Here’s an excrept from Thomas Piket­ty’s Cap­i­tal in the Twen­ty-First Cen­tu­ry dis­cussing some of the dif­fer­ences between the incomes nations obtained from for­eign own­er­ship of assets in the 19th Cen­tu­ry vs today. In addi­tion to point­ing out that it was infla­tion that basi­cal­ly saved Ger­many from its crip­pling post-war debts, the book notes that while France and Britain held sub­stan­tial for­eign cap­i­tal posi­tions dur­ing the colo­nial era (at 100–200% of nation­al income) their cur­rent net for­eign own­er­ship is clos­er to zero today. Ger­many, on the oth­er hand, cur­rent­ly has for­eign assets worth ~50% of nation­al income, which is pret­ty much the same lev­el of for­eign assets Ger­many held in 1913. So, while Ger­many had a much small­er colo­nial empire com­pared to France and Britain over a cen­tu­ry ago, Ger­many’s for­eign assets (as a per­cent of nation­al income) dwarfs that of France and the UK today. It also notes that half of Ger­many’s cur­rent for­eign assets where only acquired since 2000. It’s all one more reminder that, just as you can’t have the whole world run­ning trade sur­plus­es at the same time, the Ger­man high-end export-inten­sive eco­nom­ic mod­el can­not be export­ed since you can’t have an entire world with a net pos­i­tive for­eign asset own­er­ship at the same time too. And yet export­ing that export-ori­ent­ed mod­el is exact­ly what Berlin is demand­ing of the entire con­ti­nent as the only way out of Europe’s depres­sion:

Piket­ty, Thomas, and Arthur Gold­ham­mer. Cap­i­tal in the Twen­ty-first Cen­tu­ry. Cam­bridge, MA: Har­vard Uni­ver­si­ty Press, 2014. p. 142. Print.
...
Note, too, that Ger­many over the past sev­er­al decades has sub­stan­tial for­eign assets thanks to trade sur­plus­es. By 2010, Ger­many’s net for­eign asset posi­tion was close to 50 per­cent of nation­al income (more than half of which has been accu­mu­lat­ed since 2000). This is almost the same lev­el as in 1913. It is a small amount com­pared to the for­eign asset posi­tions of Britain and France at the end of the nine­teenth cen­tu­ry, but it is sub­stan­tial com­pared to the cur­rent posi­tions of the two for­mer colo­nial pow­ers, which are close to zero. A com­par­i­son of Fig­ure 4.1 with Fig­ures 3.1–2 shows how dif­fer­ent the tra­jec­to­ries of Ger­many, France, and Britain have been since the nine­teenth cen­tu­ry: to a cer­tain extent they have invert­ed their respec­tive posi­tions. In view of Ger­many’s very large cur­rent trade sur­plus­es, it is no impos­si­ble that this diver­gence will increase. I will come back to this point.

In regard to pub­lic debt and the split between pub­lic and pri­vate cap­i­tal, the Ger­many tra­jec­to­ry is fair­ly sim­i­lar to the French. With aver­age infla­tion of near­ly 17 per­cent between 1930 and 1950, which means that prices were mul­ti­plied by a fac­tor of 300 between those dates (com­pared with bare­ly 100 in France), Ger­many was the coun­try that, more than any oth­er, drowned in pub­lic debt in infla­tion in the twen­ti­eth cen­tu­ry. Despite run­ning large deficits dur­ing both world wars (the pub­lic debt briefly exceed­ed 100 per­cent of GDP in 1928–1920 and 150 per­cent of GDP in 1943–1944), infla­tion made it pos­si­ble in both instances to shrink the debt very rapid­ly to very low lev­els: bare­ly 20 per­cent of GDP in 1930 and again in 1950 (see Fig­ure 4.2).1 Yet the recourse to infla­tion was so extreme and so vio­lent­ly desta­bi­lized Ger­man soci­ety and econ­o­my, espe­cial­ly dur­ing the hyper­in­fla­tion of the 1920s, that the Ger­man pub­lic came away from these expe­ri­ences with a strong­ly anti­in­fla­tion­ist attitude.2 That is why the fol­low­ing para­dox­i­cal sit­u­a­tion exists today: Ger­many, the coun­try that made the most dra­mat­ic use of infla­tion to rid itself of debt in the twen­ti­eth cen­tu­ry, refus­es to coun­te­nance any rise in prices greater than 2 per­cent a year, where­as Britain, whose gov­ern­ment has always paid its debts, even more than was rea­son­able, has a more flex­i­ble atti­tude and sees noth­ing wrong with allow­ing its cen­tral bank to buy a sub­stan­tial por­tion of its pub­lic debt even if it means slight­ly high­er infla­tion.
...

Giv­en cor­po­rate Ger­many’s inter­na­tion­al buy­ing spree, you have to won­der how many major multi­na­tion­al boards of direc­tors are going to be pin­ing to get scooped up by a Ger­man firm after read­ing an arti­cle like this:

Bloomberg View
Guess How Much Mon­ey Bill Gross Made Last Year?
Nov 14, 2014 6:59 AM EST
By Bar­ry Ritholtz

How much com­pen­sa­tion the folks at Pacif­ic Invest­ment Man­age­ment Co., bet­ter known as Pim­co, haul in each year has always been a top­ic of fas­ci­na­tion on Wall Street.

In 2012, news reports sug­gest­ed that the fir­m’s top 30 part­ners “pulled down an aver­age $33 mil­lion a year in com­pen­sa­tion in recent years.” A sub­se­quent col­umn by Felix Salmon guessed that the aver­age invest­ment pro­fes­sion­al at Pim­co was mak­ing “rough­ly $7 mil­lion each” annu­al­ly.

A Pim­co spokesman denied Salmon’s claim, respond­ing that “The num­bers cit­ed in your blog post today are wild­ly inac­cu­rate.”

Salmon’s spec­u­la­tion was, indeed, wild­ly inac­cu­rate — to the down­side. Actu­al bonus­es at Pim­co are high­er, much high­er, than prob­a­bly any out­siders pre­vi­ous­ly believed. Based on news reports, pub­lic records and new data obtained by Bloomberg View, it appears that Pim­co had a 2013 bonus pool for its 60 man­ag­ing direc­tors of almost $1.5 bil­lion.

So how much have Pim­co’s top exec­u­tives earned? Accord­ing to doc­u­ments pro­vid­ed to Bloomberg View by some­one with knowl­edge of Pim­co’s bonus poli­cies, the num­bers break down like this: Gross earned $290 mil­lion as his year-end bonus for 2013. Mohamed El-Erian, Pim­co’s for­mer chief exec­u­tive offi­cer and one-time heir appar­ent to Gross, received $230 mil­lion (El-Erian is a fel­low Bloomberg View con­trib­u­tor).

And the sto­ry does­n’t end with Pim­co’s two most vis­i­ble (for­mer) employ­ees. For­mer deputy chief invest­ment offi­cer Daniel Ivas­cyn — now serv­ing as Gross’s replace­ment as Pim­co’s chief invest­ment offi­cer — took home a $70 mil­lion bonus. Wendy W. Cup­ps, the glob­al head of prod­uct man­age­ment, gar­nered $50 mil­lion, mak­ing her one of the high­est-paid woman in finance. (Her rocky push into equi­ties was the sub­ject of well-pub­li­cized harangu­ing by Gross.) Dou­glas Hodge, now the CEO, took home $45 mil­lion of hol­i­day cheer. These giant bonus­es almost make the $22 mil­lion award­ed to Pimco’s pres­i­dent, Jay Jacobs, seem puny.

The top three man­agers after Gross and El-Erian — Ivas­cyn, Cup­ps and Jacobs — were rumored to have been behind the coup that sent Gross pack­ing to Janus Cap­i­tal in Sep­tem­ber. Next month, free of Gross and El-Erian, these three will have an extra half a bil­lion or so to keep to them­selves or dis­trib­ute to the oth­er man­ag­ing direc­tors.

Gross’s bonus — 20 per­cent of the total bonus pool for 2013 — places him in a com­pen­sa­tion class of his very own. To put that fig­ure into con­text, in 2013 Gross made just shy of what the next 20 pub­licly held finance com­pa­ny CEOs made com­bined.
[see image]

In the world of sports, you would have to take the total salaries, win­nings and endorse­ment deals of LeBron James, Lionel Mes­si, Kobe Bryant, Tiger Woods and Roger Fed­er­er — togeth­er — to be on par with Gross.

* * *

How Pim­co became such an earn­ings machine is a quirk.

It has been four decades since it was spun out of Pacif­ic Life Insur­ance Co., a move that was made in part to allow Gross a freer hand to man­age the insurer’s fixed income port­fo­lio. Since then, Pim­co has grown into a behe­moth, in terms of the bot­tom line and as a force in the bond mar­ket.

Much of what we know about Pim­co stems from Allianz SE’s $3.3 bil­lion pur­chase of 70 per­cent of the firm in 2000. A pub­licly trad­ed Ger­man insur­er, Allianz has released some details about Pimco’s oper­a­tions in its quar­ter­ly earn­ings reports. That data, along with mutu­al fund dis­clo­sures and fil­ings, pro­vide hints about the firm’s rev­enue.

We can esti­mate earn­ings by look­ing at the largest Pim­co funds. The 20 biggest have an aver­age fee of about 61 basis points. Let’s low­er that to account for dis­counts giv­en to large insti­tu­tion­al clients, and we get a rough esti­mate of about 50 basis points. On $1.82 tril­lion dol­lars, that yields $9.1 bil­lion in rev­enue a year.

Pim­co is, by any mea­sure, a fab­u­lous­ly wealthy com­pa­ny. Using my back-of-the-enve­lope rev­enue esti­mate, it gen­er­ates far more rev­enue per employ­ee than any bank or asset man­ag­er — almost four times as much as Gold­man Sachs.
[see image]
When Allianz bought into Pim­co, it picked up about $250 bil­lion in assets under man­age­ment. Pim­co cur­rent­ly man­ages about $2 tril­lion.

The bonus struc­ture is a quirk of that orig­i­nal deal: Allianz’ par­tial pur­chase left Pacif­ic Life own­ing 30 per­cent of Pim­co. But Pacif­ic Life was­n’t inter­est­ed in run­ning the asset-man­age­ment busi­ness and even after the Allianz deal, every­one involved con­tin­ued to defer to Gross’s finan­cial and man­age­r­i­al judg­ment.

Thus Pim­co — based in New­port beach, Cal­i­for­nia, and 6,000 miles removed from its major­i­ty own­ers — remained ful­ly autonomous. Bloomberg View’s fee analy­sis sug­gests Allianz takes about 70 per­cent of the total rev­enue Pim­co gen­er­ates annu­al­ly (plus or minus a few per­cent­age points). Pim­co keeps the rest.

This same deal struc­ture con­tin­ued even after Allianz pur­chased the 30 per­cent of Pim­co that it did­n’t already own from Pacif­ic Life in the mid-2000s. A sub­se­quent restruc­tur­ing in 2011 saw Gross and his team gain even greater con­trol over the firm. That gave Pim­co so much free­dom in rela­tion to its cor­po­rate par­ent that, as one ana­lyst described it to Bloomberg News, it appeared as if it was “the tail wag­ging the dog.”

* * *

Part of the rea­son for Gross’s longevi­ty after the Allianz takeover — and anoth­er ele­ment of the fir­m’s enor­mous wealth — is what we might call the “Pim­co Pre­mi­um.” Despite being in a com­pet­i­tive field includ­ing giant com­pa­nies such as Van­guard and Black­rock, Pim­co man­ages to charge more than the indus­try stan­dard for access to its funds and its sep­a­rate­ly man­aged accounts.

Why? When com­pet­ing for busi­ness, the firm has had an unbeat­able com­bi­na­tion of a long his­to­ry and out­stand­ing long-term results. (At least it did, until recent bad bets on ris­ing inter­est rates by Gross tor­pe­doed the 1‑, 3- and 5‑year record of the flag­ship Total Return Fund.)

Pim­co also became the go-to com­pa­ny for the Fed­er­al Reserve and U.S. Trea­sury in many of the cred­it facil­i­ties used to com­bat the con­tin­u­ing eco­nom­ic fall­out from the finan­cial cri­sis. Pim­co’s suc­cess in the fed­er­al gov­ern­men­t’s pro­gram to jump­start con­sumer lend­ing and a vari­ety of mort­gage-backed secu­ri­ty pro­grams added more lus­ter to its rep­u­ta­tion. Gross even man­aged to buy up lots of MBS’s before the Fed offi­cial­ly announced the pro­grams. Share­hold­ers of the Total Return Fund net­ted about $10 bil­lion from its mort­gage plays.

Beyond the sheer size of Pim­co’s bonus­es, there are oth­er aspects of its com­pen­sa­tion prac­tices that should give pause to every­one involved in insti­tu­tion­al asset man­age­ment.

For one, Pim­co has been part of a pub­licly trad­ed com­pa­ny — Allianz — for the past 15 years. Unbe­knownst to Allianz’s share­hold­ers, employ­ees of one of its busi­ness units have been pay­ing them­selves these extra­or­di­nar­i­ly large sums of mon­ey.

In the U.S., it is hard to imag­ine $1.5 bil­lion in spend­ing on any­thing not being dis­closed. Almost 16 per­cent of Pim­co’s rev­enue is a “mate­r­i­al” amount of mon­ey that would nor­mal­ly require dis­clo­sure in the U.S. But Allianz is a Ger­man com­pa­ny, sub­ject to dif­fer­ent reg­u­la­tions.

Anoth­er item worth notic­ing: Pim­co investors rep­re­sent pen­sion funds, foun­da­tions, char­i­ta­ble trusts, 401ks and oth­er retire­ment accounts. Pim­co’s enor­mous, self-paid bonus­es come right off of the top of the returns those out­side investors might oth­er­wise receive.

In a recent Allianz pre­sen­ta­tion fol­low­ing Gross’ depar­ture from Pim­co, the fir­m’s new chief exec­u­tive, Doug Hodge, stat­ed, “We don’t com­ment on mat­ters of com­pen­sa­tion.”

But while Gross may be gone, the high fees and com­pen­sa­tion struc­ture at Pim­co appear to remain firm­ly in place. Allianz does­n’t seem inclined to change things — it start­ed a $279 mil­lion award pro­gram this fall to keep peo­ple from fol­low­ing Gross out the door.

...

Ok, so in addi­tion to learn­ing that Bill Gross was paid almost as much as the com­bined pay pack­ages of the CEOs of Black­Rock, Amer­i­can Express, Gold­man Sachs, Wells Far­go, Cap­i­tal One, Trav­el­ers, ACE, Cit­i­group, Pru­den­tial, PNC, State Street, Simon Prop­er­ty Group, AIG, MetLife, Mor­gan Stan­ley, Bank of Amer­i­ca, JPMor­gan Chase, USB, BNY Mel­lon, and Berk­shire Hath­away com­bined (although pre­sum­ably oth­er forms of com­pen­sa­tion bal­ance it out a bit), we also get to learn that one of the jus­ti­fi­ca­tions for this extreme pay pack­age was the great his­tor­i­cal per­for­mance of Pim­co’s funds. Great his­tor­i­cal performance...assuming you ignore the last few years:

...
Part of the rea­son for Gross’s longevi­ty after the Allianz takeover — and anoth­er ele­ment of the fir­m’s enor­mous wealth — is what we might call the “Pim­co Pre­mi­um.” Despite being in a com­pet­i­tive field includ­ing giant com­pa­nies such as Van­guard and Black­rock, Pim­co man­ages to charge more than the indus­try stan­dard for access to its funds and its sep­a­rate­ly man­aged accounts.

Why? When com­pet­ing for busi­ness, the firm has had an unbeat­able com­bi­na­tion of a long his­to­ry and out­stand­ing long-term results. (At least it did, until recent bad bets on ris­ing inter­est rates by Gross tor­pe­doed the 1‑, 3- and 5‑year record of the flag­ship Total Return Fund.)
...

In oth­er words, Bill Gross and Mohamed El-Erian were mak­ing the one of the same mis­takes about inter­est rates and infla­tion that Paul Krug­man has been pub­licly chastis­ing econ­o­mists about for years. And for that they got almost $290 mil­lion and $230 mil­lion dol­lars. A year. And now that Gross and El-Erian have left Pim­co, investors are leav­ing Pim­co too. Is there any­thing that isn’t wrong about this sit­u­a­tion?

Keep in mind that Pim­co’s pay pack­age is pre­sum­ably an unchar­ac­ter­is­tic fluke over­all giv­en the his­tor­i­cal­ly low CEO com­pen­sa­tion in Ger­many com­pared to their US coun­ter­parts. But giv­en the recent his­to­ry where Ger­many’s lead­ers sud­den­ly dropped the mask and start­ed demand­ing unre­lent­ing aus­ter­i­ty across Europe, you have to won­der just how unchar­ac­ter­is­tic the Pim­co com­pen­sa­tion mod­el will be for major Ger­many firms going for­ward.