Financial Update

TSX battered by falling commodities

· TSX -130.53pts a gain by financials cushioned the fall as Canadian banks were lifted by a rally in bank stocks south of the border and by optimism that U.S. lawmakers would approve a rescue plan for mortgage finance giants Fannie Mae and Freddie Mac .
· Dow +29.88pts stocks were buoyed by rising financials, as well as the lower price of oil, which eased inflationary worries
· Dollar -.69c to $99.17US on weaker-than-expected retail sales data for May and a widespread rally in the greenback against major currencies.
· Oil -3.09 to $127.95US per barrel hits a further 6 week low on growing fears that high prices and the weak economy are destroying demand. The Energy Department report showed that gasoline stockpiles jumped by 2.9 million barrels last week, far more than analysts predicted.
· Gold -$25.60to $922.4US per ounce tumbling more than 2%

Bush is nursing the U.S. economy's hangover

BOYD ERMAN From Thurday's Globe and Mail

Now we know what George W. Bush really thinks happened to his country's economy and financial markets: “Wall Street got drunk.”

In public, the U.S. President has been subdued in his statements about who is to blame for the mess on the balance sheets of banks and the country's waning growth – preferring bromides to straight-out criticism. But in private – or at least, when he thought it was private – Mr. Bush laid his real view out in folksy yet harsh terms last week. Wall Street overindulged in the “fancy financial products” that became the flavour of the bull market, and now faces a hangover, he told supporters in Texas.

Mr. Bush wasn't aware he was being recorded when he cracked the joke at a private fundraiser for a congressional candidate. In fact, he wanted cameras banned, but someone in the crowd surreptitiously taped him using a cellular phone. Almost a week later, the clip made its way to a local television station, then onto the Internet and sites such as YouTube.

“Wall Street got drunk – that's one of the reasons I asked you to turn off the TV cameras – it got drunk and now it's got a hangover,” Mr. Bush said on Friday at the fundraiser in Houston. “The question is, how long will it sober up and not try to do all these fancy financial instruments?”
That line got only a few chuckles, but Mr. Bush soldiered on with his comedy revue of the economy.

“And then we've got a housing issue – Not in Houston, and evidently not in Dallas because Laura's there trying to buy a house,” he said to a roar of laughter.

According to the White House, Mr. Bush has always seen the fallout from the housing and banking debacle this way, even if he hasn't always said it in such colourful language.

“President Bush has had similar sentiments before when he's talking about how, over the years, Wall Street was dealing with very complex financial instruments, and it's clear now to everybody that those markets didn't fully understand the risk that all of those instruments posed to the overall health of the economy and the instability in the market,” White House spokeswoman Dana Perino told reporters Wednesday.

She added later, “I don't think the criticism is any different, it's just said with a little bit more candour and more bluntly.”

But not everybody who has studied what has happened with the market for such things as collateralized debt obligations (CDOs) and other complex securitization products created by Wall Street believes, as Mr. Bush does, that it was the bankers who went too far.

In fact, some argue, investors were the ones drinking too much without regard to the consequences. Wall Street was merely the bartender serving up whatever investors ordered.
“My view is not so much that Wall Street got drunk,” said Joshua Coval, a professor at Harvard Business School. “We set up an apparatus that was fairly flawed and over time investors came to rely on it excessively – that is, using ratings to measure risk and outsourcing due diligence in terms of the nature of investments that were being made and risks that were being borne. As far as I can tell, that's what's fuelled the spectacular growth in securitization. Wall Street just responded to this behaviour.”

Mr. Coval, who studies behavioural finance, the idea that investors don't always behave rationally as economists expect, says Wall Street “maybe kept the party going longer than it should have, and it looks somewhat spectacular now that a bunch of the big financial firms have these writedowns and losses. But the party was started and led by the institutions that have been buying these products for the last five years or so.”

Now that the hangover is setting in, the Bush administration finds itself playing the role of a parent who has come home from a weekend away to find the kids have thrown a big, messy party.

The President is using stern words but finding himself unable to resist helping out by providing pain relievers.

Mr. Bush had threatened to veto a bill aimed at rescuing the two biggest housing lenders, Fannie Mae and Freddie Mac, because of a provision that he felt would bail out banks rather than homeowners.

However, on Wednesday he dropped his opposition after his Treasury Secretary, Henry Paulson, stressed the importance of getting a fix for the housing market under way with as little delay as possible.

When one reporter asked whether the new measures would keep Wall Street sober, Ms. Perino took a cue from her boss, cracking a joke of her own. That, she declared, would be “a great new slogan.”