NBR CompleteTranscripts- July 14, 2008
Monday, July 14, 2008Freddie & Fannie Can't Fail
SUSIE GHARIB: It was a jittery day on Wall Street in the wake of the government's rescue of mortgage giants Fannie Mae and Freddie Mac over the weekend. While shares of the stocks spiked in early trading, Fannie closed down $0.52 or 5 percent at $9.73. Freddie stock ended off $0.64 or 8 percent at $7.11. And financial stocks overall fell sharply. In Washington, lawmakers assessed the emergency move by the Treasury and the Federal Reserve and worked on getting congressional approval. We have two reports tonight looking at reaction to Fannie Mae and Freddie Mac action on Wall Street and on Capitol Hill. We begin with Scott Gurvey in New York.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: The government decision to stand behind the two mortgage industry giants had a noticeable impact on bond traders today. Freddie Mac's regularly scheduled auction of $3 billion in short-term debt came off better than expected. That indicates investors have confidence in the safety of Freddie Mac's debt securities. But while investors bought Freddie's short-term notes, they did demand a premium over similar Treasury issues. Jerry Webman of OppenheimerFunds says that is understandable.
JERRY WEBMAN, DIRECTOR OF FIXED INCOME, OPPENHEIMERFUNDS: Some of it has to do with issues like the callability of these bonds and at least of some of their debt. It has it do with relative liquidity. But you know, this is still a slightly more explicit guarantee, but it's still not full faith and credit of the U.S. federal government.
GURVEY: If federal officials expected to see a rebound in the stock price of Fannie Mae and Freddie Mac, they were disappointed. After a big move up at the open, both stocks closed below last week's levels. Market watchers say that's because the future of Fannie and Freddie's equity is uncertain. Most experts expect the government to buy an equity stake in one or both of the companies. That new capital would let the firms continue their mortgage support operations which are essential to the housing market. But that could greatly dilute the stock of current shareholders. Cary Leahey of Decision Economics says Wall Street is afraid that along with the government money, which Wall Street likes, comes government oversight, which it does not.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: The Federal Reserve, which has been no friend of Fannie and Freddie, is now going to have a consultation role in overlooking their books. I have a feeling one of the deals for Freddie and Fannie to go to the discount window is that a horde of Federal Reserve accountants is probably over at those building checking the books, which is one thing I don't think those two agencies ever wanted happening.
GURVEY: Analysts do not expect to see much of a recovery in Fannie Mae and Freddie Mac shares until Washington makes its next move. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
Capitol Hill Comments on the Freddie Mac/Fannie Mae Rescue Plan
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Darren Gersh in Washington, where the Fannie/Freddie rescue operation was billed almost as an exercise in fear management. House Financial Services Committee Chairman Barney Frank will play a key role in moving the plan through Congress.
REP. BARNEY FRANK (D-MA), FINANCIAL SERVICES COMMITTEE: This is a case where the government is saying to the market, will you please get a grip and look at the reality, and if you do, you won't be in this kind of a panic.
GERSH: A senior Treasury official tells NIGHTLY BUSINESS REPORT investors in Fannie Mae and Freddie Mac bonds should take comfort in the financial backstop the government unveiled over the weekend. The plan would extend through the end of 2009, the Federal Reserve would provide access to funds and also consult on regulatory capital requirements. And, if Congress approves, the Treasury would be authorized to take an equity stake in the companies. Freddie and Fannie would also get an unlimited line of credit to the Treasury. Barney Frank says that makes sense.
FRANK: If you were to say there is going to be a line of credit up to X hundred billion, expecting that maybe none of it, maybe 5 percent of it would be used, the headline would still be that. So, it is perfectly reasonable not to have a number, because the number would just be distorted and isn't necessary.
GERSH: Critics want the Treasury to replace Fannie and Freddie management as a condition of making a big investment. No matter what, senators like Iowa's Charles Grassley are going to be taking a harder look at how these businesses have been run.
SEN. CHARLES GRASSLEY (R-IA), RANKING MEMBER, FINANCE COMMITTEE: When people are going to look at it, why are they in trouble? It seems to me irresponsible, the fabulous salaries these leaders of these two groups have gotten.
GERSH: Concerns about the financial health of Fannie and Freddie are not going away. If they are forced to take similar write-downs as Merrill Lynch (MER) and Citigroup (C) did on their prime mortgage investments, analyst Sean Egan figures Fannie and Freddie may expose taxpayers to enormous risks.
SEAN EGAN, MANAGING DIR., EGAN-JONES RATINGS: You're looking at $500 billion of exposure. What is that, several years of an Iraq War? So it's huge. It's absolutely huge.
GERSH: A senior Treasury official says there are no plans to nationalize Freddie and Fannie. The goal is to get through the current crisis, leaving longer-term reforms for another day. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
Richard Bove, Banking Analyst at Ladenburg Thalmann Examines Freddie Mac, Fannie Mae & IndyMac
PAUL KANGAS: Joining us now to talk more about Freddie and Fannie and reaction to the federal takeover of IndyMac Bancorp is Richard Bove, banking analyst at Ladenburg Thalmann. And welcome back to NBR, Dick. Good to see you.
RICHARD BOVE, BANKING ANALYST, LADENBURG THALMANN: Thank you, Paul.
KANGAS: First, Fannie and Freddie, what did you make of the moves by the Treasury, last resort?
BOVE: I think so, I think that if there was any other sources of capital to save these companies, the federal government would not have had to move in. I think the fact that the federal government has moved in, however, does tell you that these companies will not fail. The bigger question, though, is, do we really need these two companies? And I think that a year from now, you will see that there will be legislation that will probably break them up and make them into much smaller entities.
KANGAS: Well, this whole move was designed to bolster confidence in the companies. But the stocks were punished again. So now what happens now for these mortgage giants? Are they eventually going to fade?
BOVE: Well, they're going to stay there until there is some legislation that changes them. But I do think Congress will now recognize that they're too big -- they're too much of a threat to the United States financial system. They are poorly run and they should be broken up.
KANGAS: Moving to the banking sector in general, the regional banks in particular, they have been really hard hit. Are they in worse shape than the big city banks?
BOVE: No, actually, they are not. I think that the regional banks are actually in relatively good condition. And I think there are a number of ways to measure that. One way is to take a look at their loan losses or their nonperforming assets as a percentage of their loans. If you do that, you see that today the banking industry in this country is at a 3 percent ratio whereas in 1990 it was over 6 percent.
KANGAS: And the danger level now is what percent?
BOVE: Five percent. In other words, when banks have 5 percent of their loans on a nonperforming status, that tends to be a very dangerous position for them. And it is very difficult to recover from that position.
KANGAS: Mm-gm. And, well, I understand IndyMac had a 10.5 percent ratio of bad loans divided by overall loans out, is that true?
BOVE: That's correct. In other words, they were well above the 5 percent danger level.
KANGAS: A good warning that they were in trouble.
BOVE: I think so, yes.
KANGAS: Now you issued a clarification today saying that banks are doing better than most people think. Tell me more about that. I want to hear some good news. BOVE: Well, this morning we put out this report which we thought said that the banking industry was in much less trouble than the market believed it was. But because we put this table in showing the banks that might be in trouble, no one read the report. They looked at the table. What we are trying to say is, look, number one, there is more equity in the banking system today than there has been in a number of years. Number two, that there is higher reserves in the banking system than there has been for the last couple of years. Number three, deposits are rising in the banking system, which is a very positive metric. Number four, the loans are increasing in the banking system. And number five, their margins are flat. So while the whole world seems to be concentrating on the bad loans, if they look beyond bad loans to the fundamental functioning of the business, they would see that the banks are not in terrible trouble.
KANGAS: Step number six, buy some bank stocks, is that true?
BOVE: Well, I think if you look a year from now, the prices of bank stocks will be considerably higher than they are today. But if you were to say, in this panic do I want to take a large amount of my money and bet it against bank stocks? Very risky thing to do.
KANGAS: Dick, I want to thank you for coming in and sharing your insights with our viewers.
BOVE: Thank you, Paul. KANGAS: My guest, Dick Bove of Ladenburg Thalmann.
One on One with Michigan's Governor, Jennifer Granholm
SUSIE GHARIB: The turmoil in the financial markets was a hot topic at the annual meeting of the nation's governors this weekend. Michigan's governor, Jennifer Granholm, attended the event in Philadelphia and she joins us now. Governor, welcome to NIGHTLY BUSINESS REPORT.
GOV. JENNIFER GRANHOLM (D), MICHIGAN: Thank you, Susie.
GHARIB: Well, we focused our show so much on the Fannie and Freddie crisis, tell me, what is the trickle down impact of their problem on a state like Michigan?
GRANHOLM: Right, well, all of the states, we have to deal with the implosion in the whole mortgage industry. Obviously Fannie and Freddie hold half of the mortgages. So that affects us. It affects us even though those aren't traditionally the -- there are more traditional loans rather than the subprime loans which many of us are dealing with on the other end. But the bottom line is for the states, we're doing everything we can as governors to be able to negotiate voluntary agreements, to refinance, et cetera. But ultimately we're one, grateful that the Feds have stepped in to make sure that Fannie and Freddie will survive. And two, there is a really important bill that just went through the House and the Senate. And it would allow for additional means for refinancing of these foreclosed homes, additional counselors, at the local level so that people can stay in their homes which ultimately the banks would much prefer them to do if they can refinance in more acceptable terms.
GHARIB: Do you think that that bill and any other efforts will help revive the housing sector in Michigan? Because I know your state has a record number of foreclosures.
GRANHOLM: We do. And we are not alone but certainly the impact when you combine the economy and certainly the restructuring that is happening in the domestic auto industry, and of course General Motors (GM) has another announcement tomorrow, you combine that with the overall efforts to try to clean up some of the subprime lending practices, and the economy, with $4 a gallon gasoline, it is just -- it's a triple-whammy on citizens. And so whatever we can do to allow for people to stay in their homes under more comfortable terms, to freeze the adjustable rate mortgages adjustments, to make sure that people can refinance under terms they can afford is really important to us as governors. And there are a number of governors who have undertaken specific measures to be able to do that. We did in Michigan. It's called "Save the Dream," it is with our Michigan State Housing Development Authority, but we're certainly not alone. Whatever Congress can do to keep people in their homes is something all the governors should be in favor of.
GHARIB: And, Governor, one factor of keeping people in their homes is they have to have the financial wherewithal and jobs to be able to afford it.
GRANHOLM: Right.
GHARIB: What can the state do to keep people in their jobs and from leaving the state, because as you mentioned, the auto industry is really struggling now.
GRANHOLM: Well, sure. We've lost since the year 2000, Michigan alone has lost 400,000 good-paying manufacturing jobs. For me it is all about diversification of this economy. We've had the largest footprint of automotive industry of any state in the country. And we're very proud of that history. But really as they go through this extremely difficult structure change, and have -- are forced to pivot on a dime to respond to $4 gallon gasoline, we've got to bring in jobs that are…
GHARIB: What are you doing…
GRANHOLM: … that enlarge the economy.
GHARIB: What are you doing to get jobs into the state?
GRANHOLM: Well, and so tomorrow, for example, we'll be announcing 14 projects that we are bringing in that add to sectors like alternative energy, which is something that we're really focused on because we believe those workers in the auto industry can be easily trained to do the CNC machining that they are already doing, but to build wind turbines, et cetera, solar, you name it, we are focused on it. In fact, just as a quick response to the $4 a gallon gas, we just announced a cellulosic ethanol plant up in the upper peninsula, Paul, which is going to be taking wood waste and turning into that cellulosic ethanol, creating 700 jobs, but producing fuel at a price that could be as much as half of the price of gas.
GHARIB: All right. Well, it sounds like are you doing the best efforts. We wish you the best of luck, and hope things…
GRANHOLM: Appreciate it.
GHARIB: … turn around for Michigan. Thank you so much for coming on the program.
GRANHOLM: Yes, thank you. You bet.
GHARIB: My guest tonight, Michigan Governor Jennifer Granholm.
"Get Your Finances Ready for Retirement" -Transitioning to a Retirement Portfolio
SUSIE GHARIB: Baby Boomers are closing in on the home stretch of their careers with retirement on the horizon. So how do you go from living off your paycheck to living off your retirement income? Continuing our series "Get Your Finances Ready for Retirement," Joe Collum looks at transitioning your portfolio goals for the golden years.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: Tim Czerniec isn't quite ready for the rocking chair yet, but the 61-year-old feels financially secure enough to step away from his job as chief financial officer at Barry University after 38 years at the Miami Shores school. When the retirement parties are over, Tim Czerniec and his wife Gloria will be gradually moving from living off a paycheck to living off their retirement income. They expect to need about 85 percent of their pre-retirement income to maintain their current standard of living. For them that will mean a budget of $13,000 per month or $156,000 per year. Most of their assets are in his 403(b) plan, the equivalent of a 401(k) plan for employees of non-profit institutions. With the help of his UBS stockbrokers, Steve Gold and Annick Iwanowski, Tim plans to roll that money directly into an individual retirement account, or IRA. By doing that, he will incur taxes and will be able to invest his funds any way he wants.
TIM CZERNIEC, RETIREE: Move it out of where it is into direct investment management so that I can benefit by it -- my wife and I can benefit by it, over a period of -- hopefully until I'm very old.
COLLUM: A critical issue for all retirees is how best to invest their nest eggs once their paychecks stop. Often that means switching to a less-volatile mix of investments. Gold and Iwanowski helped the Czerniecs put most of their portfolio into fixed-income investments, better known as bonds.
STEVE GOLD, UBS FINANCIAL SERVICES: Because you're going to be stepping down, it's going to be prudent to start taking less risk, also taking into consideration the current economic environment, and we moved to a portfolio that I can tell you today is more around 70 percent fixed, 30 percent equity.
COLLUM: But the Vanguard Group's John Ameriks says many retirees will need to remain more invested in stocks before moving into safer income-producing holdings.
JOHN AMERIKS, INVESTING ANALYST, VANGUARD GROUP: As you get into retirement, that fund allocation is about 50 percent stocks at the point of retirement, and then it drops to about 30 percent stocks once you're about seven to eight years into retirement.
COLLUM: Many retirees are in for a rude awakening when they begin transitioning their portfolios from the accumulation phase of their working years, to the distribution phase of retirement, when they start withdrawing funds from their individual retirement accounts and 401(k) plans. IRA expert Ed Slott says the biggest and most unpleasant surprise is likely to be the tax bite.
ED SLOTT, IRA EXPERT: Remember, none of this money has been taxed. We were all told we had this goody-goody tax break up front, we got a tax deduction but it's kind of like your deal with the devil, in any deal with the devil, there's a day of reckoning and that's the taxes.
COLLUM: For that reason, many financial advisers urge new retirees to avoid tapping tax-deferred accounts as long as possible. But Slott expects the nation's huge national debt to lead to higher taxes in the future. He recommends retirees cash out their IRA portfolios first.
SLOTT: I really believe taxes are going to have to go up. Somebody has got to pay these bills. And if you believe that, it might pay to take some of that taxable money down now while I believe taxes are relatively low
COLLUM: Experts say the financial decisions people like the Czerniecs make going into retirement have big implications. That's because if you don't make the right moves, tax penalties and lower investment returns could mean less income for the rest of your life. Joe Collum, NIGHTLY BUSINESS REPORT, Miami.
GHARIB: Of course, the ideal mix of stocks and bonds in a portfolio depends on an individual's financial situation. So consult with a qualified financial adviser before re- allocating your portfolio.
Paul Kangas' Stocks in the News
PAUL KANGAS: Bolstered by strong openings in the stocks of Freddie and Fannie, Wall Street's blue chips jumped about 100 points on the Dow at the outset. But the gains did a quick fade when there was little follow-through buying. And then lingering doubts about whether the government backstop would be successful kept the market on the defensive for the rest of the day. So the Dow Industrial Average closed off 45.35 points at 11,055.19. The NASDAQ Composite lost 26.21, ending at 2,212.87. Standard & Poor's 500 Index fell 11.19, ending at 1,228.30. In the bond market, the 10-year note rose 28/32 to par and 4/32, putting the yield at 3.86 percent.
Washington Mutual (WM) down $1.72. The company reportedly maybe forced to take another big second-quarter loss as it adds $4 billion to its loan-loss reserves. But after the market closed, the company said it has a current excess liquidity of $40 billion. And in after hours trading, the stock moved up $0.50 a share from what you see here.
Wachovia (WB) down $1.70. UBS Financial downgraded it from buy to neutral today.
And then Lehman Brothers Holdings (LEH) off $2.03. The Wall Street Journal reports the company is examining the possible alliance with a partner, the sale of assets, or perhaps a stock buyback.
National City Corp. (NCC) down $0.65 in response to rumors the company might be experiencing a run on its bank. But the company today said there were no unusual depositor or creditor activities today. No run on the bank whatever.
And then M&T Bank (MTB) down $10.88. It traded as low as $53.61 after reporting second-quarter earnings of $1.44, down from $1.95 a year ago. Standard & Poor's downgraded it from hold to a sell.
And as we touched on, Republic Services (RSG) up $3.86. Waste Management bidding $34 a share for all of the outstanding stock.
And then Waste Management (WMI) itself losing $2.12.
Allied Waste (AW), which was in a deal to be acquired by Republic, down $0.20 a share.
Allegheny Technologies (ATI) up $4.86. The company sees second-quarter earnings coming in at around $1.66, way above the first-quarter level of $1.40.
Molson Coors Brewing (TAP) up $1.70, Deutsche Bank upgraded it, hold to buy. There was a rumor SABMiller is eyeing the company as a takeover.
And speaking of brewers, another good gain by AmBev (ABV), up nearly $3 a share. The Anheuser-Busch (BUD) takeover has started up quite a bit of speculation of takeovers in the brewing industry in general.
Offshoring drilling stocks very strong today after President Bush lifted the ban on drilling. Ensco (ESV), Noble (NE), Rowan (RDC), Schlumberger (SLB), and Transocean (RIG) all doing very well, indeed.
Kimberly-Clark (KMB), a $0.52 loss. After hours it tumbled $4 from there after the company said its second-quarter preliminary earnings would be $1.03, about $0.06 below the Wall Street estimate.
And Apple (AAPL), down $1.30. The company sold 1 million iPhones over the last three days since it was introduced last Friday.
And then Yahoo! (YHOO) losing $1. The company again has rejected Microsoft's advances.
Microsoft (MSFT) fell $0.10 to close at $25.15.
And those are the "Stocks in the News" tonight.
