NBR Transcripts-July 15, 2008
Tuesday, July 15, 2008Bernanke & Paulson Take To The Hill
SUSIE GHARIB: The nation's three top financial officials were on Capitol Hill today defending their rescue plan for Fannie Mae and Freddie Mac. But that didn't help shares of the mortgage giants. Both plunged over 25 percent today. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and Christopher Cox of the Securities and Exchange Commission were grilled by lawmakers on what steps they're taking to stabilize the nation's financial system. Washington bureau chief Darren Gersh reports.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Treasury Secretary Henry Paulson again and again stressed there are no immediate plans for Fannie and Freddie to tap the unlimited federal line of credit he is proposing. It is really about psychology. If the backstop is unlimited, Paulson says the markets will feel reassured. But if the credit line were too small, Paulson argues it would almost surely be tapped.
HENRY PAULSON, TREASURY SECRETARY: If you've got a squirt gun in your pocket, you may have to take it out. If you've got a bazooka and people know you've got it, you may not have to take it out. You're not likely to take it out. By having something that is unspecified, it will increase confidence, and by increasing confidence it will greatly reduce the likelihood it will ever be used.
GERSH: To Senator Jim Bunning, a long-time critic of the government-sponsored mortgage giants, that kind of thinking is all wet.
SEN. JIM BUNNING (R), KENTUCKY: A lot of us would like to believe what you're saying, but we're a little skeptical, because every time we propose and do something, it always gets used. And you want an unlimited amount used.
GERSH: Debt issued by Fannie and Freddie is an asset on the books of pretty much every major financial institution in the world. That makes some sort of action by Congress to shore up confidence in that debt a good bet. Lawmakers are clearly concerned more banks may follow IndyMac (IMB) into insolvency, but Federal Reserve Chairman Ben Bernanke assured senators the banking system is well-capitalized.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: My concerns have turned more -- have turned less on the solvency of these institutions and more on their ability to extend the credit that our economy needs to keep growing. Because in many cases, banks are de-leveraging or shrinking or reluctant to raise the extra capital needed to take advantage of business opportunities.
GERSH: Bernanke and Paulson both stress the goal of backstopping Freddie and Freddie is to help the housing market, and through it the overall economy, not to bail out Wall Street or company shareholders. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
GHARIB: At today's hearing, SEC Chairman Cox said his agency is launching emergency action to stem short selling abuses in shares of Fannie Mae and Freddie Mac. Starting on Monday, the SEC will bar the so-called practice of naked short-selling in which traders sell a stock short without first borrowing the shares. An order requiring pre-borrowing will last for 30 days and apply to shares Fannie, Freddie, and major broker dealers, like Lehman Brothers (LEH), Merrill Lynch (MER), and Morgan Stanley (MS). Cox said naked short-selling is a big factor behind the steep drop in shares of Fannie and Freddie.
CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION: What we do know is that the combination of short selling and other manipulation in the market can be a very, very volatile mix. Indeed, it's a witch's brew of very dangerous activities.
GHARIB: Meanwhile, Fed Chairman Bernanke gave lawmakers a gloomy assessment of the U.S. economy, saying it faces, quote, "numerous difficulties." Analysts say Bernanke's comments about the economy and the turmoil in the financial sector suggest the Fed will not raise interest rates anytime soon. Erika Miller reports.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: If there's one thing Wall Street hates, it's uncertainty. But that's exactly what Federal Reserve Chairman Ben Bernanke says the U.S. economy is now facing: BERNANKE: Many financial markets and institutions remain under considerable stress, in part because the outlook for the economy, and thus for credit quality, remains uncertain.
MILLER: In his much anticipated semi-annual testimony before the Senate Banking Committee, Bernanke warned of numerous economic headwinds.
BERNANKE: The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets, all represent significant downside risks to the outlook for growth.
MILLER: Merrill Lynch economist Sheryl King says Bernanke's tone was decidedly gloomy.
SHERYL KING, U.S. ECONOMIST, MERRILL LYNCH: There are a lot more downside risks to growth than what was apparent in any previous testimonies that we have seen so far this year. And the financial market turbulence that has reemerged just since -- in the last few weeks and most especially in the last week really took front and center in his testimony.
MILLER: Economist Conrad DeQuadros says the Fed chairman also intensified concerns about inflation. DeQuadros says the Fed is no longer just worried about the impact of rising energy and commodities prices.
CONRAD DEQUADROS, ECONOMIST, RDQ ECONOMICS: What came out in this testimony was now the Fed is focusing on the risk of an inflation-wage spiral. So, inflation moves higher, then wages move higher, that pushes inflation even higher, and you get into this adverse spiral.
MILLER: But investors were pleased to hear Bernanke explicitly state that stabilizing financial markets is a top priority. Just two days ago, the Fed and the Treasury Department offered Fannie Mae and Freddie Mac the possibility of emergency loans. Economists say Bernanke's views on the economy and financial markets today reduce the odds of an interest rate hike soon.
DEQUADROS: I think all of that argues for the Fed holding policy steady through at least the end of this year, and we're probably going to be in for an environment of accommodative monetary policy for some time.
MILLER: Fed Chairman Ben Bernanke will continue his testimony tomorrow before the House Financial Services Committee. Although his prepared remarks will be the same, observers expect him to use the question and answer session to clarify any misperceptions from today's testimony. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Michelle Girard of RBS Greenwich Capital Markets & Mike Holland of Holland & Company Analyze Fed. Chairman Bernanke's Capitol Hill Visit
SUSIE GHARIB: Joining us now with more analysis about the Fed's comments on the economy, the rescue plan for Fannie and Freddie, and the outlook for the financial markets, Michelle Girard, senior economist at RBS Greenwich Capital Markets; and Mike Holland of Holland & Company. Hi, Mike. Hi, Michelle.
MICHELLE GIRARD, SENIOR ECONOMIST, RBS GREENWICH CAPITAL MARKETS: Good evening, Susie.
MICHAEL HOLLAND, CHAIRMAN, HOLLAND & COMPANY: Hello, Susie.
GHARIB: Mike, let me begin with you. Would you say that the financial markets are stabilizing and that investors were satisfied by what they heard today from Treasury Secretary Paulson and Fed Chairman Bernanke about their rescue plan for Fannie and Freddie?
HOLLAND: In a word, yes, Susie, but then let me qualify it by saying it is a process now. The markets back in March basically seized up, and because of what Bernanke and Paulson have been doing since then, particularly Bernanke, he gets an A for what he has been doing, they have been mending, but they have been in bad shape and it was very important that they did what they did with Freddie Mac and Fannie Mae today.
GHARIB: Michelle, what do you think? Are things stabilizing?
GIRARD: Well, I think what is important here is that they have sent a clear message that Fannie Mae and Freddie Mac are going to be supported and that is so important because what we cannot have happen now is the availability of mortgage credit to get even more difficult. I mean, housing demand is already weak, if it becomes even more difficult because Fannie and Freddie are not able to participate in the market, if it gets even more difficult to get a mortgage and housing demand weakens further, then we are just going to continue to see this sort of spiral between weak housing, weak financial markets, and it ends up feeding negatively on itself.
GHARIB: Exactly. I think that is the point. I think one of the worries out there for investors and for Americans generally is that despite all of the best efforts here to fix up the situation, that Fannie and Freddie and the banks just won't be able to shake off this financial crisis. What do you think, Mike?
HOLLAND: Well, what has happened, Susie, we have had a sea change here, and it goes actually back to Bear Stearns but now comes through Freddie and Fannie, and that is that we are being told that the federal government, which means us as taxpayers, we taxpayers are going to stand behind these situations. Disregarding the arguments on both sides of that, that is a huge sea change. If they hadn't done that, no one knows what the state of the capital markets would be right now, but we wouldn't be so calm as we are right now. We are now standing as taxpayers behind these institutions. The Congress who were questioning these three guys this morning were the people who created this mess, which is ironic, but these three guys have actually come together and they have made some changes here that are very seismic and significant. And whether they are good or bad we will only know over time, but that makes a big change.
GHARIB: Michelle, let me turn to the economy, because Fed Chairman Bernanke gave a very gloomy outlook about the economy. Do you think that the Fed is running out of tools in its toolbox to fix the economy?
GIRARD: Well, I don't think so. You are right, I do think that the outlook for growth, there was more concern than there was even after the June FOMC meeting when we last talked. And I think it is as a result of the renewed, you know, turbulence in the financial markets. You know, the problem here really is not about the Fed cutting interest rates, it is about banks being willing to extend credit. So there certainly is room for the Fed to do more, cutting rates, which I don't think is really in the cards, or adding more liquidity, but the biggest thing here is to stabilize the financial system and hopefully get the banking system back on its feet so we get into a situation where credit can be extended.
GHARIB: So what is the solution, in your view, Mike? I mean, this has been -- so many bleak headlines this week, Fannie, Freddie, the weak dollar, General Motors today. What is it going to take to restore confidence in the U.S. economy and the whole financial system?
HOLLAND: Time, Susie. I think the steps that have been taken have been, as I said, seismic. They have been very important. We have now taken our balance sheet as a nation and put it behind this system and said, we are not going let it fail. So that confidence will over time seep through. We have found people who are selling, for example, the debt of these companies, they made a mistake. Common sense has also prevailed, they have said we are not going to bail out the shareholders, that's a smart thing. I think time -- whenever we get into a bear market like this, every time I have heard -- been in one, I have always heard how scary it was and this is the worst ever. And when it turns out if you are an optimist in the worst of times, you probably are going to do OK because they do work themselves out. And we'll be -- we will get through this, but it will just take time.
GHARIB: OK. I hope you are right and I hope it is a short time. Thank you so much, Mike and Michelle, appreciate it. My guests tonight, Michelle Girard from RBS Greenwich Capital Markets, and Mike Holland of Holland & Company.
News of Layoffs Shift GM's Stock in the Right Direction
PAUL KANGAS: Another turnaround effort is under way at General Motors. The company announced its latest plan today which includes more layoffs and the possible sale of assets. As Diane Eastabrook reports, GM says a lousy outlook for U.S. sales prompted today's aggressive move.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: General Motors says it needs to raise at least $15 billion over the next year-and-a-half to survive and become more competitive in the future. To do this, the automaker plans to save $10 billion by cutting plant capacity, sales and marketing spending, salaried positions, and suspending dividends on its common stock. The company also hopes to raise between $4 billion and $7 billion by selling assets and accessing capital markets. Still, GM Chairman and CEO Richard Wagoner doesn't rule out more cost-cutting down the road.
RICHARD WAGONER, CHAIRMAN & CEO, GENERAL MOTORS: Certainly we would hope that today's actions are going to be sufficient to get us through the down cycle that we are in, but at this point no guarantees on what is going to happen to the U.S. economy and oil prices.
EASTABROOK: While Wagoner didn't announce the sale of any specific assets, he did say the sale of the Hummer brand is being considered. Global Insight auto analyst Rebecca Lindland thinks sales of other brands at this point would be too expensive in part because of dealership obligations. But she thinks GM will cut costs in other ways.
REBECCA LINDLAND, AUTO ANALYST, GLOBAL INSIGHT: So instead, they have to do the channel marketing that they are looking at doing. They are looking at combining some of the dealerships. They are looking at cutting marketing costs. And they are really just looking at what can they do internally because some of the external obligations they have prevent them from canceling brands.
EASTABROOK: GM estimates that the entire auto industry will sell about 14 million units in the U.S. this year and next due in large part to skyrocketing fuel prices. The industry sold about 16 million vehicles last year. GM President and Chief Operating Officer Fritz Henderson says the company is positioning itself for that market reality.
FRITZ HENDERSON, PRESIDENT & COO, GENERAL MOTORS: With the changes that we've seen in full size pickups and full size utilities, we've retimed or in fact postponed or in some cases even eliminated certain programs in that area which has allowed us to free up capital and engineering to deploy and to fully support passenger cars and crossover vehicles.
EASTABROOK: GN thinks by late next year, U.S. vehicle sales will rebound. The auto company thinks the steps it announced today will assure that it will be stronger and leaner by then. Diane Eastabrook NIGHTLY BUSINESS REPORT, Chicago.
"Commentary" -Worries & Warnings
SUSIE GHARIB: While Fed Chairman Bernanke noted today that wage and price spirals could boost inflation, tonight's commentator thinks that worry is premature. He's Bernard Baumohl, chairman of the Economic Outlook Group.
BERNARD BAUMOHL, DIRECTOR, ECONOMIC OUTLOOK GROUP: Every once in a while we all make statements that seem outlandish to others. But when we hear it from the Federal Reserve, well, then you have to ask, what were they thinking? We know that inflation is public enemy number one at the Fed, as it should be. But then several officials there suddenly began to sprinkle their speeches with warnings that a wage and price spiral may fire up inflation, and that struck me as bizarre. The Fed's argument goes something like this: To offset higher price food and energy prices, workers will demand more pay, and that would force companies, who want to protect their profit margins, to raise prices on consumers. The fear is this could trigger a vicious circle between employees and employers. True, wage and price spirals have caused inflation to flare up in the past. But higher wages will not inexorably result in more inflation, and certainly not in this economy. First of all, let's give American workers a break. While food prices have jumped 5 percent and gasoline 40 percent over the past year, average weekly pay has edged up a miserly 2.8 percent. In fact, wage increases have fallen behind inflation in each of the last nine months, shrinking the purchasing power of workers to their lowest in two years. Ironically, this has happened as labor productivity jumped by its fastest pace since 2004. Rising productivity permits companies to lift wages without hurting earnings. For these reasons I think Fed warnings that higher wages can fuel inflationary pressures are misplaced and premature. I'm Bernard Baumohl.
Paul Kangas' Stocks in the News
PAUL KANGAS: Fed Chairman Bernanke's comments about energy and the economy helped send oil prices tumbling today, notching their steepest one-day dollar decline in 17 years. At one point prices were down $10 a barrel from the day's high, before creeping back up. Light sweet crude settled down $6.44 to $138.74 a barrel. And we see an extremely volatile session, no question about it. Now while that big tumble in oil prices played a major roll in afternoon trading on Wall Street, the scope of the financial crisis was a big overhang at the start of trading, sending stocks sharply lower. A bigger than expected 1.8 percent jump in June wholesale prices was another negative. That had the Dow plummeting over 200 points at mid-morning with the NASDAQ off 34 points. Stocks made a sharp recovery thanks to those plunging oil prices, but after moving to a 50-point gain at 3:00 p.m., the blue chips fell back at the close. So the Dow Industrial Average ended down 92.65 points at 10,962.54, that's the first close below 11,000 in about two years. The NASDAQ Composite managed to gain 2.84, ending at 2,215.71. Standard & Poor's 500 lost 13.39 at 1,214.91. Over in the bond market, the 10-year note rose 10/32 to par and 13/32, putting the yield at 3.82 percent.
Big Board volume leader on a heavy 40.3 million shares was Citigroup (C), down $0.66.
Followed by Wachovia (WB), a $0.76 drop there. And Wachovia traded as low as $7.81. Standard & Poor's repeated a strong sell recommendation. Oppenheimer downgraded it from market perform to underperform in the belief that Wachovia will have difficulty in growing earnings.
Another weak bank stock, Bank of America (BAC), down $1.63.
But Washington Mutual (WM) edged up $0.38.
Lehman Brothers (LEH), an $0.82 gain, traded as high as $14.57. The New York Post reported that CEO Dick Fuld is seriously mulling over a way to take the company private and out of the public eye, what with all of these rumors as to whether it's solvent or not. Moving along, Freddie Mac (FRE) down $1.85 on concerns that rescue plans may hurt the equity stakes of current shareholders.
And for the same reason, that's why Fannie Mae (FNM) was down $2.66.
General Electric (GE), a $0.53 drop there.
Wells Fargo (WFC) fell a $1.06.
And JPMorgan Chase (JPM) lost $0.67, 10th in Big Board volume.
American International Group (AIG) off $1.91. Wachovia downgraded it from outperform to just a market perform rating.
Johnson & Johnson (JNJ), another Dow stock, but this one is up $1.29. Second-quarter earnings $1.18, up from $1.05 last year, that's $0.06 above the Street estimate. Standard & Poor's upgraded it from buy to a strong buy.
State Street Corporation (STT), look at this, a bank with earnings and a nice gain of $3.95. Second-quarter operating earnings came in at $1.40, $0.04 above the Street estimate, and that's up from $1.07 a year ago. Revenue jumped 39 percent. The company now sees 2008 operating earnings at the high end of 10 to 15 percent growth factor. Safeco (SAF), the insurance company, up $3.25. Liberty Mutual has reaffirmed it will acquire Safeco for $68.25 a share in cash.
Schering-Plough (SGP) was up $0.94. Lehman Brothers upgraded it from equal weight to overweight.
On the downside, we have Eaton Corp. (ETN) losing $5.42. Second-quarter operating earnings were higher, $2.10, up from $1.70 last year. But the company cut its full-year earnings estimate by $0.20 a share.
The coal and other related stocks in the energy field were very weak today on Fed Chairman Bernanke's comment that the U.S. economy would slow down and cut demand for a lot of commodities. Arch Coal (ACI), CONSOL Energy (CNX), Massey (MEE), Patriot Coal (PCX), and Peabody Energy (BTU), all significant losses on that news today.
Sonic Automotive (SAH) down $1.91. The auto retailer sees second-quarter earnings of $0.48 to $0.50, well below the $0.55 Street estimate.
Then Worthington Industries (WOR) off $2.31. The metal processing company got a downgrade to sell from Goldman Sachs.
Apple (AAPL) topped the active list, down $4.24.
Google (GOOG) off $5.53.
Research In Motion (RIMM) fell almost $2 a share.
Microsoft (MSFT) moving up a dollar. Earnings are due out Thursday for Microsoft.
Intel (INTC), we told you the story earlier, up $0.24, better-than-expected earnings.
Baidu.com (BIDU) down $9.36.
Cisco (CSCO), a $0.26 loss.
Qualcomm (QCOM) fell $0.94.
Oracle (ORCL), a $0.20 drop.
And then First Solar (FSLR) off $8.96.
Evergreen Solar (ESLR), however, up $1.05. The company got a $1.2 billion contract to supply solar panels to a German firm called IBC Solar.
And then finally we see CSG Systems International (CSGS) up $2.68. Citigroup upgraded it from hold to a buy.
Those are the "Stocks in the News" tonight.
