NBR Transcripts-September 22, 2008
Monday, September 22, 2008Wall Street Isn't Buying The $700B Bailout Plan
SUSIE GHARIB: A huge sell-off on Wall Street today on uncertainty about the long-term benefits of the government's $700 billion bailout of the financial sector. The Dow plummeted 372 points and the NASDAQ plunged almost 95. Financial stocks led the decline, including shares of Goldman Sachs (GS) and Morgan Stanley (MS). The two investment banks failed to boost investor confidence even after they announced plans to convert into traditional banks. We have two reports tonight, looking at the specifics of the government rescue plan and what Wall Street thinks about it. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: In the first day of trading in this new era on Wall Street, it's clear investors don't know what to think. On the one hand, the government's $700 billion bailout plan should help restore investor confidence and ultimately put a floor under stock prices. On the other hand, it saddles the government and taxpayers with an unprecedented amount of debt. Standard & Poor's equity strategist Alec Young says investors are fixated on the challenges that remain for U.S. economy.
ALEC YOUNG, EQUITY STRATEGIST, STANDARD & POOR'S: We think it helps sort of draw a line under the market and under financial stocks. It helps prevent the likelihood that our weak economy will get even weaker. It doesn't mean that we have got a strong economy. We still face headwinds, and I think that reality is coming home to investors today.
PRATT: Another reality hitting investors with a thud today was that the government's plan will inflate America's budget deficit by Olympic proportions. NNYU Professor Larry White also says Americans are beginning to understand that the bailout doesn't alleviate problems in the housing sector.
LAWRENCE WHITE, ECONOMICS PROFESSOR, NYU STERN SCHOOL OF BUSINESS: Prices simply got too high. They have to come down. Most of that pain is going to be experienced by households who will simply be less rich than they thought they were two years ago.
PRATT: Investors were also digesting the changing landscape for investment banks on Wall Street. Morgan Stanley and Goldman Sachs got permission yesterday to transform from investment banks to more scrutinized bank holding companies. Veteran financial analyst Robert Albertson called the move a hurry-up fix in a period of great uncertainty, and says it's potentially unhealthy.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: What we've done with Lehman (LEH), AIG (AIG), Merrill (MER), inhibits financial sector capacity, creativity, and economic growth in general. And I'm sure the two survivors -- the large survivors, probably will be curtailed as a result. PRATT: Extreme caution is the overwhelming sentiment on Wall Street tonight. There are still too many unknowns for investors to place any big bets, and as one expert put it, "volatility is the only certainty." Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Dhue in Washington. Lawmakers put their imprint on the Treasury's plan today, adding several provisions to the $700 billion plan to purchase troubled assets from financial firms. They include: profit-sharing for taxpayers if the assets are sold at a profit; an oversight board that includes the Federal Reserve and the SEC; limits on executive pay for companies that sell assets into the fund; and increased foreclosure prevention plans. Banking Committee Chairman Chris Dodd says senators realize the urgency.
SEN. CHRIS DODD (D-CT), CHAIRMAN, BANKING COMMITTEE: We don't have a lot of time, we recognize that, we want to act. But we also want to act responsibly and carefully, to make sure we do this correctly.
DHUE: President Bush also warned against too many changes. That didn't stop the call for add-ons. Housing advocates, like John Taylor of the National Community Reinvestment Coalition, are pressing for people's homes to become a protected asset in bankruptcy.
JOHN TAYLOR, NATIONAL COMMUNITY REINVESTMENT COALITION: With the lender knowing that they could declare bankruptcy and protect their home, it's really going to force them to the table to reach some sort of reasonable agreement to refinance, restructure that loan.
DHUE: Financial firms say requiring changes to the bankruptcy law as part of the Treasury plan would increase the risk of mortgage lending and reduce the availability of credit. They are also against the pay provision. Steve Bartlett heads the Financial Services Roundtable, which is made up of the CEOs of banks, brokerages, and insurance companies. He says cutting CEO pay could keep financial firms from participating.
STEVE BARTLETT, PRES. & CEO, THE FINANCIAL SERVICES ROUNDTABLE: If you say to management of a company that if you won't -- that if sell assets into this distressed asset fund, then you lose your pay, well, then they would be inclined not to do it, one would presume, until they really have to. And if you wait until they really have to, then you -- then you pervert the system.
DHUE: Lawmakers hope to have a final bill by the end of the week. But with so many issues still up for debate, that timing could slip. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
One on One with Robert Brusca, Chief Economist of Fact & Opinion Economics
SUSIE GHARIB: Joining us now to analyze the impact of the financial crisis and the government's rescue plan on the U.S. economy, Robert Brusca, chief economist of Fact & Opinion Economics. Hi, Bob.
ROBERT BRUSCA, CHIEF ECONOMIST, FACT & OPINION ECONOMICS: Hi, Susie.
GHARIB: Bob, as you know, even before all of this financial turmoil, the U.S. economy was pretty weak. What's your diagnosis now and are you changing your forecast?
BRUSCA: Well, I don't think this really changes very much. We're not sure this plan is going to be accepted. If we assume it is accepted, it is some help for the banks but it doesn't help homeowners and it doesn't help consumers and it doesn't change the fact that the unemployment rate is rising and industrial production is falling. So it's nice to patch up the financial intermediaries, but that's not a full solution.
GHARIB: So I take it that you mean that banks will not be more willing to lend. It will be just as difficult for consumers and businesses to get loans.
BRUSCA: Well, you know, I think that if you were to take some of these mortgages off their balance sheets and give them cash and make them more whole, they might be a little bit more eager to lend but not much. The housing market is still weak. And so they're going to be cautious about lending into a market that has been such a disaster, even if you reduce their exposure there.
GHARIB: And the overlay on all of this is today this big jump in oil prices, that can't be good for the economy and it can't be good for consumer spending. What do you think?
BRUSCA: No, you're exactly right. We're making some progress on that ground. We thought that maybe we were going to put some money into the consumer's pocket. And now there's a big backtrack on that. And we're sort of left shaking our head and wondering if the true trend is still lower, if it's higher. It's very confusing and it certainly isn't good for the consumer.
GHARIB: Tell me a little bit more about housing, the ripple effect of all of these bailouts and rescue plans and everything out of Washington. And what's the ripple effect of all of this for homeowners?
BRUSCA: Well, the homeowners aren't helped at all. They continue to have whatever problems they had before. If you make banks whole, homeowners still now have the government owning that mortgage and have to figure out something to do. I think the big problem is going to come when you put this front of the Banking Committee as you try to decide what of the Treasury proposal is going to be approved and what the Democrats want to introduce. Because they definitely want to do something to help the homeowners out, and that wasn't in Paulson's plan. Paulson's plan was just to give money to the banks and require nothing of them. He was going to give the money for free.
GHARIB: And what about Ben Bernanke's plans? Is there anything that he can do, whether it's cutting interest rates or any other action that can help the economy out of this situation?
BRUSCA: Well, you know, the Fed has room to cut rates some more if it wants to. I just don't think you get a big bang out of that. The problem now isn't the height of interest rates. It's liquidity problems, it's the debt problems, it's the financial situation people are in. And right now I think that, you know, the treasury secretary has taken up the front row. When Bernanke was the chief man, you know, he was putting - - getting capital positions in weakened firms, and he was firing the CEOs. And Paulson's inclination is not to fire anybody and not to get a capital position and just give them money. So it will be interesting to see when we get the two of them testifying how they -- to what extent they're on the same page.
GHARIB: And on the bigger picture, the United States has been the biggest economic power of the world. Does this financial turmoil change that potentially? And I need a quick answer because we're running out of time.
BRUSCA: Yes, it changes it a lot. It's going to hurt the growth in the U.S. And it also hurts us as a leader. Capitalism, this was our model. We're spreading it around the world. It's not clear that people are going to want to follow our lead anymore after the way we've behaved.
GHARIB: All right. We'll get you back another time and talk more on that. Thanks a lot, Bob, for coming on the program.
BRUSCA: Thank you.
GHARIB: My guest tonight: Robert Brusca, chief economist of Fact & Opinion Economics.
Investors Share Their Anxieties About Our Nation's Economic Uncertainty
PAUL KANGAS: As lawmakers hash out just what will go into the Treasury's $700 billion bailout of the financial sector, Main Street America is trying to hash out what happened. Jeff Yastine talked to investors today and found most people remain conflicted about the rescue plan.
JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: As main streets go, this is one of the wealthier ones in the nation: downtown Coral Gables, Florida. But people here are watching with as much anxiety as anywhere else as Wall Street and Washington try to resolve the crisis. Bryant Esquinazi, an attorney, wonders where the blame lies for the mess that caused last week's bailout proposal.
BRYANT ESQUENAZI, ATTORNEY: What would make me angry is if this could have been avoided, and if it occurred due to some lack of government participation. In another words, if certain regulations that should have been in place weren't in place.
YASTINE: As Americans ponder the Treasury's bailout of Wall Street, people are uneasy with the solutions being proposed and the choices lawmakers will be forced to make. The values of both stocks and real estate have dropped sharply, yet many, like Kathy Pareto, wonder what is worse, a plummeting stock and real estate market or Washington's efforts to help resolve the situation.
KATHY PARETO, INVESTOR: I have mixed feeling because it was a lot of greed that went on on Wall Street for the last several years, and a lot of missed opportunities by the regulators to really step in and do something more practiced before the stuff hit the fan. And it's going to cost the taxpayers a huge sum of money that our children will be paying for some time.
YASTINE: At this Charles Schwab (SCHW) office, things were quiet. Branch manager Chris Duffy says the phones were ringing last week when the Reserve Fund's primary money market fund "broke the buck." He says the financial bailout isn't on customers' radar yet.
CHRIS DUFFY, BRANCH MANAGER, CHARLES SCHWAB & COMPANY: The retail client responded to when a money market broke the buck. Retailer client responds to when it's the first news story on every news channel. But the bailout is not something that is really affecting them one way or the other, we haven't had a lot of feedback on the bailout yet.
YASTINE: The rhythm of life here continues at its usual casual pace, but many Americans think it will be a long time before it will be business as usual for Wall Street. Jeff Yastine, NIGHTLY BUSINESS REPORT, Coral Gables, Florida.
"Get Your Finances Ready for Retirement"-Second: Acts-Working In Retirement
SUSIE GHARIB: Many Americans are rethinking their retirement plans given the recent sell-off in the stock market, and some are deciding to add a new element to their retirement: work. As we continue our series, "Get Your Finances Ready for Retirement," Joe Collum looks at the pluses and minuses of starting a new career in your golden years.
JOE COLLUM, NIGHTLY BUSINESS REPORT CORRESPONDENT: When Don Arthur was downsized from his job as a mechanical engineer in Massachusetts, he saw it not as a setback, but at age 56, a new door opening in his life. He had a nice severance package, no money problems, and his wife held a job with a good salary and benefits.
DON ARTHUR, RETIREE: So I looked at all that and said, you know, I'm going to try something different. I had been teaching myself wood-turning for several years, and I thought, I'm going to go try that. I'm going to be an artist, something totally different than engineering.
COLLUM: After consulting with financial planner Tony Proctor, Arthur spent $30,000 for equipment and set up a wood-turning shop in his basement. He then began working eight hours a day turning raw wood into fine bowls and artifacts and selling them on weekends at arts and craft shows. Don Arthur is among a growing legion of American Baby Boomers who have come to see their retirements not as a time to stop working, but as a chance to start a new career. Kerry Hannon of U.S. News & World Report says the economy is also driving many people to come out of retirement and get back into the workplace.
KERRY HANNON, RETIREMENT CORRESPONDENT, U.S. NEWS & WORLD REPORT: Without question there's a large segment out there that is finding, hey, you know, with inflation, with the way the economy is, I do need to get back to work. I can't just sit around and live off of my retirement funds quite yet.
COLLUM: Experts say the key to a second career is preparation. If you're starting a small business, you may have to study marketing, finance, and employment laws. You'll also need to know about start-up costs and how much income you can expect. And be prepared to pull the plug on the business to keep from spending money you'll need to live out your retirement years.
TONY PROCTOR, CFP, PROCTOR FINANCIAL INC.: There needs to be a reality check going in that says, here's the limits of what I'm willing to put up on the table here in this new venture.
COLLUM: For some working retirees, like Rook Younger, money is not the key. A lifelong baseball fan and season ticket holder, Younger went to work for the Arizona Diamondbacks as a tour guide at its stadium in Phoenix, Chase Field. Then his old employer, a computer company, asked him to come back to work in a higher-paying position. When he refused to give up his tour guide job, the firm agreed to let him do both.
JIM "ROOK" YOUNGER, RETIREE: That meant I had to have the flexibility with my consulting job to have time off here and there and work certain days and that has worked out really well for me.
COLLUM: There are possible drawbacks to second careers in retirement. If you go back to work in your early 60s after you've started to collect Social Security, your Social Security payments could be reduced. And if you work and collect Social Security at any age, there's another wrinkle: If your annual earnings total more than $25,000 or $32,000, depending on marital status, part of your Social Security benefits become taxable. But there could also be tax advantages, like the deductions Don Arthur took for the equipment he purchased. Despite that though, his venture as an artist has not worked out as he hoped.
ARTHUR: It has not met my expectations, revenue-wise, to be quite frank.
COLLUM: So Don Arthur changed course, going back to his former job and limiting his wood-turning business to weekends. The bottom line: If you decide to start a second career in retirement, be sure to have a backup plan. Joe Collum, NIGHTLY BUSINESS REPORT, Upton, Massachusetts.
The Candidates' Economic Choices-According to Dr. Ken Mayland, President , Clearview Economics
SUSIE GHARIB: With the presidential election rapidly approaching, we begin a series of special commentaries looking at the candidate's economic choices and the ultimate choice facing voters: Who will be our next president? Every Monday and Tuesday leading up to the election, we will have commentaries dealing with the candidates' platforms. We begin tonight with Dr. Ken Mayland. He is president of ClearView Economics and his view of the Obama economic plan.
KEN MAYLAND, PRESIDENT, CLEARVIEW ECONOMICS: Presidential candidate Barack Obama is a self-proclaimed pro-growth and pro-market guy. The irony is that he takes issue with free market outcomes. There is a market reason why stock clerks might make $8 an hour while top corporate executives can earn more than $250,000 per year. In principle, both individuals could be working equally hard at their occupations. The core of Obama's economic policies posits there is something unbalanced and unfair in seeing such disparate market outcomes. It follows from this view that a proactive government is right to give tax cuts for families who pay no income taxes, for industries favored by free trade to compensate those industries and individuals disfavored by trade, and for the rich to fund in-kind benefits for those that cannot afford them. President Clinton sought to end welfare as we know it. I hate to seem impolite, but Obama's policies would establish welfare as we have never known it. Will folks be held personally responsible, perhaps with some incentives here and there, for their own well-being? This was the case for the first 190 years of America's existence. Or will a new president and Congress concoct large income transfer schemes to pay for college educations, to fix Medicare and Social Security, and to reverse the widening distribution of income? Will another crack at President Johnson's Great Society programs be the source of America's future prosperity? You decide. I'm Ken Mayland.
Paul Kangas' Stocks in the News
PAUL KANGAS: A record spike for oil prices today, October crude futures soared as much as $26, touching $130 a barrel. It settled at just under $121, up $16.37, its biggest one-day gain ever. The unprecedented rise caused trading at the New York Mercantile Exchange to stop for five minutes after the $10 daily movement limit was reached. The Commodities Futures Trading Commission is looking into that sharp price swing. The rally was partly fueled by the biggest drop in the U.S. dollar since the euro debuted in 1999. But according to oil trader Joe Marshall of McNamara Options, tomorrow's switch to the November oil contract played an even bigger role.
JOSEPH MARSHALL, OIL TRADER, MCNAMARA OPTIONS: It's the last trading day for October crude futures. And it looked to me like there was a short covering squeeze going on and these positions needed to be closed out today and that's where you got the run-up
KANGAS: That spike in oil prices played a big role in the selling on Wall Street today, as did the clouds of uncertainty surrounding the Treasury's rescue plan. By noon, the Dow was already off 190 points and the NASDAQ down 44 points. Stocks continued lower after that short squeeze sent oil prices soaring, while the dollar tumbled. So stocks went on to end the day at their lowest levels. The Dow Jones Industrial Average closed down 372.75 at 11,015.69. The NASDAQ Composite tumbled 94.92, ending at 2,178.98. While the Standard & Poor's 500 Index fell 47.99 to 1,207.09. In the bond market, the 10-year note slid 8/32 to 101 8/32, putting the yield at 3.85 percent.
The most active New York Exchange issue, trading 45.7 million shares was American International Group (AIG), moving up $0.87. Major shareholders are discussing alternatives to the $85 billion government rescue loan, which would effectively give control to the government. Then came Washington Mutual (WM) with a $0.92 loss. The Wall Street Journal reports potential buyers are pushing for a government-assisted takeover of WaMu.
Citigroup (C) down $0.64. Sallie Krawcheck, the head of the company's wealth management unit, is stepping down.
Wells Fargo (WFC) down $4.62.
Bank of America (BAC) fell $3.33.
And then Pfizer (PFE), a $0.48 loss.
Sprint Nextel (S) dropped $0.65.
JPMorgan Chase (JPM) down $6.25. Sandler O'Neill brokerage downgraded it from a buy to just a hold.
Morgan Stanley (MS) down $0.12. As you heard, it is becoming a federal bank holding company.
And then Petroleo Brasil (PBR), the big -- or Petrobras, as they called it, a $0.72 gain, 10th in volume.
I'm sorry that we don't have charts tonight. We had a computer problem, we apologize. But Hewlett-Packard (HPQ) down $1.10, even though the company plans to buy back $800 billion in stock.
Then came MasterCard (MA), plunging $22.80. Standard & Poor's downgraded it from buy to hold on concerns of customer defections in this economy.
And that affected two other major credit card companies, American Express (AXP) down $3.11.
And Visa (V) losing $4.39.
Fairfax Financial (FFH) had a good day, up $66.22. The company has realized cash proceeds of $574 million during the third quarter from the sale of $3.2 billion in credit default swaps.
Federal Agriculture (FFA), and this is called "Farmer Mac," notes in an SEC filing that it owns $60 million of senior debt issued by Lehman Brothers. Its value is only 19 percent of the principal amount.
Apple (AAPL) topped the active list with a loss of $9.86. Morgan Stanley cut price targets from $192 to $178, and did so on a number of high-tech issues.
Microsoft (MSFT), a $0.24 gain.
Google (GOOG) down $19.01.
Research In Motion (RIMM) fell $5.60.
Cisco (CSCO) off $1.18.
Intel (INTC) a $0.73 loss.
And Qualcomm (QCOM) down $2.78.
Oracle (ORCL) off $0.32.
First Solar (FSLR) down $19.25.
And CME Group (CME) fell $9.
And I should mention incidentally that Microsoft plans to buy back $40 billion of its own stock, boosting the dividend a bit. And Standard & Poor's and Moody's both gave it the coveted triple-A debt rating.
And that's a look at our "Stocks in the News" tonight.
