NBR Transcripts- October 2, 2008
Thursday, October 02, 2008The Bailout Bill Leads To Another Late Night In The House
SUSIE GHARIB: Stocks on Wall Street plunged today on investor anxiety about the fate of the government's financial rescue plan and tighter conditions in the credit markets. The Dow tumbled 348 points to 10,482, that is its lowest level in three years. The NASDAQ tumbled 92. On Capitol Hill, House lawmakers debated the merits of the $700 billion bailout plan after it cleared the Senate last night. The House votes on the legislation tomorrow and many in Washington are optimistic the measure will be approved. We have two reports looking at where things stand on the eve of the House vote and whether passage will soon make it easier for businesses to get credit. We begin with Stephanie Dhue in Washington.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The focus is here now.
UNIDENTIFIED FEMALE: Congressman Baird's office.
DHUE: . in offices like Democratic Congressman Brian Baird's. He voted yes on Monday. Supporters of the plan are worried the fiscal conservative could switch to a no. But Baird says he'll vote yes again, because the cost of voting no is too high.
REP. BRIAN BAIRD (D), WASHINGTON: When people are out of work, when businesses across the country are shutting down, when schools can't afford to make payroll, when farmers can't afford to buy seed or fertilizer for the next year's crop, when banks at all levels are failing, we've got a problem. We must prevent that from happening.
DHUE: Members of the National Association of Manufacturers met with President Bush at the White House this morning to drive home the message that the economic problems have already begun. Mary Andringa of construction and farm equipment-maker Vermeer says her customers are pulling back.
MARY ANDRINGA, CO-CEO, VERMEER MANUFACTURING: This whole crisis makes everyone extremely cautious. And for our customers, especially if they can't get credit, it means they're not buying. If they're not buying, we're not able to produce, which means we don't have the jobs that are needed for our employees.
DHUE: Pine Hall Brick President Fletcher Steele says he laid off 19 people Monday because of slack demand. He wants lawmakers to pass the bill to boost confidence.
FLETCHER STEELE, PRESIDENT, PINE HALL BRICK COMPANY: People are scared, our employees are scared, they're coming to us and saying, I want to get my 401(k) money, I want to put it under the mattress. They're scared. We need something to stop the downward spiral that I think that we're in, and the crisis of confidence. We really feel like by being able to provide more credit to the system -- and this bill really does -- really provides the underpinning to do that, we can stop this downward movement.
UNIDENTIFIED MALE: Fund people's needs not Wall Street greed!
DHUE: Some consumer, community and housing advocates say this bill is not the answer. Bruce Marks of the Neighborhood Assistance Corporation of America says lawmakers need to do more to stop rising foreclosures.
BRUCE MARKS, NEIGHBORHOOD ASSISTANCE CORPORATION OF AMERICA: It's the foreclosures, stupid. It's the underlying issue are the massive numbers of foreclosures. You stop that, you make those mortgages affordable, and that's the solution for the homeowners, for the community, for Main Street, and for Wall Street.
DHUE: House leaders say they are cautiously optimistic the bill will pass this time. Majority Leader Steny Hoyer says he won't even bring up a bill without the votes to pass it. Until then, both sides are working to build support. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Erika Miller in New York. Wall Street is hoping for a government rescue plan. But experts do not think it would have much immediate impact on the ailing commercial paper market. Over the past few weeks, interest rates for these short-term corporate IOUs have skyrocketed for some industrial borrowers, even top rated financial firms. Economist Brian Levitt says there's also a trickle down effect to small business, which hurts the overall economy.
BRIAN LEVITT, ECONOMIST, OPPENHEIMER FUNDS: What happens is, as banks continue to take these losses on the toxic debt on their balance sheet, they've been having a harder and harder time getting overnight lending to try and recapitalize their balance sheets. And what that does is make significantly less credit available to the small businesses that often drive employment in this country.
MILLER: Part of the problem is that money market funds, the biggest holders of commercial paper, have lost their appetite for risk in the face of the worst financial crisis since the Great Depression. But even if the government passes the bailout, credit expert Andy Brenner says recovery won't come quickly.
ANDREW BRENNER, CO-HEAD OF CREDIT PRODUCTS, MF GLOBAL: It's not going to happen right away. There have been a lot of problems here that have to be addressed and it takes time. As it -- this has been happening now for 15 months. It's not going to go away in three weeks.
MILLER: Best case scenario, experts say, it will be six months before commercial paper lending returns to normal. But interest rate strategist Ira Jersey says that's far better than what would happen if there is no government bailout package and financial firms continue have trouble getting short term loans.
IRA JERSEY, U.S. INTEREST RATE STRATEGIST, CREDIT SUISSE: You have the possibility that if they can't do that and they can't find funding elsewhere, that there will be serious problems for those firms. Not dissimilar to what you've seen in the past couple of -- in the past year.
MILLER: Tightness in the commercial paper market is bad for more than just businesses. If it continues, experts say firms will pass along higher borrowing costs to consumers or opt to layoff workers. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Roger Kubarych, Chief Economist at UniCredit
SUSIE GHARIB: While the U.S. economy is at the center of the financial crisis, the global banking system is also in turmoil. Joining us now to talk about the global impact of the credit crunch, Roger Kubarych, chief economist at UniCredit, Italy's largest bank. Hi, Roger, how are you?
ROGER KUBARYCH, CHIEF U.S. ECONOMIST, UNICREDIT GROUP: Good to be with you, Susie.
GHARIB: All right. What -- how would you describe the health of the global banking system? I hear that a lot of European banks have plenty of toxic debt of their own on their books.
KUBARYCH: It's very mixed. There are quite a few European and even Asian banks that are involved with the toxic debt, but have strong capital elsewhere. And others are just sort of embroiled in it because the flow out of the banks has been indiscriminate. There has been kind of guilt by association even for those who are not guilty.
GHARIB: I understand that there is a lot of resistance among different countries and European banks putting together a coordinated plan to bail out European banks, something along the lines of what the United States is doing with this bailout package. But isn't it necessary to do that so that they can get the money flowing throughout the whole international banking system?
KUBARYCH: Well, the Europeans have the European Union. And the European Commission in Brussels likes to set common standards and common approaches to all these problems. But there are very big differences of view between, for example, France and Germany and Ireland, of all people, about how to proceed, and those are not going to be easy to reconcile quickly. They are going to go on a nation- by-nation basis. And they are not impressed by the way our bailout has proceeded.
GHARIB: Well, how important is the U.S. bailout for what's going on on the international scene?
KUBARYCH: It's very important, because, you know, the Europeans were affected by the beginnings of this crisis back in July of 2007, two German banks, the very lurid failure of Northern Rock in the U.K. But ever since the Bear Stearns fiasco in March, they've been complacent, and they've thought that they were not part of it. But in the last week we've had five major failures in different countries. And now they are running way behind where they should be in terms of coming to grips with it. And they need America to get our house in order first.
GHARIB: All right. So, who are the lenders of last resort here? The United States is having its problem. Europe is having -- banks are having their problems. I mean, there are -- there is only so much that Warren Buffett can do to lend a helping hand to American businesses. Who are the lenders of last resort?
KUBARYCH: Well, in terms of liquidity support, the European Central Bank, the Bank of England, the Swiss National Bank, and in Asia the Bank of Japan have all been very active in providing liquidity on much the same basis as the Fed has been doing. But in terms of bailing out individual firms, it's a lot different. For example, the Irish put on unlimited deposit insurance for all Irish banks in the wake of a near failure of a firm in Ireland. Other countries in Europe think that that is far too excessive, and that's why when ask who the lender of last resort is, it is an open question.
GHARIB: All right. We're going to leave it there. Roger, thank you so much for coming on our program. Hope to get you back again.
KUBARYCH: Thank you.
GHARIB: My guest tonight, Roger Kubarych, chief economist at UniCredit.
John Gutfreund of Gutfreund & Company Examines The Financial Crisis
PAUL KANGAS: Joining me now is a man who is no stranger to financial crises. He's John Gutfreund, former chairman and CEO of Salomon Brothers and current president of Gutfreund & Company, a New York-based financial consulting firm. And, John, welcome to NIGHTLY BUSINESS REPORT.
JOHN GUTFREUND, FORMER CHMN. & CEO, SALOMON BROTHERS: Thank you.
KANGAS: Business Week magazine once called you the king of Wall Street. So drawing on that kind of vast experience, do you think that the stock market declines are being overdone here?
GUTFREUND: No, I think the circumstances are unique. In 55 years in the Street, the only thing that ever struck me as strongly as this was the bombing September 11th in '01.
KANGAS: Mm-hmm. So now if the rescue bill-passes, will that bailout get money flowing on Wall Street again in your opinion?
GUTFREUND: I don't think money on Wall Street is necessarily the issue. I think that the public confidence has been sorely shaken and the procedures in Washington where they confuse the issues by adding all sorts of goodies on a bill, on a most serious matter, just is so offensive. Anybody that can read and write has got to be sore as hell at their congressman and Senators who are anxious to get back to their political hustings.
KANGAS: Do you think they are sore enough so that this plan will not make it through the House like it did the Senate?
GUTFREUND: I think that the -- these monkeys are under enough pressure and they have probably got enough goodies, pork barreling stuff, that they will get it through, whether it makes sense or not is something else.
KANGAS: So they will pass it, do you think?
GUTFREUND: Yes, but I thought they were going to pass it the other day.
KANGAS: OK. Well, if it passes, what will it do for investor and consumer confidence, won't that be a bit of a boost, at least near term?
GUTFREUND: Well, it should be. But when are you are going downhill on a slide, it will take more than one or two things. I think that the thing that they added the other day about increasing the limit of insured deposits from $100,000 to $250,000, things like that are much more important and really bear consideration. Who are they kidding with this nonsense, bailing out Wall Street? The public is concerned. You have got a huge population, it isn't just Wall Street.
KANGAS: Mm-hmm.
GUTFREUND: I am of the school who thinks it will take a lot of work. I think people will be more interested in watching that lady and that senator debate tonight.
KANGAS: OK. What are you telling your clients to do, if anything, here?
GUTFREUND: Stay liquid. Stay close to shore. I don't think that we have seen an absolute market bottom. The credit problems are very severe. And the one thing that we've never had before is, because of the technology and the age in which we live, it's a global problem. It isn't just a U.S. problem. And you can't detach us from the rest of the world. The banks in Europe, in Asia, they will all suffer, those who have been as imprudent as ours.
KANGAS: Mm-hmm. Now you have been through these types of crises before at Salomon. What are the lessons from today's credit crunch?
GUTFREUND: The lesson is you ought to treat your depositors, your shareholders, as if they were yourself. In other words, act as if it is your own money. Don't do things you don't understand. Don't take crazy, imprudent risks and because other people seem to be getting rich doing it. Don't get carried away. If you were that smart, would you have been rich already.
KANGAS: Very good points that you make. John, I want to thank you for sharing your candid insights with our viewers.
GUTFREUND: My pleasure. Glad to do it. I wish all of them well and I wish I felt more enthusiastic or euphoric. But I think you really have to pay attention to this and say, it's my money, and I want to be careful. I may have made some foolish mistakes up to date, but in here I want to keep my liquidity.
KANGAS: John, thanks very much. John Gutfreund of Gutfreund & Company.
GUTFREUND: Thank you.
How One Small Town Community Bank Is Weathering The Financial Crisis
SUSIE GHARIB: And finally tonight, the nation's financial crisis is rippling across the United States from large cities to small towns. Many community banks are bracing for potential loan defaults and tighter credit conditions. But in the small enclave of Galena, Illinois, customers are still getting loans to buy homes and expand businesses the old-fashioned way. Diane Eastabrook explains.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Historic Galena, Illinois, is like a postcard. Small businesses and specialty stores dot Main Street. White church steeples peep through trees. And President Ulysses S. Grant's home overlooks the town. It's the kind of quiet Midwest hamlet where banks know their customers by name.
UNIDENTIFIED FEMALE: Hi, Nancy. UNIDENTIFIED FEMALE: Hi there.
EASTABROOK: Apple River State Bank has been a part of Galena for 60 years. It has roughly $225 million in assets, with $20 million in capital and reserves to cover losses. While much of the banking industry is in turmoil, Apple River State Bank President William Wubben thinks his losses will be minimal.
WILLIAM WUBBEN, PRESIDENT, APPLE RIVER STATE BANK: Through the years we've done a lot of lending on character, individual character of the borrowers because sometimes we maybe helped individuals get a loan because even though they maybe didn't meet all of the requirements. But we knew the family, we knew the individual, and they were -- we knew they were capable of getting us paid back.
EASTABROOK: Michael Hillard's Tri State Tours has done business with Apple River and one other local bank for decades. Hillard says both banks played a role in his firm's success.
MICHAEL HILLARD, PRESIDENT, TRI STATE TOURS: The thing about local banks that I've always felt is they know you as well as you know them. I mean, it's on a first-name basis with the bankers and they will tell you point blank that this could be something you don't want to do.
EASTABROOK: There are roughly 8,000 community banks in the U.S. in towns just like this. Most weren't involved in sub-prime mortgages and remain fairly well-capitalized. But despite that, many are still at risk from the fallout of the nation's banking crisis. Analysts say some community banks that loaned heavily to builders could face losses if their speculative properties don't sell. Howe Barnes banking analyst Daniel Cardenas says other banks that invested heavily in Fannie Mae (FNM) and Freddie Mac (FRE) preferred stock could also face potential losses.
DANIEL CARDENAS, BANK ANALYST, HOWE BARNES: And so as a result, we're going to see probably in this quarter these banks write these investments down substantially anywhere from 90 to 95 or even 100 percent write-off in the quarter. So that is going to put some pressure on the capital side of these community banks.
EASTABROOK: Apple River State Bank put lending caps on speculative home- building and didn't hold stock in either Fannie Mae or Freddie Mac. Still, Wubben thinks the mortgage mess will force all banks to tighten lending standards.
WUBBEN: It may get back to the old days where our previous bosses said, you had to have 20 percent down when you come in to the bank to get the loan, and I think that we may be headed back in that direction.
EASTABROOK: For now, though, Apple River State Bank will continue to loan money the old-fashioned way, with a handshake. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Galena, Illinois.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street opened sharply lower on those investor concerns the rescue plan might not pass, or even if it does, it won't be enough to snap the economy out of the doldrums. By midday the Dow was already down 265 points with the NASDAQ off 61 points. Stock prices continued to fall this afternoon amid a host of corporate earnings cuts and analyst downgrades. And the major indices ended at the day's lowest levels. The Dow Industrial Average closed off 348.22 points at 10,482.85. The NASDAQ Composite plunged 92.68 ending at 1,976.72. While the Standard & Poor's 500 Index tumbled 46.78 to 1,114.28. Over in the bond market, the 10-year note rose 30/32 to 103 2/32, pushing the yield down to 3.63 percent.
By far and away the most active Big Board issue on 157 million shares was General Electric (GE), down $2.35. The company priced an offering of 547 million shares of common stock at $22.25 a share.
National City (NCC), was up $0.25.
Wachovia (WB) gained $0.36.
Citigroup (C) down a half a dollar.
And then Pfizer (PFE), a $0.15 loss there.
MetLife (MET) plunging $7.19. The Senate majority leader, Harry Reid, said a well-known insurance company is on the verge of bankruptcy. He didn't name any specific company, but it certainly sent the whole sector lower. MetLife said it's financially sound and later a spokesman for Reid said MetLife was not the company he was referring to.
Let's have some other hard-hit insurance stocks, though, Hartford Financial (HIG), Prudential (PRU), and XL Capital (XL), all sizeable losses.
Alcoa (AA) down $1.89. Goldman Sachs downgraded it from buy to neutral. Earnings are due out next week from Alcoa.
Another Dow stock, Boeing (BA), down $3.04. The Jefferies brokerage cut its price target from $100 to $85 a share. And the Barnes Group (B) off $3.03. The company cut its full-year earnings guidance because of the strike at Boeing, which is hurting its aerospace business. That accounts for 20 percent of its total sales.
Then came the fertilizer stocks, hard-hit Potash (POT) tumbling $34.53. Merrill Lynch downgraded it from buy to underperform on the weakening fertilizer demand.
And did the same downgrade on a host of other fertilizer stocks like Agrium (AGU), CF (CF), Intrepid (IPI). And Mosaic (MOS) down $27.86, first-quarter earnings for Mosaic, $2.65, but that was $0.29 below the Street estimate.
Then Terra Industries (TRA) lost $5.79.
Monsanto (MON), another agribusiness stock hard-hit by sellers, even though Monsanto boosted its 2008 earnings forecast from $3.60 to $3.64 a share.
Then came the transportation stocks hard-hit. Con-Way (CNW), the truck, down $8.78. The company cut its 2008 earnings guidance from a high of $3.40 all the way down to $2.80 a share at best, because of weak demand for its freight transportation services.
And other transport stocks hard-hit on that news, the rails especially, Burlington (BNI), CSX (CSX), and then trucker J.B. Hunt (JBHT), Norfolk Southern (NSC), and Union Pacific (UNP) all major losses. Incidentally, the Dow Transport Index tumbled almost 400 points, or 8.7 percent.
Then Constellation Energy (CEG) up $3.49 -- $3.48, I should say. The company's takeover by Berkshire Hathaway's (BRK) MidAmerican Energy is progressing nicely. And wouldn't you know, one of the few gainers is a Warren Buffett deal.
NASDAQ's most active, Apple (AAPL) down $9.02. Nokia (NOK) is introducing a new touchscreen phone, which offers free music. Competition there.
Microsoft (MSFT), a $0.23 loss.
Google (GOOG) plunging $21.23.
Research In Motion (RIMM) down $4.93.
And then Intel (INTC) with a loss of $1.32.
And then finally the shares of Atmel (ATML) rose $1.12 to $4.40 on news chipmakers Microchip Technology (MCHP) and semiconductor -- ON Semiconductor (ONNN) is the name of the other firm, will acquire the company for $2.3 billion, or $5 per share.
