NEW YORK (Reuters) - Mohamed El-Erian, the chief executive of top bond fund Pimco, said on Friday that the U.S. banking system doesn’t have enough money to weather the current credit crunch related to massive mortgage-related losses.

Many financial firms, from banks to insurers, are in desperate need of capital -- not just investment banks such as Lehman Brothers LEH.N or mortgage finance companies such as Fannie Mae and Freddie Mac, said El-Erian.

El-Erian, who had rejoined Pimco last year after managing Harvard University’s endowment, in April had said that a “euphoric” rebound in stocks and non-government bonds might be premature because deeper home price declines threatened the economy and financial markets.

“Recent developments highlight the extent to which the banking system as a whole lacks sufficient capital to comfortably navigate this period of sharp deleveraging,” El-Erian, of Pacific Investment Management Co, which oversees more than $812 billion in assets, told Reuters in an interview on Friday.

Investors pounded financial shares across the board on Friday.

Lehman is the latest casualty of the credit crisis sparked by losses in the subprime mortgage, but leading brokerage Merrill Lynch & Co MER.N and American International Group Inc AIG.N, once the world's largest insurer by market capitalization, also dropped sharply on credit concerns.

AIG stock, the most actively traded on the New York Stock Exchange, lost over 30 percent to close at $12.14, while Merrill shares fell 12.25 percent to settle at $17.05.

The show stopper, of course, was Lehman.

Lehman shares, the second most actively traded on the NYSE, were down 13.5 percent to close at $3.65 after earlier hitting a nearly 14-year low. On Thursday the shares had plunged more than 40 percent. Lehman was forced into talks about a possible sale after the freefall in its share price on Thursday, raising questions about its survival.

Lehman, formerly the No. 4 U.S. investment bank, and U.S. regulators were in intensive discussions about options for the investment bank, including a complete sale, a source with direct knowledge of the talks said.

“Today’s market action suggests that the institution-specific aspects will become clearer within the next 72 hours,” said El-Erian.

That said, a resolution to Lehman’s fate by the weekend will not be the end of the crisis for U.S. banks, he said. “Banks are experiencing higher funding costs which will serve to accentuate the economy-wide credit crunch.”

El-Erian said Lehman’s troubles will continue to reverberate in the months ahead. “More institutional consolidation will likely be part of the redefinition of the financial landscape as the deleveraging process continues,” he said.

Pimco’s prognostications have unfolded. Days before the U.S. government’s takeover of Fannie and Freddie, Bill Gross, chief investment officer at Pimco, wrote in his September Investment Outlook that to avoid systematic debt liquidation and halt a “financial tsunami,” the U.S. government should give the Treasury the right to buy debt and other assets.

On Monday, Pimco’s $132 billion Total Return Fund posted its strongest day ever, as prices of their mortgage-backed security holdings rose after the government seized control of Fannie and Freddie.

The fund outperformed its benchmark Lehman Aggregate Bond Index by 60 basis points or “800 million actual dollars,” said Gross.