NBR Transcripts-September 18, 2008
Thursday, September 18, 2008The Wall Street See-Saw Ends Up ... Up
SUSIE GHARIB: The nation's top leaders will meet tonight in Washington, D.C., to discuss ways to resolve the credit crisis. Senators and congressman from both sides of the aisle will talk with Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke about steps to stabilize the financial markets. The session comes after a huge late day rally on Wall Street on word that something could be in the works. The Dow surged in the final hour of trading, going from almost flat to 410-point closing gain, that's its biggest one-day gain in six years. The NASDAQ jumped 100 points, or almost 5 percent. Investors were also encouraged by a big capital injection by the Federal Reserve this morning. We have two reports tonight looking at a potential government rescue plan and the Fed's intervention in the financial markets. We begin with Darren Gersh in Washington.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Republican presidential nominee John McCain today announced his support for what could become the most sweeping financial rescue plan in U.S. history. There were few details, but the centerpiece of the effort would be a new mortgage and financial institutions trust that would clear the wreckage left from the housing and Wall Street bust.
SEN. JOHN MCCAIN (R-AZ), PRESIDENTIAL CANDIDATE: The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions this will provide an orderly process through which to identify bad loans and eventually sell them.
GERSH: The move could put McCain in the company of Democrats like House Financial Services Committee Chairman Barney Frank, who floated a similar idea on NIGHTLY BUSINESS REPORT last night. Even so, McCain was blasted by New York Democrat Charles Schumer, who called this a bailout for the Wall Street firms in his state.
SEN. CHARLES SCHUMER (D), NEW YORK: The federal government would take on all the risk of the bank's troubled assets without addressing the root of the problem: the housing market. Proposals like Senator McCain's may help Wall Street, but they'll do nothing for Main Street.
GERSH: In his speech, McCain referred to the Resolution Trust Corporation set up to buy the assets of thrifts that failed in the late 1980s. By the time the RTC wound down, it had taken over more than a thousand thrifts with half a trillion dollars in assets. The ultimate cost to taxpayers: $124 billion. This time, economist Desmond Lachman says the costs of the bailout could hit ten figures.
DESMOND LACHMAN, ECONOMIST, AMERICAN ENTERPRISE INSTITUTE: We've got to clean up the banks, which will cost anywhere between $1 trillion and $2 trillion to do, I would think. And on top of that, we've got to stabilize the housing market.
GERSH: Former Federal Reserve economist Ted Truman says it's also unclear whether a new RTC would simply put off the inevitable.
TED TRUMAN, ECONOMIST, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS: You want to accomplish I think a little bit more than just sort of wiping the slate clean and saying, we are going to start over again, because even when you do that, you have to figure out what you are going to do with all that toxic waste.
GERSH: The Treasury has said for months that it is looking at all options, including something like the RTC. But administration officials also know it won't inspire confidence in the markets to ask Congress for a complex piece of legislation that can't be delivered in the 47 days before a presidential election. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Scott Gurvey in New York. The Federal Reserve began its day at 3:00 a.m., the start of the trading day in Europe. Coordinating with other central banks in Europe and Asia, the Fed literally flooded the world with money, $180 billion were injected into money markets where borrowing had virtually ground to a halt as scared participants tallied the losses from failed debt instruments. The central banks' move had the desired effect with stock markets opening up sharply even as interest rates fell around the world. But throughout the day markets proved vulnerable to any kind of news, whether fact or rumor. Economist Thomas Cooley, dean of NYU's Stern School of Business, says that's because the Fed's unprecedented action, while welcome, did not calm investor's fears.
THOMAS COOLEY, DEAN, NYU STERN SCHOOL OF BUSINESS: The real issue is that nobody knows how deep the financial problems are, how bad the assets that banks are holding are, and how much more is there to find out about these large banks, investment banks, and even some of the commercial banks. So the question is really, when are we going to get all of this toxic stuff off of banks' balance sheets?
GURVEY: Experts say the crisis of confidence will not end until policymakers are able to convince the markets that there is a mechanism in place to deal with liquidity concerns, also needed, a long range plan to rein in the freewheeling credit markets. But Andrew Burkly, market strategist at Brown Brothers Harriman, who owns shares of Wachovia (WB), upgraded his tactical outlook from neutral to bullish. He says it is not too early to think of buying, even in the financial sector.
ANDREW BURKLY, MARKET STRATEGIST, BROWN BROTHERS HARRIMAN: Wells Fargo (WFC), Wachovia, Bank of America (BAC), those are still pretty high quality big deposit gathering institutions, so much safer I think getting into some of those names as opposed to certainly the more risky investment banks. But I would also look at, you know, more stable names within the staples sector, within the health care sector. They tend to be certainly less sensitive to the big de-leveraging process that's going on in the financial sector.
GURVEY: In a joint statement today, the central banks say they will continue to work together closely, and will take appropriate steps to address the ongoing pressures on financial markets. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
One on One with Richard Bove, Bank Analyst at Ladenburg Thalmann
SUSIE GHARIB: Joining us now to talk more about latest developments in the financial sector, Richard Bove, bank analyst at Ladenburg Thalmann. Hi, Dick.
RICHARD BOVE, BANKING ANALYST, LANDENBURG THALMANN: Hi, Susie.
GHARIB: Well, you heard our report about a possible comprehensive rescue plan by the government. Could this be the answer to clean up the banks and the bad assets on their books?
BOVE: Yes, I think it could. I think that basically speaking what we need is something to assure investors in banks or other financial institutions that the quality of the assets held by these institutions is sound. And in order to show them that the quality of the assets are sound, we have to have a buyer. And if it's going to be the RTC II, so to speak or if it's going to be some other government mechanism, I think that will do the trick. Because, you know, this cliche that everything is toxic out there, I just think is dead wrong. Bank stocks soared today. And a number of the stocks that we are recommending hit 52-week highs.
GHARIB: There was a lot of attention about Morgan Stanley (MS) and that it's in -- reportedly talking with Wachovia. We know that Wachovia has its own set of problems. Does that linkup make any sense if this were to happen?
BOVE: No, it makes no sense whatsoever. And therefore it will not happen. The reason why it makes no sense whatsoever is because Morgan Stanley has leverage of 30 to 1 to common equity. Wachovia has leverage of 12 to 1 to common equity. If you put the two firms together, Wachovia would have to, so to speak, do the mother of all capital raises. So it's just never going to happen.
GHARIB: Dick, you were on our program last week, and I asked you about the future of Lehman Brothers (LEH). And you said that it would survive and it would be around for a long time, something like 50 years. Well, given what happened to Lehman and Merrill (MER), when you look at Morgan Stanley and Goldman Sachs (GS), are they going to be forced into merger partners whether they like it or not?
BOVE: Well, the fact is that if you took a look at Lehman, basically in the third quarter they had $3.5 billion in revenues, and $600 million in pre-tax profits from their operations. From the markdowns of the securities that they held, they came in with this horrendous loss. And that is the core issue, because if there is a belief that the assets of these companies are basically all valueless, then the people who provide liquidity to the firms will take their money away. And that's what is happening to Morgan Stanley and Goldman Sachs. If they believe that these assets had any value, they would continue to provide the liquidity and these firm would stay forever.
GHARIB: What about Washington Mutual (WM)? It looks like nobody wants to buy it.
BOVE: Yes, because Washington Mutual does have too many problems. It has, you know, an overwhelming amount of troubled loans on its balance sheet. And in that case, the government has no choice, because FDIC insurance forces the government to step in to back up the $181 billion in deposits. And the fact that the Washington Mutual has borrowed $58 billion from the Federal Home Loan Bank, mostly in San Francisco, means that the government has to step up and protect that also. So in Washington Mutual's case, there is going to be an assisted acquisition whereby the government goes into a partnership with a private company to try and share what the losses might be.
GHARIB: These are complicated times. Thank you, Dick, for coming and on and giving us your views.
BOVE: Thank you, Susie.
GHARIB: My guest tonight, Richard Bove, bank analyst at Ladenburg Thalmann.
Signs of a Shopping Slowdown Are Already On The Horizon
SUSIE GHARIB: Investors may be in a far better mood today, but many economists are downright gloomy. There are fresh concerns now that the turmoil in the financial markets could push the U.S. economy in to a prolonged contraction. But, as Suzanne Pratt reports, experts say America will not go it alone.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It's becoming increasingly clear that Wall Street's nightmare will spread to Main Street. As the availability of credit declines throughout the economy, experts say spending will slow on everything from new cars to holiday gifts. Economist Josh Feinman says that pullback is already happening.
JOSHUA FEINMAN, CHIEF ECONOMIST, DEUTSCHE ASSET MANAGEMENT: It's tougher to get a loan. It's tougher to get a mortgage. You need more of a down payment, those sorts of things. And that has an impact on -- a direct impact on consumers and business ability to borrow and to spend. There's also a psychological impact.
PRATT: Most experts say the full effect of the credit crisis on the real economy is still a question mark. While many agree we're probably already in a mild recession, some now predict the escalating financial turmoil will result in a longer and deeper one. Economist Brian Fabbri expects GDP growth will be stagnant at best for many quarters.
BRIAN FABBRI, CHIEF ECONOMIST, BNP PARIBAS: We may really be at the crisis point in terms of financial activity in the financial meltdown. But its ramifications to the real economy will take quarters to unravel.
PRATT: And there's growing evidence that the credit crisis is moving far beyond our backyard.
FABBRI: This is not just a U.S. thing anymore. The rest of the advanced country economies in the world are going into recession or are already in recession.
PRATT: That's particularly troubling because exports have been the one area keeping U.S. GDP in positive territory this year, partly a function of real demand, but also aided by the weak dollar. Experts are now concerned America's only bright economic light will soon dim.
FEINMAN: The worry is that, you know, in the not-too-distant future, the impact of slower growth outside the U.S. will wash back onto to U.S. shores and start to weaken U.S. exports.
PRATT: Economists say when the dust settles and the financial crisis is finally over, U.S. households and businesses will have far less debt than they've been in years. And, that's the silver lining to this very dark cloud. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Michael Lewitt, President of Harch Capital Management Offers His Expertise On The Financial Crisis
PAUL KANGAS: Joining me now to talk more about the financial crisis gripping Wall Street is Michael Lewitt, the president of the money management firm Harch Capital Management. Michael, welcome to NIGHTLY BUSINESS REPORT.
MICHAEL LEWITT, PRESIDENT, HARCH CAPITAL MANAGEMENT: Thank you.
KANGAS: We heard reports late today that the government may be considering a Resolution Trust Corporation type of solution. Is this the best way to fix the problems in the financial system now?
LEWITT: Well, I think the market is looking for leadership, particularly on the part of the government. And I think this is at least one step in that direction. I think the issue is going to be that unlike the Resolution Trust Corporation in the early '90s, the types of assets that need to be sold at this point are very complex financial instruments. They are not apartment houses.
KANGAS: Derivatives and things like that, yes.
LEWITT: Derivatives. So it is going to be a much more complex enterprise on a vastly greater scale.
KANGAS: Well, we started the day with a massive liquidity injection by global central banks. Is this what is needed to boost investor confidence or do you see that as a Band-Aid approach?
LEWITT: No, I think it is an essential component of what is needed to get the plumbing of the system unstuck.
KANGAS: A good way to put it, OK. Well, many have said a big factor in the current crisis has been naked short-selling of financial stocks. Today the New York attorney general launched a probe of short sales of Lehman, AIG, Morgan Stanley, and Goldman Sachs shares. And the British banned short-selling. Where do you come down on all of this?
LEWITT: Well, I think that people who are engaging in speculative short- selling of these stocks, particularly at this time of crisis, really need to ask themselves why they are doing it. It is not a constructive activity.
KANGAS: I know why viewers are curious to know, what is the difference between short-selling and naked short-selling?
LEWITT: Well, naked short selling is when you simply don't borrow the stock and you are simply selling the stock short without borrowing it first. It's not done to hedge a position. It's done merely to bet on the stock going down. And it doesn't really provide any productive activity. It's just merely a bet on stock going down.
KANGAS: And you haven't made arrangements to borrow the stock that you are selling in the first place.
LEWITT: Right. Now it is not legal, but -- and there are laws on the books to prevent it but unfortunately those laws have not been enforced. And so now the SEC is taking steps to try to enforce those laws. But it would be much more effective for the SEC to put in place the uptick rule.
KANGAS: The uptick rule. Why did they ever take it out?
LEWITT: I don't know why they took it out. They need to put it back in.
KANGAS: Were they throwing a crumb to speculative investors -- or traders, I should say?
LEWITT: Perhaps. I don't know what they were doing. It has turned out to be a grievous error. They need to put the uptick rule back and do it right away.
KANGAS: OK. And you think it will happen, it will be restored?
LEWITT: I don't know. I mean, they've had opportunities to do it. They had an opportunity when they banned short-selling -- naked short-selling on financial stocks a few weeks ago. They have an opportunity now. They seem very reluctant to do it, I don't know the reason.
KANGAS: OK.
LEWITT: They need to do it.
KANGAS: But anyway, the events late today you think are very encouraging for the market maybe to form a bottom here, somewhere?
LEWITT: They are certainly a start. And they certainly show leadership on the part of those from whom we need leadership.
KANGAS: And that did what we needed on Wall Street.
LEWITT: Absolutely.
KANGAS: Well, that is very encouraging, Michael. And I want to thank you very much for joining us.
LEWITT: My pleasure.
KANGAS: My guest, Michael Lewitt, president of Harch Capital Management.
"Commentary"-New York Is Down But Not Out
SUSIE GHARIB: By some estimates, the current turmoil on Wall Street could cost the state of New York up to 40,000 private sector jobs and as much as $3 billion in tax revenues over the next two years. But tonight's commentator says that doesn't mean an end to the financial capital of the world as we know it. He's Daniel Gross, senior editor at Newsweek.
DANIEL GROSS, SENIOR EDITOR, NEWSWEEK: In recent years, New York's status as a global financial capital has been challenged by threats from all over: the attacks of September 11th, 2001, the resurgence of London as a trading center, explosive growth in developing markets like China and India. In 2005, 24 of the 25 largest initial public offerings took place outside the United States. The consulting firm McKinsey & Company last year produced a 142-page report that identified a host of other risk factors: high corporate tax rates, restrictive visa policies, and, of course, regulations like the Sarbanes-Oxley law. But nobody seems to have identified the most serious threat of them all. Bear Stearns, Lehman Brothers, and Merrill Lynch weren't done in by foreign competition. These investment banks were laid low by cultures of excessive risk-taking and incompetent management. In 2008, Wall Street met its enemy, and it was itself. Can New York's financial center recover from this self-inflicted wound? The answer is yes. New York has weathered all sorts of shocks in its past century of dominance, from the panic of 1907 to the crash of 1987. The city's collective financial mind has always shown an ability to regroup, and to find new lines of business, at home and abroad. Today, the most profitable sectors of many of Wall Street firms are their foreign operations. As the U.S. markets continue to struggle, the bankers in Midtown and Lower Manhattan will increasingly have to look to the world's emerging markets for renewed growth. I'm Daniel Gross.
Paul Kangas' Stocks in the News
PAUL KANGAS: The huge infusion of funds by the global central banks had buyers out of hiding on Wall Street this morning. The Dow soared just over 200 points at the opening and the NASDAQ jumped 42 points. The rally fell apart after oil surged toward $100 a barrel while the August leading indicators fell 0.5 percent, and 10,000 new weekly jobless claims were reported. By 1:00 p.m., the Dow down 136 points. That news that the Treasury was considering options to solve the credit crunch set off an explosive late rally. And the Dow Industrial Average closed with a gain of 410.03 at 11,019.69. The NASDAQ Composite jumped 100.25, ending at 2,199.10. While the Standard & Poor's 500 Index vaulted 50.12 points to 1,206.51. In the bond market, the 10-year note fell 1 8/32 to 103 18/32, putting the yield at 3.57 percent.
New York Exchange volume leader on 49.5 million shares, Citigroup (C), up $2.80, after trading as low as $12.85 today. Reportedly it's eyeing
Washington Mutual as a possible takeover.
Then came Morgan Stanley (MS) with an $0.80 gain. It traded as low as $11.79. I would hardly call that an orderly market. Reportedly Morgan Stanley is in official talks about merging with Wachovia. And it is also trying to raise capital from the Chinese government.
American International Group (AIG), a $0.66 gain. As you heard, Kraft (KFT) will replace it in the Dow 30. Let's have a look at Kraft stock and see what happened to it, up $1.09 today. And it looks like it's doing all right these days.
Then we Bank of America (BAC) with a gain of $3.38. A lot of nice comebacks here.
General Electric (GE) up $1.71, was fifth in Big Board volume.
JPMorgan Chase (JPM) up $4.53.
And a $5.38 gain on Wachovia (WB) on those rumors it is talking with Morgan Stanley..
Wells Fargo (WFC) gained $3.57.
Ford Motor (F) $0.34 gain.
And Washington Mutual (WM), which apparently has put itself up for sale, rose $0.98 a share.
State Street (STT) closed down $5.75, but get this, it traded as low as $29.26 today. That's on fear that the company's business could be hurt by many mutual funds for which it does custodial work because they face perhaps declining assets. Also the company's lucrative securities lending business could be hurt by short-selling restrictions.
And the stocks below it, Bank New York Mellon (BK), Fed Investors (FII), and Northern Trust (NTRS), all are in that same business. Northern Trust, however, did very well, made a nice comeback today.
Comerica (CMA), up $5.23, the company agreed to buy back nearly $1.5 billion of auction rate securities from its customers nationwide.
And a nice gain for Media General (MEG), up $9.64. The company had solid August sales. That stock was over $30 about a year ago. So it has come back a long way. Rockwell Automation (ROK) edged up $0.38 today. It traded $4 lower than after Citigroup downgraded it from hold to a sell.
And Constellation Energy (CEG), which a week ago was about $58 a share, got a boost today from MidAmerican Energy, which that's a Warren Buffett company, incidentally, it's going to acquire Constellation for $26.50 cash. And the stock would -- well, it looks like the Oracle of Omaha is in the bargain-hunting mode today.
Apple (AAPL) topped the NASDAQ active, up $6.26.
A nice gain of $24.59 by Google (GOOG).
Research In Motion (RIMM) up $5.18.
Microsoft (MSFT) a $0.69 gain.
Intel (INTC) moved up $0.71 a share.
Cisco (CSCO), a $1 gain.
Qualcomm (QCOM) up $1.76. Look at that rise in Baidu.com (BIDU), a $50.79 advance. Amgen (AMGN) down $1.74.
And then Oracle (ORCL), a $0.65 gain. But after the close, Oracle reported first-quarter earnings, $0.29, up from $0.22 a year ago, $0.02 above the Street estimate. In after-hours trading, the stock moved up $1 from the price you see here. And that is our look at "Stocks in the News" tonight.
