NBR Transcripts-June 8, 2009
Monday, June 08, 2009Bankruptcy Attorney Thomas Lauria Reviews The Chrysler/Fiat Case
SUSIE GHARIB: The U.S. Supreme Court today slammed the brakes on a critical deal for Chrysler. The high court temporarily postponed the sale of most of Chrysler's assets to Italian auto maker Fiat. Justice Ruth Bader Ginsburg ordered the delay until the court can review appeals from groups opposed to the sale. Last week a U.S. bankruptcy judge approved the transaction between Chrysler and Fiat, but three Indiana pension funds appealed to the high court to stop the sale. Those funds claim the deal unfairly favors unsecured stakeholders like the United Auto Workers over secured creditors. Joining us now to talk more about the case, Tom Lauria. He's a bankruptcy attorney with White & Case, representing those Indiana investors. Mr. Lauria, welcome back to the program.
THOMAS LAURIA, BANKRUPTCY ATTORNEY, WHITE & CASE: Hi, how are you?
GHARIB: I'm fine, thank you. Let me begin by asking you that if you do make an argument before the Supreme Court, what's the case that you're going to make on behalf of your Indiana investors?
LAURIA: Well, there are really two issues. The first one is that the executive branch of the government has no statutory or constitutional authority to take over and run a car company as it's done with Chrysler. The second argument is that the scheme that the government put together with the company and some of the other stakeholders is really a sham transaction that was designed to upend the priority scheme under the bankruptcy code and to deprive my clients of their contractual rights.
GHARIB: So you're saying on the first point, you're saying that the government didn't even have a right to give those bailout funds to Chrysler. That's number one. Number two is, what's the take away money or restructuring part of the deal, right?
LAURIA: Correct.
GHARIB: All right. So then what's the end game here? What do you want to happen?
LAURIA: Well, we want to see Chrysler be reorganized in a way that complies with the law. I think it's actually pretty easy to do. Rather than try to characterize this as a liquidation of Chrysler for $2 billion which gets paid to the secured lenders and then giving the $20 billion going concern value of the company to junior creditors, what you should do is sell the assets for the full price, $22 billion and then let the creditors share that $22 billion which is cash, debt and equity according to their contractual rights and the priority under the bankruptcy code.
GHARIB: But time is running out here and if the deal between Chrysler and Fiat doesn't go through and Chrysler is forced to just liquidate, my understanding is that the value of the company, the break up value of Chrysler is under a billion dollars.
LAURIA: Well in fact there's no competent evidence in the record what the liquidation value of Chrysler is. The expert who testified in front of the bankruptcy court below left out critical assets from his valuation analysis. He used multiples that were well under market and most interesting to me, he was going to get a $10 million success fee if the deal went through which really raises a question as to whether or not his testimony was biased.
GHARIB: I understand in the court papers that when the funds were making this appeal to the high court, they said that there would be irreparable harm if the sale between Chrysler and Fiat went through. What was meant by that irreparable harm?
LAURIA: Well, it's a fundamental legal principle that not being able to get your issues reviewed by a court is irreparable harm. And what Chrysler has been attempting to do using Fiat as its crutch, saying that Fiat would walk away from the deal if it didn't close by June 15, is they wanted to get the deal closed so that our appeal would be rendered moot. There's a lot of law out there that says the most fundamental form of irreparable harm is losing your right to have your case heard.
GHARIB: Isn't there also harm to other people here, other parties if Chrysler -- if a deal with Fiat doesn't go through between Chrysler and Fiat, isn't it worth more alive than dead and there will be a lot of losers in this whole case even though you may win legally?
LAURIA: Nobody is saying that Chrysler is dead if this deal has to be done in compliance with the law. In fact, Sergio Marchionne, the CEO of Fiat, I understand today said that he would never walk away from this deal which makes all the sense in the world because he's basically getting 20 percent of the company for free. So I think people are jumping to a lot of conclusions to say that simply by requiring Chrysler and the other parties to this deal to comply with the law that we're sounding the death knell for Chrysler.
GHARIB: All right, so let's say you break some new legal ground on this in terms of the best case scenario. What do you think the impact of this would be on the GM restructuring because General Motors is just going through this process now.
LAURIA: The architects of the Chrysler deal are the same architects of the GM deal.
GHARIB: The U.S. government.
LAURIA: Exactly. The Treasury and Chrysler decided that they were going to allocate value that should have gone to the first lenders of Chrysler to their preferred political interests, labor- related claims. In GM, they've got the same favored interests but there they're trying to take the value away from $27 billion of bond holders, same basic structure. So they can't do it in Chrysler. They can't do it in GM either.
GHARIB: All right. Thank you very much for explaining all of this to us. We really appreciate your coming on the program.
LAURIA: Thank you.
GHARIB: My guest tonight, Tom Lauria of White & Case.
It's Time To Payback The TARP
PAUL KANGAS: While Chrysler await word on how its government bailout will end, the Treasury could tell us as soon as tomorrow which banks will be allowed to pay back their TARP loans. Goldman Sachs, JPMorgan Chase and Morgan Stanley are among the most likely to be on that list. But they'll have to prove to regulators they can raise private capital without government help. As Stephanie Dhue reports, the nation's largest banks have been busy doing just that.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Some banks had to raise capital because of the stress test, but others did it to remove the stress of being under government control. Congressional restrictions on executive pay are creating headaches for bank executives taking TARP money. Analyst Karen Petrou says the headaches didn't end with those restrictions.
KAREN PETROU, FEDERAL FINANCIAL ANALYTICS: They are subject to untold amounts of political risk, anything they do, buying a fancy lunch, first comes before the public is look what they're doing with your money. They really can't operate as they see fit as long as they've got TARP.
DHUE: But some analysts say there are risks to having the banks pay back the money too soon. The economy is still on a shaky foundation and the bank stress tests may not have been stressful enough. Brookings fellow Doug Elliott says the Fed easily could have underestimated the amount banks need by $300 billion.
DOUG ELLIOTT, SENIOR FELLOW, BROOKINGS: That would just be 3 percent of their assets, so instead of $75 billion needed by the banks, it could be the right number was $375 billion. We would be feeling a lot differently about the world if that were the case.
DHUE: Paying back the TARP money won't necessarily be a strain, since banks are getting a lot of other help from U.S. taxpayers. The Federal Reserve has lent banks more than a trillion dollars in emergency funding. The FDIC has a program to guarantee private money lent to banks. Analysts say there could be political pressure to put new restrictions on banks. Bank lobbyist Scott Talbott says that would be a mistake.
SCOTT TALBOTT, LOBBYIST, FINANCIAL SERVICES ROUNDTABLE: You'd see companies exiting those programs and we need the companies to remain in those programs to continue to restore the secondary markets.
DHUE: To pay back the loans, banks will have to buy back the preferred shares and warrants they issued to the government. Banks and regulators have been at odds over valuing those warrants. How much they're worth will determine the return taxpayers get on their investment. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
One on One with Jeff Saut, Chief Investment Strategist at Raymond James
SUSIE GHARIB: Our guest tonight is bullish on the markets and has been busy buying stocks since March. Joining us now Jeff Saut, chief investment strategist at Raymond James. Good to see you, Jeff.
JEFFREY SAUT, CHIEF INVESTMENT STRATEGIST, RAYMOND JAMES: Good evening.
GHARIB: So you're pretty bullish but is this a bear market rally or really the beginning of a new bull market?
SAUT: Too soon to tell Susie. (INAUDIBLE) Dow theory make that call for, Dow theory to call it a new bull. You're going to have to close both the Dow and the transports above their January 6, 2009 closing highs and that would be 9015 on the Dow and 3717 on the transports.
GHARIB: Can you give us any kind of gauge of where you think the Dow and the S&P 500 could be by -- where those averages will stand by the end of this year?
SAUT: I think they'll be higher because I think the stimulus money that is going to hit, a lot of it's going to hit between this month and September, is going to make the economic numbers look better than most people think. That's going to cause some businesses to restock inventories especially those that are looking at the beginning back-to-school and then followed by Thanksgiving and the Christmas. That should get some capital ex spending going and we might even see people hired. So I think the economy is going to look better. The risk there is that you're borrowing sales perhaps from 2010 with the stimulus money. So a lot is going to depend on 2010. But between now and the end of the year, I'm pretty bullish.
GHARIB: What other issues might derail this rally?
SAUT: Well if the interest rate complex backs up a lot more than it should -- and I don't think the Federal Reserve is going to let that happen. I think they are still scared. The markets and the economy could back into a deflationary spiral. So I think they're going to do everything in their power to bring interest rates back down until they're sure we're by that. I don't think they're going to be sure of that until we get into 2010.
GHARIB: A lot of people are already talking and speculating, I'm sure you've heard this, that the Federal Reserve might have to raise interest rates to fight inflation. Is that one of the things that you're referring to? You're saying the Fed will do whatever is necessary to keep those rates down?
SAUT: I think they're more worried about the economy slipping back than they are about inflation. In fact, there's so much excess capacity in the system right now and with unemployment continuing to rise and probably will continue to rise, you don't see the wage pressures right there. So while I think the seeds for inflation have been planted, I think it's a back half of 2010 of it and that's something they'll worry about in the near term.
GHARIB: Well certainly there are a lot of issues, a lot of investors have doubts about is this a real rally or are we still in a bear market? And so they're sitting on the sidelines waiting until it looks like it's safe to invest. What are your thoughts on that? What do you tell your clients who are kind of doubtful?
SAUT: Every new bull market has started out as a short covering bear market rally. Dick Nixon resigned in the summer or actually August of '74 and the market went down 27 percent into October, had a sharp rally into November and then came back down and broke the October low. That was it. The (INAUDIBLE) sold stocks. The market turned up, rallied into January and February of '75. When the Justice Department dropped the IBM monopoly suit, markets never looked back. I'm not promising that's the way it is going to happen this time, but I think it's a mistake to be too bearish right here.
GHARIB: All right, so if someone buys into your argument here, what would you say are some good stocks to invest in and just hold on to them for a while.
SAUT: I really like the income theme, the dividend theme. You can't really get income and Treasuries anymore. So I think with the baby boomers retiring, shortage of income is going to be a big theme going forward. So situations with clean balance sheets, decent thematic investments and decent fundamentals with dividend yields I think will do pretty well going forward.
GHARIB: All right. Can you name one or two stocks real quickly? We just have a few seconds.
SAUT: I like the agricultural theme a lot as per capita incomes rise and the frontier and emerging markets. They want better food. Archer Daniels (ADM) has a convertible preferred with a 9 percent yield. I think that's a good place to park money.
GHARIB: Jeff, do you own this stock or other disclosures to make?
SAUT: You bet I do.
GHARIB: OK. Thanks for telling us that. Good of you to come on the program. Thanks so much.
SAUT: Always a pleasure.
GHARIB: Jeff Saut, chief investment strategist at Raymond James.
"Reviving the Economy"-Treasury Bond Safety
SUSIE GHARIB: Treasury bond prices fell again on speculation that the recession is nearing an end. The yield on the 10-year bond is the highest it's been since November as the government gets ready to sell billions of dollars in debt this week. Experts fear rates will have to increase further to attract investors. As we continue our "Reviving the Economy" coverage, Suzanne Pratt reports that some people are questioning the safety of ultra-safe Treasuries.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: If ever there were a safe investment, U.S. Treasuries are it. After all, they have the full faith and credit of Uncle Sam behind them. And since last fall, when stocks cratered and real estate tanked, Treasuries have been in big demand. In the last several weeks, however, some investors have started to lose their appetite for government bonds because of growing concern about risk. The scariest on the list of risks is default. After all, China, the U.S. government's largest creditor, is worried about its holdings of Treasuries. So, shouldn't other investors also be concerned? Fixed income expert Suvrat Prakash says absolutely not because there's no chance the U.S. will default on its own debt.
SUVRAT PRAKASH, INTEREST RATE STRATEGIST, PNB PARIBAS: The Treasury debt is the first in line to be paid off by the U.S. government. So if you're thinking that there's anything else in the fixed income world or even in equities that's even safer, then it's hard to imagine that.
PRATT: Don't forget the U.S. government can always print money to meet its obligations which brings us to the second and growing risk for Treasuries: inflation. UBS bond expert Anne Briglia says Treasury investors loathe inflation, which erodes bond values.
ANNE BRIGLIA, SR. FIXED INCOME STRATEGIST, UBS WEALTH MANAGEMENT: There's concern about inflation. Obviously it's not going to be a problem this year or next year because of excess capacity. But over the long run, I would say the concern of market participants is will the Fed begin to raise rates soon enough when it needs to?
PRATT: Does all this talk of risk for government bonds mean investors should steer clear or at least reduce their exposure? Financial planner Scott Brewster isn't recommending portfolio changes, but says Treasuries are at greater risk today for returning less down the road.
SCOTT BREWSTER, BREWSTER FINANCIAL PLANNING: We could see high inflation in the future. Bottom line unfortunately is no one knows. But, with rates as low as they are and if we go into a period of high inflation, long and intermediate term Treasuries could have some pretty bad years.
PRATT: One way for investors to minimize risk in their portfolio is to stick to shorter maturity Treasuries, like two-year or five-year notes. Ten year or 30-year bonds are thought to be too volatile for most investors in the current environment. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Last Word"-The Business of Marriage
SUSIE GHARIB: And finally tonight, the economic meltdown is making for strange bedfellows in Britain or maybe we should estranged bedfellows. A new study shows the divorce rate in Britain is falling and that's because couples can't afford to set up two households. Slumping house prices are also making it tough for couples to sell their homes. So many people are opting to stay married at least until the economy turns around. And there could be another trend in the works, Paul. Lawyers say the financial meltdown could fuel pre-nuptial agreements, so money is discussed before anyone says I do.
KANGAS: Makes a marriage license look like a tax return.
GHARIB: A legal document.
KANGAS: Right.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street traders today decided it was time to take some profits from the recent rally. The Dow fell over a hundred points in the first half hour of the trading session with the NASDAQ down as well. But light volume on the sell-off convinced a lot of investors this was a healthy correction and they started to buy this afternoon and stocks went on to close narrowly mixed. The Dow closed with a gain of 1.36 at 8764.49. The NASDAQ Composite fell 7.02, a modest lost at 1842.40. Standard & Poor's 500 down just a fraction, .95. Over in the bond market, the 10-year note fell 9/32 to 93 28/32, lifting the yield to 3.88 percent.
New York exchange volume leader on nearly 49 million shares, Citigroup (C) losing $0.04.
Followed by Bank of America (BAC) a $0.20 rise there.
Ford Motor Co (F) edged up $0.02.
And so did General Electric (GE).
Pfizer (PFE) $0.20 loss there.
JPMorgan Chase (JPM) rose $0.84.
Sprint Nextel (S) $0.15 loss.
Wells Fargo (WFC) $0.67 gain.
SLM Corp (SLM), the Student Loan Marketing Corp., that's what it used to be called, up $1.32, good percentage gain. The William Blair investment house said despite potential elimination of the Federal family education loan program, the government still needs SLM for student lending because the U.S. doesn't have the necessary infrastructure in place to do that student lending and SLM does.
Altria Group (MO), tenth in volume, $0.18 gain there.
McDonald's (MCD) down $1.15. May local sales up 5.1 percent from a year ago. U.S. sales up only 2.8 percent. In April, both of those figures were well above 6 percent but the strong dollar in May hurt those sales especially overseas.
Texas instruments (TXN) closed with a $0.09 gain and jumped $1 in after hours trading when the company boosted its second quarter earnings guidance from a high of $0.15 to $0.22 a share at best.
General Mills (GIS) up $2.06. The company says fiscal 2009 earnings estimates will exceed recent guidance of $3.87 to $3.89 by at least several cents a share.
Blackrock (BLK) up $5.62. The company confirms it's been in talks with Barclay's bank about Blackrock's potential purchase of Barclay's global investors unit and that includes the Ishare business. Meanwhile, "Financial Times" said the deal is close between these two. The price will be around $12 to $13 billion.
Continental Airlines (CAL) a $0.94 loss. The International Air Transport Association, IATA as it's called, forecasts the airline industry could lose up to $9 billion this year. That's nearly double its March forecast for a loss of $4.79 billion.
Scotts Miracle-Gro (SMG) $1.22 gain there. BMO Capital upgraded it from "market perform" to "out perform" on the company's improving fundamentals.
Apple (AAPL) topped the active list on NASDAQ, losing $0.82. You heard the story there.
Google (GOOG) $5.55 loss.
Microsoft (MSFT) $0.09 drop there.
Research in Motion (RIMM) $0.75 loss.
No change in Cisco Systems (CSCO). This was its first day of trading as a Dow Industrial Average stock.
Moving along, Oracle (ORCL) $0.16 gain.
No change in Intel (INTC).
Baidu (BIDU) down $0.17.
$0.03 drop in Qualcomm (QCOM).
And First Solar (FSLR) up $1.87.
Elsewhere, Verisign (VRSN) tumbling $3.29 on news negative reaction to the reversal of the lower court dismissal of an antitrust suit against the company.
And those are the stocks in the news tonight.
