Rejection of Wall Street bailout may lead to systemic damage in world financial systems: CIBC World Markets report
Until financial pain felt on Main Street, Americans unlikely to support bailoutTORONTO, Sept. 30 /CNW/ - CIBC (CM: TSX; NYSE) - Public support for a bailout of Wall Street will likely only come after the average American directly feels the pain from the banking crisis - and by then the world's financial system may have suffered systemic damage, finds a new report from CIBC World Markets. "In acquiescing to a sceptical Main Street, Congress voted thumbs down on the Wall Street bailout package, leaving the country's, if not the world's financial system exposed to further price declines in the U.S. housing market," says Jeff Rubin, chief economist at CIBC World Markets. Mr. Rubin says that the rejection by Congress of the package reflects the huge and growing chasm that still exists between Wall Street and Main Street. "Notwithstanding the growing list of banking casualties in the U.S., and ballooning credit spreads, particularly for financial institutions themselves, Wall Street's crisis is yet to make a big splash on Main Street." He notes that while floating-rate mortgages in the U.S. are up almost a full percentage point, car loans are getting harder to come by and leases for fuel pigs like SUVs are virtually unobtainable, minimal payroll and industrial production losses to date means that the average American has yet to feel much pain from the crisis gripping the financial markets. "It is the very benign nature of today's downturn on Main Street that could pose the greatest danger tomorrow," says Mr. Rubin. "Without a material worsening in the unemployment rate or GDP growth, Main Street could well remain unimpressed with Wall Street's balance sheet ills. And it could still take a quarter of two before average Americans feel the full impact of what is happening to their financial institutions. "Until they do, they are unlikely to become any more tolerant of a bailout package. For once, a much weaker economy may be needed, if only to put Main Street and Wall Street on the same page." Mr. Rubin is concerned that "the financial system may not be able to tread water long enough before Main Street suffers sufficiently to get on board with a package. That's why it is so pivotal that a package come now, before systemic damage is sustained." While neither the Canadian economy nor the Canadian housing market are as exposed to the U.S. financial crisis as their American counterparts, the roller coaster rides on the TSX recently shows that it is far more leveraged to the crisis than either the Dow or the S&P 500. "Fears of a financial market meltdown do not bode well for investor sentiment towards commodities," finds Mr. Rubin. "The recent wild ride in oil prices underscores how concern over toxic balance sheets on Wall Street can spill over into other markets, even where there is little to fundamentally connect them." He notes that global demand for oil has shown little sign of decline with automobile sales globally poised to set a record for the seventh consecutive year. Demand for automobiles - and the oil to fuel them - is still booming in Brazil, Russia, India, China (BRIC). Sales in these nations are up more than 20 per cent in the second quarter of 2008. In fact, total annual automobile sales in the BRIC countries are expected to overtake the U.S. for the first time ever next year. The CIBC World Markets report also notes that while housing prices in Canada are cooling, there is little worry of a U.S.-like meltdown in prices. U.S. housing prices have been falling for two years with a cumulative decline of 18 per cent to date-on their way to an eventual correction of 25 per cent. The study finds that by almost any measure, American households entered the current housing crisis from a more vulnerable position relative to their Canadian counterparts-carrying a heavier debt load and a much lighter net worth position. At the peak of the cycle, subprime and Alt-A mortgages accounted for no less than 33 per cent of originations in the U.S. market. At the peak, non-conforming mortgages reached 5.4 per cent of originations in Canada. The report concludes that the existence of such a high ratio of subprime mortgages led to the large drop in U.S. housing prices - a situation that does not exist in Canada. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/ssep08.pdf. CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.