Now that the shock of Mohamed El-Erian’s resignation has resonated throughout the financial services industry, the rumor mill of speculation as to his next step is in full swing.
The speculation spinning out of the early turn includes a position at the US Federal Reserve, the President of Egypt and even US Treasury Secretary Jack Lew stepping down and being replaced by El-Erian, which is being reported by Charlie Gasparino of Fox Business as one potential outcome.
Fed replacement talk
Immediately after the announcement that El-Erian was leaving PIMCO, talk began regarding a potential move to the Fed. Bloomberg’s Matthew Klein noted that for 15 years early in his career El-Erian was a staff economist at the International Monetary Fund where he worked closely with Stanley Fischer, who was just nominated as Federal Reserve Board vice chairman. “It’s possible that Fischer is pushing to get his trusted deputy into the last open slot at the Fed,” Klein wrote.
“A job at the Fed might be a natural fit for El-Erian,” Klein wrote. “He clearly enjoys thinking about financial and economic policy, considering how many op-eds and books he has written on the subject. He would also fill a crucial void at the central bank, which now lacks top officials with significant market experience. (Having said that, it’s important to note that some of his predictions about the impact of Fed operations were incorrect.)”
Boosting confidence of Fed skeptical bond traders
While it may seem counterintuitive, talk among professional traders on the yield curve was that El-Erian would be provided a needed boost in confidence. El-Erian is a market savvy investor who believes various stimulus policies and manipulation of interest rates have damaged the credibility of the bond market. If the Fed wanted to boost its credibility among skeptical bond traders, appointing an outspoken Fed critic viewed as a champion of free markets would go a long way towards accomplishing this goal.
Further, El-Erian considers one of the most significant economic risks the potential for another too-big-to-fail bank bailout. He understands the interest rate market and knows the potential exists for rates to experience a quick and dramatic rise, as do certain players on the yield curve. When rates rise they could trigger the OTC SWAP contracts many banks have underwritten. The Fed regulates the banks and would be the regulator most held responsible. El-Erian, a seasoned interest rate practitioner with an academic mind, could likely help manage this problem better than a pure academic. The fact that El-Erian is viewed as a credible free-market supporter with a keen understanding of interest rate markets would likely soothe concerns among bond traders who have watched with horror market manipulation beyond any historic precedent.
Why El-Erian won’t move to the Fed
The very reason that yield curve professionals may cheer a move by the Fed to grab El-Erian could be a reason it won’t happen. The Fed may not be up to the challenge of managing a well-regarded practitioner that would likely challenge their core prescriptive thesis for managing economic policy. Further, how El-Erian’s outspoken personality would react when the Fed chose a different direction is an unknown. Another factor against El-Erian for the Fed is the assumption that President Obama would use the Fed vacancy to name the Fed’s vice chairman for banking supervision, which was mandated in the Dodd-Frank bill. As Marketwatch reports, large banks and community banks are fighting over the position and Fed governor Daniel Tarullo has been the most forceful point man on bank regulation.
Politics and academia
Other speculation for El-Erian’s next move includes politics and academia. Bloomberg’s Klein notes that El-Erian, whose parents are Egyptian, would make an interesting candidate for president of Egypt. At one point he was considered as a prime minister. But inserting himself in a highly volatile, war torn region in the middle of civil unrest doesn’t seem the high percentage call. Other speculation calls for El-Erian to enter a softer academic life, but those who have followed his career say he believes the country is at a historic moment and would like to be actively engaged.