Please Note: You are viewing the unstyled version of Subprimelosses. Either your browser does not support CSS (Cascading Style Sheets) or it is disabled. As a result, much of this website will not look the way it was intended, although all of its contents will be accessible to you. For more information, visit our Browser Support page.

Skip to Primary Site Navigation, Secondary Site Navigation, Content

Home > Cases > Pimco Funds > Pimco Overview

Questions Loom Over Investor Losses In Pimco Closed-End Funds

Pacific Investment Management Company (PIMCO), which manages the world's biggest bond fund, has hit a wall recently concerning several of its leveraged closed-end municipal bond funds. As reported Jan. 20, 2009, in the Washington Post, Pimco was forced to postpone dividend payouts on at least six of its funds last month following massive declines in the asset values of the funds' portfolios. The financial wreckage left the funds' asset coverage well below the 200% of outstanding auction-rate preferred shares that is required when making dividend payments under the Investment Company Act of 1940.

The funds include the PIMCO Municipal Income Fund II; the PIMCO Municipal Income Fund III; the PIMCO California Municipal Income Fund II; the PIMCO California Municipal Income Fund III; the PIMCO New York Municipal Income Fund; and the PIMCO New York Municipal Income Fund III.

In failing to make dividend payments to shareholders, Pimco became the first manager in modern times to defer dividends on these funds, according to the Washington Post article.

That is hard news for investors to swallow, considering that the monthly payouts on the Pimco funds were a key selling point touted by Pimco management. By comparison, Pimco's competitors did not resort to suspending their dividends to clients. That's because those firms apparently took a more conservative approach to managing their funds.

Pimco's problems have to do with auction-rate preferred stock, which the funds used to borrow money. That might have worked several years ago, but in February 2008, the $330 billion market for auction-rate securities seized up. Instead of being able to sell auction-rate preferred shares at face value, holders of the instruments were left empty handed.

Unlike its competitors, which sold “tender option bonds” in order to raise money to pay off preferred holders, Pimco did nothing.

Making matters worse: the Pimco funds had gambled that Treasury bond prices would fall. Instead, the opposite happened. Treasury prices increased, while municipal bond values plummeted. This, in turn, created further turmoil on the asset values of the Pimco funds.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Return to Pimco Funds >


Top