UPDATE 1-Pimco CEO sees economy slowly resetting in 2010

Fri Jan 29, 2010 2:41pm EST

* Pimco's El-Erian: may be too soon to call post-crisis

* Says markets pricing in smooth exit strategy

* Says important to have financial reform by summer

By Karey Wutkowski

ARLINGTON, Va., Jan 29 (Reuters) - The chief executive of the world's biggest bond fund said on Friday that he sees the U.S. economy slowly resetting in 2010.

Mohamed El-Erian, the CEO of Pacific Investment Management Co, questioned whether it is too soon to say 2010 is a post-crisis year. He also said markets may have gotten ahead of themselves, pricing in that the government would be able to smoothly transition from temporary and reversible government intervention to normal market functioning.

"Too many markets, too many institutions have assumed this would happen quickly," El-Erian said during a Federal Deposit Insurance Corp-sponsored conference on interest rate risk.

"2010 is about the slow resetting of the U.S. economy."

El-Erian laid out a series a risks to the recovery, including his belief that unemployment will stay high for a long time.

Stubbornly high unemployment is still dogging the recovery. On Wednesday, President Barack Obama in his annual State of the Union address said, "Jobs must be our number one focus in 2010."

In surprisingly good news on Friday, the government reported that the U.S. economy grew at its fastest pace in more than six years in the fourth quarter, as businesses curbed their aggressive efforts to cut stocks and stepped up spending. [ID:nN28246399]

El-Erian said there were risks in simultaneously aiming for contradictory economic goals such as fighting high unemployment while reducing the large U.S. deficit or asking banks to increase lending while reducing balance sheet risks.

He said financial firms must realize the public policy risks, and should be prepared for a regulatory environment that will remain unsettled for some time.

HOPES FOR REFORM BY SUMMER

Separately, in an interview with Reuters Insider on the sidelines of the conference, El-Erian said it is important for financial reform legislation to pass by summer.

"I suspect that something will happen in 2010 and it's important it happens by the summer because thereafter we are going to be so close to November elections that political issues will totally dominate," he said.

The House of Representatives passed its version of the sweeping legislative package. The Senate has been slower to act, seeking more bipartisan cooperation on the regulatory overhaul.

Financial firms are currently hobbled, El-Erian said, because the uncertainty surrounding regulation prevents them from crafting multiyear business plans.

Regarding the Obama administration's recent proposals to limit financial firms' proprietary trading, El-Erian said they make sense in theory.

"I think in principle it makes sense to try to separate proprietary trading from institutions that benefit from a deposit guarantee, that these are separate things," he said. "So it makes sense to target that, but like everybody else we're waiting for details as to how that works in practice."

Obama last week proposed to ban financial institutions with commercial banking operations from engaging in proprietary trading operations that are for their own profit, not for their clients.

The proposal is designed to prevent banks from using insured deposits to bankroll their own risky bets.

The White House proposals came amid a reinvigorated attack on Wall Street excesses designed to tap populist anger at the big banks.

El-Erian said politicians and society are reacting to the fundamental unfairness of having banks privatize their massive gains and then force their massive losses on the public.

"The question is how far does the reaction go," he said. (Reporting by Karey Wutkowski with additional reporting by Jennifer Ablan in New York; Editing by Gary Hill)

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