NBR Transcripts-July 10, 2008
Thursday, July 10, 2008Fannie Mae & Freddie Mac's Capital Concerns
SUSIE GHARIB: Fannie Mae and Freddie Mac have adequate capital. That was the word late today from the regulator overseeing the two mortgage finance giants. The Office of Federal Housing Enterprise Oversight said that both companies have large portfolios, access to new lending and $1.5 trillion in assets. Those comments came after the stocks fell sharply for the second straight day on Wall Street. Meanwhile, at a hearing on Capitol Hill today, lawmakers grilled Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson about the future of Fannie and Freddie. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is a treasury secretary's job to try to calm the waters, and the surf was up this morning. As Henry Paulson sat down to testify before Congress, shares of Fannie Mae were off almost 22 percent, Freddie Mac off more than 30 percent on growing concerns over their liquidity. Then Paulson spoke.
HENRY PAULSON, TREASURY SECRETARY: Fannie Mae and Freddie Mac are also working through this challenging period. They play an important and vital role in our economy and housing markets today and they need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalized.
GERSH: That was enough to halt the slide in the shares of the so-called GSEs or government-sponsored enterprises. But Standard & Poor's now warns Freddie Mac, in particular, will find it difficult and expensive to raise the billions of dollars in new capital it needs. Fed Chairman Ben Bernanke urged the GSEs to hurry up and find more cash.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: We've called upon all financial institutions to expand their capital bases, so that they can be even more proactive in providing credit and support for the economy. So I would include the GSEs in that broad call for increased capital.
GERSH: How important are Freddie and Fannie? Together the two companies provide the insurance that backs up seven out of every 10 new mortgages in the country. Given that, former Fed Governor Lyle Gramley calls a Fannie or Freddie failure unthinkable.
LYLE GRAMLEY, FORMER FEDERAL RESERVE GOVERNOR: Fannie and Freddie are much too big to fail. That simply can't happen. If Fannie and Freddie have liquidity problems, the Fed can help out. The Fed has bought Fannie and Freddie securities before, they haven't in recent years, but they have before. And I'm reasonably sure they would again.
GERSH: Congress got the message. A housing rescue bill cleared a key Senate vote today, setting up passage by the end of the week. Senate Banking Committee Chairman Chris Dodd says Fannie and Freddie need the help.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: Recent news makes clear that these entities need a strong regulator to ensure they are viable and help the institutions. It also raises loan limits from $417,000 to as high as $625,000 so that the GSEs can play an even more active role in stabilizing the housing market.
GERSH: The presidential campaigns also jumped in on the GSEs. John McCain said Fannie and Freddie would not be allowed to fail. An adviser to Barack Obama called the mortgage giants troubles a sign of the overall weakness of the economy. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Mark Zandi, Chief Economist for Moody's Economy.com
SUSIE GHARIB: Joining us now for more analysis on the future of Fannie Mae and Freddie Mac, Mark Zandi, chief economist for Moody's Economy.com. Hi, Mark. MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: Hi, Susie. GHARIB: Well, politicians are saying that Fannie and Freddie have adequate capital, but investors on Wall Street seem to be saying that both companies are in danger of becoming insolvent. Who is right here?
ZANDI: Well, I think it's clear they don't have enough capital. They, I think, are far away from insolvency, if you tote up the capital for both, it's about $80 billion as of the end of the first quarter. So I don't think insolvency, at least not now, is an issue. But they need more capital and they need it so that they can become more aggressive in extending out more mortgage loans and other credit so that this housing market can get going again.
GHARIB: And where is this capital going to come from? What are the options?
ZANDI: Well, they're going to have to issue new equity. They're going to have to go back to stock investors and say, you know, buy my stock, I need capital. Unfortunately, it's going to be very tough for existing shareholders. They're going to be deluded and therefore the value of their stock holdings are going to be much less, but that's what's going to happen here. They're going to have to go back to the stock market and just raise more capital.
GHARIB: Treasury Secretary Paulson is pushing for a new, more powerful regulator of both Fannie and Freddie. Now while that may be a good thing, I mean, how does that in the near term solve a lot of these fundamental problems?
ZANDI: Well, it may help if it restores confidence. I think one of the problems that Fannie and Freddie have is no one trusts the numbers. They don't trust the information they're putting forth. You can see that in today's news report. People really don't believe that -- what they're saying. So if you have a strong regulator that everyone trusts and the regulator imposes discipline, then that will create confidence, and that confidence will be key to their long-run survival.
GHARIB: One of the main issues at the core of all of these problems is what's going on in the housing market. How much longer do you think that this country is going to go through a housing crisis and prices continue to fall and their mortgage losses keep mounting? What's your outlook?
ZANDI: Yes, you know, I think it's another year. Prices have been declining for two years. The peak was the spring '06 selling season. Since then prices have nationwide have fallen about 15 percent. I think it will take another year and another 10 percent decline before housing values get back in-line consistent with incomes and rents and we get people back in the market thinking this is a good buy. So another year.
GHARIB: And what is the role of high oil prices have on all of that, because a lot of people's sense of well-being comes from their current economic situation? When you're paying a lot of money for gas, you probably are not too much in the mood to buy a house or anything else for that matter.
ZANDI: Yes, you know, there is nothing more debilitating than the high energy gasoline prices. It's what driven consumer confidence to lows that we haven't seen in the early '80s. It's particularly hard for homeowners, let's say they bought a big home out in the exurbs, somewhere 50, 60 miles away from their work. When gas prices are up, it becomes untenable to own that home and commute in. So it's a real problem. We need a little bit of luck. And hopefully those oil prices start to come down. At the very worst, hopefully they don't rise. We certainly would have a tough time with that.
GHARIB: It has been a year now that we've been going through this credit crisis, and today there was news that for the first time no Wall Street firm borrowed any money from the Federal Reserve's emergency lending program over the past week. How do you interpret that information? Is that a sign that things are improving in this credit crisis? Is it coming to an end?
ZANDI: No, not necessarily. You know, I'm not taking too much solace in that yet. I mean, clearly the investment banks, the primary dealers who can use that credit facility are under a lot of stress. Just look at the stock price for companies like Lehman Brothers (LEH) and Morgan Stanley (MS). So I don't know that we can take a whole lot of solace from that at this point. The crisis continues on, it's not as bad as it was back in mid-March when Bear Stearns collapsed, but it's still not where it needs to be. And I think we have got a ways to go.
GHARIB: All right. Mark, thanks a lot for all of that information. We really appreciate it. ZANDI: Thank you.
GHARIB: My guest tonight: Mark Zandi, chief economist for Moody's Economy.com.
Retailers Continue To Pay The Price For The Gas Crisis
SUSIE GHARIB: The latest monthly sales numbers from the nation's retailers show the pressure facing American consumers, as soaring gas prices dominate spending choices. Discounters fared the best last month: sales at Wal-Mart rose nearly 6 percent, while wholesalers Costco (COST) and BJ's (BJ) reported strong gains on sales of gasoline. Target (TGT) didn't do as well as its discount rivals. Its sales rose just 0.4 of a percentage point. Among clothing retailers teen retailer Aeropostale (ARO) and Children's Place (PLCE) posted double-digit gains. J.C. Penney (JCP) and Gap Stores (GPS) continued to struggle. As Scott Gurvey reports, analysts say the retail sales picture may get worse before it gets better.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: There is a clear divide in the retail sector where success is being determined by the product mix and little else. Analyst Deborah Weinswig of Citi says one product is a sure winner.
DEBORAH WEINSWIG, RETAIL ANALYST, CITI: If you sell gas, you're doing extremely well, because you're driving traffic. Because theoretically if you're one of the retailers I follow, you're selling cheaper gas than the gas station on the corner of Main and Main.
GURVEY: Other products bringing profits are food and other necessities which are driving traffic to wholesale clubs and discounters. But for sellers of discretionary items in these difficult economic times, it is a completely different story.
WEINSWIG: If you're a high end retailer these days, you're probably in one of the worst positions because we are really seeing people really kind of clamp down on discretionary spending. So it really is kind of very barbelled in terms of what you're seeing out there.
GURVEY: Shoppers are increasingly price-driven. Arthur Rubin of Staten Island traveled to Wal-Mart in New Jersey.
ARTHUR RUBIN, SHOPPER: We usually shop at shop at ShopRite in the city. The difference in savings is about $1.75 to $2 on an item, and that's unbelievable.
GURVEY: Analysts do not expect to see much from back-to-school sales. They say parents will cut back. Analysts also see reduced demand as consumers like Marla Toro of Union City finish spending their economic stimulus checks.
MARLA TORO, SHOPPER: I thank the government for that money. That's something that we wasn't expecting, you know?
GURVEY: The prospects for holiday sales, when most retailers do more than half their annual business, are equally bleak. On Wall Street, the retail sector has been battered and stock prices are cheap. But analyst Brian Tunick of JPMorgan says investors are making a rational decision by being negative.
BRIAN TUNICK, SPECIALTY RETAIL ANALYST, JPMORGAN: You can clearly see the investors who have to actually make those decisions, they're very bearish. We've never seen sentiment like this. I've never seen sentiment like this before. And they continue to push on the short interest higher and higher. So they're selling into every rally and they're trying to short as much as they can.
GURVEY: Flat screen televisions are another product still selling. Analysts say people who have decided on stay-at-home vacations are buying the TVs for entertainment. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
'Bill of Health"-Digital Pathology
SUSIE GHARIB: In health care, digital X-rays and CT-scans have become commonplace. But the field of pathology is just beginning to enter the digital era. As Jeff Yastine reports in tonight's 'Bill of Health," it's a change that promises faster diagnoses for patients and potential cost- savings for hospitals.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: For more than a century, this is how pathologists, specialists in identifying disease through the study of human tissue, do their jobs: a high-powered microscope, and glass slides embedded with tiny slices of tissue samples. But some pathologists, like Dr. Azorides Morales, are beginning to embrace new digital pathology tools. The technology lets them rapidly scan and digitize dozens of glass slides at a time, then a pathologist can use a computer screen just like a microscope.
DR. AZORIDES MORALES, PROFESSOR OF PATHOLOGY: I will have exactly what is in this slide. And then I could focus on a specific area there and bring that up and move the slide around. So I say, OK, I want to look at this in higher magnification. And there we are.
YASTINE: Why is that a big deal? Well, until now, pathology has meant shipping lots of glass slides back and forth between pathology offices. Now these same images can be streamed over the Internet, making them instantly available to any consulting pathologist. Dr. Jared Schwartz, president of the College of American Pathologists, says digital pathology means faster diagnoses and potentially lower health care costs.
DR. JARED SCHWARTZ, PRESIDENT, COLLEGE OF AMERICAN PATHOLOGISTS: The faster you can get an accurate diagnosis and get the appropriate therapy, and the definitive therapy, you're going to lower the costs and the potential morbidity or mortality with an associated patient. I mean, if you have to have one surgical procedure, and you can get the diagnosis, that's far better than having to have two procedures.
YASTINE: Experts say the ability to electronically scan a slide is one of the keys to digital pathology. A few years ago, such scans took minutes to complete, now they take seconds. A dramatic drop in the cost of digitally storing such images is also a factor, says Gene Cartwright, CEO of Omnyx, a joint venture between GE Healthcare and the University of Pittsburgh Medical Center.
GENE CARTWRIGHT, CEO, OMNYX: The size of an image we're talking about digitizing here is about 10,000 megabytes, or 10 gigabytes for every glass slide. And so the technological challenge of scanning that image very quickly in a factory like environment, storing that image, streaming it over the Internet, and navigating around that image is a big, big challenge and one that hasn't really been possible until very recently.
YASTINE: The industry leader in sales of digital pathology gear is a California company, Aperio. But it and many others see GE's investment in Omnyx as a validation of the rapid growth expected for digital pathology. And with the average hospital pathology lab cranking out as many as 200,000 slides a year, there's a lot of room for growth in sales as hospitals begin to scan and digitize all of that medical information. Jeff Yastine, NIGHTLY BUSINESS REPORT, "Bill of Health."
"Commentary"-Comfort in a Crisis
SUSIE GHARIB: Tonight's commentator says relaxed readiness is key to leadership in a crisis. He's Alfred Edmond Jr., senior vice president and editor-in-chief of blackenterprise.com.
ALFRED EDMOND JR., SENIOR V.P., EDITOR-IN-CHIEF, BLACKENTERPRISE.COM: What should be the posture of leadership when a company, an industry, or an entire economy is in crisis? Most would probably agree that "don't worry, be happy" is not the way to go. Comfort leads to contentment, which too often leads to complacency and inaction. Comfort is the disposition of the prey just before ambush by a predator. On the other hand, a state of constant alarm leads to stress, panic, and exhaustion, resulting in poor decisions driven by impulse and anxiety, and eventually total dysfunction. People and organizations can turn on each other, or be literally paralyzed by fear. When faced with crisis, the healthiest disposition is neither the comfort of complacency nor a constant state of alarm. To survive a high-stakes, competitive environment, whether in the wild, in sports, or in business, the goal is to maintain a state of relaxed readiness, a posture lying somewhere between total relaxation and absolute rigidity. In a dangerous economic environment, we must be on the alert for challenges and change, but not so stressed and intimidated by them that we can't respond. We can't be so focused on the dangers that we fail to see the opportunities within crisis. The most resilient companies and individuals will be those who can achieve and maintain a state of relaxed readiness. I'm Alfred Edmond Jr.
Paul Kangas' Stocks in the News
PAUL KANGAS: Worries over Fannie and Freddie added to a volatile day on Wall Street. Stocks opened modestly higher in a rebound from yesterday's drubbing. But by 11:00 a.m., the Fannie and Freddie concerns had wiped out the early gains, sending the Dow to a 21-point loss. Stocks pushed higher in the earlier afternoon only to pull back on a late surge in oil to a one- week high. But some last minute buying lifted the market to a positive close. The Dow Industrial Average ended with a gain of 81.58 at 11,229.02. The NASDAQ gained 22.96 to 2,257.85. Standard & Poor's 500 Index added 8.70, closing at 1,253.39. Over in the bond market, the 10-year note climbed 2/32 to par and 19/32, putting the yield at 3.80 percent.
Now let's see what else bonded on Wall Street as we take a look at some other "Stocks in the News" tonight. Big Board volume leader on 23.25 million shares, Lehman Brothers (LEH), down $2.44. This morning it traded as low as $15.73 on a rumor that Pimco was cutting back on doing business with Lehman. Pimco denied that and the stock partially recovered, but still ended down $2.44.
Bank of America (BAC), a $0.30 gain today. Yesterday the company said it doesn't have to raise additional capital and it won't cut the dividend.
Then Freddie Mac (FRE), down $2.26. Standard & Poor's repeated a sell today and cut its price target to only $6 a share.
Fannie Mae (FNM) down $2.11. Standard & Poor's repeated a hold rating today on that one, and cut its price target down to $15 a share.
Wachovia (WB) off $1.16. Yesterday it forecast a second-quarter loss of around $1.30. Today Standard & Poor's downgraded it from sell to a strong sell.
Citigroup (C) was down $0.16.
Ford Motor (F), a $0.37 drop.
GE (GE) moved up $0.45. GE is planning to spin off its consumer and industrial businesses.
Wells Fargo (WFC) down a dime.
And then JPMorgan Chase (JPM) moved up $0.23 a share.
American International Group (AIG) lost $2.15. Moody's today downgraded the company's insurance financial strength rating.
And then MasterCard (MA) closed up a $1.95. MasterCard was informed that it will -- by Standard & Poor's it will replace ACE Limited (ACE) in the Standard & Poor's 500. And MasterCard stock will replace GM (GM) in the Standard & Poor's 100. After hours trading MasterCard jumped to $266 a share on that news. ACE feel about $3. And General Motors actually moved up about $0.11 after hours.
Alcoa (AA), a $3.06-gain. Aluminum prices rebounded nicely today and that certainly helped the stock.
Nordstrom (JWN), the big department store chain down $2.72. June same- store sales plunged 19 percent and the company sees second-quarter earnings at or a bit below its previous $0.65 to $0.70 per share guidance.
Shaw Group (SGR), the big engineering firm, up $5.49. Its earnings came out, third quarter, $0.70, $0.06 above the Wall Street estimate and up from $0.66 last year. Standard & Poor's upgraded the stock from hold to a buy.
Then came Cypress Semiconductor (CY), moving up a $1.60. The company's majority-owned subsidiary, SunPower Corporation (SPWR), was selected by Florida Power & Light (FPL) to build the largest solar power plant in the United States. SunPower's stock jumped $8.83 to $70.06 a share. Nice move there.
Then Marriott International (MAR) losing $1.87, lower second-quarter earnings, $0.41 versus $0.43 a year ago. And the company sees the upcoming environment being very challenging and North America particularly. That news hurt a lot of the resort and casino stocks, particularly those in Las Vegas. Let's have a look at those: Las Vegas (LVS), MGM (MGM), Penn National (PENN). And Wynn Resorts (WYNN) down $7.62. The company said earnings at its Las Vegas casino in the second quarter fell almost 70 percent. But its Macau casino earnings almost doubled. And after the close, Wynn said it's going to buy back an additional $500 million in stock and denied the reports that it needs to raise $3 billion. In after hours trading, Wynn stock jumped right back to $78 a share.
Entercom Communications (ETM) down $1.66. Citigroup downgraded the radio station owner from hold to a sell recommendation.
Apple (AAPL) topped the active list on NASDAQ, up $2.38. Its iPhone introduced tomorrow, the new one.
Google (GOOG), a $0.98 loss.
Research In Motion (RIMM) fell $0.41.
Intel (INTC), an $0.81 gain.
Cisco Systems (CSCO) gained $0.55 a share.
Microsoft (MSFT), a $0.22 advance.
Qualcomm (QCOM) up a $1.59.
Baidu.com (BIDU) down $3.52.
First Solar (FSLR) was up $14.60.
And Dell (DELL) up $0.75 a share.
FCStone Group (FCSX) down $12.26. The commodity risk management company had third-quarter earnings of $0.42, and that was $0.05 below the Wall Street estimate.
And finally, Excel Technology (XLTC) jumped $8.20. GSI Group (GSIG) will acquire the company for $32 a share in cash.
Those are the "Stocks in the News" tonight.
