment is full of clues.  At Pimco, the trading room reflected Gross’s need for quiet, so that he could think.  Louder people were moved further away from his desk.  Communication was usually by email, even if someone was a few feet away.

In some organizations, that sort of hushed habitat indicates a studious, collegial approach.  That was not the case at Pimco:

Serene for him, maybe, but his personality mangled whatever peace the rest of them could have enjoyed.  The place was suffused with Gross’s clinical insecurity that someone might catch up, that someone might threaten Pimco’s dominance.

Those emails from Gross — and the direct personal interactions with him — demanded fast answers and conviction.  “Your ass was always on the line,” is how Childs summarizes it.  And:  “Grown men had been brought to tears.”

The byproduct of his approach was a cutthroat, often merciless environment that could chew people up and spit them out, like the “sweet statistics nerd [who] left twisted, broken, full of rage.”

Gross is quoted as saying, “Maybe there should be a grain of sand in the oyster to produce the pearl, maybe there should be some conflict.”  But how much was too much?  What’s the right recipe?  What are the effects of a win-at-all-costs mentality?

After the infighting at Pimco became public, Marc Andreessen said:

The behavior described is completely typical of any highly-successful, high-functioning organization in any field I’ve ever seen.  [They] aren’t Disneyland.  There’s always stress, conflict, argument, dissent.  Emotion.  Drama.

Where is the line?  At what point does productive tension become destructive infighting?  When do the land mines that have been planted start blowing up?

Gross himself had earlier declared, “Pimco is less likely to explode externally from the ingestion of too many assets than it is to implode internally from a self-induced ulcer.”

Cult

Many investment managers keep their private lives close to the vest, but Gross would sometimes bare his innermost thoughts in his monthly Investment Outlook pieces.  And at times he would say things at conferences that would raise eyebrows.

Childs delves into some of that and offers a multi-faceted look at his personality and behavior.  They has also been the topic of articles by others (and Gross has weighed in himself, as during a Masters in Business podcast), so we won’t go into it any further here.

Despite his quirks and his challenging nature, Gross led a wildly successful firm for more than thirty years, which engendered devotion to him within it.  He might have been an odd duck, but he was the odd duck that laid the golden eggs.

The same kind of admiration grew and grew among investors and gatekeepers and members of the media.  Once he became known as “the Bond King,” it intensified.

Kingdom

Always willing to use narrative to achieve his goals (more on that in the next posting), Gross has said that he wasn’t going to disabuse anyone of the notion that he was, in fact, the Bond King.

He readily admits that being famous was always his goal, and he used his fame like a weapon.

History has shown that investors have trouble maintaining objectivity when it comes to investment managers.  They can fall hopelessly in love, especially with the acknowledged greats.  They even are willing to forgive a manager’s quirks as part of the package you get when you do business with a genius.

Gross was viewed as the king of the bond market, the person who had solved it and, through his use of influence and market power, had even controlled it at times.  His kingdom was vast, but, as he had predicted, it was vulnerable from within.

Secretariat and the diplomat

Many people move in and out of Childs’s story across the decades, but one matters more than all of the others:  Mohamed El-Erian.

El-Erian had worked at Pimco previously, but he left for a short stint as the head of the Harvard Management Company.  When he returned, he was named Co-CEO and Co-CIO.

It turned out that he and Gross were a bad match, but it would take more than six years for the breakup to occur.

Both were paranoid, in the Andy Grove only-the-paranoid-survive sense of the word, but both were driven to notch personal wins too.  El-Erian had his own flaming emails to match Gross’s, often sending them off from distant lands as he flew the world around visiting clients.  Now there were two alpha males, fighting for position.

The son of a diplomat, El-Erian was the consummate behind-the-scenes operative.  A former Pimco partner is quoted (by name) in the book:

Mohamed operated in a Machiavellian way . . . behind the scenes, usually in unilateral conversations, where he would conspire to bring others into supporting his view that other people in the organization should not be given the responsibility they currently are, or compensation, or role.  He was a champion underminer of people, in a stealth fashion.

The pressures grew within the organization.  People started to pick sides.

Gross had always been distrustful of bureaucrats (a quite common point of view among investment managers).  Childs quotes him as saying to some traders, “I’m Secretariat.  Why would you bet on anyone other than Secretariat?”

Pots of gold

Monstrous paydays were the norm.  For example, one year Gross made around $300 million and El-Erian about $230 million — after so-so performance and notable outflows from Pimco’s flagship product.  And they weren’t the only ones getting rich.

Childs:

Compensation was Pimco’s devil’s bargain.  It was also largely how the firm expressed affection.  Why else would anyone tolerate such a scorching office climate?

The extreme unpleasantness was the cost of fatter paychecks than almost anywhere else, at least at the top — and beneath:  the hope of those future paychecks.

So what if it’s a “crucible of toxicity”?  As Don Draper said in Mad Men, a clip of which has become a widespread Twitter meme, “That’s what the money is for!”

The fall

It was destined to end badly.

The fault lines were lying in wait, not just those between Gross and El-Erian, but all of the ones that had been covered up on the one-way road to success.

There had been tremors before, but an earthquake had never occurred until El-Erian resigned in early 2014.  Gross was out eight months later, gone from the firm he defined.

With the solid reporting and good writing that is featured throughout the book, Childs details the palace intrigue and maneuvering that accompanied the deposition of the king.

The subtitle of the book is “How One Man Made a Market, Built an Empire, and Lost it All,” although in his Wall Street Journal review of it, James Grant suggested that it should be “How One Man Reimagined a Market, Built a Business, Got Rich, and Stayed Rich.”

Each is true in its own way.  Like many investment managers before him, Gross got rich and stayed rich, even after losing his edge.  But he also lost his firm and his spot upon the throne, which were the real treasures he had sought.