It’s payback time for betting on moral hazards as Pimco, Vanguard Are Biggest Bond Fund Losers in Lehman Collapse.

Pimco Advisors LP, Vanguard Group Inc. and Franklin Advisers Inc. are among the investment companies that will face losses of at least $86 billion stemming from the collapse of Lehman Brothers Holdings Inc., the biggest bankruptcy in history.

Mutual fund companies’ filings show they hold more than $143 billion of bonds, led by Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund, and Valley Forge, Pennsylvania-based Vanguard, according to data compiled by Bloomberg as of June 30.

While bond investors will recover different amounts based on their ranking in Lehman’s capital structure, models of credit default swaps assume lenders will recoup 40 percent of their loans overall in a bankruptcy. Investors may receive less than that, based on prices for Lehman’s senior bonds of as little as 35 cents on the dollar from market reporting system Trace.

Pimco holds Lehman bonds in at least 12 of its funds, including the $134 billion Total Return Fund. Bill Gross, manager of the fund and co-chief investment officer of Pimco, was buying Lehman bonds as recently as June, Bloomberg data show.

John Woerth, head of public relations at Vanguard, said the company holds Lehman bonds among the $450 billion of fixed income it manages.

New York-based Lehman, which filed for protection from creditors today, owes its 10 largest unsecured creditors more than $157 billion, according to the Chapter 11 filing today in U.S. Bankruptcy Court in New York. The largest single creditor is Aozora Bank Ltd. in Tokyo, with $463 million in a bank loan. Other top creditors include Mizuho Corporate Bank Ltd., owed $382 million, and a Citigroup Inc. unit based in Hong Kong, owed an estimated $275 million, according to the filing.

Lehman listed total debts of $613 billion and $639 billion of assets in the filing.

Axa SA, Europe’s second-biggest insurer, and unnamed affiliates, own 7.25 percent of Lehman’s equity, according to the filing. Clearbridge Advisers LLC, the asset manager that Baltimore-based Legg Mason Inc. acquired from Citigroup Inc. in 2005, held 6.33 percent, according to the filing. Boston-based FMR LLC, the parent of Fidelity, the world’s largest mutual fund company, held 5.9 percent, the filing said.

The Fed As Clearinghouse?

According to this Bloomberg video Bill Gross Wants Fed To Act As Clearinghouse. I say the markets should fend for themselves, the Fed has done enough damage already.

Mike “Mish” Shedlock
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