NBR Transcripts September 24, 2008
Wednesday, September 24, 2008President Bush's $700B Prime Time Push
SUSIE GHARIB: President Bush talks to the nation tonight. He will try to persuade the American public that the government's $700 billion financial rescue plan is the best way to resolve the credit crisis. Meanwhile, on Capitol Hill today, another day of intense debate on that bailout. Federal Reserve Chairman Ben Bernanke warned lawmakers the U.S. is facing "grave threats" to its financial stability and he urged swift passage of the plan. But many Democrats in Congress aren't convinced and want tough restrictions on it. We have two reports tonight looking at where the plan stands and what happens if Congress doesn't approve it. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Clearly unhappy at the huge mess they are being asked to clean up, members of Congress searched for alternatives. And on one alternative, Treasury Secretary Henry Paulson came Congress's way, agreeing to limit the pay of CEOs at companies that take taxpayer dollars.
HENRY PAULSON, TREASURY SECRETARY: The American people are angry about executive compensation and rightfully so. Many of you cite this as a serious problem and I agree. We must find a way to address this in the legislation, but without undermining the effectiveness of this program.
GERSH: But the concerns about the Paulson plan went deeper. Citing articles on the web like "Why Paulson Is Wrong," Ohio's Deborah Pryce wanted to know if there was a better way to use $700 billion in taxpayer money.
REP. DEBORAH PRYCE (R), OHIO: Instead of buying these toxic assets, the government should buy preferred stock in ailing banks, and that could raise matching private sector equity.
GERSH: Paulson argued no one would invest in a bank until they know what the bad mortgages on the books are really worth and the only way to price mortgage-related securities now is to hold a Treasury auction
PAULSON: That encourages private capital to follow and it makes it possible for the banks to recapitalize themselves because lenders right now are concerned about putting capital in, because they don't trust the balance sheets and they have concerns about what these assets are worth.
GERSH: Bernanke suggested the Treasury's asset purchase plan might do a little bit of both, buy up assets and inject cash directly into banks. But at a hearing earlier in the day, Bernanke said private investors would likely pull back needed funds if the government stepped in. After all, when the government took over Fannie Mae and Freddie Mac, private shareholders who had put in billions were effectively wiped out.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: If it were possible to convince the markets that in fact the government was going to act like Warren Buffet, and make investment banking deals based on, you know, negotiations and approval by the common shareholders and the board, et cetera, et cetera, I think that's something that's probably worth discussing with the White House, and see if they see any benefit in that.
GERSH: All the talk of high finance was lost on many members of Congress. What they really wanted to know is how this mess affects voters back home. Bernanke says unfortunately Wall Street has a lot to do with Main Street right now.
BERNANKE: It's really a question of saying, there's a hole in the boat, you did it, why should I help you? Well, there's a hole in our boat, we need to fix it and then we need to figure out how make sure it doesn't happen again.
GERSH: Democrats are considering another option to fix the boat, putting the Treasury on an installment plan, approving $150 billion now and offering more later if it's needed. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT NEW YORK BUREAU CHIEF: This is Scott Gurvey on Wall Street. What if nothing passes? Or if something passes, but it doesn't work? The specter raised is one of possible economic disaster, with a deep recession, a sharp drop in consumer sales and a big spike in unemployment. While Wall Street will take the biggest hit, Jerry Webman of Oppenheimer says Main Street will not escape.
JERRY WEBMAN, CHIEF ECONOMIST, OPPENHEIMER FUNDS: If nothing passes, it will be very dangerous for financial markets. That doesn't just mean people who own stocks right now, but it means the functioning of the whole system that makes loans for automobiles, for mortgages, for capital equipment, for countries, for cities to pave roads, for countries to borrow for national purposes. If nothing happens, that system locks up.
GURVEY: But that doesn't mean the system will come to a complete standstill. New York's 80-year old Sterling National Bank (STL) ran an ad in today's Wall Street Journal titled, "What Credit Crunch?" The ad says Sterling continues to provide financing for growing businesses. President John Millman says Sterling can still make loans because it avoided the traps others fell into.
JOHN MILLMAN, PRESIDENT, STERLING NATIONAL BANK: We do not do exotic things. We do not have involvement with subprime lending. We don't do home equity loans. We don't do auto leasing. We're not a retail bank. We're a business bank.
GURVEY: But unless lenders can get some of the bad loans off their books, William O'Donnell of UBS says only the best credit risks will have access to funds.
WILLIAM O'DONNELL, FIXED INCOME STRATEGIST, UBS: Lending standards have been tightened throughout this year in all loan categories. We see this in the senior loan officer survey and we expect to see it again in the quarterly survey from the Fed in October.
GURVEY: And then there is the question of price. Jerry Webman says unless the government plan succeeds. The cost of money will stifle growth.
WEBMAN: Anything that has a credit or liquidity aspect to it, whether it's corporates, mortgages, municipals which are unbelievably cheap relative to Treasuries right now, the market is just not receptive. So good quality issuers and borrowers will be able to get a mortgage, or sell a municipal bond, or raise corporate funds, but they're going to pay a premium to do it.
GURVEY: There was clear evidence of that today as industrial giant Caterpillar (CAT) announced a new bond issue at an interest rate roughly double what it would have had to offer just six weeks ago. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
New York Times Chief Financial Correspondent Floyd Norris Weighs In On The Financial Crisis
PAUL KANGAS: Joining me now to talk about the financial crisis is Floyd Norris , chief financial correspondent at The New York Times, and the author of the blog "Floyd Norris: Notions on High and Low Finance." And, Floyd, welcome to NIGHTLY BUSINESS REPORT.
FLOYD NORRIS, CHIEF FINANCIAL CORRESPONDENT, THE NEW YORK TIMES: Thank you, Paul.
KANGAS: You've been writing and blogging about this situation for days now. What in the world do you think is going on? Is it a good deal or a bad deal for tax payers as you see it?
NORRIS: There's no way to know right now. It's clearly a good deal for the banks because they're going to be able to unload assets that are at very low value at prices higher than market value. Whether it works out for the Treasury depends on whether those assets turn out to be worth something in the long run.
KANGAS: What's your guess?
NORRIS: My guess is that some of them will turn out to be worth more money than current market value, but I have my doubts it will overall be a good deal.
KANGAS: Does Warren Buffet's $5 billion investment in Goldman Sachs give you a warm and fuzzy feeling about confidence in the financials?
NORRIS: No, it gives me a warm and fuzzy feeling that I wish I was Warren Buffet. (LAUGHTER) He got an excellent deal. He's assured a 10 percent return, which is a very high return these days from a company as solid as we think Goldman Sachs is -- as I think it is. But he did give up unlimited upside potential because they have the right to buy the securities back any time they want to at a 10 percent premium.
KANGAS: But he also has warrants where you can buy the common stock, right?
NORRIS: He has got an equity thing but I think that may go away if they buy back the stock. So it's not unlimited, so he can't just sit there with the warrants and wait for the stock to soar.
KANGAS: I understand, OK. What about the issue of CEO pay, Floyd? We've received a ton of viewer e-mail with folks that are outraged at the thought of golden parachutes for corporate honchos.
NORRIS: There is a lot of anger about that, and it appears the Bush administration is going to give in on that and put in some kind of limitation into this bill on companies that accept their help. They didn't want to do that because they wanted this to appear to be a thing where they were giving the aid to everybody and that the fact you took the aid didn't mean there was anything bad about you. And now it may be taken that way. And that's the risk.
KANGAS: I see. In one of your blogs -- posts, well, you call the treasury secretary "King Henry." What do you mean by that?
NORRIS: Well, that's the thing that had been going around on the Web today. His original proposal was incredibly audacious, saying there should be no oversight, no legal review of what he did, that he could do anything he wanted. And, you know, that wasn't going to fly in the current atmosphere.
KANGAS: Mm-hmm. Any final observations for our viewers tonight, Floyd?
NORRIS: No, I think it's going to be very interesting to see what the president has to say tonight. They will probably pass something this week. And if they do, it will be interesting to see if that gets the financial system moving again.
KANGAS: Is time really of the essence? Is it that important, how quickly they do this?
NORRIS: I mean, this week versus next, I don't see it. The principal urgency in Congress I think is they want to get out and campaign. (LAUGHTER)
KANGAS: A very good point. Listen, Floyd, I want to thank you very much for sharing your thoughts with us tonight.
NORRIS: Thank you.
KANGAS: My guest, Floyd Norris, chief financial correspondent at The New York Times.
Toyota's Tundra & Sequoia Are Out Of Production For Now
SUSIE GHARIB: Toyota (TM) has slammed the breaks on production of its Tundra pick-up and Sequoia sport utility because of sluggish sales. Production of those vehicles will resume in mid-November, but while assembly work on those products has stopped, the workers who make them are still on the job. Diane Eastabrook explains how Toyota's strategy to keep workers busy during a shutdown could pay bigger dividends down the road.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Todd Brackin isn't performing a Japanese mime dance.
TODD BRACKIN, INSPECTION TEAM MEMBER, TOYOTA: Twelve, seven.
EASTABROOK: Brackin is actually part of an inspection team learning how to save time and improve vehicle inspections at Toyota's Princeton, Indiana, manufacturing plant.
BRACKIN: We're learning how to look at our individual jobs and finding where there's error, where there's room for improvement and where we can have cost savings.
EASTABROOK: Roughly half of Toyota's 4,500 Princeton workers are now retraining while the assembly lines they normally work on sit idle for three months. In August Toyota temporarily halted production of the Sequoia sport utility and pulled the plug on production of the Tundra pick- up in Princeton because of stagnant sales and bloated inventories. So until production starts again, workers on those vehicles are sharpening installation techniques and other parts of the plant where Sienna minivans are still being built, and spending time in makeshift classrooms learning or relearning better ways to do their jobs to prevent injuries.
UNIDENTIFIED MALE: I'm really not square to my work either, right? He's looking this way, but he's working over here. That's why we get the side bin.
EASTABROOK: Toyota has never idled production and retrained workers at any of its plants in North America, but it has in Europe and Asia. The company says in those instances, productivity, quality, and safety all improved once assembly lines began running again. Norm Bafunno is the Princeton plant's senior vice president of manufacturing production and quality planning. He admits it would be cheaper for Toyota to lay off workers during the shutdown, but he says in the long run, that could be more expensive.
NORM BAFUNNO, SENIOR VICE PRESIDENT, TOYOTA: Well, we look at the dollars and cents, it's one element. But it's also the element of how competitive are we going to be long term? And we're trying to position our company through this downturn, the expenditure that we're making in wages and training to position ourselves to be a higher-performing company in the future.
EASTABROOK: Experts say there is another compelling reason why Toyota is retraining rather than idling workers. James Schrager, management professor at the University of Chicago's Graduate School of Business, says Toyota's strategy encourages worker loyalty and discourages the United Auto Workers union from organizing the plant.
JAMES SCHRAGER, MANAGEMENT PROFESSOR, UNIVERSITY OF CHICAGO: And when the union comes knocking on the door, the Toyota folks will be able to make their pitch: We match benefits, we match wages, but we have job security.
CHARLIE WONNELL, ASSTISTANCE QUALITY MANAGER, TOYOTA: You guys are getting pretty consistent. And the key is, you're learning the challenges of the times here.
EASTABROOK: Back at the inspection area, assistant quality manager Charlie Wonnell is pleased by his team's progress. He's also optimistic the tools team members are getting now will improve their performances later.
WONNELL: Truly, when they get back on the line and apply it on the floor, they'll be able to better understand where there might be waste and opportunity for improvement.
EASTABROOK: Toyota managers in Princeton are confident that once the U.S. economy improves, sales of their vehicles will improve as well. And they're confident the workers at this plant will be better prepared to meet the demand. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Princeton, Indiana.
"Money File"-Ensuring Your Insurance & Annuities
SUSIE GHARIB : In the "Money File" tonight, protecting your insurance and annuities in turbulent times. Here's Harriet Johnson Brackey, personal finance columnist at The South Florida Sun-Sentinel.
HARRIET JOHNSON BRACKEY, PERSONAL FINANCE REPORTER, SOUTH FLORIDA SUN- SENTINEL: After the government took over AIG (AIG) last week, people asked, is my life insurance policy still good? What about my annuity? Your policies and contracts are still in force. And state regulators say the insurance companies behind them are solvent. But what if they weren't? That answer to that can be found in an obscure corner of the insurance industry. In every state, Puerto Rico, and D.C., there's something called a guaranty association. If one insurer fails, the others have to pick up the coverage, or some of it. This varies by state, but generally, if your insurer fails, the cash value of a life insurance policy under $100,000 is likely to be covered. For death benefits, the coverage is higher, often to $300,000. And the general rule is that up to $100,000 in annuity contracts would be covered. The life insurance industry insists that its $5 trillion in assets are conservatively invested, mostly in high quality bonds. But its also true that this a heavily-regulated industry that has been through a few panics. The failure of Mutual Benefit comes to mind. And regulators have responded with more and more safeguards, including the guaranty associations. So if you have an insurance policy under your state's limits, I wouldn't lose sleep over it. I'm Harriet Johnson Brackey.
Paul Kangas' Stocks in the News
PAUL KANGAS: Stocks on Wall Street opened higher as investors were cheered by Warren Buffett's $5 billion investment in Goldman Sachs (GS), which we told you about last night. By 11:00 a.m. the Dow was up 30 points and the NASDAQ up 20 points. The market turned mixed during midday as traders moved to the sidelines to watch the debate on Capitol Hill. In the absence of any major developments, stocks lost more ground this afternoon in very slow trading and ended near the day's lows. The Dow Industrial Average closed off exactly 29 points at 10,825.17. The NASDAQ Composite managed to gain 2.35 to 2,155.68. And in a statistical oddity, the S&P 500 fell 2.35, ending at 1,185.87. Over in the bond market, the 10-year note fell 4/32 to 101 16/32, putting the yield at 3.82 percent. The most active Big Board issue on 34.4 million shares, American International Group (AIG), losing $1.69. The company, however, today did sign that two-year pact with the Federal Reserve Bank of New York for an $85 billion credit facility.
Washington Mutual (WM) still looking for a buyer, down $0.94.
And then National City (NCC), a $0.20 loss there.
But Goldman Sachs (GS) up $7.95. As you heard, Warren Buffett's Berkshire Hathaway (BRK) investing $5 billion. And also the company itself is selling 40.6 million common shares at $123 each. That's another $5 billion coming into the coffers.
Citigroup (C) was down $1.03, fifth in Big Board volume.
And then Bank of America (BAC) down $0.23.
While Pfizer (PFE) dropped $0.02.
General Electric (GE), a $0.36 drop.
And Morgan Stanley (MS) off $3.21. Reportedly, Morgan Stanley has ended merger talks with Wachovia (WB). Wachovia's stock dropped $0.95 to $13.80.
Then came Exxon Mobil (XOM) with a $0.34 gain.
Lennar (LEN), the homebuilder, doing well, up $2.06. Yesterday the company reported a third-quarter loss of $0.56. The Street was looking for something around $0.63 in the red, so that was better than expected. And it helped some of the other homeowner stocks to rally today, also helping was news of shrinking existing home inventories. Centex (CTX), D.R. Horton (DHI), KB Home (KBH), Ryland Group (RYL), and Toll Brothers (TOL) all on the plus side today.
PPG Industries (PPG) used to be called Pittsburgh Plate Glass, down $2.48. The company said the impact of hurricanes and the slowdown in auto manufacturing will hurt third-quarter results. Down went the stock. Pilgrim's Pride (PPC), the meat producer, down $3.90. A lot of the leading meat companies were down on concern that the credit crunch will make it harder to get operating loans and loans for expansion. Let's have a look at some other food stocks. Smithfield (SFD) down $1.68, and Tyson (TSN) traded as low as $11.86, but was off $0.68 on the close.
National Financial Partners (NFP) tumbling $5.56. The life insurance firm says the first two months of the third quarter that its total revenues dropped 7 percent in that period and same-store revenues down 10 percent from a year ago.
Medicis Pharmaceuticals (MRX) down $2.34. The skin care products firm is going to restate financials all the way back from 2003 through the first half of this year. It also is suspending any previous earnings guidance for the rest of this year.
MEMC Electronic Material (WFR) up $2.03. This stock up on the Senate's passage of an extension on solar tax credits. And that helped some other stocks, let's have a look at some of those that did well on the Senate's passage: Energy Conversion (ENER), Sunpower (SPWR), and Trina Solar (TSL) all doing very nicely today.
Topping the active list -- well, we missed UAL Corp. (UAUA), down a $1.45. The company's -- there we go.
Apple Computer (AAPL), we wanted to get to the active list in here. Apple up $1.87.
Microsoft (MSFT) a $0.28 gain there.
Google (GOOG) up $5.84.
Research In Motion (RIMM) fell $0.26.
Intel (INTC) a $0.07 gain.
Some more actives, Cisco (CSCO) up $0.07.
First Solar (FSLR), another one of those strong solar stocks, up $10.91.
Qualcomm (QCOM) down $0.62. The company lost a patent infringement lawsuit to Broadcom (BRCM), whose stock gained a dollar to $19.39.
Amazon.com (AMZN) fell $1.80.
Oracle (ORCL), a $0.26 gainer.
UAL (UAUA), finally we get to it with a loss of a $1.45 on -- the parent of United Airlines fell that much on concerns the upcoming holiday travel season may be a slow one.
And those are the "Stocks in the News" tonight.
