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Week of 9.19.08
Economy in Crisis: How Will it Affect Us? An interview with David Johnson Listen Now | Download | Podcast [mp3, 4MB]
(Photo by Elizabeth Lavin/ D CEO Magazine) Interview Transcript DAVID BRANCACCIO: Thanks for joining us. Every week for ten years, I would have a conversation on public radio with business analyst David Johnson in Dallas, a long time stock broker, and business reporter. His wisdom is very helpful, in good times, and in bad. And we have just had—no hyperbole here—a cataclysmic week for financial markets, for the government's role in the economy, and for American pocketbooks, both rich and poor. And I think we could all use some direction, from a market veteran, David Johnson, in Dallas. I can—I'm surprised you can even speak at this stage. DAVID JOHNSON: Oh, I can speak. And I'll speak right back to you, David Brancaccio, my good friend of over a decade. You wait until the earth swallows up the markets, and then it's just, "Let's give old Johnson a call, and hang the albatross around his neck." BRANCACCIO: Yeah, well I'll try to call more often, mom. JOHNSON: We could have been talking in October, and—at new all time highs in the market. BRANCACCIO: Well, sorry about that, but look where we are at. And well, let me—let me just be direct with you. Did you ever expect, David, to live in a world where Lehman Brothers had gone out of business, where the Federal Government had to keep the biggest of insurance companies, AIG, essentially, afloat, where Merrill is absorbed by B of A—you know, I could go on here. JOHNSON: No, I—I mean this really is—and I've been asked this many times, 'cause I have—this is my 36th year, you know, as a—as a stock broker, and three years prior to that sort of working around Wall Street, and in the back office—and I've never seen anything like this. I've seen the Arab Oil Embargo. I've seen—911. I've seen long term capital. I've seen the crash of '87, and the crash of '89, and I have never seen anything like this. And I had no idea—I didn't think it was possible that—that that names that you're talking about could disappear. But more than that, I mean, disappear, and in some cases, in hours. I mean, where did—where did the Merrill Lynch thing come from? BRANCACCIO: You know, and you—you—give you two words. I'll tell you where it came from. Easy credit. You know, and people say we didn't see it coming. Three years ago, I sat with people in a story that we were doing for NOW on PBS here. They didn't have enough money to by the house they were getting into. They were getting loans based on promises and hope, and no proof of their income. And then you add to that people in foreign lands with a lot of capital, being willing to lend to Americans. And the Federal Reserve, right? I mean, the easy money policy that's gone on for several decades. JOHNSON: Yeah, I mean, think about it. In your home town, a—and in mine—we both came from very small towns—a—and you'd go in, and—and your parents or friends would go into a bank, and you'd—you were talking to the banker, and you'd—or the S&L, and you'd arrange for a loan, 'cause you're going to buy a new house. And, you know, that guy'd probably drive out and see it, and there was a real vested interest. BRANCACCIO: And you'd say, "Hey, bring in your pay stubs," you know. "I'd—I know I see you down at Denny's, but let's just see exactly how much you—you make before we think about giving you a loan." JOHNSON: Oh, absolutely, absolutely, but more than that is, they wanted you to do well. They were your best friend. They wanted you to keep your job. They wanted you to—to do well, and they wanted you to prosper, and—and—and the underlying reason is, they wanted you to be able to make those payments every month. Well, you get to a situation—now you—you leap forward, and all of the sudden, there's these big institutions that just have clerks, and they—they take orders for houses. And they don't have any vested interest, 'cause what they're going to do, is they're going to take the package—your loan—they're going to package it with a bunch of other ones, and they're going to sell it to the German's, or somebody. That—they're never going to see it. The—they don't care if you lose your job. They're on—working on the next one. So there's—there's no incentive to stay with them. BRANCACCIO: You'd think that the smarty pants' who kept—who went to business school would have known that this was an accident waiting to happen. But as I was about to say, three years ago, and change, Alan Greenspan is asked about some of this stuff, and he was saying, essentially that sub-prime lending would work out all for the good. And his quote back then was, "Lenders are now to quite efficiently judge the risk posed by individual applicants." The only thing was, they were not able to. JOHNSON: No, and they didn't care. If—if it's not going to be your non-performing loan piece of paper, then you don't care. You're going to pass it on to somebody else. BRANCACCIO: But here's the thing, all right? So maybe that is what bankers are ultimately going to do. They're going to get out ahead of themselves, easy credit comes in, but you'd think maybe the government would watch over these things, in their watchdog role, but the operative words for decades now in America is Laissez Faire, you know? It means let people alone to do what they're going to do. Well, look what they did. JOHNSON: Yeah, well that ain't going to work any more. I mean, it—it—this—that—when the cavalry rode in, the rules changed. And—and admittedly, there're lots of—going to be lots of meetings with members of congress over the weekend, and they're going to be hammering it out, but—but we're going to come out of this a much more regulated environment. I don't know how far it's going to go, but—but the way these things typically go, is the pendulum swings all the other way. I mean, the outgrowth or, you know, of—of acts of terrorism is, to this day, that you have to take off your shoes when you—before you get on an airplane. Probably a little extreme, but—but that's what happens. That's the way the pendulum goes. BRANCACCIO: No, the pendulum is probably going to go that way, but first we have to figure out and explain to people, not just the people listening now, but actually policy makers—people who have to make decisions—how the system worked, and how it went wrong. I mean, look at this vocabulary. And how they what? JOHNSON: And how they tricked, David, how they tricked the system. BRANCACCIO: Oh, how they tricked the system. JOHNSON: Yeah. Let me give you an example. It sounds esoteric, but stay with me. You're going to like this. Credit default swaps—you've heard—you've heard that term. BRANCACCIO: That's what in fact brought down AIG, whatever they are. JOHNSON: Yeah, exactly. What it—what credit defaults are—there's really a very simple thing. It's—it's—it—if you think about it in it's essence, it's a—it's and insurance policy. It's—I'm going to—I'm going to invest—I'm going to buy—you know, I'm going to loan you money, or I'm going to buy your debt, but I need some sort of—something—that'll compensate me if this doesn't work out. Kind of like—mortgage loan insurance, you know? BRANCACCIO: Yeah, sure. JOHNSON: Or—okay. So—so you buy a c—so I buy a credit default swap, so that if it doesn't work out, then that's going to go up. Okay, so bad news becomes good news, and the credit default swap goes up. So what you saw a bunch o' hedge funds, and short sellers doing, is they would buy that, which benefits if the company goes down, then they would turn around, and they would take millions of dollars and bam, bam, bam, bam, bam—start shorting an individual stock. So the stock would start dropping, and—and everybody would look around and say, "Well, there must be something wrong with—you know, old—Lehman Brothers, or whatever it is." BRANCACCIO: Because the stock is going down, but it's actually the short sellers who are—come up with a system to profit if the stock goes down. JOHNSON: But more than that, see, it's a double dip. They're making money as the short is working—as the sock is going down, and down, and down, and down, and down. They're making money there. But remember, remember that—that—that credit default swap that we talked about? It's going up in value. So they're making money on the upside of the credit default swap, and they're making money as the stock goes down. The analogy is, you take out a life insurance policy on your next door neighbor, all right? Then tomorrow, you get on your riding lawn mower, and you run him down. BRANCACCIO: That, you know, it's—it—it's that—it—it's very much resembles that kind of situation. And, but the way, you mentioned it, the short sellers, there's efforts now to reign in these huge bets that the stocks will go down—the bets that actually end up taking the company down, to a large extent. One of the candidates running for office here, Senator McCain, has been very critical of the head of the Securities and Exchange Commission, Christopher Cox, for not being tough enough on things like reigning in short sellers. But—you know, it's not illegal. I mean—to—to—to sell short. JOHNSON: Well, it's not illegal to sell short, as long as you have the stock, as long as you borrowed the stock. Now, hypothecating, or selling stock that you haven't borrowed—that's another thing. That's naked short selling. BRANCACCIO: That's what's called naked short selling? JOHNSON: Exactly, and it's never been—it's never been legal, and I don't know, somehow they get away with it. So had—I don't know how you do it. Well, what they did today, was they—they—they banned short selling on 800 financial stocks. They banned it till October 2nd. They can extend it another 30 calendar days if they want to. So maybe this gets some semblance of order into things. Now they're talking about making hedge funds who are, you know, most of the ones who were doing this—this—this bad stuff—making them disclose their short positions. BRANCACCIO: But, you know, I tried to cover this issue, this program now, on PBS, has, over the years, and when you ask the hedge funds to disclose more, they get very upset with those proposals— JOHNSON: Oh, yeah. BRANCACCIO: —and then work very actively to thwart any legislation heading in that direction. JOHNSON: Well, no, their argument is, we've got this super secret formula—the super secret sauce—and it's so thinly traded that if everybody finds out what we're doing, then they'll do what we do, and then we won't be able to do it any more. So, in essence, you've violated my, you know, copyright, or my patent. BRANCACCIO: You know, well, that—it may be, that that argument—just doesn't cut it anymore. JOHNSON: The—these are really interesting ideas that I—and they're—at least you have sort of a moratorium on this. 'Cause you know what they're doing? You and I've both been to Africa, we've both seen a lot of these—these National Geographic shows, and you've seen those great—those—go—great migrations of the Wildebeests, you know, the—it's like chow time for any animal that lives in Africa, and you show up. But—but if how they hunt— BRANCACCIO: And that's what these hedge funds are doing. JOHNSON: Yeah, that's what they're doing. They'll go out, and they'll find a financial, and maybe it's not a weak financial company. They'll take a bite of it, then they'll take another bite. Then all of the sudden, everybody, all—the whole—the whole herd—the whole pack, you know, surrounds this animal and takes it down. And they're doing it systematically one by one. That's what they did with—Lehman, which—which had plenty of fault. You know, over value their debt, and all that kind of stuff. But that's what they did with AIG. That what they did with Fannie Mae. That's what they did with Freddie Mac. They started to do it with Merrill. They tried to do it with Morgan Stanley. It's just—it's unbelievable. And—that you could do this in—David, in hours. BRANCACCIO: And the government has been forced to respond within hours, and there is talk now in Washington—we'll see it develop over the weekend, and into next week—about a massive program to buy lousy debt. And think of what that means for tax payers. All of us tax payers are about to inherit a big investment portfolio. How neat. JOHNSON: Yeah, exactly. Probably—trillions of dollars—tax payer money is out there. BRANCACCIO: Yeah, of—of radioactive waste. That's what's—in the form of mortgages and other investments that the people are having trouble paying back. It has effects not just on Wall Street. It's not just the folks who got the big bonuses—for doing their financial work. It's really percolating down to regular people, some of whom were already struggling. I don't know if you've heard this phrase before, but it was in the paper this morning. You ready for this? Loan famine. A condition where credit is very hard to find, and many people can't borrow to, you know, expand businesses, to go to college, to buy a house or a car. A loan famine starves the economy and households. JOHNSON: Absolutely. And—and the credit system was just absolutely frozen. Henry Paulson talked about this today. BRANCACCIO: The Treasury Secretary, he was talking about that. JOHNSON: Yeah, yeah. Yeah, it, and they've got to find some way to, you know, to unfreeze this, and—and it's a very legitimate argument. BRANCACCIO: Yeah, but David, the only thing is, it's going to cost hundreds of billions of dollars, potentially, to come up with solutions that seem to be so necessary. JOHNSON: It may be trillions. But—but I think it's money well spent. I mean, look at the alternatives. You're talking about—you're talking about people's life savings. I mean, forget the big businesses for right now. Think about all the 401ks, and all the IRA's, the things we've been forced to do. You know, they don't do pensions anymore. You don't get those. You're supposed to save for yourself. You're supposed to squirrel money away, you know, for your own retirement. And these are the things that have been savaged, absolutely savaged, and will continue to be savaged, unless they do something. I don't know about doing something on the long run, and we need to get back to, you know, some form of normalcy. But I w—you know, for right now, I just—I can't conceive of there being any choice. BRANCACCIO: And what about for the regular person, a person who's just now trying to figure out what do I do about the savings that I have? What do I do about my investments? I mean, just the other day I went online to read the rules about the federal deposit insurance corporation, the FDIC, about my regular bank savings account. You—what—are you supposed to sit tight? JOHNSON: Yeah, I mean, that's exactly the message that came out this morning. That was an impossible task. You couldn't—I—I don't know that you could ask anybody to—to just truly sit tight and be at all comfortable. But this morning, when we heard— BRANCACCIO: Friday morning. JOHNSON: Exactly, when they—when they—we heard the—the RTC is—is taking out—i—in essence being created—they're taking the bad loans out of these institutions. They're going to ban short selling till October the 2nd, and maybe another month beyond that. And the treasury is going to move to—to give you the same level of comfort with money market funds, that you have with the FDIC behind CD's. That's bought us some time. That's what we need. Then we need to get confidence back into the system, because this whole thing is predicated on confidence. I'll loan you money, because I think you're going to pay me back. BRANCACCIO: A little confidence is what is in order. All right. David Johnson, Dallas, Texas stock broker, long time business reporter, and for many years was the business analyst for my old public radio show, Marketplace. Johnson, it was good to hear your voice. JOHNSON: My good friend Brancaccio, it's always good to talk to you. |
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