NBR Transcripts- October 23, 2008
Thursday, October 23, 2008Former Fed Head Alan Greenspan Gets Grilled on the Hill
SUSIE GHARIB: A mea culpa of sorts from Alan Greenspan today, as he admitted to making mistakes during his tenure as chairman of the Federal Reserve. But in testimony before congressional lawmakers, Greenspan did not take responsibility for what he called a once in a century credit tsunami. As Stephanie Dhue reports, the man who was once called the maestro for orchestrating growth in the markets and the economy, is now under fire for his role in the global financial mess.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The former Fed chairman said he was shocked that financial firms failed to protect themselves and their shareholders. And he confessed he was wrong to think that markets could regulate themselves.
ALAN GREENSPAN, FORMER FEDERAL RESERVE CHAIRMAN: Yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact.
HENRY WAXMAN, CHAIRMAN, OVERSIGHT & GOV'T. REFORM CMTE:. You found a flaw.
GREENSPAN: A flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
DHUE: Congressman Dennis Kucinich attacked the Fed chairman with Greenspan's own comments from 2004, when he said the traditional fixed rate mortgage may be an expensive method of financing a home.
REP. DENNIS KUCINICH, (D) OHIO: You, Mr. Greenspan, promoted adjustable rate mortgages that fueled the sub-prime market.
GREENSPAN: I went before this Economic Club of New York just days later and very significantly pointed out that the 30-year mortgage is the most important mortgage we have. And that whenever I took our a mortgage, I didn't take out an adjustable mortgage, because I thought it was too risky.
DHUE: Throughout 2005 and into mid-2006, Greenspan dismissed the idea of a housing bubble and said there was no evidence home prices would collapse. He now says his forecast was wrong.
GREENSPAN: The housing bubble became clear to me sometime in early 2006, in retrospect. I did not forecast a significant decline because we had never had a significant decline in prices.
DHUE: Greenspan says economic forecasts are only accurate 60 percent of the time. And he didn't know until 2005 that banks were making bad loans, despite warnings from other Fed officials.
GREENSPAN: There were a lot of people who raised issues about problems emerging, but there are always a lot of people raising issues and half the time they are wrong and the question is what do you do?
DHUE: For some on the committee, like Congressman John Sarbanes, the answer doesn't seem too difficult.
REP. JOHN SARBANES (D) MARYLAND: Certainly, we're smart enough as people to have put basic underwriting standards in place or to preserve basic underwriting standards.
DHUE: While the maestro's forecasting ability is in some doubt, Greenspan didn't hesitate to give his current outlook. He says this crisis will pass, but not until home prices stabilize, still many months away. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
One on One with Pulte CEO, Richard Dugas
SUSIE GHARIB: Shares of Pulte Homes tumbled 18 percent today as investors reacted to disappointing quarterly numbers announced late yesterday. The nation's fourth largest home builder reported a bigger than expected loss, its eighth consecutive quarter of red ink. Joining us now, Pulte CEO Richard Dugas. Mr. Dugas, welcome back to NIGHTLY BUSINESS REPORT.
RICHARD DUGAS JR., PRESIDENT & CEO, PULTE HOMES: Thank you for having us.
GHARIB: When do you expect Pulte to be profitable again?
DUGAS: Gosh. It's tough to say. The housing market is clearly going through a severe correction. I would certainly hope that in the coming couple of quarters, we might be able to post a profit, but it's very difficult to say based on inventory write-downs that have been affected by this crisis.
GHARIB: Let me ask you this. When do you think that you will be able to hire back workers and contractors and get building going again?
DUGAS: I don't believe it's going to be anytime soon, frankly. The market is still reeling from an incredible combination of fear and effectively locking down the markets in total. We are continuing to lay people off, unfortunately and the overall industry is in tough shape right now. So I wish I could give you a good forecast on hiring again, but at this point I don't see it in the near term.
GHARIB: Now, you have been successful in building up your cash trove, whether through cost-cutting and other measures. What do you think is the best use of that cash? DUGAS: For now, I think the best thing to do is to sit on it. Anytime you have a very difficult environment, overall cash is king as you know, and we can be defensive with that cash to help allow us to run our business, if conditions deteriorate further and also we can be opportunistic with that cash when it does stabilize -- when the market does stabilize, we can use it to actually invest. So I think for now the prudent thing to do with the cash is to continue to build it and sit on it. It's a very conservative strategy, but this market has thrown us many curves and we certainly don't want to bet wrong.
GHARIB: At some point, banks are going to sell the foreclosed homes and land that they've seized. When do you think that might happen? And would you be interested in buying any of the distressed properties?
DUGAS: Definitely, we would be interested in buying distressed properties. Banks are already selling the foreclosed homes. As a matter of fact, there was a report out this week that in California, as much as 50 percent of resale inventory in the recent period was foreclosed homes being sold. So the homes are moving through the bank system, but land has not yet really made it to the market at prices that we would find attractive. However, that will eventually work through and at that point we would like to take advantage of some of those opportunities. We are one of the few companies in the industry that does have significant cash reserves and to spend a small portion of that to buy opportunistically would be appropriate, we believe.
GHARIB: You talked about stabilizing the housing market. If you were advising the next president of the United States, whether it's Senator Obama or Senator McCain, what would you tell them to do to solve the housing crisis?
DUGAS: I'm glad you asked. We need two things. We need a large one- time tax credit for buyers to stimulate demand in the range of $10,000 to $25,000 depending on the price of a home in your given area that does not have to be repaid. It needs to be a true stimulus from the government combined with a 2-250-basis-point mortgage rate reduction. That's exactly, Susie, what happened in 1975. The Ford administration passed a tax credit and a mortgage rate reduction that lasted for about nine months.
GHARIB: But Mr. Dugas, let's say that that tax credit were offered. Do you think consumers who are so fearful right now would actually take advantage of it and maybe most of them are just waiting for prices to come down?
DUGAS: I do not think a tax credit alone is enough, but in combination with a 4 percent 30-year fixed rate mortgage, it would be good enough to stimulate demand. It worked back in 1975. We have the recipe for it, we just need to enact it. Unfortunately most of the stimulus discussion today is excluding housing which is ironic since it's the root of the economic problem in the country. I definitely believe it would stimulate demand.
GHARIB: All right, to be continued. Hope you come back and talk more about that. Thank you so much for coming on the program this evening.
DUGAS: My pleasure. Thank you for having us.
GHARIB: My guest tonight, Richard Dugas, CEO of Pulte Homes.
The Hedge Fund Hazard
PAUL KANGAS: The stock market has been rocked by volatility as it copes with the financial crisis. Market insiders say sales by hedge funds are causing many of those gyrations. The mostly unregulated investment partnerships are one factor behind the market's late-day freefalls and as Scott Gurvey reports, Wall Street pros see more hedge fund selling ahead.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Hedge funds are often highly leveraged. They must sell assets to meet margin calls in a falling market and to raise cash to meet redemption demands from investors. These sales are putting downward pressure on stocks. Hedge Fund Research, a Chicago-based firm, says the value of assets held by the funds fell by $210 billion in the third quarter. Investors withdrew over $31 billion, the largest net capital redemptions in the industry's history. Fund manager Whitney Tilson says many funds are in chaos.
WHITNEY TILSON, MANAGING PARTNER, T2 PARTNERS, LLC: A lot of funds are being hit with a double whammy, of being, of delevering both as a risk mitigation tool, but also because they're being forced to. They're getting margin calls from their prime brokers and then that combined with investors redeeming is a double whammy for a lot of hedge funds that's putting them under tremendous pressure and the only way to mitigate that pressure is you got to sell what you own.
GURVEY: Hedge funds often sell late in the day when they have an idea of what their margin and redemption requirements will be. Half of the recent market declines have come in the final hour of trading. Drew Chapman, a lawyer representing funds, says we can expect still more sales.
DREW CHAPMAN, PARTNER, DLA PIPER: I think redemption requests are going to continue. November 30 is obviously I think the last day I guess of the year. Funds are usually on a quarterly or a monthly redemption cycle and November 30th is going to clearly see more and more redemptions come through.
GURVEY: While most individual investors fear the volatility, Art Cashin, who directs floor trading for UBS, says it can be played to your advantage if you place a limit order naming your price.
ARTHUR CASHIN, DIRECTOR, NYSE FLOOR OPERATIONS, UBS: If you're going to expect selling in the final hour and you're thinking about looking for bargains, that's the perfect time. You put in a silly bid and if there is that heavy selling look, you got a bargain. And if there's no heavy selling, you didn't buy anything. So I think you have to look at it as opportunities more than anything else.
GURVEY: There are about 10,000 hedge funds and some market watchers believe due to the financial crisis, as many as one third will close up shop in the months ahead. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
"Economic Choices 2008"-Battleground Virginia
SUSIE GHARIB: Virginia will be one of the closely watched races in this year's presidential election with McCain and Obama both courting suburban voters. The economy, government spending and taxes are key issues in the state and with the economy new on shaky ground, voters there could play a key rose in next month's presidential election. Washington bureau chief Darren Gersh, wraps up our look at the battleground states with the economic choices Virginia voters will make in 12 days.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In 2004, Occoquan, Virginia was Bush country. The president carried this area of northern Virginia by close to 20 percentage points. Now polls show John McCain is down here, but not out. Just ask shop owner Laverne Carson, what she thinks about Obama and it's clear the race for Virginia is far from over.
LAVERNE CARSON, MCCAIN SUPPORTER: I want somebody who's not going to be spending us into oblivion. And I think he's -- with the things he's come out with, he's going to take from the rich and give to the poor. We're going to be one mushy mess when it's done. We won't have any rich and the poor will still be poor.
GERSH: Down the walk along Occoquan's old town, Kendall Jackson believes Obama will be better for the economy. She's also a business owner, but she's not worried about paying more in taxes.
KENDALL JACKSON, OBAMA SUPPORTER: I'm a store owner. When you talk about the small business and being taxed more heavily, I don't have to worry about that because we as a small business fall way below the $250,000 threshold. I just think also the way in which Barack was raised and his family and his values, he's seen hard work. And he's worked hard for what he has. I think he's more in touch.
GERSH: Occoquan sits in the heart of Prince William County, a far Washington suburb that both the Obama and McCain campaigns consider critical to winning in Virginia. And just as we've seen in our reports from Pennsylvania and New Mexico this week, the issue that's likely to tip the election here is the economy. And on the economy, the news here is mixed. In September, the unemployment rate in Virginia was 4.3 percent, much lower than the national average. That may explain Arlene Chaves's reaction when you ask her about the economy.
ARLENE CHAVES, MCCAIN SUPPORTER: It's a strange question. Just yesterday, my daughter called me and she was out shopping and she said, recession? What are people talking about? The stores are crowded.
GERSH: Government spending helps power the region. The Pentagon is not far from here and many military families have also settled here. That is a double benefit for John McCain. It helps explain why many Virginians like Chaves think experience matters.
CHAVES: It's kind of like 1960 when everyone was concerned that John F. Kennedy was too young and too inexperienced. Why not go with Lyndon Johnson as the presidential candidate? And I look at it kind of that way, that maybe Obama could stand a little more experience.
GERSH: The experience in the local housing market is grim. Prices are down 40 percent over the last year. A few shops on this street have shut down in the last few months. And Daniel Prophet is struggling to keep his business on track.
DANIEL PROPHET, UNDECIDED VOTER: I can't borrow money. If I wanted to borrow, I've got equity and I can't borrow money even though I have equity and they wouldn't lend me more. And that's a bad situation.
GERSH: Prophet is a Republican but when we talked to him, he was wavering.
PROPHET: (INAUDIBLE) Change, Change, what change? We need to know what the change is and that's very important.
GERSH: And we'll soon find out what that change will be in Virginia and the rest of the nation. A presidential campaign that lasted longer than any other will end in just 12 days. Darren Gersh, NIGHTLY BUSINESS REPORT, Occoquan, Virginia.
"Commentary"-The Banking Catch 22
SUSIE GHARIB: Tonight's commentator has a few thoughts on greed. He's Rick Newman, chief business correspondent at "U.S. News & World Report."
RICK NEWMAN, CORRESPONDENT, US NEWS & WORLD REPORT: Maybe we should have been a little nicer to all those greedy guys who wrecked Wall Street, because we could use some greed right about now. Hey, I understand we need some villains to blame for our economic mess and they can't be us. That old comic strip still isn't funny. The rich guys who ran the profligate banks are the obvious targets. They care about making money above all else, and for that, they've been trashed by politicians and voters alike. So now we have banks that don't want to make money. They just want to sit on the money they have and make sure they don't lose it. They're afraid to be greedy, so they're being careful instead. I liked it better when the banks were greedy. Back then, they'd loan money to people who needed it, because they'd make a profit on the loan. They made a lot of profits, which made them eager to lend a lot of money. Some of the people who borrowed the money even used it to make their own profits, by expanding a business or buying a house. When it was the little guy getting ahead, we didn't call it greed, we called it building a better life. It used to be nice to invest in greedy companies, too, because they earned profits and their stock went up and your retirement portfolio got bigger. We didn't want them to steal or lie, but we all understood that in the greedy economy, the whole point of public companies was to make money. Now we seem to have a nonprofit economy. Greed is unfashionable, so we're begging banks to lend money for the good of the planet or to feel better about themselves. And big surprise, bankers don't even speak that language. When there's something in it for them, that's when they'll open for business once again. Maybe there will be something in it for the rest of us, too. I'm Rick Newman.
Paul Kangas' Stocks in the News
PAUL KANGAS: It was a mixed open and a mixed close for Wall Street today. With the Dow rising 30 points and the NASDAQ falling seven points in the opening minutes, but then several large computer buy programs sent the blue chips jumping to a 270 point gain at 11:00 a.m. Bearish traders sold into that strength over the next several hours, so by 3:00 p.m. this afternoon, the Dow was down 228 points. Then came a final hour whipsaw rally which lifted the blue chips to a positive close. The DOW Industrial Average ended with a gain of 172.04 points at 8691.25. The NASDAQ still lost but it was just a modest 11.84 ending at 1603.91. Standard & Poor's 500 Index gained 11.33 to close at 908.11. Over in the bond market, the 10-year note fell 20/32 to 102 21/32, putting the yield at 3.67 percent.
New York exchange volume leader with 22.4 million shares was Citigroup (C) down $0.21.
Followed by General Electric (GE) with a $0.16 drop.
Wachovia (WB) gained a nickel.
ExxonMobil (XOM) rebounding $5.82 after dropping sharply yesterday as oil fell, but today it was up $1.09 in New York trading.
Pfizer (PFE) $0.36 gain there.
Bank of America (BAC) was up $0.34.
JPMorgan Chase (JPM) $0.68 advance.
American International Group (AIG) lost a penny.
AT&T (T) up $1.48. It dropped about $1.95 yesterday despite higher earnings.
Ford Motor Co (F), tenth in volume was down $0.10.
Coca-Cola Co (KO) losing $2.32. Coca-Cola Enterprises, which is its largest bottler, which it owns 35 percent, cut its 2008 earnings forecast, partly due to a $35 million cut in funding from Coca-Cola and tension are building between the two companies. Enterprise's stock was down $2.04, closing at an even $9 a share.
Hewlett-Packard (HPQ) off $2.08 after Goldman Sachs removed it from its "buy" list.
Goldman Sachs Group (GS) off $6.13, traded as low as $101.71 today. The company's cutting 3200 jobs globally. That's 10 percent of the workforce for Goldman Sachs.
Dow Chemical Co. (DOW) moved up $2.32 on higher third quarter earnings, $0.46 versus $0.42 a year ago. Sales in the period up 13 percent.
Colonial Bancgroup (CNB) big loser of the day, down nearly 56 percent with that loss of almost $4. The company had a third quarter loss of $0.35 a share. It's suspending its $0.38 per share annual dividend. JPMorgan downgraded it from "over weight" to just a "neutral" rating.
Alcon (ACL) tumbling $38.66, traded as low as $87.60. The Swiss eye care company had higher third quarter earnings of $2.07, up from $1.38 a year ago, but it cut 2008 overall sales and earnings guidance and that really hurt the stock.
Covance (CVD) down $14.02. The drug developer had third quarter earnings rising to $0.80 from $0.69 a year ago, but the fact is that 40 percent of the company's sales come from overseas and the stronger dollar recently is proving to be quite a headwind for the company's earnings.
Apple (AAPL) topped NASDAQ's most active, up $1.36.
Microsoft (MSFT) closing up $0.79. As you heard after the close, first quarter earnings $0.48, a penny better than the Street, but the outlook isn't too bright and the stock didn't do much in after hours trading.
Google (GOOG) down $3.35.
Research in Motion (RIMM) down $2.45.
Amazon.com edged up $0.33. After the close yesterday, the company had higher earnings, but its guidance was rather guarded (ph) and traded as low as $43 today, then rebounded.
Cisco Systems (CSCO) $0.17 loss.
Baidu.com (BIDU) tumbling $36.55. After the close yesterday, third quarter earnings came in at $1.47, $0.20 above the Street estimate, but it turns out that Google appears to be gaining market share in China from Baidu.
Amgen (AMGN) up $5.85. After the close yesterday, its third quarter earnings of $1.23 were $0.15 better than the Street was expecting. Nice move today on the upside.
Intel (INTC) a $0.07 loss.
Then came Qualcomm (QCOM) losing $0.37.
Phoenix Technologies (PTEC) dropping about 35 percent with that loss of $2.45. The company reported a fourth quarter loss of $0.16 a share, eight times worse than the $0.02 loss from a year ago.
Those are the stocks in the news tonight.
