NBR Transcripts-October 26, 2009
Monday, October 26, 2009Washington Reworks Financial Regulations
SUSIE GHARIB: Too big to fail, those four words stirred up lots of anxiety for American taxpayers during the financial crisis. Now the Obama administration and lawmakers are working on new rules to deal with large financial firms that run into trouble and threaten the overall economy. What firms are too big to fail and in a crisis which ones will be rescued and how? As Stephanie Dhue reports, those are just some of the questions under discussion as the government reforms financial regulations.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: It wasn`t too long ago that the average American didn`t even think about financial firms that were too big to fail. But with billions spent on bailouts things have changed. That has House Financial Services Chairman Barney Frank and Treasury officials crafting new regulations to put an end to AIG-style rescues. Under the proposal, the Federal government would have the authority to seize troubled financial firms, throw out their management, change terms of existing loans and wipe out shareholder stakes. Scott Talbott lobbies for large financial institutions. He says the proposal may go too far.
SCOTT TALBOTT, SR. VP GOV`T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: Our concern is that they over regulate and stifle the ability of the firms to raise capital. If there`s so much government intervention or the threat of government intervention, then the investors will demand a higher rate of return or demand a higher rate in order to invest in the company, thus weakening the companies` ability to raise capital.
DHUE: Too bad says banking expert Karen Shaw Petrou.
KAREN SHAW PETROU, MANAGING PARTNER, FEDERAL FINANCIAL ANALYTICS: If they are able to raise capital because the market expects them to be bailed out, then it`s time to change that.
DHUE: Frank`s proposal also makes it harder for financial firms to borrow heavily against their assets. Petrou says what`s needed are tougher regulations and a new authority to resolve failed banks.
PETROU: If all you do is come up with a soft landing for very large financial institutions, then they`ll just get bigger.
DHUE: But others say bankruptcy courts, rather the government are better suited to wind down big financial firms. AEI scholar and former Federal Home Loan Bank President Alex Pollock says so-called orderly resolutions can be costly to taxpayers.
ALEX POLLOCK, RESIDENT FELLOW, AEI: Somehow or other, as you expand this notion of having regulatory resolutions, you`re also expanding typically the amount of money that the government is willing to put up.
DHUE: Lawmakers are considering setting up a resolution fund so regulators can unwind failed financial firms, but the big question is just how to pay for it. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
3rd Quarter Shows Promise Halfway Through The Season
PAUL KANGAS: Quarterly earnings season is nearing the halfway mark and so far Wall Street has something to cheer about. Throughout corporate America, profits are still shrinking but in many cases those declines are moderating. And as Suzanne Pratt reports, early hints about the fourth quarter are pretty good, too.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Baseball`s post- season isn`t the only season getting attention in New York these days. On Wall Street, earnings season is nearly as big a hit as the big apple`s beloved Yankees. That`s because third quarter results from corporate America are so far much better than expected, perhaps confirmation the economic recovery is underway. Of the S&P 500 companies that have already reported, 81 percent have beat analysts` expectations. On average, nearly two-thirds typically exceed Wall Streets` highest hopes. The record high for any quarter is 73 percent. Thomson Reuters earnings expert Ashwani Kaul says it`s time to give a thumbs up to management at some of the nation`s largest companies.
ASHWANI KAUL, DIRECTOR OR RESEARCH, THOMSON REUTERS: I think companies are just doing a good job navigating in this difficult environment. You have to start giving corporations and CEOs some credit as well.
PRATT: To be sure, third quarter profits are still declining. But, these days everything is relative. When all of the results are in, third quarter earnings are expected to drop by about 18 percent from last year. That`s a lot better than the nearly 25 percent decline expected on October 1. Companies from JPMorgan to Apple are posting better than expected bottom line results with financials showing the greatest improvement. As for the much talked about revenues, experts say they`re slightly better than expected, but could be better.
KAUL: The revenue story looks a lot better than it did three months ago. But we still have a long way to go before we can really have a lot of conviction in this market and people can feel very comfortable in the top line.
PRATT: Citi`s Tobias Levkovich predicts the revenue story will soon begin to improve.
TOBIAS LEVKOVICH, CHIEF US EQUITY STRATEGIST, CITI: We should be starting into the fourth quarter and into the first quarter of next year. There`s normally a lag between credit conditions and business conditions improving. It takes about nine months and, credit`s been improving. But, this is pretty normal.
PRATT: When it comes to the outlook for profits, there`s more good news. Experts say expectations for earnings growth in the fourth quarter are also improving. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
"Your Mind and Your Money"-According to Prof. Richard Thaler of University of Chicago
SUSIE GHARIB: In our new series, "Your Mind and Your Money," we`re looking at behavioral finance or the psychological factors influencing our financial decisions. Three decades ago, economist Richard Thaler was one of the first to suggest that link. He`s now a distinguished service professor at the University of Chicago`s Booth School of Business and co-author of the best-selling book, "Nudge." I recently spoke with him and began by asking, why do we make wrong investment decisions?
RICHARD THALER, PROF., UNIV. OF CHICAGO BOOTH SCHOOL OF BUSINESS: Well, there`s lots of reasons. We`re busy and the decisions are complicated and we get emotional. So we don`t always make the smartest decisions because emotions take over from reason.
GHARIB: I understand that neuro scientists are doing studies to find out if the errors that people make in financial decision making are actually hard-wired into the brain. Do you think that there`s going to be evidence of that?
THALER: Well, I think the research, so-called neural economics is a pretty young field and it`s just getting started. In some sense it doesn`t really matter whether it`s wired into the brain or not. We are what we are. We`ve evolved into the pretty smart beings that we are. But we`re not perfect. We make mistakes. We are subject to emotion and that leads us to sometimes choosing things not right (ph).
GHARIB: So I there anything that investors can do to keep emotions from dominating their financial decisions like more self-control, for example?
THALER: Well, yes. I mean, the biggest problem most Americans have is just not saving enough. There`s been a little increase in savings in the last few months, but for most of this decade, the personal saving rate was zero. The best way of overcoming that is to save it before you have a chance to spend it. Max out your 401(k) plan and don`t touch it.
GHARIB: We all hear this kind of advice but we don`t necessarily apply it in our lives. So how can you re-jigger your financial behavior?
THALER: Well, you can -- when you`re in a calm state, you know, New Year`s Day, when you`re making your New Year`s resolutions, set up commitment strategies that don`t allow you to make mistakes. A colleague and I developed something we call save more tomorrow where people sign up to increase the contribution to their 401(k) every time they get a raise. That`s probably available at the company you work for. That`s a very good way of committing yourself to saving more later and pretty soon you`re saving quite a bit.
GHARIB: You`ve also devised the method called choice architecture. Can you tell us briefly how that works?
THALER: Well, choice architecture just describes the context in which we choose. So, you know, when you go to a restaurant, you`re influenced not only by the things they have on the menu but the order in which they`re listed and the names that they`re given. So in our book "Nudge" we try to illustrate how choice architects can help us make better decisions by creating an environment where good decisions are easier.
GHARIB: In your book, you say "Nudge," as you mentioned, you say that the government should nudge people to make certain financial decisions because many people are unsophisticated about financial decision-making. Critics say that the government has a spotty record in deciding what`s right for people and shouldn`t people be free to make their own investment decisions even if they`re bad ones?
THALER: Well, you know, we advocate giving people freedom. We just suggest that for people who don`t know what they`re doing, they could use some hints. So the example of having a good default option, we don`t say people should be required to take that. We just say that it should be offered and if they don`t know what to do, then they should take that one.
GHARIB: You can watch more of my interview with Thaler and learn more about his studies at our website on pbs.org and be sure to catch our next installment of "Your Mind and Your Money" on November 16. We look at what`s called herding, the tendency to follow the crowd.
"Commentary"-The Marshall Plan
SUSIE GHARIB: Tonight`s commentator has some thoughts on improving the lives of some of the world`s poorest people. He`s Glenn Hubbard, dean of Columbia University`s graduate school of business and author of "The Aid Trap: Hard Truths about Ending Poverty."
GLENN HUBBARD, GRADUATE SCHOOL OF BUSINESS, COLUMBIA UNIVERSITY: The global financial crisis is squeezing budgets in the west for economic development aid to countries in sub-Saharan Africa. At the same time, China is using aid in a bid to capture Africa`s natural resources for its own industrial growth. Can the U.S. respond, respond effectively and respond without unaffordable new spending? Yes. Aid has failed to make poor countries more prosperous and that aid system continues to do the same things again and again despite evidence that they don`t work. Economic evidence isn`t kind to the proposition that aid is the answer if growth is the question. But the U.S. has an alternative. The main purpose and mechanisms of the successful Marshall plan are relevant to Africa today. They offer the west in general and the U.S. in particular a long-term solution to the short- term problem of China`s Africa surge. The heart of the Marshall plan was loans to local business. The businesses repaid the loans to a national fund, which spent the money on commercial infrastructure to help those businesses. Today, we can redirect much of existing economic aid in a Marshall plan for local businesses. A Marshall plan for Africa would go a long way to countering China`s advances. It would give the United States a positive role to play in energizing local businesses and improving the lives of millions of the world`s poorest citizens. I`m Glenn Hubbard.
Paul Kangas' Stocks in the News
PAUL KANGAS: Wall Street welcomed the new week with an opening rally on better than expected results from Radio Shack, Corning Corp. and Verizon. The Dow gained nearly 100 points early on with the NASDAQ up 27 points. But then stocks reversed course as a spike in the dollar sent oil and other commodity stocks broadly lower. A brokerage downgrade on several regional banks kept the selling pressure on and the market went on to close at the day`s lows. The Dow Industrial Average ended down 104.22 at 9867.96. The NASDAQ Composite fell 12.62 to 2141.85, while the Standard & Poor`s 500 Index lost 12.65 to end at 1066.95. In the bond market, the 10-year note fell 18/32 to par 18/32, putting the yield at 3.56 percent.
Big board volume leader on 110 million shares was Citigroup (C) moving down $0.19.
Followed by Bank of America (BAC) with an $0.82 loss. Bank of America reportedly has hit a snag in repaying TARP funds. It has to do with a disagreement over how much additional capital the bank must raise to satisfy regulators.
General Electric (GE) $0.19 loss there.
Pfizer (PFE) fell $0.13.
Sprint Nextel (S) down a nickel a share. Third quarter results due out Thursday. The Street estimate a $0.15 per share loss for Sprint.
Wells Fargo (WFC) down $0.87. A group complaining about bank greed picketed the company`s offices in Chicago and also picketed Goldman Sachs` offices there too.
JPMorgan Chase (JPM) down $1.41.
Ford Motor Co (F) $0.16 loss.
Regions Financial (RF) losing $0.43. Bank analyst Dick Bove said many of the regional banks will not be profitable until the year 2011.
AT&T (T), tenth in volume, down $0.42.
Caterpillar (CAT) fell $0.53. The company will permanently cut 2500 laid off workers despite signs of improving product demand.
Verizon Communications (VZ), another Dow stock, down $0.21. Third quarter earnings fell 30 percent to $0.41 from $0.59 a year ago, but excluding one-time items, those earnings were $0.60 a share and that was a penny above the Street estimate.
Monsanto (MON) fell $4.54. The company is offering lower than expected pricing for its high tech corn seed.
And Corning (GLW) down $0.14. Third quarter results excluding one- time items, $0.42, $0.03 above the Street estimate. But sales did decline 5 percent. However, the company said LCD demand is picking up.
RadioShack (RSH) had a good day on the upside, up nearly $2.50. Third quarter earnings fell to $0.30 from $0.38 last year, but the company said its financial performance improved in the latter part of the third quarter and today, Janey Montgomery Scott brokerage repeated a "buy" on RadioShack.
General Cable (BGC) losing $4.16. Lower third quarter earnings, $0.55, way down from $1.16 (ph) last year. Revenues fell 25 percent and the company cut its fourth quarter earnings estimate to top things off. Ethan Allen (ETH) off $2.64. The company sees worse than expected losses in the first quarter, be around $0.21 to $0.23 in the red versus the Street estimate of a loss of only $0.08. Standard & Poor`s repeated a "sell" today.
And the big tobacco company Lorillard (LO) down $5.60. Third quarter earnings a bit higher, $1.44 versus last year`s $1.38, but $0.08 below the Street estimate.
NASDAQ`s most active, Amazon.com (AMZN) up $6.15, still riding high on those earnings that were fantastic late last week.
Microsoft (MSFT) moved up $0.66. (INAUDIBLE) Adams brokerage upgraded it "hold" to "buy" with a $34 a share target.
Apple (AAPL) down $1.46.
And then Google (GOOG) $0.52 gain.
Baidu (BIDU) was down $2.34.
Intel (INTC) a nickel gainer.
Cisco Systems (CSCO) $0.47 loss.
Research in motion (RIMM) down $0.09.
Qualcomm (QCOM) $0.02 drop.
And then came Amgen (AMGN) losing $1.84.
Elsewhere, Private Bancorp (PVTB) lost nearly 37 percent of its value. The company reported a third quarter loss of $0.68 a share, much bigger than last year`s loss of $0.25. The company blamed heavy loan losses.
And those are the stocks in the news tonight.
