Q: How has the financial services industry changed as a result of the crisis sparked by the collapse of Lehman Brothers Holdings Inc.?
A: Lehman serves as a reminder that persistently large economic and financial imbalances have a way of affecting even the most astutely designed asset allocation — a relevant observation given today's experimental Fed policies and the unusual degree of political polarization.
The successful navigation of the Lehman storm by investors required a solid investment process and timely adjustments. Organizational and operational agility also emerged as even more critical for managing risk and delivering returns for clients.
Five years ago, the payment and settlement system was under siege, liquidity and counterparty risk were surging, and governments were scrambling to contain a cascading crisis. Unthinkables became more than thinkable; they were possible, if not likely. Meanwhile, close linkages across asset classes and around the world combined to deliver highly volatile and unusual network effects.
For Pimco, this meant more than the usual all-hands-on-deck attitude anchored by our constructive paranoia for protecting and enhancing funds entrusted to us by clients. Heightened information sharing among our portfolio managers around the globe was accompanied by an even closer integration of our investment, clients, product management, operations and legal procedures.
We were also busy with a larger range of future scenarios, specifying detailed action plans. We used structure to do the heavy lifting and, importantly, to handle unusual complexity. And we expanded and deepened interactions with clients to ensure the timely dissemination of analyses and other thought leadership.
Given the Lehman trauma, it is more than tempting — indeed, comforting — to regard it as a global calamity that will not be repeated in our lifetime. But this would deny the persistence of some of the underlying forces that took the world to the verge of a global depression.
Some of Lehman's contributing factors — be they economic, financial, political or behavioral — persist, given the frustratingly slow pace of global economic healing. Their impact is repressed by exceptional liquidity injections and incomplete regulatory responses, making investment excellence and organizational agility critical, be it to respond to the unintended consequences of artificial repression or safeguard against new dislocations.
Mohamed El-Erian
Chief executive and co-chief investment officer
Pacific Investment Management Co. LLC
Newport Beach, Calif.
— as told to Jeff Benjamin
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