From Naked Capitalism…..

Hypo Real Estate, Germany’s second largest real estate lender, teeters on the verge of collapse. The bank has a €400 billion balance sheet, which would make for a failure of a similar scale to Lehman’s (Hypo’s footings are roughly $550 billion, while Lehman’s were $660 billion as of its last balance sheet date).

Even though Hypo it technically a bank, it is not a depositary institution, so rescuing it poses similar difficulties (procedural and political) to the authorities as Bear and Lehman did in the US. The financial system cannot take another body blow of this magnitude. The authorities had better patch this one up over the weekend, or we face even more credit market panic on Monday.

And if that weren’t an ugly enough picture, the failure to salvage Hypo has even broader ramifications. From Marshall Auerbach, independent global strategist who does consultancy for a number of funds, and sometimes financial commentator, via e-mail:

The euro is in serious trouble with this Hypo Real Estate collapse. Germans remain completely in denial. The French get it, largely because their clever finance minister, Christine LaGarde, was educated at the University of Chicago and consequently understands something about markets. Sarkozy, to his credit, appears to be listening to her. The Germans are about to destroy EMU with their pigheadedness, and this will be the stuff of revolution, given that the German people were never consulted on abandoning the DM (if there had been a referendum, the euro would have never been accepted in Germany) and were forced to get rid of arguably the most successful post-war monetary institution, the Bundesbank.

The sop thrown their way was the stupid Stability and Growth Pact, designed by former German Finance Minister, Theo Waigel. So he has hoisted the Germans and the euro zone on a German petard. And that’s made things worse! No EU wide guarantee of deposits, no EU-wide prospect of a major fiscal stimulus and bye bye euro.

Read the rest of Yves post and the comments to get the full scale of Europe’s problems.

From the New York Times….

Gov. David A. Paterson said on Friday that he would seek $2 billion in new cuts to the state’s current budget and challenged lawmakers to abandon Albany’s spending habits amid a deepening financial crisis.

And where are the cuts going to come from?

Many observers believe that when a special legislative session is convened after the election, lawmakers will be forced to cut the two largest areas of the budget, Medicaid and education. Hospitals and their workers and teachers are among the most powerful interest groups in Albany.

Also there is this from the LA Times….

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.

From Felix Salmon….

This is not how triple-A sovereigns behave. It’s as though the analysts at Moody’s were only able to see one step ahead, and not two: they could anticipate that Iceland would bail out its banks, but they couldn’t anticipate that when a tiny country bails out a bank whose assets vastly exceed the country’s own GDP, then the sovereign itself loses much creditworthiness. One scary datapoint: the assets of Kaupthing Bank amount to 623% of Iceland’s GDP, which is possibly why its own credit default swaps are trading somewhere over 2500bp.

There was is so much bad stuff in the Bloomberg article that I don’t know where to start. For starters there is this….

California, the most populous U.S. state, will run out of money by the end of this month and needs $7 billion in funding.

Naturally, the feds are being asked to cough up.

But that is not the worst of it. There is also this….

One California lawmaker said the state should consider borrowing the money from its public employee pension system, the largest such pension fund in the U.S., with $214 billion in assets.

Senator Dean Florez, a Democrat, said the California Public Employees’ Retirement System could buy all the state’s cash flow notes, earning more in interest than the system would by investing that same amount of money in U.S. Treasury notes.

From the New York Times (h/t Naked Capitalism)…….

In a move suggesting how the credit crisis could disrupt American higher education, Wachovia Bank has limited the access of nearly 1,000 colleges to $9.3 billion the bank has held for them in a short-term investment fund, raising worries on some campuses about meeting payrolls and other obligations.

Wachovia, the North Carolina bank that agreed this week to sell its banking operations to Citigroup, has held the money in its role as trustee for a fund used by colleges and universities and managed by a Connecticut nonprofit, Commonfund.

On Monday, Wachovia announced that it would resign its role as trustee of the fund, and would limit access to the fund to 10 percent of each college’s account value. On Tuesday, Commonfund said that by selling some government bonds and other assets held in the fund, it had succeeded in raising its liquidity to 26 percent.

Still, Wachovia’s announcement sent shock waves through higher education, sending hundreds of college presidents rushing to check their financial vulnerability on every front.

Some smaller colleges that had not previously arranged lines of credit were feverishly seeking to negotiate those on Wednesday. And some large institutions said they were facing, at the least, a major financial inconvenience as a result of Wachovia’s action.

If you are interested in the health of manufacturing you should read this and this.