NBR Transcripts-October 30, 2008
Thursday, October 30, 2008The Auto Industry is Looking for a Bailout
SUSIE GHARIB: Pressure is mounting tonight for Uncle Sam to help the nation's struggling auto makers. The governors of six states asked the Federal government today to throw the "big three" a lifeline, saying problems at General Motors, Ford and Chrysler threaten to become an unmanageable disaster. The leaders of Michigan, Delaware, Kentucky, New York, Ohio and South Dakota sent a letter to Treasury Secretary Paulson and Federal Reserve Chairman Bernanke urging immediate action for the troubled auto makers. The governors say letting the companies fail could put at risk the financial wellbeing of other major industries and millions of Americans. GM and Chrysler are contemplating a merger, but there's a long way to go before it's a done deal. Analysts tell NIGHTLY BUSINESS REPORT that financing is the biggest hurdle, which is why GM is lobbying for Federal money to help buy Chrysler. We're also told GM needs Chrysler's mini-van and Jeep brands. Consulting firm Grant Thornton said if a merger happens, Chrysler owner Cerberus Capital Management would likely get half of GM's financing unit. It also predicts that only seven of Chrysler's 26 models will survive. Half of Chrysler's plants will be forced to shut down and 24,000 Chrysler workers would lose their jobs.
The Nation's Financial Crisis Worsens
PAUL KANGAS: Pressure is also mounting for the government to help resuscitate the economy. Gross domestic product, the broadest measure of the economy, shrank by 0.3 of a percentage point in the third quarter. That's the worst showing in seven years. That's a sharp reversal from the second quarter's 2.8 percent increase. Erika Miller takes a look at the report and the outlook for the economy from here.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: The economy's performance in the third quarter was downright dismal. But economist Drew Matus warns things are likely to get a lot worse before they get better.
DREW MATUS, ECONOMIST, MERRILL LYNCH: We're not anticipating positive growth in the economy until 2010. The duration is really going to be the story in this particular recession. At its deepest we could see a minus 4 percent reading for GDP growth.
MILLER: The reason economic growth turned negative in the third quarter is that consumer spending plunged by the biggest amount in nearly three decades. Economist Joe Lavorgna sees more belt-tightening ahead.
JOSEPH LAVORGNA, CHIEF US ECONOMIST, DEUTSCHE BANK: What worries me is where we're going this quarter. With the credit crunch and perhaps the inability of people to get credit to spend, and that means we could have consumer spending fundamentally weaker for a much longer period of time.
MILLER: Lack of credit is not the only reason consumers are slashing spending. They're also worried about their jobs, falling home prices and the falling value of their investments. Against that backdrop, economists say this recession will be hard to reverse.
MATUS: This one is going to be a little longer lived, in part because the U.S. consumer is leading it but also, in part because we still have a housing recession that's underway and capital equipment spending is also going into recession, as corporations cut back. So we have multiple levels of things going wrong in the U.S. economy right now.
MILLER: To make things go right, economists generally want Congress to pass another fiscal stimulus plan. Many also applaud the Federal Reserve's decision to lower interest rates yesterday to encourage lending to businesses and consumers.
LAVORGNA: The Fed's going to be on hold at either 1 percent or possibly a bit lower for a very long period of time until it becomes obvious that one, either the financial markets are noticeably improving or two, the economy is in a self feeding cyclical recovery. And one could make a compelling case that won't happen until 2010 at the earliest.
MILLER: Economists say they'll know things are poised for recovery when home prices stabilize. But they warn that's not likely until the credit crunch eases and the job market improves. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
For Sale By Bank
SUSIE GHARIB: Key to stabilizing home prices is slowing the tide of foreclosures. So far, despite several optimistic mortgage rescue programs with names like Hope Now, FHA Secure and Hope for Homeowners, foreclosures continue to rise. By the end of the year, over a third of all homes for sale will likely be bank owned. As Stephanie Dhue reports, the government is now considering a comprehensive plan to help struggling homeowners.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Four million Americans are behind on their monthly mortgage payments. With banks getting government bailouts, pressure is building for more help for homeowners. White House spokesperson Dana Perino says more may be coming, but the details still have to be worked out.
DANA PERINO, WHITE HOUSE SPOKESPERSON: We're doing a lot of analysis right now on several different ideas, thinking about the efficiency issues, how effective it could be, the fairness issues, how would you protect taxpayers and by fairness, I also include in that who would qualify and how would you design it.
DHUE: Sources say the plan could cover as many as three million homeowners at risk of foreclosure, at a cost of $40-$50 billion. It would work like this: lenders would reduce the mortgage amount owed or cut the interest rate so a borrower could afford the monthly payment for five years. In return the government would guarantee half of the lender's losses in the event the modified loan later goes bad. Scott Talbott of the Financial Services Roundtable says the challenge is to protect struggling homeowners without breaking the bank.
SCOTT TALBOTT, SR. VP GOVERNMENT AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: The financial services industry may not be able to continue to lend as well to other sectors of the economy. Remember we're only talking about a small sector of the economy here, a small sector of the homeowners that we're working to save. The rest of Americans are paying their mortgage on time.
DHUE: So far, voluntary plans, like Hope Now and Hope for Homeowners have had limited success. In the last year, foreclosures have outpaced loan modifications four to one. Eric Halperin of the Center for Responsible Lending says the new plan may not go far enough.
ERIC HALPERIN, DIRECTOR, CENTER FOR RESPONSIBLE LENDING: So with this new modification system hopefully that gap will close, but until you can compel lenders to come to the table and provide modifications to the homeowners who qualify and deserve them, we're not going to see numbers of foreclosures reduced significantly.
DHUE: The Neighborhood Assistance Corporation of America is also concerned. NACA's Bruce Marks wants the government to first work out the troubled loans held by Fannie Mae and Freddie Mac.
BRUCE MARKS, FOUNDER & CEO, NEIGHBORHOOD ASSISTANCE CORP. OF AMERICA: That will set the standard for every servicer and lender in this country without one dollar of taxpayer money.
DHUE: Lawmakers may consider more housing proposals as part of a second stimulus package but whatever aid may come will have to wait until after Tuesday's election. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
"Anatomy of a Financial Crisis"-The Consumer's Role in the Financial Crisis
SUSIE GHARIB: This week we looked at the roles of Washington and Wall Street in the financial meltdown. Tonight as we conclude our series, "Anatomy of a Financial Crisis," we look in the mirror, at ourselves. How did the greed of American consumers contribute to the mess? As Suzanne Pratt explains, our bad behavior is now forcing us to face the music.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Since the 1980s Americans have been on a serious shopping spree. Our homes, our cars, our wardrobes and our gadget collections have gotten larger and more expensive. At first we paid for things with cash or few major credit cards. Pretty soon, however, our wallets were bulging with plastic. To make matters worse, by the middle of this decade, interest rates were at historic lows, allowing banks to offer loans we couldn't refuse. And as home prices surged, many Americans extracted the value by refinancing mortgages or taking out home equity lines of credit. We used the extra cash to bankroll lifestyles we couldn't afford and some of us got greedy and irresponsible. Financial historian and NYU Professor Richard Sylla says consumers deserve at least some of the blame for the current mess.
RICHARD SYLLA, ECONOMICS PROFESSOR, NYU STERN SCHOOL OF BUSINESS: The American public is responsible, the consuming public because the American public has been saving less and less over the years and went on this borrowing binge. You know there have to be two parties to a loan transaction. Somebody says yes I agree to borrow it and the other person says I agree to lend.
PRATT: Our need for things has gravely injured our household finances. Just look at the stats. Between 1990 and 2007, credit card debt more than quadrupled from $214 billion to $937 billion. At less than 1 percent, our nation's savings rate is the lowest in the developed world. Much of Europe is saving in double digits while China is at a whopping 24 percent. Nobel Prize winning economist and Princeton Professor Paul Krugman says we're bad savers partly because of easy credit.
PAUL KRUGMAN, ECONOMICS PROFESSOR, PRINCETON UNIVERSITY: You have to come up with a lot of cash if you want to buy a house in Japan and in a lot of Europe. In the United States, the money has flowed freely so saving doesn't seem quite as important.
PRATT: Still, others say our urge to splurge is also cultural. Psychotherapist April Benson is an expert on compulsive shopping and has written two books on the topic. While only a fraction of us suffer from the actual disorder, she says we're a society of excessive spenders.
APRIL BENSON, PH.D., PSYCHOTHERAPIST: We think that happiness is only as far away as the next purchase. But really nothing could be farther than the truth. And, in the pursuit of all of these goods, we really miss out on what's good: community, time with family, there's such a race.
PRATT: OK, so maybe we over borrowed and we did so to feel better about ourselves. But some experts say don't be so quick to blame our fondness for debt on emotions. Blame instead our desire to keep up with the Joneses, while our income was stumbling.
SYLLA: How is an American going to maintain his increasing standard of living, which he's gotten used to throughout American history, at a time when real wages aren't going up? The way to do was to go into debt.
PRATT: Still, others say blame stretches well beyond U.S. households or busy suburban shopping malls. Krugman questions why we expect the public to have seen the folly when our leaders did not.
KRUGMAN: It's not up to John Smith in the street or Joe the plumber or whatever to say, hey, this is a housing bubble, look at the price-rent ratio. You expect, you expect responsible people in Washington and New York to be saying that and they didn't.
PRATT: Historians will debate for many years who or what should bear the blame for the 2008 financial crisis. But, most experts already agree the experience will limit our irresponsible spending. Whether that change is permanent is another matter. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
Economic Choices 2008 - The Balance of Power
SUSIE GHARIB: While many voters are eagerly watching the polls to see who the next president might be, savvy lobbyists are watching the Senate. That's where the balance of the power may tip on critical issues like energy, health care and taxes. Right now, Democrats are expected to pick up six to eight Senate seats. But as Darren Gersh explains, that number that will determine our economic choices in the coming year is 60.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: First some civics 101. The biggest legislative check in our system of checks and balances is the United States Senate. Any one senator can stop anything, unless 60 of his or her colleagues vote to keep going. That's why Republican consultant Phil Musser will be watching the Senate election returns closely on Tuesday.
PHIL MUSSER, PRESIDENT, NEW FRONTIER STRATEGY: A 60 vote super- majority allows the majority in that chamber to advance legislation over the dissenting voice of the minority.
GERSH: If the polls are right and Senator Barack Obama wins on Tuesday, the only place Republicans can effectively fight tax increases or other government mandates on business will be in the Senate, provided there are still enough Republicans seats. Musser says investors don't fully appreciate what's at stake for key sectors like health care and banking.
MUSSER: The likelihood that we have an overreach with respect to regulation of the financial industry is one of the great threats that I think Wall Street should be cognizant of and be looking forward to. It will be a major fight.
GERSH: Of course, if Senator John McCain pulls out a win, the White House will check Democratic ambitions. And, in any case, the most likely scenario now is for Democrats to finish Election Day with 56 to 58 Senate seats. But even if Democrats get to 60, they won't act in lockstep on taxes, health care or anything else, says former Senate Democratic staffer Nick Allard.
NICK ALLARD, PARTNER, PATTON BOGGS: There are conservative Democrats and extremely liberal Democrats. And almost on any major issue, the Democrats are going to have to reach across the aisle to the Republicans to get to 60.
GERSH: The other check and balance on congressional power will be the huge Federal budget deficit. The next president will likely inherit a budget deficit that will top $1 trillion, making this an expensive time to pass historic reforms. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
"Commentary"-Now May Be The Time For Commission Consolidation
SUSIE GHARIB: In tonight's commentary, consolidating fragmented regulation. Here's Myron Kandel, founding financial editor at CNN.
MYRON KANDEL, FOUNDING FINANCIAL EDITOR, CNN: The current financial crisis has reawakened calls to merger the Securities and Exchange Commission and the Commodity Futures Trading Commission. The massive destruction of values due to the explosive growth and downfall of credit default swaps and other esoteric derivatives that fell between the cracks of existing regulation makes it imperative that a comprehensive regulatory system be developed. The first serious attempt to merge the SEC and the CFTC occurred 20 years ago when the Brady report suggested that split regulatory responsibilities abetted the 1987 stock market crash. But that effort went nowhere, even as incredibly complex new products made that split even more dangerous, as we have now sadly learned. There are serious obstacles to a merger, including the different cultures of the two agencies, the varying interests of their constituents and likely turf battles among congressional oversight committees. And what about the Federal Reserve? I think fragmented regulation must be consolidated into a unified system. But the way to do it is not to rush into a quick fix. Let's take a step back and decide what needs to be regulated. What are the threats to the capital markets, how risk can be evaluated and made transparent and how investors can be protected. We need a non-partisan group to develop a plan that can be implemented in the public interest. The next president should move quickly on this issue. I'm Myron Kandel.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street viewed that decline in GDP as smaller than feared and responded with a sharp opening rally with the Dow shooting up nearly 200 points and the NASDAQ adding 42 points. Most of that advance faded by mid-day on word firms like American Express, Hartford Financial and Avon Products reported disappointing results or earnings warnings. Afternoon brought renewed strength though amid signs the credit markets are thawing out and stocks went on to end near the day's best levels. The Dow Industrial Average closed up 189.73 points at 9180.69. The NASDAQ Composite was up 41.31 at 1698.52 while Standard & Poor's 500 rose exactly 24 points at 954.09. Over in the bond market, the 10-year note lost 27/32 to par and 9/32, putting the yield at 3.97 percent.
Big board volume leader on 20.4 million shares, Wachovia (WB) moving down $0.06.
Followed by Pfizer (PFE) $0.67 gain.
General Electric (GE) up $0.15.
And then ExxonMobil (XOM) with a $0.04 closing gain, but it traded as low as $71.46 today even though it reported record third quarter earnings of $2.86 a share, up 58 percent from last year and that translates into a record $14.8 billion, the biggest quarterly profit in history ever.
Citigroup (C) $0.36 advance there.
Moving along in the actives, National City (NCC) a $0.09 gain.
MGIC Investment (MTG) fell $0.56.
Co Vale do Rio (RIO) was an $0.84 gainer.
Bank of America (BAC) rose $0.46.
JPMorgan Chase (JPM) gaining $1.91.
Hartford Financial (HIG) tumbling $10.24, losing almost 52 percent of its value after reporting a big third quarter loss of $1.40 a share versus earnings of over $3 last year. Standard & Poor's today repeated a "sell" recommendation on Hartford.
Avon Products (AVP) losing $4.10 despite third quarter earnings nicely higher, $0.52 versus $0.32 a year ago, but the company sees sales and earnings deteriorating in the fourth quarter and along with lower profit margins, so that's what got the stock down.
Colgate Palmolive (CL) doing nicely, up $4.23. Third quarter earnings higher, $0.99 versus $0.86 a year ago. Sales were up 13 percent during the period.
CVS Caremark (CVS) up $3.01. Third quarter earnings rose to $0.60 from $0.50 a year ago. Revenues gained 2 percent and today the company closed its acquisition of Longs drug store. Standard & Poor's repeated a "strong buy" on CVS stock.
Intercontinental Exchange (ICE) rising $25.21. Third quarter earnings rose to $1.04 from last year's $0.93. Revenues jumped 33 percent. The company agreed to buy the Clearing Corporation and form a new ventured called ICE U.S. Trust.
Visa (V), the credit card company, up $3.56. Third quarter earnings of $0.58 versus a loss of over $2 last year. Those earnings $0.02 above the Street estimate.
Owens-Illinois (OI), which makes packaging materials and things like that, up $4.11. Third quarter earnings rose to $0.90 from $0.78 a year ago. Revenues up 4 percent in that period.
Diebold (DBD), makes ATMs and things like that, up $3.54. Third quarter earnings up 65 percent to $0.70 a share. That was $0.06 better than the Street was expecting.
And Assurant (AIZ) tumbling $8.42. The company's in the homeowners' insurance business. It had a third quarter loss of $0.95 a share versus earnings of $1.56. Revenues dropped 9 percent in the period.
A nice gain by Genco Shipping (GNK), up $3.04. Third quarter earnings rose to $1.99 from $0.64 last year and the company says 93 percent of its fleet is on contract for the rest of the year, 60 so far for the year 2009.
NASDAQ's most active, Apple (AAPL) up $6.49.
Followed by Google (GOOG) up $1.69.
Intel (INTC), $1.23 gain, nice move there.
Microsoft (MSFT) fell $0.37.
And Oracle (ORCL) up $1.03.
Cisco Systems (CSCO) down $0.08.
$0.43 drop in Research in Motion (RIMM).
First Solar (FSLR), look at that gain, up $28.32. Third quarter earnings jumped to $1.20 versus only $0.58 last year, $0.19 better than the Street was expecting.
Qualcomm (QCOM) up $1.80.
Amazon.com (AMZN) was down $0.18.
Symantec (SYMC), which is in IT security, down $2.62. Second quarter earnings, $0.16, up from $0.06 a year ago, but it sees third quarter earnings at $0.33, $0.04 below the Street estimate.
And those are the stocks in the news tonight.
