NBR Transcripts-June 16, 2009
Tuesday, June 16, 2009An Examination of Systemic Risk
SUSIE GHARIB: The Obama administration tonight is putting the final touches on its blueprint for new regulations for the U.S. financial system. The reforms will be released tomorrow. At the center of the plan are new tools and new rules to prevent what's called systemic risk, widespread risks that threaten the entire financial system. So why is this so important and why should we care? Darren Gersh explains.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Here is one way to think about systemic risk -- if you can bring down a building without destroying the neighborhood, the risk is not systemic. The challenge for regulators is figuring out before they collapse, which institutions could take down big chunks of the financial system. And that's not as easy as it sounds, says Lily Fu Claffee, a former top Treasury lawyer.
LILY FU CLAFFEE, PARTNER, JONES DAY: Because there are organizations that are not large, but if they cease to exist, if we stuck dynamite in their front door and blew it up, it would have systemic ramifications.
GERSH: The understanding of systemic risk has been stress-tested in this credit crisis. Bear Stearns was considered too big to fail and was rescued, but after Lehman Brothers was allowed to fail, regulators expanded systemic risk to include firms that are interconnected with many other firms. Some of the confusion is intentional, because regulators have been deliberately vague about what they consider a systemic risk. Brookings scholar Douglas Elliott says there's a good reason for that.
DOUGLAS ELLIOTT, FELLOW, BROOKINGS: There's been an allegation, which I doubt could ever be proved, that banks that are big, but not quite big enough to be a systemic risk might actually want to be bigger, because if they are systemically important, the taxpayer will pretty much have to rescue them. And if people know that, they are going to be more comfortable dealing with that bank.
GERSH: The Obama administration has already signaled it considers size and connections key components of systemic risk. But being more specific won't be easy.
CLAFFEE: You've heard folks in Congress warn that their could be over- regulation based on a definition that's too broad and you can also define it too narrowly.
GERSH: The definition matters here. Banks, insurance companies and even some hedge funds that are now found to pose a systemic risk will face more regulation.
ELLIOTT: They are clearly going to have tougher requirements. They are going to have to hold more capital. There may be types of business they are not allowed to do. There will be disadvantages and I guess the hope is that the disadvantages will roughly balance out the advantages.
GERSH: This may sound like a wonky policy debate, but it's not. Regulators have got to get this right if they're going to protect all of us from another crisis that could send stocks, home prices and the economy reeling. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
The Revival of REITs
PAUL KANGAS: With the housing market showing signs of life, the market for real estate investment trusts or REITs appears to have been resuscitated. Many REITs were decimated in the housing downturn and there may still be trouble ahead for those with heavy debt loads. But as Scott Gurvey explains, some analysts think now may be the right time to revisit REITs.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Considering the mortgage melt-down and the near collapse of the financial system, investing in real estate is probably the farthest thing from your mind. But since hitting a bottom in March, shares of some publicly traded real estate investment trusts or REITs, have begun to inch upward. Martin Cohen of Cohen and Steers, a firm which specializes in managing REIT funds, says the market has turned.
MARTIN COHEN, CO-CEO, COHEN & STEERS: Something new has developed over the last couple of months and that's really a recapitalization of the REIT industry. The liquidity concerns are still there and were still there and are now. But REITS have been able to raise capital to address those liquidity concerns, so there's no question now about them being going concerns, because there's no debt maturities that are going to trip them up over the next few years.
GURVEY: Many financial advisors recommend investors have a small amount of their portfolio in real estate. But it is important to pay attention to the mix of properties a REIT holds -- some focus on residential properties, others on office space and still others on commercial space, like shopping malls. Scott Robinson of Cadence Capital says, when it comes to recovering from recession, one factor is key.
SCOTT ROBINSON, MANAGING PARTNER, CADENCE CAPITAL GROUP: Those companies with shorter lease terms, the most likely, multi-family, maybe hotels, but that's -- the travel industry is a little bit different right now than the broader economy, so, again, probably multi-family and then grocery anchored retailers.
GURVEY: Martin Cohen recommends clients hold one large REIT in each of the major classes. He likes and owns Avalon Bay for rental, Boston Properties for offices and Simon Property for retail. He also says office and commercial property REITS may suffer further losses, but if that were to happen, he thinks there are now billions of dollars waiting to buy distressed properties.
COHEN: This capital is both in the public companies and also a lot of private equity and then other private funds. So while there may be a shoe to drop where certain loans will be in default and certain mortgages will not be able to be repaid or refinanced, there's going to be a lot of capital to catch -- to replace the current owners.
GURVEY: With the liquidity crisis apparently passing, analysts say investors should watch to see which REITs begin buying properties again. They say that will be another sign of recovery in the REIT market. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
The Silver Lining of the Recession
SUSIE GHARIB: No one welcomes a recession, but downturns can also create opportunities. Some small firms are taking advantage of the soft economy to steal business from larger rivals. Erika Miller introduces us to a Manhattan software firm taking on some of the industry's titans.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: If you think recessions are bad for business, software firm Passlogix says, think again. CEO Marc Boroditsky says sales have never been stronger.
MARC BORODITSKY, PRES. & CEO, PASSLOGIX: Do I welcome the down economy? No. But am I benefiting from the down economy? Yes.
MILLER: His 100-person firm designs password security software, competing with similar products from IBM, CA and Novell. Passlogix says it has been beating out those companies to win customers, nearly doubling revenues in the past two years. So, why would a company prefer to do business with Passlogix over one of the big industry players? Passlogix says a big reason is better customer service. One example, clients can call Boroditsky directly when they need help.
BORODITSKY: The thing about small companies that's different than big companies is that you can't hide. So, the bottom line is the problems become very visible very quickly. If you are prepared to deal with them, it's possible for you to be a lot more successful than big companies.
MILLER: There's another reason big companies may be at a disadvantage nowadays. Management consultant Peter Bregman says the failures of iconic American companies like General Motors and Lehman Brothers are undermining trust in large firms.
PETER BREGMAN, CEO, BREGMAN PARTNERS: The credibility of large companies is in many ways, lost. They are laying off people. People who work within the large companies oftentimes aren't secure in their job. They don't know whether they're going to have a job or not. They don't trust the leadership.
MILLER: Of course, it's important to keep perspective. Small firms still face plenty of hurdles in a recession. Bill Dunkelberg of the National Federation for Independent Business says two key ones are soft sales and access to credit.
BILL DUNKELBERG, CHIEF ECONOMIST, NFIB: They're usually not as deep on the capital side. And they don't have access to the bank lines that the big firms do. So when something hits hard, like the recession that we had starting heavily last fall, it's probably easier for the big firm to make it through than the small one.
MILLER: For his part, Marc Boroditsky has some tips for small firms that are struggling.
BORODITSKY: I think small companies have to be a lot more nimble, have to be smarter, have to be quicker and that actually becomes an advantage for a small company in a tough environment.
MILLER: Erika Miller, NIGHTLY BUSINESS REPORT, New York.
Lessons From Japan's Lost Decade
SUSIE GHARIB: While President Obama is preparing to unveil his financial reforms tomorrow, he could learn a thing or two from Japan's lost decade. That's when the Asian nation experimented with many reforms in the 1990s as it tried to revive its economy but had little success. Lucy Craft reports on the painful lessons that Japan learned and what it took to turn things around.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Aqualine, a state-of-the-art, nine-mile combination bridge and tunnel spanning Tokyo Bay, is the kind of outsized infrastructure project Japan has long relied on to keep its economy humming. Thanks to white elephants like the Aqualine, public debt here now stands at an almost unbelievable 200 percent of gross domestic product -- by far, the worst public debt in the industrialized world. No wonder Japanese taxpayers are steamed.
TRANSLATION OF: VISITOR: I think these big public works are unnecessary and a waste of taxpayer money.
CRAFT: Built at a cost of $12 billion during Japan's troubled economy of the 1990s, the Aqualine is now one of the most deluxe and deserted, roads in Japan, says Hosei University Professor Takayoshi Igarashi.
TRANSLATION OF: TAKAYOSHI IGARASHI, PROFESSOR, HOSEI UNIVERSITY: The Aqualine was a total mistake. It was built on overly optimistic projections. Tolls had to be raised to cover costs, further depressing usage. We'll never pay it off.
CRAFT: Japan is brimming with dubious public works projects like the Aqualine, the legacy of years of fiscal spending programs run amok. And yet, after Japan's severe downturn in the 1990s, Japan did figure out how to restart growth. Japan's successes as well as its failures, experts say, offer a road map for dealing with the U.S. financial crisis. Japan spent its so-called lost decade of the 1990s fitfully trying one conventional fiscal and monetary fix after another. Trillions of dollars later notes Morgan Stanley economist Robert Feldman, Japan finally embraced a new tack -- a vast, sweeping and unprecedented program of reforms.
ROBERT FELDMAN, SR. ECONOMIST, MORGAN STANLEY JAPAN: They didn't have everything right until there was a big enough crisis and they had a charismatic leader in the form of Prime Minister Koizumi and a very, very solid staff of people working (INAUDIBLE) to say, OK, we're going to do this. We're going to get it done. And he had to prove that he meant business. And when he did prove that he meant business, everybody fell in line.
CRAFT: A growth strategy, including deregulation, sparked lucrative new businesses. A safety net was created for reform losers. Bad loans were aggressively written off and so-called zombie banks shuttered. Solid public support was mustered and regulators got tough about asset valuation -- in other words, a perfect storm of positive factors.
FELDMAN: And only when all of them are working at the same time do you get a recovery. If one of them is missing, you're not going to get the recovery.
CRAFT: Of course, say scholars like Igarashi, public works that generate benefits beyond job creation are worth emulating.
IGARASHI: Japan's public transport system is advanced and well-run. America, on the other hand, is very backward in this regard. If the U.S. shifted from cars and planes to bullet trains, it would create employment, spark healthy competition among cities and really revitalize America.
CRAFT: The overriding lesson of Japan -- in extraordinary downturns, it takes much bolder action than ordinary macro remedies to fix what's broken. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
Commentary- Retail's True Value
SUSIE GHARIB: Tonight's commentator says, when it comes to retail, the recession has consumers seeking value. She's Barbara Kahn, dean of the University of Miami school of business administration.
BARBARA KAHN, DEAN, SCHOOL OF BUSINESS ADMIN., UNIV. OF MIAMI: Given the current economic situation, many business people are asking whether old marketing rules still hold. Will consumers dial back to depression mentality and buy only necessities? Must retailers offer deep discounts to get consumers into stores? No one knows for sure, but if we think about the past, we know that firms must adapt. Pre-1990s, when markets were less competitive, many firms were product-driven. Profit maximization was tied to market share -- sell as much as you can. In the mid-1990s, markets got more competitive. Firms had to segment their markets and deliver what their best customers demanded. In the past decade, the Internet connected the world as never before and customers could easily share product information, so firms had to cater to the total customer experience rather than focusing merely on the transaction. But what about today? There are two trends occurring. First, high unemployment and big market losses have made consumers poorer. Consumers will demand higher quality for a better price. It's not about providing deep discounts, but rather about providing better value. No more glitz, no more bling, but the real thing. Second, consumers trust has been violated. Ponzi schemes and the instability in the markets have threatened consumer confidence. Consumers are demanding accountability. The winning firms will be those that one, provide real customer value and two, communicate why they can be trusted. I'm Barbara Kahn.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street staged a mild opening rebound from yesterday's steep sell-off, but couldn't hold onto the gains. Early buyers were encouraged by a smaller than expected .2 percent rise in May wholesale prices and a stronger than expected jump in new housing starts. More about those in a moment. By 11:00 a.m., the Dow posted a modest 15 point gain, with the NASDAQ up just 13 points. Continuing worries about the duration of the global recession triggered renewed selling in the afternoon and stocks ended at their lowest levels of the day. The Dow Industrial Average closed down 107.46 points at 8,504.67. The NASDAQ Composite lost 20.20 at 1,796.18 while the Standard & Poor's 500 Index fell exactly 11 3/4 points to close at 911.97. Over in the bond market, the 10-year note rose 17/32 to 95 22/32, putting the yield at 3.65 percent.
Most active big board issue on 52 million shares, Bank of America (BAC) losing $0.60 a share.
Followed by Citigroup (C) with a $0.12 drop.
General Electric (GE) lost $0.37.
Ford Motor Co (F) a $0.26 loss there.
American International Group (AIG) dropped a nickel a share.
JPMorgan Chase (JPM) dropped a half a dollar.
But Sprint Nextel (S) bucked the trend with a dime gain.
And Pfizer (PFE) was up $0.03.
Wells Fargo (WFC) $0.31 loss.
Same story with Alcoa (AA), tenth in volume.
Best Buy Co (BBY) down $2.82. First quarter earnings, excluding restructuring charges came in at $0.42, down from $0.43 a year ago, but that was $0.08 better than the Street estimate. However, sales fell 6.2 percent in the first quarter and that's despite the demise of the company's chief rival, Circuit City stores.
Nucor (NUE), the big steel company, up $1.11. The firm says its second quarter loss could be smaller than expected because incoming orders have improved recently.
Magna International (MGA) up $2.37. JPMorgan upgraded the auto parts supplier's stock from "neutral" to "over weight" in the belief U.S. auto production will rebound in the second half of this year.
La-Z-Boy (LZB) up $0.71, almost a 20 percent increase, traded as high as $4.58. Even though the fourth quarter sales for La-Z-Boy down 23 percent, but the company in the period still earned $0.04 a share and that's well above the Street estimate for a loss of $0.11. Raymond James financial brokerage boosted earnings estimates, repeated a "strong buy" on La-Z-Boy.
Harman International (HAR) down $2.91. The manufacturer of auto equipment began a public offering of nine million shares. It will use the proceeds to improve liquidity and cut debt.
Another company selling stock, Assured Guaranty (AGO) off $1.72. It plans an offering of $550 million of common shares and equity units to help fund its impending takeover of Financial Security Assistance holdings.
Yet another stock seller, McMoran Exploration (MMR) down $1.46. It began a public offering of 11 million of its shares.
And then Genesee & Wyoming (GWR) down $2.02. It began -- $2.01 I should say. It began a registered public offering of four million shares. This as the company is shutting down its Huron Central Railway unit and that's due to the economic downturn.
Apple (AAPL) topped the active list on NASDAQ, $0.26 gain. Piper Jaffray sees a modest drop in Mac sales this year.
Microsoft (MSFT) a $0.03 gain.
Research in Motion (RIMM) down $0.09. The company unveiled a new Blackberry product and RBC Capital set a price target of $100 a share on RIMM. And incidentally, earnings due out this Thursday.
Google (GOOG) $0.77 loss.
Genzyme (GENZ) fell $2.87.
Cisco Systems (CSCO) a $0.28 loss there.
Intel (INTC) $0.12 drop.
Oracle (ORCL) was down $0.53.
Qualcomm (QCOM) $0.86 loss.
And Amgen (AMGN) moved up $1.77. The Sanford Bernstein brokerage set a $65 a share target for this stock.
Stec (STEC) up $4.86. The flash memory company increased its second quarter earnings estimate from $0.22 a share at best to as much as $0.36 a share.
Then a major loser, Matrixx Initiatives (MTXX) plunging $13.46. The FDA said consumers need to stop using certain of the company's Zicam cold products because they can cause permanent loss of smell.
And those are the stocks in the news tonight.
