Mohamed El-Erian, co-CIO of PIMCO, described how his firm sets up frameworks to deal with potential crises, both political and economic, at a Reuters Newsmakers event today.
Prefacing his comments with the statement, “we’re all hostage to our comfort zones,” El-Erian outlined how his firm prepared for the crises across the Middle East and, previously, with Lehman Brothers.
For Lehman Brothers the firm set-up a framework of three different scenarios:
- Bear Sterns all over again (bailout, this is what was expected)
- Orderly default (second most likely, according to PIMCO)
- Disorderly default (least likely, according to PIMCO)
Plan three occurred, and while PIMCO wasn’t expecting it, they were prepared, with lawyers arriving at Lehman Brothers at 3AM.
On the Middle East, El-Erian admitted that he was not expecting change in Egypt to come so soon. He said in only December 2010 that the country was not close to revolution, when he visited with his family. After things kicked off, however, he came to a conclusion.
“(We) immediately recognised we could not predict what was going on in the Middle East,” he said.
In order to adjust for this, PIMCO set up a framework for the Middle East, determining how a country would respond to pressure, and what the impact would be on oil prices:
- X axis: Political change or no change
- Y axis: Orderly or disorderly
- The result would suggest how oil output would be impacted
Overall, El-Erian described the culture at PIMCO as “constructive paranoia.”