NORTH BAY BUSINESS JOURNAL EVENT

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September 25, 2008, 5:30-7:30 p.m., Doubletree Hotel, Rohnert Park

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Brad Bollinger: U.S. borrowers deleveraging; and, oops, the economy grew

Get ready for the great deleveraging.

After years of stoking up on debt, many businesses and households are rediscovering the beauty of cash.

Brian Pretti, the senior vice president for Richmond-based Mechanics Bank and the head of its $1.7 billion investment fund, argues the U.S. has been not so much in an economic cycle but a “credit cycle” just now in the early stages of being unwound.

This has enormous implications for consumers and business.

In recent years, companies from GE to Harley-Davidson have increasingly relied on their finance arms to generate profits. Suddenly, all of those entities are under attack.

Debt was securitized by Wall Street and sold back to Main Street with the blessings of investment ratings agencies.

Extreme leverage brought down one of Wall Street’s best-known investment houses, Bear Stearns.

Meanwhile, many consumers and homeowners leveraged up, whether it was with credit cards, exotic loans to buy homes or equity lines of credit.

In nearly every case the lesson was pretty simple: easy money is great until it has to be paid back.

Mr. Pretti, who was the keynote speaker the the Business Journal’s Commercial Real Estate Networking Reception last Thursday, said business and consumers are at an “inflection point” in the deleveraging process.

The only question is how orderly the process will be. So far, so good.

***

An aside: For months there has been an endless barrage of grim headlines and talking heads going on about how the economy was contracting. Google “recession” and you get 24.3 million hits.

Well, this just in: the nation’s Gross Domestic Product didn’t contract at all in the first quarter. It grew by 0.6 percent.

Now, 0.6 percent is nothing to write home about. But given the headwinds of $4-a-gallon gas, rising food prices and housing’s weakness, it was a welcome indicator of the economy’s resilience.

On Friday after the Business Journal went to press, the Bureau of Labor Statistics was scheduled to release April payroll data. There was speculation that the bureau, which has a questionable track record on the accuracy of its figures, would report job losses of 50,000 to 100,000 in April.

But Santa Rosa-based TrimTabs Investment Research estimates no loss in jobs but a gain of 9,000. TrimTabs tracks jobs by daily inflows of withholding taxes.

Perhaps the bureau got the message in time to reconsider its estimates to avoid yet another inaccurate picture of the economy.

•••

Brad Bollinger is editor in chief and associate publisher of the Business Journal. He can be reached at bbollinger

@northbaybusinessjournal.com or 707-579-2900, ext. 201.

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