The wise man of Wall Street

Mohamed El Erian is one of the last men standing on Wall Street. The chief executive of Pimco, home to the world's largest bond fund, and one of the world's most respected financial analysts, El Erian talks banks, bailouts and the benefits of investment tips from five-year-olds.

Mohamed El Erian has the slightly stunned air of someone who had a ringside seat to the financial fallout and lived to tell the tale. As chief executive of Pimco, home to the world's largest bond fund with $744bn in assets under management, he has more to lose than most, but America's spiralling recession has done little to dampen his straight-talking style.

"There are times when you worry about the return on your capital, and there are times when you worry about the return of your capital," he says with gallows humour. "Today, you need to worry about the return of your capital."

Dubbed ‘one of the sanest voices on Wall Street' by the US media, El Erian is a former deputy director of the International Monetary Fund (IMF), ex-manager of Harvard University's $35bn endowment fund, and author of the award-winning ‘When Markets Collide - Investment Strategies for the Age of Global Economic Change'. He also ranked No. 7 in this year's Arabian Business Power 100 list.

In short, when it comes to the billion dollar question of market recovery, few are better qualified to answer. So you can believe him when he says the news is not sunny.

"We are on a volatile journey to a new normal. The worst of the economic slowdown is still not behind us," he says. "The risk of policy mistakes and market accidents, which is a polite way of saying ‘big institutions facing problems', is still high. It's a completely different landscape."

El Erian is a fast thinker and an even faster talker, dispensing predictions on everything from the consolidation of hedge funds ("Half of the hedge funds today won't be in existence in a year's time") to US politics ("We will find out that what is economically desirable is not politically feasible").

His crystal ball has cracks though: one of his toughest challenges is positioning Pimco to meet the new world order, without knowing precisely what it will be. First on his list he says, with a flicker of a smile, has been to adopt a company policy of "constructive paranoia", schooling analysts to bypass market chatter in favour of solid, financial data.

"We spend more time looking at the downside than the upside, which is to say; ‘if I'm forced to make a mistake, what does that mistake look like?'" he says. "I manage risk very, very carefully."

Like the rest of Wall Street, El Erian is still sifting through the rubble of the financial quake while Corporate America reels from a crisis that, uniquely, originated from within the US. He is still shell-shocked that banking icons such as AIG and Bear Stearns were brought to their knees so quickly and that "the unthinkable happened".

"There was a time when I called my wife - and I remember this very, very clearly at the end of September - and I said; ‘go to the cash machine and pull cash out because I don't know if the banks are going to open tomorrow'," he recalls. "It's not like the world of 2006, 2007 any more."

The blame list is long. El Erian counts bankers, rating agencies, private firms and regulators among those at fault, but traces the crux of the crisis to a financial system that had outpaced its infrastructure.

"Whether in the private or the public sector, the infrastructure did not keep up with the changes on the ground," he says, spreading his hands wide.

"Ultimately the system collapsed because its foundations were too weak;" a fix compounded by governments that failed to keep pace with the markets and are now scrambling to slow the downturn.

El Erian comes forth as a great lover of analogies, conjuring up references to planes, cardiac arrests and Monopoly in the course of our half-hour conversation.

For instance, those same governments - out in force at the G20 summit with their corporate bluster - are likened to pilots in stormy weather, aiming for a show of solidarity but "frantically looking at manuals, moving the wheel and not getting a response from the plane and fighting among themselves as to what should happen".

When Lehman Brothers fell it was "the equivalent of a cardiac arrest for the globe" while the state-backed bailouts "were an emergency action to keep the patient alive. Now, the question is how will the patient recover?"

On to the $787bn rescue plan currently trickling down Wall Street, and El Erian displays the tact you would expect from a diplomat's son, conceding that Obama has inherited an unenviable situation. It's hard to disagree - only the Great Depression looms larger in America's financial history.

Among US taxpayers the backlash to the bailout has been huge; many furiously oppose a system where they perceive massive profits to be privatised and massive losses to be socialised. The scheme is expected to cost every US taxpayer $5,354.

"The bailouts were necessary but not sufficient," El Erian says slowly. "There was little thought given to the exit policies, or to the externalities or the unintended consequences of the bailout.

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