NBR Transcripts June 19, 2008
Thursday, June 19, 2008The Great Mortgage Fund Crackdown
SUZANNE PRATT: Two former Bear Stearns hedge fund managers were indicted and arrested today in the first criminal prosecution stemming from the collapse of the sub-prime mortgage market. Ralph Cioff and Matthew Tannin were charged with mail and securities fraud as well as conspiracy. They each face up to 20 years in prison if convicted. Cioffi was also charged with insider trading. The government alleges the pair misled investors about the health of hedge funds that bet heavily on sub- prime debt. As Darren Gersh reports, those charges come on the same day prosecutors revealed hundreds of indictments linked to the nation`s housing crisis.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was the first perp walk of the mortgage market meltdown. Two former Bear Stearns hedge fund managers, Ralph Cioffi and Matthew Tannin, charged with securities fraud that cost investors more than a billion dollars. U.S. Attorney Benton Campbell says the men committed a crime after investments they`d made in the sub-prime mortgage market turned bad.
BENTON CAMPBELL, U.S. ATTORNEY, EASTERN DISTRICT OF NY: Rather than disclosing the true state of the funds to investors and lenders, however, the defendants lied about the fund`s condition, including their prospects, liquidity and exposure to the sub-prime market.
GERSH: Campbell stressed the two men did not cause the collapse of Bear Stearns, but their actions did take a toll. The key piece of evidence in this case, an email in which Tannin calls the sub-prime market damn ugly. If reports of problems in the market were right, Tannin adds, quote, we should close the funds now. The entire sub-prime market is toast, end quote. A month before that email was sent, prosecutors say Chioffi called the fund an awesome opportunity. Prosecutors charge the two men also lied about mounting requests to pull money out of the fund. In Federal court this afternoon both men pleaded not guilty and were released after posting bonds of more than $5 million. Cioffi defense attorney Edward Little says the government`s case won`t hold up.
EDWARD LITTLE, DEFENSE ATTORNEY: The only good news today is there will be a trial in this case and hopefully at the end of the trial, we`ll get a jury verdict that says not only that Ralph Chioffi is innocent, but that his reputation is restored.
GERSH: The Bear Stearns case promises to be the first of many. Speaking in Washington, FBI Director Robert Mueller said 19 sub-prime- related investigations are underway up and down Wall Street.
ROBERT MUELLER, FBI DIRECTOR: Currently, we have been focusing our investigative resources on potential frauds committed by the investment banks, hedge funds, brokerage houses, rating agencies and due diligence firms.
GERSH: In a separate action, the Justice Department continues to look into some of the scams that Fed the housing bubble. Prosecutors made 60 mortgage fraud arrests yesterday. U.S. Attorney Alexander Acosta today announced 19 indictments were handed down this week in south Florida alone.
ALEXANDER ACOSTA, US ATTY SOUTHERN DISTRICT OF FL: Ultimately we`re going to prosecute. We`re going to be very aggressive. But the real answer is prevention and that is where a lot of the focus should be. That said, we have seen and we will continue to see the costs of declining property values have on our families, in our communities.
GERSH: The FBI now has 1,400 active mortgage scam inquiries underway. But investigators have received more than 50,000 reports of suspicious activity from lenders. That`s far more than state and Federal prosecutors have the time or resources to investigate. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Investment Strategists Offer Their Outlook For Oil & Stocks
SUZANNE PRATT: Those lower oil prices helped stocks move higher on Wall Street today as investors defended the psychologically important 12,000 mark for the Dow. After dipping below that level for a second day, the Dow closed at 12,063, up 34 points. Rising oil prices and fears of recession have been pressuring investors for weeks. Erika Miller looks at what may be in store on Wall Street.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Dow managed to close above 12,000 today. But many analysts are betting the index will continue to retest that level over the next few weeks. They say investors have plenty of concerns on their plate, including record energy prices, rising inflation and the possibility of recession. But most strategists, including UBS`s Mike Ryan, do not think stocks are headed significantly lower near term.
MIKE RYAN, CHIEF INVESTMENT STRATEGIST, UBS WEALTH MANAGEMENT: What I think we`re going to continue to do is we`re going to range trade. We`re going to continue to chew through the economic data and we`re also importantly going to look at the guidance we see on the earnings side to see whether we`re going to start to see some downward revisions in earnings for the second half of this year.
MILLER: For now Wall Street is expecting a big second half recovery in earnings. Analysts surveyed by Thomson Reuters are predicting the S&P 500 will post 13 percent profit growth in the third quarter and a 58 percent increase in the fourth, thanks to easy comparisons and strong U.S. exports. Another big unknown for financial markets is the outlook for interest rates. The Federal Reserve`s open market committee meets next week and some traders fear it will hint at the possibility of a rate hike later this year.
RYAN: I think that the near-term catalyst here clearly is going to be the outcome from the FOMC meeting. We don`t expect to see a change in the policy. However, I think the wording of the statement and a potential bias are two of the things we`re going to be focused on very closely.
MILLER: Ryan expects most major stock market indices will end the year near current levels. But S&P`s chief investment strategist Sam Stovall thinks the Dow and the S&P 500 could both eke out a single digit gain for the year. He thinks the third quarter will be lackluster followed by a rally late in the year.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR`S: In this presidential election year, I think now that we`re going to be focusing on the conventions, a lot of negative rhetoric that`s going to occur between now and the election. I think only after November, will we start to see investors breathing a sigh of relief because at least now there`s more clarity for the next four years.
MILLER: The market`s obsession with Dow 12,000 stems partly from the fact that the index last closed below that level on March 17. That was the day Bear Stearns collapsed, a psychological turning point for the stock market. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Rep. Barney Frank Explains the Building of the Mortgage Bailout Bill
PAUL KANGAS: The chairman of the House committee, Barney Frank is a key player in the debate that began in Congress today. It involves a massive mortgage aid bill which is already being threatened with a presidential veto. The administration is concerned about a provision that gives money to help state and local governments buy foreclosed properties. Stephanie Dhue sat down with Frank today and began by asking him if the bill will become law.
REP. BARNEY FRANK, CHAIRMAN, HOUSE FINANCIAL SERVICES COMMITTEE: I think so. There is a great deal of need for it. There is a lot of support for it including from within the administration. The piece that the veto message focused on is something I think is very important. But it could be done separately. Obviously we don`t have the votes to override the veto. But we in the House, in fact, voted even more money. This is money that would go to communities to buy up property that has been foreclosed. And it`s now a buy (ph) and it could be used for good purposes. But it`s not essential to this same bill. We won`t stop trying to get the money for the city. It is very important to the mayors and to the governors who will try hard to get it. But it may be that there is another legislative place in which you can do it, maybe in an appropriations bill. It, after all, not so much policy change as money.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Is there anything that`s nonnegotiable? I know you wanted conforming loan limits to be --
FRANK: Oh yes, there are some things that are nonnegotiable.
DHUE: And those would be.
FRANK: I`m not going to non-negotiate with you, I hope you don`t take offense. But I admire what Chris Dodd did. It was tough thing to get that bill through the Senate. I appreciate the cooperation that Senator Shelby gave him. I hope it is going to go through. And they had some hope that we could just accept it as is; that was not realistic. It`s too complex a piece of legislation. (INAUDIBLE) just need more time to make sure you wrote it all correctly. But I think and I accept the veto threat on the CEBD (ph) as probably definitive at this point. I think the rest of it were all in areas where we can work something out.
DHUE: Countrywide allegedly gave favorable loans to at least two senators, Chris Dodd and Kent Conrad. That has cased some Republican senators to call for the bill to be pulled so they can determine how much Countrywide and other lenders will benefit. How much has this controversy slowed momentum on the bill?
FRANK: Not at all. In the first place Countrywide is not going to benefit at all because the good news is pretty soon there won`t be any more Countrywide. How I wish there never was. That is an organization that did a lot of harm. But the Bank of America which is a much more responsible financial institution agreed some time ago to buy Countrywide. So the question about whether or not they are going to do this in the future, no, they can`t. As to whether anybody else did it, I don`t know. There is no -- I don`t know how would you find that out, subpoena everybody who ever got a mortgage. Finally, I would say this, those Republican senators who said hold off the bill until we find out, were never for the bill anyway.
DHUE: If you call a CEO, say you call the CEO of Countrywide, what would you expect in return?
FRANK: Actually, I did call the Countrywide CEO. I called him greedy and urged him to give back some of the money. I wouldn`t call a CEO about a personal item. Well, I take that back, not a CEO. I started a credit card with the bank. I was on a plane. I was kind of bored. I must have run out of things to read. So they had this credit card deal so I signed up. And I said this is more trouble than it is worth so I wrote to the credit card company, I stopped this. I don`t want to have it anymore. So they keep sending me the bill. I write back and say what is the matter with you? Stop sending me this bill. So I talked to an executive of the company and said, will you please stop sending me a bill is so I would expect him to stop sending me a bill. But I would never talk to the official of a company about trying to get, the CEO of a company about an individual transaction.
DHUE: Analysts say the housing bill will do little to stop the slide in house prices. Does Congress need to do more?
FRANK: Which analyst? Some people say Elvis is alive. So when people tell me somebody said -- no, some analysts say this, some say that. The Congressional Budget Office which is a fairly neutral organization, said that the bill as it passed the House will prevent 500,000 foreclosures that would otherwise have happened at a cost of about $3800 per foreclosure. That will still leave many that will happen. But I think averting 500,000 more foreclosures is a good thing. Whether we need to do more I think you have to see how this one works. It is not clear how much more you can do. Nobody is going to support, I think, in any substantial numbers putting taxpayer dollars in there to pay off peoples` mortgages or to pay off the lenders. Within the constraints of that, I don`t know how much further you could go.
DHUE: We`ve been speaking with Barney Frank, the chairman of the House Financial Services Committee. Thank you for joining us.
FRANK: Thank you.
"Commentary"-Talking Up Innovative Inspiration
SUZANNE PRATT: In tonight`s commentary, boosting innovation through conversation. Here`s Erwin Danneels, associate professor of marketing at Worcester Polytechnic Institute.
ERWIN DANNEELS, ASSOC. PROF. MKTG, WORCESTER POLYTECHNIC INST.: It should be common wisdom by now that employees should be encouraged to share ideas and opinions and that managers should be open to constructive input, even criticism. It`s surprising, then, that barriers to open communication are still common. For example, a recent study by James Detert of Penn State University and Amy Edmondson of Harvard business school show that fear of speaking up is pervasive in large, multinational corporations. Companies that don`t foster a frank exchange of ideas are at a big disadvantage. In my own research, I`ve looked at the connections between what is known as constructive conflict and innovation. I found that firms where employees feel free to vigorously challenge ideas, beliefs and assumptions are also the best at developing new technologies and entering new markets, and have more innovative products. At companies with a climate of constructive conflict, employees express dissenting opinions without fear of personal attacks or reprisal. The merits of ideas are openly debated and a rich range of options is created and evaluated. Is this how things are at your company? Or are people there reluctant to express their honest opinions? Do they try to figure out what higher-ups want to hear and then say as much? It`s been said at loose lips sink ships. In business, tight lips torpedo innovation. So, speak up and let others do the same. I`m Erwin Danneels.
"Last Word"-Homemade Hybrid
SUZANNE PRATT: And finally tonight, if you`re looking to ditch that big SUV in favor of a new hybrid, why not look at the newest hybrid on the market? It`s called the XR-3 and it isn`t built by Ford or GM, but by Bob Riley. The Arizona man spent five years noodling around with this 1,500 pound three-wheeled hybrid, which uses batteries and diesel fuel. It can get up to 125 miles per gallon, not bad. But here`s the catch: you have to build it yourself. Riley sells the plans for $200, telling you what to buy and how to put it together. Paul, it sounds like a good project for you this weekend. KANGAS: With my lack of mechanical dexterity I would probably end up suing myself under the lemon laws.
Paul Kangas' Stocks in the News
PAUL KANGAS: As we mentioned, investors tested the Dow 12,000 level again this morning as Citigroup said more mortgage-related write-downs are on the way. But the Dow bounced back with a 20 point gain at mid-session after an analyst upgrade on AIG stock. Trading remained choppy until mid-afternoon when oil fell sharply on that news that China is boosting fuel prices to curb demand. That sparked a late rally led by the airline, rail and tech stocks. So the Dow Industrial Average closed up 34.03 at 12,063.09. The NASDAQ Composite gained 32.35 ending at 2462.06. Standard & Poor`s 500 Index rose 5.02 ending at 1342.83. In the bond market, the 10-year note lost 17/32 to 97 10/32, putting the yield at 4.21 percent.
Big board volume leader, 28.3 million shares traded, Citigroup (C) down $0.23, traded as low as $19.41. As we touched on, the company reportedly said it could take some more big losses in the second quarter from its exposure to troubled bond insurers.
Bank of America (BAC) lost $0.23.
Then came Wachovia (WB) with an $0.89 gain.
No change in Pfizer (PFE).
General Electric (GE) edged a penny higher.
Moving along, Motorola (MOT) down $0.51, down on fears that it`s losing ground to its competitors.
BB&T Corp (BBT) ended up $0.02 a share after trading as low as $21.40 this morning. That`s when the regional banker disputed an analyst comment that a dividend cut is in the works. Instead, BB&T said it now sees some increase in its dividend this year and the stock rallied. Earlier this work on NBR incidentally, Citi stock credit strategist said the troubles were just beginning for the regional banks.
United Health Group (UNH) down $2.33. That`s in sympathy with Coventry Health which second quarter and full year earnings estimates today and that sent the whole group down. Let`s have a look at some of those other health care companies.
Coventry (CVH) itself off $8.70.
Aetna (AET) just a fractional loss.
But Cigna (CI) down $2.76.
Humana (HUM) Wellpoint (WCP) pretty bad losses there. Getting back into the active list, we see JPMorgan Chase (JPM) with a $0.09 loss.
Followed by ExxonMobil (XOM) down $2.04 on that sharp drop in oil prices.
American International Group (AIG) up $1.55. Citigroup upgraded it from "hold" to "buy" in the belief the stock is under valued.
Apria Healthcare (AHG) up $4.18. Blackstone Group will acquire this company for $21 a share in cash.
IHS (IHS) up $3.63. This is an information technology company and they`re out with higher second quarter earnings today, $0.37, up from $0.32 a year ago and revenues jumped 34 percent. The company boosted its 2008 revenue growth estimate.
Pier 1 Imports (PIR) down $1.23. It had a loss of $0.37 in the first quarter, well smaller than the $0.64 last year, but the Street estimate was for only a $0.15 loss, so the stock got hit.
Huntsman (HUN) also got hit for an $8 drop. Hexion specialty chemicals and Apollo Management have filed suit to cancel their proposed merger because of Huntsman`s increase in debt and lower than expected earnings in recent times.
JM Smucker (SJM) losing $4.39. Fourth quarter earnings fell to $0.67 from $0.75 a year ago as restructuring costs offset a 20 percent rise in sales.
Apple (AAPL) topped the NASDAQ active list, up $2.15.
Followed by Google (GOOG) with a loss of $2.18.
Then Research in Motion (RIMM) up $3.10.
Microsoft (MSFT) $0.47 gain.
Qualcomm (QCOM) up $1.26 a share.
Cisco Systems (CSCO) gained $0.24.
Intel (INTC) up $0.57.
Oracle (ORCL) edged up $0.26.
Fifth Third Bancorp (FITB) edging back $0.49 after dropping $3.47 yesterday when the company cut its quarterly dividend 66 percent and today, Citigroup cut its price target from $24 all the way down to $11 a share.
Baidu.com (BIDU) was up $2.32, tenth in NASDAQ volume.
Casella Waste (CWST) up $1.42, nice percentage move. The company slashed its fourth quarter loss to only $0.31 from $0.80 a share last year and today, Standard & Poor`s upgraded it from "hold" to a "buy."
XM Satellite (XMSR) down $1.77, big loss there. Goldman Sachs issued a negative outlook on the company today and saying the demand for satellite radio is diminishing. Its proposed merger partner Sirius stock was down $0.30 at $2.13 a share.
Those are the stocks in the news tonight.
