NBR Transcripts- October 7, 2008
Tuesday, October 07, 2008The Federal Reserve's New Financial Lifelines
SUSIE GHARIB: Another dismal day of heavy selling on Wall Street. It came despite unprecedented action by the Federal Reserve in the corporate debt market, and hints by Fed Chairman Ben Bernanke of a possible interest rate cut. The Dow plunged 508 points and the NASDAQ tumbled 108. Investor jitters overshadowed several Fed developments, including a plan to buy commercial paper and hints an interest rate cut could be in the works. We have two reports tonight, looking at the Fed's latest moves and the debate over rates. We begin with Washington bureau chief Darren Gersh.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Having already propped up banks, Wall Street, and the nation's largest insurance company, Federal Reserve Chairman Ben Bernanke announced much of the rest of corporate America will now be getting a financial lifeline. The Federal Reserve, Bernanke said, would act as buyer of last resort for the short-term debts of corporations. In the financial world, that debt is called commercial paper.
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE BOARD: Disruptions in the commercial paper market and the tightening of bank lending standards have made it more difficult for businesses to obtain the working capital they need to meet everyday operating expenses, such as payroll and inventories.
GERSH: The total amount of commercial paper eligible for the backstop is $1.3 trillion. Senior Fed officials say the new program will be substantial, though they did not offer a dollar figure. Companies that use the Fed backstop would have to pay a fee, or offer collateral or other guarantees that taxpayers will not end up losing money. Any purchases will be limited to the amount of commercial paper a company had outstanding in August. Since only highly rated companies like Boeing (BA), GE (GE) and JPMorgan (JPM) are eligible for the Fed backstop, analysts say the risk to taxpayers should be low. Jeff Glenzer represents corporate treasurers.
JEFF GLENZER, MANAGING DIRECTOR, ASSOCIATION FOR FINANCIAL PROFESSIONALS: If this program works the way it's intended to do, which is to restore confidence in the commercial paper markets, the extent to which the Federal Reserve actually has to provide that backstop may be very minimal.
GERSH: With credit conditions tightening, unemployment rising, and consumers throwing in the towel, the Fed chairman described the economy as "subdued," and he hinted more Fed medicine is likely to come soon in the form of a cut in interest rates.
BERNANKE: The combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened, and that the downside risks to growth have increased. At the same time, the outlook for inflation has improved somewhat, though it remains uncertain. In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate.
GERSH: A cut in interest rates normally helps the economy by making loans cheaper. But if even the best companies can't borrow in today's markets, analysts worry the usual rate cut magic may lose much of its power. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Erika Miller in New York. The rate debate took center stage on trading floors today. There was widespread disagreement on the wisdom and timing of a rate cut by the Federal Reserve. Merrill Lynch's Drew Matus believes aggressive rate cuts by the Fed would help boost economic growth. He believes the Fed should move before its next scheduled meeting, October 28th and 29th, in order to maximize impact.
DREW MATUS, SENIOR ECONOMIST, MERRILL LYNCH: Moving aggressively now might reinforce the idea that they are, in fact, moving to get ahead of the situation instead of simply reacting to it.
MILLER: However, others say a move by the Fed would be nothing more than a symbolic gesture. Even supporters warn a U.S. rate cut probably won't have much impact, unless other countries cut their rates, too.
MATUS: This is not one of those situations where the U.S. government can simply sit back and solve the problem in the United States and hope that the rest of it goes away. . It has got to be solved within the United States and also abroad in order for it to be fully effective on a global scale.
MILLER: There have been calls for massive coordinated interest rates cuts by central banks around the world. Although there has been cross-border cooperation to inject liquidity into the global financial system, economist Dean Maki says lowering interest rates is another story.
DEAN MAKI, CHIEF U.S. ECONOMIST, BARCLAYS CAPITAL: It would be another large step for the Fed and other central banks to coordinate monetary policy. They are supposed to make monetary policy according to their own domestic economies. And it would be very unusual to cut rates in a coordinated way.
MILLER: But nearly everyone agrees rate reductions alone will not cure financial and economic woes. Economists would also like the Fed to do more to encourage inter-bank lending.
MAKI: Banks are less willing to lend to other banks than has been the case in the past. It's not clear that a rate cut really addresses that issue directly. But it does provide some stimulus to the economy, relative to not cutting rates, which is why we think the Fed will choose that route.
MILLER: If there is some global coordination to lower rates, experts say it could come as soon as Friday's G-8 meeting. They also think moves could be on the agenda at the annual meeting of the International Monetary Fund this weekend. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Chris Varvares, President of the National Association for Business Economics
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Back now to our top story, speculation about interest rate cuts in the U.S. and around the world. Joining us for more analysis, Chris Varvares, chief economist of Macroeconomic Advisers and president of the National Association for Business Economics. Nice to see you, Chris.
CHRIS VARVARES, PRESIDENT, NATIONAL ASSOCIATION OF BUSINESS ECONOMICS : Nice to be here.
GHARIB: Chris, do you think -- where you are in this rate debate? Do you think the Fed is going to cut interest rates as well as central banks around the world?
VARVARES: There's a broad consensus as reflected in the Federal funds futures market to the Federal Reserve will be cutting rates at least 50 basis points in the very near future. As the previous -- Darren's package suggested, that it's coming, the chairman in his speech today pretty well signaled as much as the chairman of the Federal Reserve will, that it's on its way.
GHARIB: But will that help the global financial system? It seems like no matter what the Fed does, it doesn't get the money flowing again.
VARVARES: Well, there are a couple of things. Certainly, it's the case that lower interest rates will help. Lower interest rates tend to boost asset prices, that helps balance sheets, it helps -- it can help the stock market, in most instances, it does. So, that's the first step. It will help. And eventually, I think we're likely to go to something like 100 basis points, but we could go all the way to zero. It's not impossible. The other part of it is to get banks lending again. And if they don't, the Fed has signaled that it's prepared to stand in and for major creditworthy organizations, it is going to be the lender of last resort. Through the TARP program that the Treasury has instituted and the Fed's other policies of providing liquidity, the hope is that we can get banks once again not so much to lend to each other, that's part of the problem, but really to lend to business and to consumers. As you know, credit is the lifeblood of the economy, without it, it's very difficult to see growth. So the Fed is working very hard to solve that problem.
GHARIB: Right. But let me ask you this way, you said to get banks and lenders lending again. Does it make a difference that they're willing to lend if people are losing their jobs and not in a position to be borrowing? I mean, your own survey from your group, the NABE, is expecting the unemployment rate to get to 7 or 8 percent next year.
VARVARES: Well, the unemployment rate in the NABE survey was -- even before the intensification of the financial crisis, to get to 6.5 percent. And given the intensification of the financial crisis in the last couple of weeks, we found in the survey that the panel expected the economy to be much weaker at the end of this year and early next year. We didn't ask them specifically about the unemployment rate but one could extrapolate that it would be pushing up towards 7 percent, maybe higher. What people.
GHARIB: I know, but what my point is -- my point is, yes, if people don't have jobs, why would they be -- go borrowing money to buy a car or a house or whatever?
VARVARES: Obviously, people who are losing their jobs would be likely to not go out and take out loans, but other people who are more secure in their employment are going to take out loans to do what they do. And that's going to allow them to keep spending, to increase their spending. And it's critical for businesses, small- and medium-sized businesses, to be able to obtain bank financing for all manner of spending, whether it's expanding an advertising program or whether it's new Web site development, or whether it's new plant and equipment. So, we have got to get the credit flowing again and what I would say, rather than "drill, baby, drill," we need "loan, baby, loan," to get credit flowing again.
GHARIB: Well, I hope you're right about that. How -- where are we in the trajectory of this crisis?
VARVARES: Very hard to tell. Confidence is a fickle thing. It has been very fragile. It has eroded very quickly. If the Fed steps and as Treasury program comes on-line over the next several weeks and as the details become known, if it's effective in restoring confidence, we could see a rapid turn-around. There's no guarantee of that. We may need additional steps, we may need additional stimulus.
GHARIB: Right.
VARVARES: It really hinges critically on what happens to confidence.
GHARIB: A lot of unanswered questions. Thanks, Chris, for coming on tonight.
VARVARES: You bet.
GHARIB: My guest tonight, Chris Varvares, chief economist of Macroeconomic Advisers.
3rd Quarter Mutual Fund Report With Russel Kinnel of Morningstar
PAUL KANGAS: The third quarter ended a week ago, and for most mutual fund investors, it was three months they'd rather forget. Still, there were some bright spots. And here to discuss them is Russel Kinnel, the director of mutual fund research for Morningstar. And, Russ, welcome back to NIGHTLY BUSINESS REPORT.
RUSSEL KINNEL, DIRECTOR, MUTUAL FUND RESEARCH, MORNINGSTAR: It's good to be back.
KANGAS: Before we get to specifics, what do mutual fund investors make of this market over the last few days?
KINNEL: Well, it's a really scary market, but I think all you can really do is stick to your plan, and tune out that noise, even when it's really scary.
KANGAS: Are you seeing a lot of redemptions moving out of stock funds and into money market funds?
KINNEL: Well, we don't have data on September yet, but I wouldn't be at all surprised if we see money moving out of mutual funds in September.
KANGAS: There were some fund categories that actually made money between July and September.
KINNEL: That's right. Bear market was the best category. And what bear market means is these are funds that are shorting the market, so the worse the market does, the better they do.
KANGAS: Mm-hmm.
KINNEL: We also saw specialty real estate hold up, probably surprisingly well for most people. The reason is that real estate funds invest in commercial real estate, which is a little different from the homes that people -- as we know, the values of those have plummeted.
KANGAS: Right. Let's look at best individual funds with assets of more than $50 million. And as would you expect, a bear fund topped that list.
KINNEL: That's right. This is a fund that shorts emerging markets, and amid all of the clamor, not much attention has been paid to emerging markets. But they had a horrible quarter partly because of slowing growth in the world, falling commodity prices, but also just an end to some of the speculative frothiness that we had seen last year in emerging markets.
KANGAS: But two funds that invested in bank stocks also came in with double-digit returns, correct?
KINNEL: Yes, that's a big surprise, isn't it? You would think this would be the worst place to be. But these are funds that invest in smaller banks, regional banks, and it turns out a lot of those banks weren't sophisticated enough to blow all of their value in the derivatives and loose lending practices.
KANGAS: Now moving on to the fund with the best one-year record, it was another bear fund. Direxion S&P 500 Bear.
KINNEL: That's right. This is a fund that essentially aims to do the inverse of the S&P 500 with leverage. So that if the S&P is way down, it's going to be way up and vice versa.
KANGAS: longer term, USAA Precious Metals & Minerals Fund with a better than 19 percent gain, but that fund hasn't shined lately, has it?
KINNEL: No, it really hasn't. Gold funds and other commodity-focused funds have done really well in the last three years, but as fears of a global recession have gripped the world, commodity prices have really come down hard.
KANGAS: Let's see how the largest funds by assets did in the third quarter. These giants were all in negative territory, but there was a big divergence with losses ranging from 15 percent to just 2 percent, correct?
KINNEL: That's right. It was a wide divergence. Growth Fund of America did the worst. And its situation was really typical of other growth funds in that it was not so much financials that hurt it as energy and tech. We have seen the problems in financials really spread out to other sectors in the market. And growth funds like this one really were hit hard. On the other hand, PIMCO Total Return, a bond fund, did pretty bell, it only lost 2 percent. And as you may recall, PIMCO made a lot money betting on mortgages from.
KANGAS: Right, right.
KINNEL: . Fannie (FNM) and Freddie (FRE) when the government took those over.
KANGAS: Right. Russ, I want to thank you for your insights and analysis once again.
KINNEL: You're welcome.
KANGAS: My guest, Russel Kinnel of Morningstar.
"Commentary"-Tips For The Next President
PAUL KANGAS: Well, with the presidential election just weeks away, we continue our series of special commentaries, looking at the candidate's economic choices. Every Monday and Tuesday leading up to the election, we will have commentaries dealing with the candidate's platforms and positions. Tonight, Jack Coffee, professor at Columbia University's law school, has some thoughts on what the next president needs to do about financial regulation.
JACK COFFEE, LAW PROFESSOR, COLUMBIA UNIVERSITY: The first economic priority of the next president must be to avoid the need for future bailouts by toughening regulation. This requires him to appoint regulators who will end the current rush to deregulation, and who will restrict excessive leverage by financial institutions. Regulatory failure played a major role in the collapse of our leading investment banks. In 2004, the SEC quietly relaxed the rules that restricted the degree of leverage that an investment bank was permitted to use. Banks quickly responded by increasing their leverage, and when the market soured, they were left exposed and vulnerable. In retrospect, the SEC's mistake now seems symptomatic of that era: rapid financial deregulation gave free rein to underlying speculative tendencies of Wall Street firms, which are motivated by annual bonuses and stock options to focus more on the short run. What should be done? The first step was outlined this April in a Treasury Department report that proposed major regulatory structural revisions. As it correctly observed, the U.S. has the most fragmented system of financial regulation of any major nation. Prudent reform requires that one centralized regulatory body monitor the safety and soundness of any financial institution whose collapse could destabilize our economy. Our next president must recognize that bailouts will be needed again unless we toughen regulation today, particularly of those institutions that claim they are "too big to fail." I'm Jack Coffee.
Paul Kangas' Stocks in the News
PAUL KANGAS: A firm start and a miserable finish: that was how the day played out on Wall Street. Stocks opened slightly higher on optimism over the Fed's backstop of the commercial paper market. But stocks had reversed course by the time Fed Chairman Bernanke gave his gloomy economic outlook this afternoon, and the selling after that was sharp and swift right into the closing bell. The Dow Industrial Average plunged 508.39 points, ending at 9,447.11. That is its lowest level since the summer of 2003. The NASDAQ Composite tumbled 108.08 points to 1,754.88. Standard & Poor's 500 Index plummeted 60.66, ending at 996.23. Over in the bond market, the 10-year note fell 13/32 to 104 2/32, putting the yield at 3.51 percent. Big Board volume leader on 30.6 million shares, General Electric (GE) losing $1.08.
Followed by Bank of America (BAC), off $8.45. Late today, the company said it sold 455 million of its shares at a price of $22 even. Part of the is going to be used for the Merrill Lynch (MER) acquisition.
Citigroup (C) down $2.26 in the weak banking sector.
Pfizer (PFE) down $1.29 there.
JPMorgan Chase (JPM) fell $4.68.
Morgan Stanley (MS) off $5.85, and traded as low as, believe it or not, $14. There were rumors that Mitsubishi (MTU) would pull out of its agreement to acquire up to 25 percent of the voting shares. Morgan Stanley says the deal is still on track.
Merrill Lynch (MER) plunging $6.20. Analysts at Wachovia widened their third-quarter loss estimate for Merrill from $1.03 to $6.12, and they see a full-year loss of $12.50 a share.
IBM (IBM) losing $4.97. Barclays downgraded it from overweight to just equal weight.
And then Ford Motor (F) losing $0.77 to close at $2.92. That's the lowest close since 1983. The company is cutting its vehicle production in Europe.
Advanced Micro Devices (AMD) up $0.36. The company is going to spin off its manufacturing plants into a $5.7 billion joint venture with Abu Dhabi in its investment corporation. That's to better compete with rival Intel (INTC).
General Growth Properties (GGP) plunging $3.25, that's almost 42 percent of its value. Yesterday Standard & Poor's cut the company's credit ratings, noting that it was about -- it had about $1.2 billion of debt coming due by the end of the year and no clear plan as to how to handle it.
Landry's Restaurants (LNY) off $2.35. Fertitta Company's CEO said because of the deterioration of casual dining and gaming industries, his firm's $21 a share buyout bid for Landry is in jeopardy. He is talking about financing the deal with Jefferies (JEF), but at a much lower price.
Advance Auto Parts (AAP) losing $5.77. Third-quarter sales up lower than expected, 2.6 percent. The company sees third-quarter earnings at $0.57 a share. That's well below the Wall Street estimate of $0.66 a share.
Safeway (SWY) lived up to its name today -- in the market, anyway, up $1.08. Third-quarter earnings a bit higher at $0.46 versus $0.44 last year. Same-store sales up 2.8 percent. Standard & Poor's repeated a buy recommendation.
Apple (AAPL) topped the NASDAQ active list, down $8.98.
And Google (GOOG) tumbled $25.20. Stifel Financial cut its price target on Google from $600 a share down $525, and cut its third-quarter earnings estimate from $5.11 down to $4.78 a share.
Microsoft (MSFT) off $1.68.
Research In Motion (RIMM) down $4.61.
Cisco (CSCO) down $1.62.
And finally, shares in First Solar (FSLR) tumbled $31.71 after Goldman Sachs downgraded the stock from buy to sell.
