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Discuss this article (0 Comments)The wise man of Wall Street
by This email address is being protected from spam bots, you need Javascript enabled to view it on Sunday, 03 May 2009
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"But if you look at the situation that policymakers faced, this notion that it could have ended up in the first, best world; it's not what crisis management is about," he continues.
"It's about having to move with inadequate information and blunt tools, not because you want to but because you have to."
He, for one, is certainly making the best of a bad situation. Pimco is one of the few firms benefiting from America's shakedown, picking up business opportunities created by the government's newly beefed-up role in the markets.
Crisis management is about moving with inadequate information and blunt tools, all because you have to.
El Erian's view is that banks have largely had their day - he compares them to the utilities on the Monopoly board; "they're cheap to buy, but you can't build on them. You can earn a living but it's not a great living." - so Pimco has aligned itself with the more robust federal schemes.
The firm was one of the four asset managers picked last year by the Obama administration to run a $500bn federal programme to purchase mortgage-backed securities. The global firm also manages the Federal Reserve's $251bn commercial paper programme that keeps short-term debt flowing to Corporate America.
Two weeks ago, Pimco announced plans to launch a closed-end asset-backed fund linked to the US asset plan, TALF (Term Asset-Backed Securities Loan Facility).
The scheme is part of federal efforts to breathe some life back into consumer and small business lending. The government is offering money to investors who want to buy newly-issued securities backed by assets.
Pimco will borrow from the TALF to buy securities, delivering income flows to investors via interest payments from the purchased assets.
"Governments used to be just the referee, but now they're the referee and player in certain markets," El Erian observes.
"As the landscape changes, our clients expect us to offer a different range of services and... there is much more government involvement in markets today. It's a multi-change that, with regulation, is probably going to be overdone and then swing back."
What is certain is that, in this new world economy, the US is no longer kingpin.
Even before the crisis, the rise of the emerging economies of Brazil, Russia, India and China and the buying power of the oil-sodden Arab states were jostling the economic line-up. Now, the Gulf, with its running surpluses and greater policy flexibility, is clawing its way to the top of the pile.
"[Recovery] is a function of your initial condition," El Erian argues. "Saudi is particularly well positioned to navigate this, Kuwait too. I think Abu Dhabi is well positioned and that Dubai is more vulnerable. It's going to have to navigate a world where credit has declined by a massive multiple."
He dusts off the plane analogy again.
"The global economy was a plane powered by one huge engine, the US consumer, and its fuel was debt financed consumption. We're shifting now to a plane with many smaller engines, they're called China, India, the Gulf and they're fuelled by savings," he says. "We're on a volatile journey to a new normal."
The credit crunch is a global problem that requires a global solution, but there is a lack of viable candidates to front international efforts to halt the slide. During the G20 summit there were moves to push the IMF back into a more central role by tripling its resources, but El Erian feels his former employer has lost trust.
"For it to occupy that centre, it has to regain credibility," he says. "The IMF right now has a deficit on governance representation and expertise. It's being provided with the ability to regain the centre, but whether it does so is going to be a function of whether it can erase these deficits."
You can come away from a meeting with Mohamed El Erian feeling a little like you've had an audience with an American oracle. It's surprising to learn, therefore, who he credits for his financial expertise.
"My five-and-a-half year old daughter has taught me a lot about managing risk," he grins. "When you have a child, they always ask you ‘why?' and never take anything for granted. That is absolutely critical when you're managing money.
"And also to manage the potential downside, which is something you think about a lot when you have a child."
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