NBR Transcripts -September 23, 2008
Tuesday, September 23, 2008Bernanke & Paulson Take To The Hill
SUSIE GHARIB: The government's $700 billion financial rescue plan ran into turbulence today on Capitol Hill. At a hearing of the Senate Banking Committee, lawmakers grilled the plan's architects, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, demanding more details about the plan and assurances it will resolve the financial crisis. Paulson and Bernanke urged quick approval of the bailout, but the senators said they need more time to determine if the plan in its current form makes sense. We have two reports tonight looking at the key issues raised at today's hearing, including whether the government should regulate credit default swaps, which played a critical role in the credit crisis. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Federal Reserve Chairman Ben Bernanke explained to senators that he and Treasury Secretary Henry Paulson want $700 billion in taxpayer money so they can stop banks from being forced to sell off their mortgage assets at what Bernanke called "fire sale prices."
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: This leads to big write-downs and reductions in capital which, in turn, forces additional sales that send the "fire sale price" down further, adding to pressure.
GERSH: Bernanke warned that pressure will lead to a financial heart attack, with banks cutting off lending, sending unemployment higher, and the economy into recession. Obviously, lawmakers don't want that, but the critical question was raised by Utah's Robert Bennet: What price will the Treasury pay for assets the market is not willing to buy?
SEN. ROBERT BENNET (R-UT), BANKING COMMITTEE: If you end up paying too little to these institutions, you're not giving them the support that they need. If you end up paying too much, then there's no upside potential for the taxpayer.
GERSH: One idea the Treasury is considering is a giant version of eBay in reverse. Instead of buyers bidding for junk, banks selling junk assets will compete on the price they are willing to accept from the Treasury. The lowest price wins. While it's possible the mortgages the Treasury buys as part of its Troubled Asset Relief Program will eventually be worth far more than their fire sale price, senators like Evan Bayh worry taxpayers will be left paying off Wall Street's bad bets.
SEN. EVAN BAYH (D-IN), BANKING COMMITTEE: So the taxpayers do bear some downside risk here. What do they get in exchange for bearing that downside risk? Why should they not be allowed to participate in the potential upside? And then that gets to the question once again of possible equity participation.
GERSH: Meaning the taxpayers would get a stake in any bank that participates in the Treasury auctions. Paulson all but called that a deal- killer. He wants thousands of banks and savings and loans to participate in the auctions. The more institutions that join in, Paulson argues, the harder it will be for anyone to dump their worst assets on the taxpayers, which is one reason he opposes punishing banks that sign up for the program.
HENRY PAULSON, TREASURY SECRETARY: If we have to have to grant -- have companies grant equity stakes, grant options, that would render this ineffective.
GERSH: But how exactly that program would set prices was still unclear after close to five hours of testimony. Paulson only promised to hire the best asset managers, presumably from Wall Street, and then adopt the best plans he can come up with.
PAULSON: This is not a situation where we can come up and say, here's what we want to do, here's how we want to price it, here's the -- here's exactly how the reverse auctions will work.
GERSH: Answers like that prompted Senate Banking Committee Chairman Chris Dodd to leave the hearing calling the Paulson plan "unacceptable." But Dodd said Congress could still pass a plan quickly if some changes are made. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Dhue. Also at today's hearing, the sprawling $62 trillion market for credit default swaps came under fire. CDS are insurance-like contracts that pay out in the event of a default on an underlying security. And unlike stocks or bonds, which are traded on exchanges, credit default swaps are traded between individual parties largely outside the scope of regulators. While the SEC has anti-fraud authority over the CDS market, Chairman Christopher Cox called on Congress for more.
CHRISTOPHER COX, CHAIRMAN, SECURITIES & EXCHANGE COMMISSION: This market is rife for fraud and manipulation, and, indeed, we are using the full extent of our anti-fraud authority, our law enforcement authority, right now to investigate this market.
DHUE: Credit default swaps played a major role in the problems at Bear Stearns, Lehman Brothers (LEH), and AIG (AIG). Treasury Secretary Paulson told lawmakers the shortcomings in the CDS market made the financial crisis worse.
PAULSON: Even more important than the wind down in the insurance is the "too big to fail." And part of the reasons for the "too big to fail" is the lack of all the infrastructure and protocols and discipline around the over-the-counter derivatives market.
DHUE: New York State is already planning to regulate credit default swaps by classifying them as insurance starting January 1st. The goal is to ensure sellers have sufficient capital and risk management policies in place to protect buyers. But Greg Zerzan of the International Swaps and Derivatives Association says that will likely drive the business out of New York.
GREG ZERZAN, COUNSEL, INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION: The credit default market is overwhelmingly occupied by banks, investment banks, otherwise regulated institutions. So having the state of New York try to put an extra layer of regulation on top of that probably won't end up making these markets any more well-regulated.
DHUE: The industry also opposes regulation by the SEC. When senators asked today if they needed to include federal regulation of credit default swaps in the bailout bill, Paulson said no.
PAULSON: You can't deal with this immediately. This is -- this is a huge market that has built up over a long period of time.
DHUE: The SEC says it is investigating whether swaps were used in stock manipulations, but it has yet to bring a major case involving credit default swaps. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Wall Street Weighs The Bailout Risk
PAUL KANGAS: While Washington debates the $700 billion rescue plan, Wall Street is debating its impact. Regardless of the details, economists say there may be some negative repercussions of such a massive effort. But as Erika Miller reports, economists still think the risks are worth it.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Treasury's $700 billion bailout plan is clearly a staggering sum, but economists think the U.S. economy is strong enough to handle the additional debt. According to one estimate, total U.S. debt could surge to almost half the value of the nation's economic output. It's about 38 percent now. But even if that happens, experts say the ratio would still be below the levels of Japan and many European nations. Cary Leahey of Decision Economics warns that without a massive rescue effort, the U.S. is at risk for a deep recession.
CARY LEAHEY, ECONOMIST, DECISION ECONOMICS: We may end up having what one economist calls a slow motion recession for a couple of years. But that would be a better alternative than an old-fashioned recession where you lay off hundreds of thousands, if not millions, of workers and have an actual drop in GDP.
MILLER: However, nearly everyone agrees the government bailout will create serious long-term risks for the economy, including the potential for a big spike in inflation.
LEAHEY: It is ultimately inflationary, in the sense that you basically -- if necessary, Mr. Bernanke will use what he euphemistically referred to as the "printing press." If you can't get anybody to buy the debt, you're just going to print more money to buy off these loans.
MILLER: However, economist Lakshman Achuthan says weak global growth will help restrain inflationary pressures.
LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH: It's very difficult to discern what's going to happen here. On the one hand, you could argue that inflation is not a problem because there are recessions everywhere, which hurts pricing power. And because credit is contracting, this makes it very difficult for prices to spike up.
MILLER: There are also fears that increased Treasury debt will pressure the U.S. dollar, which could encourage foreigners to dump U.S. securities. But some experts don't see that happening due to a lack of more attractive alternatives.
ACHUTHAN: It's not clear what's the safe bet. And therefore, the U.S. is certainly part of the asset allocation that you want to have and, arguably, maybe a better place to be than some other places in the world because of the aggressive policy actions that are finally taking place.
MILLER: A massive government bailout would surely have a real impact on the economy, but experts say equally important will be the psychological effect, whether it can boost consumer and business confidence. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Terry Lanni, CEO of MGM Mirage
SUSIE GHARIB: Well, the weak economy and the financial crisis are hurting Las Vegas and the casino industry. Joining us now, Terry Lanni, CEO of MGM Mirage, the nation's second-largest casino company. Mr. Lanni, welcome back to NIGHTLY BUSINESS REPORT.
J. TERRENCE LANNI, CHMN. & CEO, MGM MIRAGE: Good evening. It's great to be here.
GHARIB: As you well know, consumers are struggling with high food prices, high gas prices, job losses, how is all of this impacting your business and MGM's earnings?
LANNI: Well, indeed, the impact of the economy is affecting our business. It's not nearly as staggering as some people think. In fact, it was interesting, we had bankers out from the People's Republic of China last week, and they were amazed how busy all of our casinos were. They basically thought from the news that they got that it basically a wasteland. But they were rather impressed with that. So it's down but not dramatically.
GHARIB: We're also hearing that many of the major airlines, because of high jet fuel prices, are cutting back flights to Las Vegas. So how are you deal being with that? Are you offering discounts to lure people in?
LANNI: No -- well, obviously, we do offer discounts and I think other properties from other companies along the strip are doing the same thing. But when you look at it, the airlines are down about 4.5 percent, which is not a good number, but it's also not as dramatic as maybe the press would have you believe.
GHARIB: Mr. Lanni, there's a lot of debate, you heard our stories about this government bailout plan for the banks and for Wall Street, from your perspective, do you think that this is the best solution to the crisis?
LANNI: Well, maybe what Secretary Paulson should do is come here with some of the government's a money and take a chance at some of our tables, it might be an opportunity here to win, because we do have winners and winners make players. But on a serious note, obviously something has to be done. I think the secretary and Mr. Bernanke have made some good suggestions. I think it's appropriate that the Senate is raising some questions about oversights and some controls. And I think those are necessary. And I think they'll work something out in the next 48 hours.
GHARIB: You have you a lot of contact with different types of Americans, rich ones, middle-income ones, all kinds of Americans. From what you're hearing, what's your sense of how much longer it's going to take to get out of this financial crisis and the weak economy?
LANNI: Well, you know, one of the advantages we have with the dollar as weak as it is, we have a lot of foreign guests now coming into Las Vegas. So where we have offset some of the loss in domestic business with visitors from Europe, from the Far East, and from Canada, with the Canadian dollar at parity now with the U.S. dollar, or thereabouts, it's an opportunity in that particular regard. So we're taking a look at areas where the economy is still doing well and reaching out to customers in that particular area. And all in all and basically as said, we're doing pretty well. We are down probably about 4.5 percent visitors. We're probably down about 8 to 9 percent, maybe up to 11 percent in EBITDA, cash flow from out properties. But again, it's not a disaster. And I think it's going to take some time. I would suspect that it's going to be probably at the very end of '09 and beginning of 2010 before we see any turn at all. But that's pretty much of a guesstimate on my part.
GHARIB: Well, does the weak economy and these issues that you're talking going to change the plans for the opening of your big -- what is it called, CityCenter?
LANNI: CityCenter.
GHARIB: CityCenter project. I mean, will you be -- yes, will you be able to fill customers into the hotels and the condos and go shopping at all the new retail outlet that you're opening up?
LANNI: Well, the interesting thing is, forward-looking bookings actually for our existing hotels are rather strong in 2009. Conventioneers are still coming, they're not spending as much money, but our view is that we will open it on time at the end of 2009, and that it will be a success from day one. And we believe there's sufficient opportunities for us with guests from international areas. There is a great demand for that hotel already and forward bookings for that hotel, the ARIA Hotel, which is part of CityCenter, are very strong.
GHARIB: All right. Is the tight credit situation impacting any of your growth plans? Are you putting projects on hold?
LANNI: Well, we obviously have to take a look at projects. CityCenter is moving ahead, will be completed on time and I believe on the budget. As far as new projects, we have some that are waiting for the capital markets to change, we will not be able to move far ward with those until the capital markets change. And we have let the appropriate people become aware of that.
GHARIB: All right. Thank you so much for coming on our program.
LANNI: It's my pleasure. Thank you for having me.
GHARIB: My guest tonight: Terry Lanni, CEO of MGM Mirage.
"Economic Choices '2008"-The McCain Economic Plan
SUSIE GHARIB: Last night, it was the Obama economic plan. So, tonight, we continue our special election-related commentaries with a look at McCain's prescription for the economy. It's all part of our "Economic Choices '08" coverage of the presidential election. Tonight's commentator, Nada Eissa, associate professor or public policy and economics at Georgetown University, weighs in on the McCain plan.
NADA EISSA, ASSOCIATE PROFESSOR OF PUBLIC POLICY & ECONOMICS, GEORGETOWN UNIVERSITY: The next president will face serious economic and fiscal challenges, made worse by the recent turmoil in financial markets and taxpayer-financed bailouts. So, how would a President McCain deal with these challenges? Well, that depends. Judging by his record on economic issues, there is a lot to like about John McCain. As a senator, he promoted free trade and fiscal discipline. And though he favored limited regulation, he called for regulating Fannie (FNM) and Freddie (FRE) long before the current crisis. But as a presidential candidate, his economic agenda falls short. The heart of it is a promise to make the Bush tax cuts permanent and to cut corporate income taxes further, to the tune of $4.2 trillion over the next decade. He has also pledged to balance the budget by 2012, but that means eliminating all discretionary government spending outside of national defense: everything from highway projects to student loans and federal prisons. Forgive me if I am skeptical of that ever happening. McCain's proposal substitutes deficit spending for taxes. That may be politically astute, but it is not pro-growth. Recently, the senator has taken a more populist tone, promising to look out for workers. But his agenda is weak on the economic anxieties many workers feel, whether from stagnant wages or insecurity about their retirement incomes. The decline of the housing and credit markets will force difficult choices be made sooner than most anticipated. How John McCain would approach these challenges is anyone's guess. I know which one I'd like to see. I'm Nada Eissa.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened higher on a technical rebound from yesterday's drubbing, with some buying inspired by high hopes Congress would swiftly produce a financial rescue plan. An hour into trading, the Dow posted a 109-point gain with the NASDAQ up 30 points. Those gains faded this afternoon as there seemed to be little progress toward a resolution in Congress. So a late selloff sent stocks to the day's lows. At the final bell the Dow Industrial Average closed off 161.52 points at 10,854.17. The NASDAQ Composite fell 25.65, ending at 2,153.33. While the Standard & Poor's 500 Index lost 18.87 to 1,188.22. Over in the bond market, the 10-year note climbed 12/32 to 101 19/32, putting the yield at 3.81 percent.
New York Exchange volume leader on 27 million shares, American International Group (AIG) moving up $0.28. The company's new CEO, Edward Liddy, sees a stronger company emerging from the federal bailout. And he expects to move swiftly to sell some assets to help repay the bailout loan.
Pfizer (PFE) in there with a $0.06 loss.
Citigroup (C) dropped $0.02 after Oppenheimer cut earnings estimates a bit. Washington Mutual (WM), a $0.13 loss. Moody's downgraded the rating on the company's covered bonds from A3 to BAA1.
Sprint Nextel (S) in there with a $0.27 gain, fifth in volume.
General Electric (GE) lost a $1.20. Merrill Lynch downgraded it from buy to neutral and cut earnings estimates.
National City (NCC), $0.15 gain.
Bank of America (BAC) down $0.85. Oppenheimer cut estimates on that stock.
Petroleo Brasileiro (PBR), the big Brazilian oil, down $3.60. And the commodity stocks were weak today, including Companhia Vale (RIO), down $2.32, 10th in volume.
Union Pacific (UNP) closed up $0.87. Traded as high as $76.49, after the company this morning boosted its third-quarter earnings estimates because of lower diesel fuel costs.
Air Products & Chemicals (APD) tumbling $7.06. The company cut its fourth- quarter earnings estimate from as much as a $1.42 down to $1.26 at best, citing a fire at one of the company's Korean facilities, and lower demand for its products because of hurricanes Gustav and Ike.
The car rental firm Dollar Thrifty (DTG) off $1.54, loss of over 33 percent of its value after the company said third-quarter results will be challenged by bankruptcy at one of its tour operators and also because of auto depreciation. One of its rivals, Avis (CAR), was down $1.06 at $5.84 in sympathy.
Genco Shipping & Trading (GNK) tumbling $4.90. The Dahlman Rose brokerage downgraded it from buy to hold. And that had a negative impact on other bulk carriers.
Let's have a look at what happened to some of those. Diana Shipping (DSX) off over $2, as was Eagle Bulk Shipping (EGLE), and Navios Maritime (NM) was down $0.88.
Hanger Orthopedic (HGR) down $2.55. The company announced the offering of 2.5 million shares of its stock coming on the behalf of Ares Corporation Opportunities Fund.
And then Downey Financial (DSL), a good percentage move, up nearly 20 percent. Positive reaction apparently to the naming of a new CEO, Charles Rinehart.
Apple (AAPL) topped the NASDAQ's most active, down $4.21. Research In Motion (RIMM), a small move of $0.87.
Microsoft (MSFT) edged up $0.04.
And then Google (GOOG), an $0.87 gain on the close. You heard it launched its new Gphone.
And then Intel (INTC) was up $0.13 a share.
Cisco (CSCO) down $0.38.
Qualcomm (QCOM) a nickel loss.
Oracle (ORCL) down $0.06.
First Solar (FSLR) fell $11.76.
And Baudi.com (BIDU) down $5.13.
ImClone Systems (IMCL) moved up $4.11, Bristol-Myers Squibb (BMY) has sweetened its buyout bid from $60 to $62 a share in the form of a $4.7 billion tender offer.
And those are the "Stocks in the News" tonight.
