When I heard that Ben Bernanke was taking a second advisory role, at PIMCO, as well as his first job out of the Fed, at Citadel, I kind of nearly dropped my morning latte in surprise. If I was PIMCO, I would not be wanting an advisor to Citadel to be coming within a hundred yards of my trading floor.
Why not? Well, the way that PIMCO works, as Felix Salmon explained a few years ago, is very dependent on their ability to execute changes in their view in a very, very efficient manner — quickly, and without too much impact on the market price. Given that, if I was PIMCO, I would be super super paranoid about allowing anyone near me who was also going to be talking to one of the world’s sharpest and most aggressive hedge funds.
Obviously, Bernanke is a) a man of pretty unquestioned integrity, b) aware of the clear potential for conflict of interest and c) neither a spring chicken nor a pushover. He will be aware of the danger of having one of his two clients out-traded by the other. So, although I doubt that will stop the Citadel traders trying, he will already be pretty resistant to questions of the following kind:
“So, what do they think up in Newport?”
“What’s Andrew Balls saying?”
“Do your other guys like the ten year linked?”
“What’s PIMCO holding? Come on, tell me, what have they got? What are we f**king paying you for anyway? Come, you bearded f**k, tell me? No, f**k your Chinese Wall, I’ve got Ken on my ass here. What are they holding? What are they holding? What are they f**king …” (repeat ad infinitum, some of them can be very persistent and/or aggressive).
In any case, it’s unlikely that Bernanke, as an outside consultant, will be reviewing portfolios or directly advising on trades. It’s more likely that he’ll be a sounding board for general discussions, and/or a brand ambassador, meeting clients of PIMCO for pitch or review meetings. That sounds like less of a problem of conflict of interest, except …
Except that if anything, information about client attitudes to PIMCO is more valuable to a competitor than information about PIMCO’s attitude to the market. After all, PIMCO’s positions are generally well-known — they’re too big and too public for it to be otherwise. But if you ever got a hint that they had received a big redemption or gained a big mandate — well, that would be very useful information indeed because you would know them to be potentially forced buyers or sellers.
At a lower level, traders are always sniffing for information about possible changes of view — whether the holders of a security are confident in their decision and happy to add more, or whether they’re doubting themselves and thinking about changing their minds. A fly on the wall at a general sounding board for PIMCO PMs could learn all sorts of useful information simply by being aware of what they were thinking about.
And furthermore, hedge fund traders are in the business of extracting “soft” information and understanding its implications. Being a human antenna for other people’s sentiment toward the market is what they do. The best ones — and Citadel doesn’t employ many lemons — can make a guess about your positioning and recent performance from the way you say “Good morning”. That’s why so many of them are poker players, and particularly why they often do well in the big face-to-face tournaments. So the questions that Bernanke really needs to look out for are things like:
“How’s California, my man? Still sunny?”
“Jeez, another tour of Asia? Working you pretty hard aren’t they?”
“What do you mean you can’t do the 15th? Frankfurt *again*?”
“Lighten up, Ben! Looks like someone’s been giving you a hard time?”
“Tell me, if we wanted to shift a big block trade in[security] who do we call at PIMCO?”
“Seen the Journal? Brutal. Rather have my performance numbers than PIMCO’s huh?”
Even with the best will (and the best poker face) in the world, this dual role looks to me like a possible conduit of information. Bernanke is experienced in keeping his mouth shut, but he’s going into a whole new world now, and he’s doing so without the benefit of a staff and a press office to protect him. If I was PIMCO, I wouldn’t have taken this risk.
Dan Davies is Senior Research Advisor at Frontline Analysts