PIMCO Co-CEO Mohamed El-Erian says the chapter 11 filing of Lehman Brothersand proposed takeover of Merrill Lynch will help stablize the financial sector but may worsen the credit crunch's drag on the overall economy.
The developments "will reduce liquidity," El-Erian told CNBC, and make it "more urgent to raise capital."
El-Erian made his comments following the stunning events of the weekend, wherein Lehman filled for bankruptcy protection after eleventh hour takeover talks with white knights failed and Merrill agreed to be taken over by Bank of America. (See the entire interview — click here).
The developments are the latest in a one-of-a-kind financial crisis that has shaken the nation's financial system and has has driven financial companies out of business or into desperation mergers. Bear Stearns becamethe first high-profile casualty when it was taken over by JPMorgan Chase earlier this year.
El-Erian says even with the latest rescue efforts the credit crunch remains a considerable problem because the "system itself doesn't have enough capital."
Such an assessment has led to enormous speculation about what federal authoroties can do to help ease the crunch. Among the latest proposals are suspending the Federal Reserve's federal funds lending rate among banks and extending the Federal Deposit Insurance Corp.'s bank deposit insurance. There's also growing talk of a Fed rate cut at its regular policy meeting Tuesday.
El-Erian says the probability of a rate cut has grown in the past week but stopped short of saying he expected one. The Fed last cut rates in the spring, lowering the federal funds rate to 2.00 percent.