NBR Transcripts-June 17, 2009
Wednesday, June 17, 2009The President's Plan To Overhaul Financial Regulation
SUSIE GHARIB: President Obama unveiled today an ambitious plan that changes the way the nation's financial system is regulated. The president said his overhaul is quote, a transformation on a scale not seen since the reforms that followed the great depression. He said the reforms are necessary to make sure another credit crisis does not happen again. The much-anticipated proposal gives vast new powers to the Federal Reserve and U.S. Treasury and includes protections for American consumers and investors. The president also said he wanted to avoid what he called schemes built on a pile of sand. Stephanie Dhue has details.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The sweeping proposal unveiled by President Obama touches every corner of the financial industry. The president says his plan will promote innovation and discourage abuse by tightening regulation.
OBAMA: The absence of a working regulatory regime over many parts of the financial system and over the system as a whole led us to near catastrophe. We shouldn't forget that. We don't want to stifle innovation. But I'm convinced that by setting out clear rules of the road and ensuring transparency and fair dealing, we will actually promote a more vibrant market.
DHUE: The plan puts the Federal Reserve in charge of supervising financial firms that are so large, leveraged and interconnected they are too big to fail. Financial institutions would have to put more money in reserves to cover potential losses. It puts new regulation on credit default swaps and other derivatives and sets up a new consumer protection agency to oversee financial products. Analyst Jaret Seiberg says the proposal is a mixed bag for banks.
JARET SEIBERG, FINANCIAL SERVICES POLICY ANALYST, STANFORD GROUP: There's clearly an incentive in this bill to avoid becoming one of these financial behemoths, because they are going to threaten you with higher capital levels and more restrictions. But at the same time, the legislation makes it more expensive to operate a bank and that's going to force consolidation among the smaller players as everyone looks for economies of scale.
DHUE: But it's clear this proposal is just the beginning. Senate Banking Committee Chairman Chris Dodd isn't sold on making the Fed the key regulator for big financial firms.
SENATOR CHRIS DODD (D) CONNECTICUT: There's not a lot of confidence in the Fed at this point and I'm stating the obvious over what's happened over the last number of years. So I hear that expressed by my, members of my committee, both Democrats and Republicans who are looking for an alternative. But I would tell you at this juncture there's been no decision.
DHUE: Another flashpoint will be the consumer financial protection agency. Consumer advocate Lauren Saunders says the agency must be truly independent.
LAUREN SAUNDERS, MANAGING ATTORNEY, NATIONAL CONSUMER LAW CENTER: We can't have people who are more concerned about bank profits being the ones who are also charged with looking out for fairness and safety for consumers. It just doesn't work together.
DHUE: But industry lobbyist Scott Talbott says creating a new regulator would be a mistake.
SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: You're separating the regulation of the bank from the regulation of the products, so each of the two regulators under that scenario would only have half of the information, which actually weakens the system.
DHUE: The administration wants to get the reforms through Congress this year. But analysts predict it will take a lot longer than six months for lawmakers to agree on the details. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Austan Goolsbee, Chief Economist of the President's Economic Recovery Advisory Board Talks About The Reform Plan
SUSIE GHARIB: One of President Obama's top economic advisors said today the regulatory reform plan will make banks a little more boring and a little less profitable. He's Austan Goolsbee, chief economist of the president's Economic Recovery Advisory Board. Washington bureau chief Darren Gersh spoke with him a short while ago and began by asking whether the reform plan will prevent a repeat of the current banking crisis.
AUSTAN GOOLSBEE, PRESIDENT'S ECONOMIC RECOVERY ADVISORY BD.: Well, I think if this plan had been in place let's say three or four years ago, you can never say it would have completely prevented everything, but there are certainly many of the most onerous damaging aspects of this crisis would have been lessened or prevented. So A, you would are had resolution authority so that when an AIG or a Lehman or one of these big systemically threatening institutions got into trouble, there would be a way that they could wind them down without bringing down the system. There would have been accountability on the part of the people issuing these securities. They would have had to retain skin in the games and they would have had less incentive to just take the $500 and pass it on. Yeah, for mortgages. You would have seen higher capital and liquidity requirements on most of the big financial institutions. So they would not have been able to get themselves so far out off the edge of the diving board that they couldn't come back.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Let me ask you about that. It sounds like banks a fair reading of this is that banks are going to be a little more boring, a little less risky going forward.
GOOLSBEE: Maybe a little less boring is what we need. I'd say they're certainly not going to be able to leverage themselves up 10 to one, 30 to one and go out and take risk that if everything goes wrong they really just melt down in a toxic waste heap. And I'd say another part of this plan that's really quite central that would have been very helpful over the last three or four years in preventing crisis is that for any institution that is big enough, there's going to be a supervisor on them on a day-to-day basis, regulating them as a complete entity. So that days where an AIG can kind of squeak itself in between the cracks of the regulatory system and nobody is watching what they're doing, that ends as soon as this is in place.
GERSH: Isn't there kind of a tax on bigness here? Because basically the bigger you are, the more threatening you are to the financial system, the more you're going to be regulated and face tighter controls, so in a way it's a --
GOOLSBEE: I wouldn't say it's a tax. But it is certainly, you got a higher responsibility and requirements. There is a disincentive for guys to just continue accumulating and become massive behemoths that are so interconnected that they would bring down the whole system if something were to go wrong. I think that's what we needed. We learned that we really wish there had been things in place over these last several years that was discouraging people from getting too big and too interconnected to fail because we got in a tough spot.
GERSH: Doesn't that essentially mean with higher capital standards and other kinds of restrictions that basically banks are going to be somewhat less profitable than they were in the boom years?
GOOLSBEE: Well, the thing about the profits in the boom days is they're super profitable when times are up and then they're super unprofitable when times are down. I think one of the things we've determined over this crisis is a little more slow and steady wins the race is probably a little more prudent. And I think you're going to see more prudence on the part of financial institutions because of this regulatory environment this year.
GERSH: Austan Goolsbee, thank you for your time.
GOOLSBEE: Thank you.
One on One with Robert Albertson, Chief Strategist at Sandler O'Neill
SUSIE GHARIB: President Obama's overhaul of the financial market regulation. Joining us with more on the impact of the new regulations on banks and financial institutions, Robert Albertson, chief strategist at Sandler O'Neill. Hi, Robert.
ROBERT ALBERTSON, CHIEF STRATEGIST, SANDLER O'NEILL: Hi Susie. How are you?
GHARIB: Good, thank you. So do you think that these reforms proposed by the president change the fundamental way that banks and financial institutions do business?
ALBERTSON: No, I don't. I've been reading and rereading this trying to understand it. In the first place, I got to tell you it's very general. It's obsessed with structure of regulation, not execution, which is the problem. And it could well be transformational, but this is basically an invitation for dysfunctional congressional committees to create or translate these golden rules into legal ideas and duties. It's kind of hard to tell where this is going. I don't think it's going anywhere good.
GHARIB: Are you saying that it's not, the new oversight, the new rules are going to change or not change the way that banks sell products, the way they loan money, the amount of credit that's available. Is it going to change that structure at all?
ALBERTSON: No, I don't think it really does. I think it will add some costs to it. I think it might un-level the field for banks. It might punish some sized banks versus others, which is not helpful. But I'm grasping for where this does anything that helps the credit creation process of America and it completely ignores the vast bulk of that process which is not in the banks in the first place.
GHARIB: What's the vast part of the process? What are you talking about?
ALBERTSON: Not the profits, the process. The bulk of the credit created in this country, loans, is not created by banks. It's created by the securities that Wall Street has created and that's evaporated because Wall Street got clobbered.
GHARIB: All right and you don't see any new oversight that's going to impact how Wall Street deals with making, whether it's securitization or any part in the process.
ALBERTSON: No. What I see here are goals that are the same goals, rules that are the same that already exist. I'm seeing boxes being moved around. I'm seeing two things here. Number one I'm seeing a new thing called a tier one FHC, which is another word for too big to fail, which has a definition that is so expansive it will encompass a General Motors, an Exxon, even a terrorist group. What it ignores are the problems that occurred in 2008. None of this would have prevented 2008. Hedge funds didn't cause 2008. It was excessive mortgage. Hedge funds are already largely registered investment advisors. Derivatives, ditto. They (INAUDIBLE) murderer. They are also largely regulated. Deregulation didn't cause this; there was no deregulation. There was no lack of -- it wasn't a lack of coordination. It was just pure execution. Think about it. Madoff was a regulated entity. It happened to have been FINRA. The head of that is now the head of the SEC. None of this would are prevented a Madoff. This would not have prevented a lapse of credit.
GHARIB: So Robert, let me ask you this. What is it that you would have liked to have seen the administration do so that it would have prevented a Madoff or another financial crisis? Is there any one key thing?
ALBERTSON: Look, the answer is it's nothing to do with the structure or any of this. It has to do with quality regulators, pay them more, make them starter, teach them, focus on product, make it simple. This is becoming a new erector set of structure. It's not going to do anything.
GHARIB: So it's enforcement?
ALBERTSON: I'm very disappointed to see this. This is deck chair movement. This is words. This is -- I like -- one of the words that comes up here is harmonize. The Chinese like that one. I look at this with my mouth dropped open. I really don't see where this is headed that is valuable. If anything, it probably takes some of the independence away from the Fed, when it has to act in an emergency situation. I just find things here that make no sense.
GHARIB: We just have 30 seconds left. Real quickly I want to ask you, what is your position then for investors to invest in the financial sector at this juncture, given what we know is going on in the market and with these new regulations.
ALBERTSON: Tread very carefully. They make sense for the long-term, only the ones that are recapitalizing themselves to stay afloat in this sea of turbulence and I think this only adds to it.
GHARIB: All right, Robert, thank you so much for coming on the program. Appreciate your time.
ALBERTSON: A pleasure.
GHARIB: My guest tonight is Robert Albertson, chief strategist at Sandler O'Neill.
"Street Critique" -Todd Harrison, Founder and CEO of Minyanville.com
PAUL KANGAS: Tonight's "Street Critique" guest says balance is key to overhauling financial regulation. He's Todd Harrison, founder and CEO of minyanville.com. And Todd, welcome back to NIGHTLY BUSINESS REPORT.
TODD HARRISON, FOUNDER & CEO, MINYANVILLE.COM: It's good to see you, Paul.
KANGAS: Give us your thoughts on today's proposed financial regulatory overhaul.
HARRISON: I think the specter of a balanced regulatory initiative is on the margin positive. It's clearly positive stuff. But I think the key word there is balance. Policy makers were by and large responsible for allowing this crisis to manifest as it did. And the conditional elements were in place. I think the risk is that they let the pendulum swing too far in the other direction and I think that's just something to be careful of as we find our way through this process.
KANGAS: The stock market certainly didn't have much of a reaction to the news as it came out. What kind of a current environment are we in? Are we in the summer doldrums already?
HARRISON: It certainly feels that way. And a smart person once told me that when it comes to financial markets, you can pick the direction or you can pick the timing, but you'll very rarely nail both. A couple weeks ago when I was on your show, we talked about S&P 950 being the key level for 2009. And sure enough we traded right there and that's where we failed. And that's what I'm looking at as we edge through the summer. Quarter end is coming up. I think the animal spirits want to try to get the market higher, but I still think that we are traversing through this W pattern. We're somewhere around the middle peak and I think that if they can get them through 950 you could see more up side. But up until that point I think you got to be prepared and I think you're going to have a chance to buy lower in the back half of the year.
KANGAS: So you think we're still in a long-term bear market?
HARRISON: Absolutely. The cumulative imbalances that are in place are not something that is going to be solved by policy. We need to see debt destruction and not the creation of more debt. So we're going to have to wean ourselves off of this credit dependency for there to be a sustainable market construct.
KANGAS: Todd, I understand there is something new going on at Minyanville. Tell us about it.
HARRISON: There's always something new going on at Minyanville. But what we've done is, I've written an e book called "Memoirs of a Minyan ." That's really, it's my life, but it's a lot of peoples' story as we edge into the age of austerity. It talks about the false Idolatry of money. I was programmed to believe that success was measured by the bottom line or bank account. And I think that we're going to have to reprioritize what's important. And I personally have been through a lot. They say that the greatest wisdom is a function of pain. And I share my miss steps and my things that I've done throughout my career chasing the brass ring, if you will and what I found to be true wealth on the other side. So I think it's going to resonate with a lot of people.
KANGAS: Sounds like some good lessons to be learned there Todd. I want to thank you very much for being with us again.
HARRISON: My pleasure.
KANGAS: My guest Todd Harrison of Minyanville.com.
"Money File"-Valuable Advice for New Grads
SUSIE GHARIB: In the "Money File" tonight, wise words for recent grads. Here's Harriet Johnson Brackey, personal finance columnist at the "South Florida Sun-Sentinel."
HARRIET JOHNSON BRACKEY, PERSONAL FINANCE REPORTER, SO. FLORIDA SUN- SENTINEL: Summer is a great time to think about setting up a retirement account. College grads are getting their first jobs and teens, hopefully, are working for the season. If they start to save now, that will set a pattern for life. My point is, getting going is crucial. The studies show, again and again, that once you get into a retirement account, you tend to stay with it. People rarely change them. They pick a certain allocation to stocks and to bonds and almost never make big changes to that. They also tend to keep their contributions coming at a steady pace. Even in times when markets are tough, they keep shoveling the money in. That set it and forget it mentality is paying off to investors who already have retirement accounts. For example, the three million participants in defined contribution accounts, think 401ks at Vanguard, largely have held steady in the 15 difficult months that ended in March. The mutual fund firm said most of these retirement investors didn't pull out of stocks, didn't dip into their nest eggs and benefited by having diverse portfolios. The markets have been so volatile, but it's the median account in this group is down less than half as much as the market as a whole. So to those who say it's dumb to keep on investing for retirement in times like these, I say I don't think so. I'm Harriet Johnson Brackey.
Paul Kangas' Stocks in the News
PAUL KANGAS: Fedex took the air out of Wall Street in early trading today, as the shipping firm issued a lower than expected first quarter earnings forecast. By 11:00 a.m. the Dow was off 24 points and the NASDAQ down two points. A mere 0.1 percent rise in May consumer prices helped lead a rebound in stocks with the Dow up 50 points this afternoon, until a late sell program wiped out that gain. So the Dow Industrial Average closed down 7.49 at 8497.18. The NASDAQ Composite ended with a gain of 11.88 at 1808.06. Standard & Poor's 500 down 1.26 at 910.71. Over in the bond market, the 10-year note fell 10/32 to 95 12/32, putting the yield at 3.69 percent.
Most active New York exchange issue on 67.4 million shares, Citigroup (C) down $0.17. Today, Standard & Poor's downgraded counter party credit ratings on 22 banks, but Citigroup was not one of them.
Bank of America (BAC) down $0.43. Neither was Bank America, one of the downgraded banks today.
General Electric (GE) in there with a $0.53 loss.
Then Wells Fargo (WFC) off $1.31. Wells Fargo was one of the 22 banks that got a credit rating downgrade from Standard & Poor's today.
Lincoln National (LNC) in the midst of a big stock offering, down $0.16.
American International Group (AIG) an $0.08 loss.
Ford Motor Co (F) bucked the overall trend with a $0.04 gain.
JPMorgan Chase (JPM) $0.77 loss. JPMorgan Chase has repaid $25 billion to TARP.
Regions Financial (RF) down $0.26.
And then came Pfizer (PFE), tenth in volume, $0.42 gain there.
Fedex (FDX) itself down $0.72, traded about $1 lower this morning after reporting fourth quarter earnings excluding items, $0.64 a share. That was $0.13 better than the Street expected. However, the company forecast first quarter earnings of only $0.30 to $0.45, well below the Wall Street estimate of $0.70 a share.
International Paper (IP) a $0.91 drop. BMO Capital brokerage downgraded it from "market perform" to "under perform."
Another forest products firm got a downgrade, Domtar (UFS). JPMorgan downgraded it from "over weight" to "neutral" due to the stronger Canadian dollar and incidentally, the stock traded as low as $16.10 today and the stock you're seeing reflects the one for 12 reverse stock split incidentally.
Potash, Saskatchewan (POT) an $11.59 (INAUDIBLE) The company is cutting its potash production after a major German firm did. Standard & Poor's repeated a "sell" on Potash and the whole sector was rather weak.
Agrium (AGU) down $3.44.
Intrepid Potash (IPI) off over $2.
And almost a $5 drop in Mosaic (MOS).
Badger Meter (BMI) did well, up $2.75. The stock will be added to the Standard & Poor's small cap 600 index after the close next Tuesday. It'll replace WMS Industries, which is moving over to the Standard & Poor's madcap 400 index.
Actuant (ATU) up $1.51. Third quarter earnings excluding items, $0.08 a share, a penny above the Street estimate and that's despite a 35 percent drop in sales in the period.
NASDAQ's most active, Apple (AAPL) a $0.77 loss. The company released 45 passes to address rare security problems in its iPhones and iPods.
Research in Motion (RIMM) down $3.08.
Microsoft (MSFT) bucking the trend, $0.23 gain.
Google (GOOG) $0.84 loss.
And Qualcomm (QCOM) moved up $1.64. Goldman Sachs put out a "buy" on Qualcomm with a price target of $53 a share.
Intel (INTC) $0.28 gain there.
$0.12 rise in Cisco Systems (CSCO).
Oracle (ORCL) up $0.25.
Amazon.com (AMZN) a half dollar gainer.
And Baidu (BIDU) was up $6.92.
And finally, Savient Pharmaceuticals (SVNT) soared $3.34 after an FDA panel recommended approval of the company's gout treatment. The FDA will make a final decision on August 1st.
