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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:

    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.

For further information:
For further information: Jeff Rubin, Chief Economist and Chief
Strategist, CIBC World Markets at (416) 594-7357, or Kevin
Dove, Communications and Public Affairs at (416) 980-8835,