NBR Transcripts- September 12, 2008
Friday, September 12, 2008Lehman's Fate Remains A Mystery
SUSIE GHARIB: What is going to happen to Lehman Brothers? Thatwas still the big question today from Wall Street to Washington. But many investors didn't wait to find out and continued to dump Lehman shares. They tumbled another 17 percent today, losing 80 percent of their value this week. There are rumors that a sale of Lehman could come as soon as Sunday.
Tonight we have two reports looking at Lehman's options and whether Uncle Sam will lend a helping hand. We begin with Scott Gurvey in New York.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Will Lehman Brothers be open for business on Monday? That was the question of the day on Wall Street. As investors continued to beat down the value of Lehman common shares, the firm's managers were shopping the company. Talk on the Street suggested a joint bid from Bank of America (BAC), J.C. Flowers, and the China Investment company. Other names mentioned were Barclays (BCS) and HSBC (HBC).
While comparisons continue to be drawn between the collapse of Bear Stearns and Lehman's current crisis, most agree Lehman is in better condition. Still, anyone making a bid must first analyze a multi-billion dollar portfolio asset by asset.
Thomas Burnett of Wall Street Access says that will be very difficult.
THOMAS BURNETT, DIRECTOR OF RESEARCH, WALL STREET ACCESS: The market is certainly not expecting anything more than like a $5 or a $6 price that was equivalent to what the Countrywide holders got. And maybe you come in with a real lowball bid and then there's litigation and complications like we had with Bear Stearns and JPMorgan (JPM) and you end up with a somewhat higher price.
But the book value of Lehman is right around $27 a share, and obviously the market says that's ludicrous.
GURVEY: Lehman earlier this week announced a plan to remain independent, raising capital through asset sales. Analysts say the company's capital markets, investment banking, and asset management businesses could all prove attractive to buyers.
Matthew Albrecht of Standard & Poor's says that plan is still viable, but something has to happen soon.
MATTHEW ALBRECHT, BROKERAGE ANALYST, STANDARD & POOR'S: Can the company raise capital somehow without an all-out acquisition? You know, I think there is a lot of value in that franchise. If they can raise some capital and absorb those loses themselves, I think there's a lot of long-term value there for shareholders. So, you know, I think we will get something done this weekend, but there's a few options out there.
GURVEY: Another option for Lehman is, nothing. Unlike Bear, counterparties are still doing business with Lehman and it can borrow from the Fed if it needs cash. As long as its creditors are willing to give it time to reorganize, it could be business almost as usual.
Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: I'm Darren Gersh in Washington where it's not business as usual at the Treasury. A source familiar with Secretary Henry Paulson's thinking tells NIGHTLY BUSINESS REPORT the secretary is adamant no government funds will be used to backstop any deal to buy Lehman Brothers.
In March, when the Federal Reserve stepped in to help finance the takeover of Bear Stearns, world markets had four days to adjust to the failure of a major Wall Street firm. With Lehman, Paulson argues, they've had six months.
The Treasury's hard line is the right policy, says economist Adam Posen, the question is whether the secretary is bluffing.
ADAM POSEN, DEPUTY DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: I'm not entirely convinced, and we'll know by Monday, I guess, that he's prepared to walk away from the table if the private sector people say well, we're not going to take this without government money. I hope, I hope he's a very good poker player, I'm not sure it's going to work out that way.
GERSH: Former senior Federal Reserve policymaker Vincent Reinhart says this is the time for Washington to draw the line on taxpayer bailouts for Wall Street.
VINCENT REINHART, RESIDENT SCHOLAR, AMERICAN ENTERPRISE INSTITUTE: Lehman owes money mostly to other investment banks. That is sophisticated parties who are supposed to be able to take care of themselves. Second, how long have they had time to adjust? A while.
Lehman has been in the headlines as having balance sheet troubles for most of this financial crisis. It was always one of the weaker antelopes in the herd.
GERSH: By letting the market determine Lehman's future, the Federal Reserve and Treasury hope to send a signal that investors won't be rescued from their bad decisions. Another question is whether Lehman is still such an important part of the financial herd that its demise will damage other institutions that are counting on it to pay up.
Reinhart says regulators should know the answer, because they've been scouring Lehman's books ever since Bear Stearns failed.
REINHART: They have people in the building that should have an understanding of their risk positions and how interconnected they are.
GERSH: While taxpayer money is unlikely to back a Lehman deal, Paulson could still offer a sweetener in the form of regulatory forbearance. That's a fancy way of saying Washington would look the other way while any buyer gets its finances in shape after picking up Lehman's pieces. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
One on One with Michael Hume, Chief European Economist at Lehman Brothers
SUSIE GHARIB: Well, the weak U.S. economy is impacting economies overseas and many analysts are now predicting Europe will fall into recession. European Union finance ministers said today they underestimated the fallout from the downturn in the U.S.
Well, to get a check on the outlook, I recently talked with Michael Hume, chief European economist at Lehman Brothers. I began by asking him just how bad is the European economy.
MICHAEL HUME, CHIEF EUROPEAN ECONOMIST, LEHMAN BROTHERS: It's pretty bad, unfortunately. The European economy experienced quite a contraction in economic activity in the second quarter. And the indication so far suggests that things haven't really gotten any better in the third quarter.
So the technical definition of a recession here is two quarters of negative growth, and it looks as though Europe is heading in that direction. There are some glimmers of light at the end of the tunnel. We have got the exchange rate coming down thanks to the dollar being resurgent again. And of course oil prices have come off.
But in our view it's only if the European Central Bank bites the bullet and starts lowering interest rates that we will get much benefit from that.
GHARIB: Well, actually, we saw that the European Central Bank kept interest rates steady last week. Do you expect them to cut rates any time soon to boost growth?
HUME: I think it will be a little while yet, I mean, we are expecting them to signal at its December meeting that it's ready to cut rates and we expect that to be implemented in January.
See, the ECB always seems to give you a one-month sort of warning of any change in interest rates, but that's still a few months away and its a little bit concerning that we're not getting a further movement of language from the European Central Bank to that effect.
And our suspicion is that they just want to wait and see whether the oil price decline is sustained, just see some of the inflation numbers come off a little bit more in Europe. But once they do, then they will move relatively quickly.
GHARIB: How would you describe the economic health of the European consumer? Are they spending money or have they turned cautious?
HUME: The European consumer never really came out of its shell, it has always been a little bit of the laggard during the recovery phase. And now that things have turned down, the European consumer has really given up whatever strength it had fairly easily.
Now part of the reason for that is the very strong rise in inflation which has eroded real incomes quite strongly in Europe. But also I think there is a confidence effect and that seems be coming through quite clearly.
So for the European consumer, it is fairly downbeat days.
GHARIB: How is the European job market? Are businesses still hiring?
HUME: Yes. The jobs market is holding in reasonably well, particularly in Germany. There have been some very sharp movements in some of the economies such as Spain, where the unemployment rates jumped several percentage points.
But on the whole, it's holding in reasonably well. But I think that it's important to point out that the European labor market takes longer to reflect developments in the economy more generally.
In the United States, the links between the economy and the jobs market tend to come through quite quickly, but because of all the protective labor legislation in Europe, it takes a little bit longer over here.
GHARIB: Michael, how would you describe the credit climate? Are banks lending? Are consumers borrowing?
HUME: Yes. The credit climate is markedly better in Europe than in the United States. Banks have been tightening credit conditions, but it does vary depending on which economy you're looking at. If you're looking at Spain or the United Kingdom, it certainly is the case that banks have been tightening credit both to consumers and to the corporate sector.
But if you turn to Germany, for example, very little sign of that happening at all and the credit growth has been robust. So it's a much more mixed picture in Europe, some tightening of credit conditions, but nowhere near as marked as in the United States.
GHARIB: You mentioned at the beginning of our conversation that the European economy is headed to a recession. Do you have any sense of how long it will be or how short-lived it will be?
HUME: Well, we are expecting it to be quite shortly. We do think that the drop in the oil price will provide a little bit of a boost in the consumer by the end of the year. And then as I say, if inflation comes down and the European Central Bank feels that there is scope for lowering interest rates, then that should really provide quite a strong boost of confidence early next year and into the middle of the year.
So we are hoping that it's a short-lived recession, but there are risks certainly to the downside in the near term.
GHARIB: All right. Michael, thank you so much for your insights and analysis. We really appreciate it.
"Market Monitor"-Michael Hasenstab, Portfolio Mgr., Templeton Global Bond Fund
PAUL KANGAS: My guest "Market Monitor" this week is Michael Hasenstab, the portfolio manager for the Templeton Global Bond Fund.
And, Michael, welcome back to NIGHTLY BUSINESS REPORT.
MICHAEL HASENSTAB, SENIOR V.P., PORTFOLIO MANAGER, TEMPLETON GLOBAL BOND FUND: Great to be back, thank you.
KANGAS: We know how volatile and rather bearish the stock markets have been recently, but how have global bond markets been behaving?
HASENSTAB: You know, actually, there have been some pretty good opportunities out there in global bonds. We've had a number of countries outside of the U.S. now following what the U.S. has done over the last couple of years, and that is, start to cut interest rates.
So that has certainly been bullish for some of the bond markets. For example, just earlier this week, New Zealand cut 50 basis points over the last month. Australia has cut interest rates. So as we see the transmission of the U.S.-led slowdown now touch into parts of Europe -- actually, most of core Europe, the U.K., Japan is slowing, that has pretty important implications for bond markets.
So we're fairly encouraged that as this continues we will find some more opportunities out there.
KANGAS: We're going to put up a chart of how your fund has done so far this year. Let's have a look at that chart, if we may. And it has been a rather bumpy ride, down sharply earlier in the year, and then a big rally. What went on there?
HASENSTAB: You know, certainly, there has been a lot going on in the markets. We're pleased that year-to-date we're up over 3 percent, which has done pretty well compared to some of the other asset markets out there.
Their total volatility year-to-date is between about 4 to 5 percent. So certainly there has been volatility, as you can see there, but on a relative basis, it has actually been pretty good. And it has done, I think, a pretty good job of offsetting some of the risks that one might have in other parts of their portfolio, with regards to equity volatility.
Now we have seen some interesting developments on the currency side, so the dollar has had a pretty big rally, and that has been against really all currencies out there, initially. And we think over time this is creating a big opportunity, because while we are short the euro versus the dollar, short the pound versus the dollar, we still are encouraged by the opportunities out in Asia.
And over the last couple of months, we've seen Asian currencies, along with the euro, move down, and that lack of differentiation between fundamentals in Europe and Asia, we think, is an opportunity.
And so we have actually been adding positions, going long Asian currencies versus the euro in the portfolio to position for what we think over the next couple of years will be some pretty good developments that continue to come out of Asia.
KANGAS: Interesting. How about the Chinese economy itself? We hear reports that it's about to take a sharp drop. Do you agree with that and see that happening?
HASENSTAB: You know, there was a lot of skepticism, you know, maybe post- Olympics, there would be a big hangover, but the reality is we haven't seen that. We have seen a downshift in growth, but growth is still coming in around 10 percent.
We would expect that to moderate. But even if you get growth down to -- closer to 8 percent, it's still 8 percent. The export growth has clearly slowed, but that is being offset somewhat by an increase in government spending and infrastructure investment.
So, ultimately, we think Chinese growth moderates but it remains a core anchor for growth throughout the region. So we're fairly encouraged that while overall Asian growth will moderate, it will still relatively outperform growth in, certainly the U.S., or in parts -- other parts of Europe.
And that relative growth differential, I think, will benefit those economies and continue to bring capital into Asia, which should support their currency.
KANGAS: We just have a half a minute left. What about Russia, Michael?
HASENSTAB: You know, I think certainly also some pretty interesting developments there, but if we look at it from a credit standpoint, Russia could be a country over the next couple of years that is able to retire all of their government debt.
So in terms of macro stability, we think that Russia is actually in pretty good shape, and the credit risk premium in Russia has backed up a little bit but, but ultimately, from a credit standpoint, we still think it's a pretty solid credit.
KANGAS: So, Michael, basically, you're bullish on bonds on a global basis, yes?
HASENSTAB: It does vary country by country. I do want to emphasize that there are some countries where we're very bearish on bonds, but there are a lot where we are finding some opportunities.
KANGAS: Michael, I want to thank you for sharing your insights with us. Thanks very much.
HASENSTAB: Great. Thank you, my pleasure.
KANGAS: My guest, Michael Hasenstab of the Templeton Global Bond Fund.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened with a steep sell-off. At 10:00 a.m., the Dow was already down 144 points and the NASDAQ off 28 points. Then talk about several potential buyers for Lehman Brothers and that dip in oil prices helped stocks recover by midday with the Dow off only 10 points and the NASDAQ up 3 points.
The market remained mixed for the rest of the day on pre-weekend investor caution. The Dow Industrial Average closed down 11.72 at 11,421.99. This week it fell twice and rose three times for a net gain of 201.03 points.
The NASDAQ gained 3.05 to 2,261.27 today. And it rose in four of this week's five sessions, gaining 5.39 points overall. The Standard & Poor's 500 Index was up 2.65, ending at 1,251.70 today. For the week it gained 9.39 points.
Over in the bond market, the 10-year note fell 20/32 to 102 9/32, putting the yield at 3.72 percent.
Most active Big Board issue, trading 36.3 million shares, American International Group (AIG), down another $5.41, or 30 percent of its value lost today. Investors fear the company will face billions of additional losses tied to home loans whose values have plummeted, and may need to raise more capital. After the close, Standard & Poor's threatened that it might have to make a ratings cut.
Lehman Brothers (LEH) down $0.57 today, it traded as low as $3.17. As you heard, they're shopping for a buyer.
Washington Mutual (WM) lost a dime a share today. And the company said it has sufficient capital. American Bankers magazine reports that JPMorgan (JPM) is in advanced talks to acquire WaMu.
Merrill Lynch (MER) down $2.38. Yesterday, a Sanford Bernstein analyst said next to Lehman Brothers, Merrill is the most vulnerable Wall Street firm to have any big trouble.
Ford Motor (F) moved up $0.23 on optimism it will get low-cost government loans for developing fuel-efficient cars.
Gold was in the spotlight -- well, let's get rid of the rest of the active list first. GE (GE) down $1.41. No specific news I saw.
Citigroup (C) fell $0.65.
Bank of America (BAC), a $0.68 gain.
Wells Fargo (WFC), a $0.44 advance there.
And then JPMorgan (JPM) losing $0.48, 10th in volume.
Now let's have a look at gold, which was in the spotlight today. The December contract in New York up $19 an ounce at $764.50 the ounce. Agnico Eagle (AEM) up$7.73, almost a $3 gain in Barrick (ABX). Freeport-McMoRan (FCX), Goldcorp (GG), and Newmont Mining (NEM) all doing well.
CONSOL Energy (CNX) up $4.13. The company plans to buy back up to $500 million of its own stock. And the Jefferies brokerage started coverage of the stock today with a buy.
It also started coverage with buys on these stocks in the coal business: Arch Coal (ACI), Massey Energy (MEE), and Peabody (BTU), all of which moved up rather smartly.
Chipotle Mexican Grill (CMG) plunging $14.45. The company sees third- quarter earnings slightly below year-ago levels due to the economic slowdown in the national, and also because of higher food costs.
That had an undermining effect on a lot of other food and restaurant stocks: Brinker (EAT), CEC Entertainment (CEC), Darden (DRI), and Panera Bread (PNRA) all down on the Chipotle news.
Federal Agricultural Mortgage (AGM), also known as Farmer Mae, down $8.20. The company sees a third-quarter loss mainly due to a $44 million charge from its investment in Fannie Mae (FNM) preferred stock.
Cemex (CX), the big Mexican cement-maker, down $1.45. The company sees third-quarter earnings down 3 percent from year-ago due to lower-than- expected results in its U.S. and U.K. operations.
NASDAQ's most active, Apple (AAPL), down $3.71.
And then Google (GOOG) moving up $3.91.
Research In Motion (RIMM) fell $3.65.
Microsoft (MSFT), a $0.28 gain.
Intel (INTC) dropped $0.03 a share.
Cisco (CSCO), a $0.41 advance.
Qualcomm (QCOM) fell $1.17.
Baidu.com (BIDU) losing $0.51.
But Oracle (ORCL) up $0.26.
Gilead Sciences (GILD) fell $0.92 a share.
PharmaNet Development (PDGI) plunging $11.79, or 51 percent of its value. The company cut its full-year revenue and earnings targets for the second time this year. Now sees a loss for the year instead of a profit, as it forecast earlier.
And finally, Diodes (DIOD) down $2.51. The company sees third-quarter earnings at the low end of its estimate of $0.26 to $0.30 a share.
Those are some "Stocks in the News" tonight.
