One of the cushiest and least risky assignments over the past year for the big bond funds has been their agency assignments on various Treasury-mandated security purchasing programs to bail out the market: these have been the definition of free money. The PPIP program has been a good case in point, which in recent months has been somewhat dormant ever since the administration realized it could generate a much greater IRR by purchasing index futures than toying around with AAA-rated CMBS, in which bond fund TCW was a key partner of the Treasury. Yet in a striking example of rational thought, the government has demonstrated it knows what "key man" provisions are. And after TCW fired Gundlach for having "too lofty" an aspiration, the Treasury has decided to fire TCW as a PPIP manager for the Treasury in turn. Poetic justice.

Market News points out that "the government has gone to great lengths to ensure it retains the right to end the partnership if certain conditions are not met, including the departure of key individuals from the private partner."

"Treasury was careful to ensure the legal documents that implemented PPIP contained many provisions designed to protect taxpayers' investments," Williams told Market News International. "One of these grants Treasury additional rights if certain key professionals leave the firm."

In the case of TCW, the clause was triggered after Jeffery Gundlach, chief investment officer of TCW's UST/TCW Senior Mortgage Securities Fund -- and said to be one of the top-performing bond managers of all time -- was fired on Dec. 4.

This moved led the Treasury to freeze the $1 billion public-private facility set up by TCW to buy toxic assets, with the firm unable to make investments or dispositions, other than those necessary to avoid losses. "The initiation of the wind-down of the TCW PPIF because of key person departures is a good example of how provisions like these can be used to protect taxpayers' interests," Williams said.

He said that as a result of "certain key investment professionals" at TCW leaving the firm, Treasury, the private investors and TCW have agreed, after careful consideration, that it is in the best interest of all investors to end the TCW PPIF investment period, release each limited partner (including Treasury) from its capital commitment to the fund and to liquidate the fund in manner that maximizes value to all investors.

Whether the $1 billion reduction in AUM will hit TCW's broader assets under management is unknown, but explaining to their LPs why they had to drop even this token amount over some unchecked pride and hubris should be amusing. The beneficiaries of this action will be the other 8 leftover managers, of which one of the primary ones, ironically, is Howard Marks' Oaktree, which is a minority investor in Gundlach's new firm.