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Pimco launches troubled-securities fund

Pimco has launched a $2-billion distressed debt fund. It will invest in mortgage-backed securities and other fancy credit instruments. Amy Scott reports.


KAI RYSSDAL: There's word today that money manager Pimco has launched a $2-billion distressed debt fund. It will invest in mortgage-backed securities and other fancy credit instruments. But wait a minute... aren't those the very investments that got us into this whole credit mess? Marketplace's Amy Scott reports.

Amy Scott: They're known as vulture funds. They feed on junk bonds close to default, and other so-called distressed securities. The Wall Street Journal reports that Pimco is the latest money manager hoping to pick over the remains left by the subprime-mortgage meltdown. Mike Hatley is president of Westgate Horizons Advisers. He says as traditional investors shun risky bonds and loans, speculators are snapping them up at fire-sale prices -- with the promise of high returns.

Mike Hatley: There's definitely potentially a lot of money to be made, because a lot of these securities, frankly there's nothing wrong with them, it's just, there's a lot of it for sale and not a whole lot of buyers right now.

Hatley's firm sells pools of corporate loans to investors. With Pimco in the game, he's hoping the debt market will pick up. But Pimco is taking on some risk if the credit market doesn't bounce back. The firm is reportedly betting on the same kinds of investments that got two hedge funds at Bear Stearns in so much trouble this summer. King Penniman analyzes the corporate debt market at KDP Investment Advisers. He says it'll take investors like Pimco to spark a recovery.

King Penniman: I think what we have to find is new, non-traditional buyers to try and clear the market and bring it back to balance, and this is certainly an important step to get there.

Pimco isn't the first company to dip its toe into the market. Several investment firms have launched funds that focus on troubled securities. And investment bankers say they're staffing up to cope with trading volume.

In New York, I'm Amy Scott for Marketplace.

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Follow Amy Scott at @amyreports