* 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 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
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
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.
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
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
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
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)