Full Episode Transcript – Wednesday Mar 14, 2012

JIM SINEGAL, BANKING ANALYST, MORNINGSTAR: A lot of investors were burned by Citigroup (NYSE:C). It’s going to take a lot for those two companies to change their image, you know, given what they’ve gone through just within the last five years.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Citigroup (NYSE:C) shares get slammed after the nation’s third largest bank fails the latest stress tests. And from stress tests to black eyes, Goldman Sachs’ reputation takes a hit as a top executive resigns with a very public goodbye. It’s NIGHTLY BUSINESS REPORT for Wednesday, March 14th.

Citigroup Analyzed After Bank Fails Stress Test

GHARIB: Good evening, everyone. My colleague, Tom Hudson, is off tonight. Well, the sounds of relief were almost audible here on Wall Street today. Just a day after the Federal Reserve unveiled the results of its bank stress test. Fifteen of the nation’s largest — 19 largest banks passed the hypothetical tests which looked at their ability to withstand another severe recession. Citigroup (NYSE:C) was among those that didn’t pass. And today, shares fell over 3 percent as investors weighed the failing grade received by nation’s third largest bank. Erika Miller takes a look at what’s in store for Citi shareholders.

ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT : One day after getting snubbed by the Federal Reserve, Citi shareholders are perplexed. The Fed says the nation’s third largest bank isn’t worthy of an invitation to the big bank party. Yet, Citi says its capital levels are strong and it would’ve passed the Fed’s dreamed-up doomsday scenario if it hadn’t asked permission to up its dividend. Still, it’s hard to say what’s worse for Citi — no tasty dividend or no invite to the Fed’s exclusive party? But some analysts say investors should not worry. The bank led by CEO Vikram Pandit is in good hands.

JIM SINEGAL, BANKING ANALYST, MORNINGSTAR: I think Pandit put forth a sound strategy, a more focused strategy than Citigroup (NYSE:C) had in the past, and, you know, I think he’s on the right track. I don’t think this tenth of a percent below the regulator’s guidelines is really cause for concern.

MILLER: Investors have good reason to be concerned. Citi was one of the most damaged firms during the financial crisis, desperately in need of government bailouts. And even though the bank has clawed its way back, a Fed- approved dividend would be the stamp of approval shareholders have been waiting for. 2012 has been a decent year for Citi shareholders, as it’s been for most bank stock investors. Still, Citi shares are down more than 20 percent from their year-ago price of $45 a share. Market pros are mixed on the outlook for the shares, with analyst David Trone only lukewarm.

DAVID TRONE, BANKING ANALYST, JMP SECURITIES: We’re neutral on Citi. We think there are other stocks that are more interesting in our space. But the scenario of the company being in deep trouble like they were, you know, in 2008, that’s behind them.

MILLER: Morningtar analyst Sinegal has a target price for Citi of $50 a share.

SINEGAL: I think really what Citi needs to do is just avoid major mistakes over the next few quarters, build a little bit of capital, you know, show investors what kind of profitability it’s capable of, and, you know, I wouldn’t be surprised if the stock rallies in that case.

MILLER: Still, that could be a tall order even for one of America’s biggest banks. After all, the world economy also to needs to lend Citi a helping hand. Erika Miller, NIGHTLY BUSINESS REPORT, New York.

Fmr. FDIC Chairman Sheila Bair Reviews Bank Stress Test Results

SUSIE GHARIB: Joining us now with more analysis on the banks and those stress tests, we are happy to have with us, Sheila Bair — former chair of the Federal Deposit Insurance Corporation, FDIC, and now senior advisor at the Pew Charitable Trusts. And, Sheila, it’s really great having you on the program.

SHEILA BAIR, PEW CHARITABLE TRUSTS: Thank you. Happy to be here.

GHARIB: Well, I think the question that most people have: are banks most to normal? How you would you rate the health of the banking system right now?

BAIR: Well, I think it’s certainly stronger than it was in 2008. And the capital cushions are much better than they were going into the crisis in 2008. So, the sector is healing. Still, some uncertainties certainly with the housing market in particular, but if the economy keeps improving, and hopefully it will, that should also strengthen bank balance sheets.

Hopefully, we’ll get to a virtuous cycle where with the strengthening of the economy, there will be more confidence to make loans and that will in turn reinforce the economic recovery.

But there’s still a lot of ways to go and housing is still a big issue.

GHARIB: Well, let me pick up on something else. A few years ago, after another round of stress test, you were very concerned about banks issuing dividends and boosting your compensation. Your warnings were not heeded and banks did raise their dividends. And now, they’re doing it again. What are you’re thoughts on that? Are they in good shape to be paying out more?

BAIR: Right. So I think — so we were successful with some of the institutions, for instance, B of A’s dividend was not approved. Citi got a token penny, and there were other smaller banks that also had their applications disapproved. So, it was bit of a mixed bag for us last year. Yes, I did think it was premature. There were robo-signing, a disgrace, it’s ugly head, we didn’t know
what we were dealing with there, what type of losses that might entail for banks. It was in very bad shape. So, and the economy was quite moribund.

So things are better now. We have better clarity about housing. There’s still a lot of uncertainty. But we know more than last year.

Europe is in much better shape and, obviously, the economy seems to be recovering as well. So, I think there’s better justification. Though, as I look at these numbers, I think some of them probably were a little more generous than they should have been.

GHARIB: You know, one thing that most Americans remember from the banking crisis — too big to fail.

BAIR: Yes.

GHARIB: And there are still those concerns that could banks bring down the economy if there are some severe economic shocks, even though that they passed these important stress tests?

BAIR: Right, right. Well, I think the stress tests involve a lot of regulatory judgment, and bank manager judgment. So I think investors and market analysts need to look at the data that the Fed has put out and decide for themselves how robust those numbers are. My personal preference is, I wish the Fed had put more emphasis on liquidity, volatility, and the leverage ratio. There are four banks that if they had this scenario, there would actually have had leverage ratios below 4 percent.

There are two types of capital. One is risk-based capital, which is based on the judgment about how risky the assets are, and then there’s a leverage ratio. It’s just simply capital with total assets.

And when you get into a crisis situation, as we did in 2008, the market looks at the leverage ratio. They don’t trust the risk-based ratios.

So, I wish the Fed had put more emphasis on leverage ratios. Clearly, any large institution that fell below 4 percent leverage ratio and a volatile environment would have a liquidity failure. So, hopefully, next year, that can be better incorporated into the process.

GHARIB: Real quickly, I wanted to pick up on what you’re saying about more lending.

BAIR: Sure. Yes.

GHARIB: American business owners and small business owners complained that they just can’t get loans.

BAIR: Yes.

GHARIB: Do you think now they will be able to get more loans, that things are in better shape? Will we see more credit flowing through the economy?

BAIR: Well, I hope so. I think — again, this virtuous cycle, as if the banks get more confident to make loans, business gets more confident to take out loans, hopefully, it will reinforce itself. Ironically, I think this low interest rate environment hurts certain higher risk borrowers, like small businesses, because the risk premium for making a higher risk loan like a small business loan is not very substantial with these very low interest rates. So, the conventional wisdom is that low interest rates hurt savers and help borrowers. But I think for higher risk borrowers, like small businesses, the low interest rate environment is actually hurting them. So, I think a bit of a bump up in interest rates might help there, too.

GHARIB: That’s a longer conversation. We’d love to come back to you at another time.

BAIR: That’s right. OK, that sounds good.

GHARIB: Thank you so much, Sheila Bair, for coming on the program.

BAIR: You bet. Happy to be here.

GHARIB: We’ve been speaking with Sheila Bair, former chair of the FDIC, and now senior adviser at the Pew Charitable Trusts.

SYLVIA HALL, NIGHTLY BUSINESS REPORT CORRESPONDENT: I’m Sylvia Hall. Still ahead: state funding to colleges and universities is dropping nationwide. We take a look at one school system and how they’re handling it.

GHARIB: Stocks muddled along today as oil and gold prices fell and investors tried to make sense of those bank stress tests that we were talking about. The Dow rose 16 points, the NASDAQ added nearly a point, the S&P slipped just over a point.

Commodities came under pressure. Oil prices fell more than a dollar to $105 a barrel as the Fed’s decision to leave rates unchanged tempered any upswing in crude prices.

As for gold, it continued a two- day sell-off, losing another $51 today, closing at $1,642 an ounce. The yellow metal is now off 4 percent in the past three sessions.

Tim Harvey manages a gold ETF and he recommends buying gold on the dip.

TIM HARVEY, SR. VICE PRES., ETF SECURITIES: Everybody is expecting the debt ceiling to be raised again this year. Obviously, we have an election. We have very important elections in Europe, as well. We’ve got elections in Greece, in Italy and in France. And this is going to lead to greater instability in the Eurozone, which has enough problems of its own already. So, I think this going to help gold in the medium to long term.

Goldman Sachs takes a hit from its now Former London Based Executive Director

SUSIE GHARIB: From gold to Goldman Sachs (NYSE:GS) — the Wall Street investment firm got hit today with another public relations problem. London-based executive director Greg Smith quit his job and wrote a scathing resignation letter in today’s “New York Times (NYSE:NYT).” In the op-ed letter, he accused Goldman for its, quote, “toxic and destructive” environment. Darren Gersh looks at what the letter says about Goldman’s culture.

LLOYD BLANKFEIN, GOLDMAN SACHS CEO: Compensation principles.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT : By now, Goldman Sachs (NYSE:GS) CEO Lloyd Blankfein is used to critics calling him a “money-sucking vampire squid” or worse, but this morning, the attack came from one of his own. In his “I quit” letter, Greg Smith, a mid-level executive for Goldman Sachs (NYSE:GS), said he was sick of a culture where clients were called “muppets” and employees were expected to “hunt elephants” by getting clients to make big trades that led to big profits for Goldman. Smith closed with this parting shot: “People who care only about making money will not sustain this firm or the trust of its clients for very much longer.”

CHARLES ELLIS, AUTHOR, THE PARTNERSHIP: Hard-hitting and accurate.

GERSH: That’s how Charles Ellis, author of “The Partnership: The Making of Goldman Sachs (NYSE:GS)”, describes Smith’s op-ed.

ELLIS: Goldman Sachs (NYSE:GS) had a unique, privileged position of trust, and it needs to rebuild the base upon which its clients can trust it.

GERSH: And Ellis has some advice for Blankfein as he struggles to revive Goldman’s reputation.

ELLIS: Pay attention to the real, real difficulties that are behind some of the rude remarks that are made about the firm and recognize that those problems have to be dealt with. And I know you are dealing with them, but you are going to have to deal with them even more intensively
than you have. And you’re probably going to have to make some public terminations of prominent people in order to get the message sent internally and externally how deeply committed I know you are personally.

GERSH : Goldman Sachs (NYSE:GS) says it has reached out to Greg Smith to learn more about his concerns but hasn’t heard back. In a memo obtained by NIGHTLY BUSINESS REPORT, Lloyd Blankfein told employees: “We are far from perfect, but where the firm has seen a problem, we’ve responded to it seriously and substantively.” Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.

GHARIB: Joining us now with more on Goldman Sachs (NYSE:GS), Peter Cohan. He’s a management consultant at his own firm, Peter Cohan & Associates. He’s also author of “Value Leadership,” in which he featured Goldman Sachs (NYSE:GS) as one exemplary company. Hi, Peter.

PETER COHAN, PETER COHEN & ASSOCIATES: Hi.

GHARIB: All right. So, is this one disgruntled employee? Or is this a universal view about Goldman?

COHAN: I think it’s a universal view about Goldman. But the interesting thing about it is that, first of all, everybody in the world of business knows that Goldman trades against its clients, which is what happened in 2007 when it ended up having to pay over half a billion dollars for advocates, which was a mortgage-backed securities bet that they made against their own clients. So, that’s one thing. As far as the employees are concerned — and I think everybody recognizes what’s going on inside the company. And this particular employee, I think, chose to basically dowse himself with gasoline and light himself on fire. I don’t know how any other major employer on Wall Street would ever hire somebody who would be willing to resign in such a public way right on the op-ed pages of “The New York Times (NYSE:NYT)”.

GHARIB: Well, let’s come back to Goldman itself, because you wrote about Goldman. You profiled it in your book. That was a few years ago, eight years ago. Has something changed at Goldman? Has the culture changed as Greg Smith wrote about in the op-ed piece today?

COHAN: Well, you know, you raise a very interesting point. In my book, I pointed out how Goldman has some very, very strong values. Things like putting the clients first, and hiring brilliant people who are really good team players. They have four team values that they still feature very prominently on their Web site.

And I think the big thing that’s happened and Lloyd Blankfein became CEO in May 2006, during that time, the stock prices fell 20 percent interestingly enough. But he was — he is a trader. And he brings that trading mentality to the firm.

And the trading mentality is very, very short term. And it doesn’t stress having relationships with CEOs. If, on the other hand, before 2006, there was a better balance between trading and investment banking. And investment banking involves establishing relationships with CEOs over the long term, where they’re kind of behavior that Goldman has demonstrated, most prominently in 2007, would not have been available.

GHARIB: OK. Peter, let me jump in.

COHAN: Yes.

GHARIB: We have about a half a minute left. I want to ask you this. I mean, what’s the fallout from this? From the point of view of investors, we saw a lot of them selling off the stock, and Goldman down sharply. It lost something like $2 billion of its market value. And what does it mean for clients? Is Goldman going to lose business? Real quickly.

COHAN: They will not lose business unless they lose a lot of their best people. And I think this will be an isolated incident, and therefore, I think that Goldman will be OK.

GHARIB: All right. We’ll leave it there. Peter, thanks for coming on.

COHAN: Thank you.

GHARIB: And we’ve been speaking with Peter Cohan, management consultant and author.

Market Focus with Tom Hudson-Wednesday, Mar 14, 2012

SUSIE GHARIB: On Wall Street today, the spotlight was squarely on financial stocks, and that helped give the broader market a lift. So, let’s take a closer look at all the big market movers in tonight’s “Market Focus.”

Many big banks were the big winners today, with the exception of Goldman Sachs (NYSE:GS) and Citi, which we already told you about. Investors gobbled up bank stocks. There were also big moves in insurance stocks, retailers and gold miners.

Let’s start with the KBW (NYSE:KBW) Bank Index, which tracks 24 of the biggest financial firms. It rose 1.3 percent as investors had a chance to react to generally positive results from those Federal Reserve’s stress tests.

Bank of America (NYSE:BAC) was the biggest mover in the Dow today. Shares of the nation’s biggest bank rose more than 4 percent, hitting levels not seen since last summer. And as we reported, the bank did pass its stress test, which was a relief to many investors.

American Express (NYSE:AXP) shares jumped almost $2, or 3.5 percent, and that’s after it announced a stock buyback worth $4 billion. The shares are now trading at pre-financial crisis levels.

But the Fed’s stress test results took a toll on many insurance stocks. Investors now fear the industry’s biggest names will face tighter capital requirements. So, Metlife (NYSE:MET) was the biggest loser in the S&P 500 index. The shares fell $2.30, or almost 6 percent, and that’s even after its plan for a buyback was rejected by the Fed.

Shares of Prudential Financial slipped alongside Metlife (NYSE:MET), falling $1.49 to $61 and change even though PRU wasn’t even subjected to a stress test. But investors think there’s a good chance both insurers will be more closely monitored by the Fed.

There were also big moves in two major retail chains on earnings news, but that’s where the similarity ends. Shares of Pacific Sunwear fell a whopping 18 percent after the teen retailer posted a deep fourth quarter loss. It also issued a disappointing first quarter forecast.

On the flip side, Francesca’s Holdings (NASDAQ:FRAN). It operates a chain of boutiques selling apparel and accessories. The company’s fourth quarter earnings surged 93 percent, and that prompted at least three brokerage firms to raise their price targets on the stock. Shares rose more than 9 percent.

And as we told you, gold prices fell sharply today, and that did hurt gold mining stocks. Here’s a look at Barrick Gold (NYSE:ABX), the world’s largest gold producer, fell more than 4 percent; Kinross Gold (NYSE:KGC) tumbled more than 6 percent; and Newmont Mining (NYSE:NEM) slipping 1 percent.

And finally tonight, a look at the biggest loser in the Dow: Disney (NYSE:DIS). Disney (NYSE:DIS) shares lost over 1 percent after its big-budget film “John Carter” bombed in its box office debut.

And on that note, that’s tonight’s “Market Focus”.

Colleges & Universities Forced to Deal with Less

SUSIE GHARIB: The pressure is on — from the White House to state capitols, to cut college costs. And as states slash appropriations, many colleges say trimming the budget is a tough assignment. Sylvia Hall visits a school system in Pennsylvania to see how its handling the cuts.

SYLVIA HALL, NIGHTLY BUSINESS REPORT CORRESPONDENT: A cafeteria serves meals without trays. New, energy-efficient buildings cut down on heating, cooling and lighting bills, and 50 jobs sit empty.

The strategies look different, but at Shippensburg University, they all serve the same purpose: cutting costs in a time when every penny counts.

BILL RUUD, PRES., SHIPPENBURG UNIVERSITY: We are at a point where we have to say everything is available to be reduced.

HALL: This year, Shippensburg University and its 13 sister schools face a possible 20 percent drop in state funding. That threat comes after an 18 percent cut last year. System chancellor John Cavanaugh says that forces tough decisions.

JOHN CAVANAUGH, CHANCELLOR: So, if we’re going to fix a roof on a building, for example, that’s now going to have to come out of the operating budget, which means you’re going to have to make a choice: do we fix the building or do we offer a section? And those are choices that are difficult to make.

HALL: Shippensburg isn’t unique. State appropriations to colleges across the country have been falling for years. And as cash-strapped states struggle, college support is often cut. Goldie Blumenstyk has written about it for years.

GOLDIE BLUMENSTYK, SR. WRITER, THE CHRONICLE OF HIGHER ED: States are not keeping up. There’s a lot of disinvestment in public higher education going on right now, and that’s where 85 percent of the college students go to college.

HALL: Published in-state tuition and fees at Shippensburg are up more than 7 percent this year. They run just below $9,000 per year, close to the national average.

CAVANAUGH: Twenty years ago, the state paid for almost twice as much as what they’re paying for now. So, if the state isn’t paying for it, then that cost gets shifted over onto to the student.

HALL : Cavanaugh says at this point, the transfer from state funding to student tuition is almost dollar for dollar. Some say its time for colleges and universities to step outside the traditional model and start finding new ways to do more with less.

UNIDENTIFIED MALE: You’re coming up with a lot more different ideas.

HALL : Some of those new ways at Shippensburg include online classes and using video conferencing to teach across multiple campuses. They’ve also stepped outside the semester system to offer some shorter courses.

RUUD: Yes, we’re adding more online classes. Yes, we’re adding more summer classes. Yes, we’re adding more winter classes. Yes, we raise class sizes. The challenge with raising class sizes, you get to a point where you ruin the educational experience.

HALL: These administrators say more clarity about how much money will be coming from state governments in the years ahead, not just next year, will help them plan new ways to deliver a college education to students. Sylvia Hall, NIGHTLY BUSINESS REPORT, Shippensburg, Pennsylvania.

Author Manisha Thakor looks at Tell-Tell Spending Habits

SUSIE GHARIB: In the “Money File” tonight: your relationship, and your relationship with money. Here’s Manisha Thakor, author of “On My Own Two Feet: A Modern Girl’s Guide to Personal Finance.”

MANISHA THAKOR, CFA & CO-AUTHOR, “ON MY OWN TWO FEET”: Last week, my hubby and I had dinner with our dear friends, Harry and Olivia. Towards the end of the meal, Harry asked a very interesting question: When you pick up a menu, what side do you look at first, the right or the left? Harry and I both immediately said the right while my hubby and Olivia both said the left. Now, what’s on the right side of a menu? Why, the prices! And what’s listed on the left of the menu? The food! Harry’s question beautifully highlights a trend academics have long noticed, namely that we are often attracted to our financial opposites when it comes to financial behavior. It turns out there’s something intoxicating about “financial otherness,” especially in the early stages of courtship. That’s why so many savers end up marrying spenders and vice-versa.

Our dinner conversation inspired me to consider other areas of our finances where behavioral patterns play a significant role. Digging around, I was thrilled to discover fresh insights from Carl Richards in his new book, “The Behavior Gap (NYSE:GPS): Simple Ways to Stop Doing Dumb Things with Money.”

Reading “The Behavior Gap (NYSE:GPS)” reminded me that one upside to this choppy economy is that it’s a great catalyst for thinking about whether there are any financial habits you want to adjust to increase your happiness. I’m Manisha Thakor.

GHARIB: Let’s take a look at now what we’re watching for you for tomorrow. We’ll get a check on inflation at the wholesale level with February’s producer price index. The big board gets revved up for Allison transmission. The auto parts maker is expected to be the largest manufacturing IPO this year. And we learn how junior achievement is grooming the nation’s next generation of entrepreneurs. So, we have a lot coming up tomorrow.

But that’s it for us tonight for NIGHTLY BUSINESS REPORT on this Wednesday, March 14th. And we want to remind you that this is the time of year your public television station seeks your support — support that makes programs like NIGHTLY BUSINESS REPORT possible.

Thanks for joining us. I’m Susie Gharib. Have a great evening, everyone. And we hope to see all of you again tomorrow night.

Copyright 2012 NBR Worldwide, Inc.


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