tv Nightly Business Report PBS October 18, 2010 6:30pm-7:00pm PDT
>> susie: the foreclosure paperwork nightmare-- is it a big deal for the nation's banks? >> i don't think this is an issue. i think this is a creation, quite frankly, of the media to some extent and listening to people who don't undertand securitization. >> tom: but other banking experts say it could be a $120 billion headache for the financial sector. you're watching "nightly business report" for monday, october 18. this is "nightly business report" with susie gharib and tom hudson. "nightly business report" is made possible by:
the financial sector was under the microscope today because of big earnings news and more worries about the foreclosure crisis. tom, bank of america said it's planning to end its moratorium on foreclosures in 23 states. but it's still studying foreclosure paperwork in 27 other states. >> tom: susie, on the earnings front, citi reported better- than-expected quarterly results. take a look at the results here. the bank earned seven cents a share, a penny more than analyst estimates in the third quarter. that's citi's third straight quarterly profit. bank stocks rallied on citi's results. still, there are continuing concerns about the impact of the foreclosure crisis on banks, and freddie mac and fannie mae. we have two reports. we begin with suzanne pratt in new york. >> reporter: bank of america, citi, j.p. morgan chase and wells fargo. these are the banks with the biggest potential exposure to what's now being called
"foreclosuregate." but just how much could faulty mortgage foreclosures cost the u.s. financial sector? on wall street, the range of estimates is staggering. jp morgan's own research staff says, worst case scenario, the price tag could reach a hefty $120 billion. that would cover the expense of buying back mortgages. most banking experts, however, are projecting losses closer to half that number, over a period of several years. s&p analyst erik oja puts the cost somewhere in between financial fiasco and minor blip. >> at this point i'm not sure if it's a minor blip. i'm sure that as these banks go through their foreclosure pipeline, they will find instances of paperwork that needs to be redone. >> and, robert albertson of sandler o'neill says speculating about the size of the losses is silly because the banks can handle it. >> people fail to understand how much the banks have reserved in case things drag out.
it is massive. it is something beyond what they got to even in the great depression. so, i do not think there's a number we should worry about. >> reporter: but, worry is exactly what bank stock investors have been doing. in the last month, as mortgage foreclosure practices have come under increased scrutiny, the k.b.w. bank stock index has fallen about 6%. still, some bank analysts say selling the shares now is probably a big mistake. >> in my judgment, all other things being equal, it's probably a reason to buy. people are overreaching for negatives, and they're imagining things that make no sense at common sense at all. >> reporter: analysts point out one thing about the foreclosure mess is that it's overshadowing a decent earnings story. not only are banks posting profits, but credit quality is also improving. suzanne pratt, "nightly business report," new york. >> reporter: this is stephanie dhue in washington. fannie mae and freddie mac own
or guarantee nearly $200 billion worth of past-due mortgages that could be foreclosed. uncle sam took control of the mortgage siblings in september 2008. since then, taxpayers have given the companies $150 billion just to stay afloat. james lockhart spent three years as the chief regulator of fannie and freddie, beginning at the height of the housing bubble. he thinks the foreclosure paperwork mess will make the cost to taxpayers even more. >> there is a foreclosure process. different states have a different process. in many states it takes a very long time, and in the meantime fannie and freddie are not getting any money, not getting any principle payment on the mortgage and as a result, effectively the taxpayer is giving a free loan to the homeowner. >> reporter: the average homeowner in default hasn't made a payment in over a year. but it's not just homeowners who may get a free ride. investors in mortgage backed securities guaranteed by fannie and freddie keep getting paid
until a home is foreclosed and taken off the books. karen shaw petrou says foreclosure delays put a further squeeze on the government- controlled firms. >> in this never never land, fannie and freddie are paying the mortgage backed security investor, but they're not getting any money in their hands with which to do it, so they're in a real cash flow squeeze. >> reporter: that squeeze may not fall completely on taxpayers. federal regulators are working to recoup $11 billion in losses by forcing banks to buy back mortgages that didn't meet fannie and freddie underwriting standards. known as "putbacks" in the industry, those sums could multiply as more shoddy paperwork is revealed. lockhart says the issue may complicate the government's ability to unwind fannie and freddie. >> to the extent we're still fighting through this mortgage mess, it will be harder to get the will to fix fannie and freddie.
there will be, unfortunately, a desire to keep them moving along without what we really need to do, which is a resolution of their future and, more importantly, a resolution to the future of the mortgage industry. >> reporter: many blame politics for helping get fannie and freddie into the mortgage mess in the first place, and many think politics will make it just as difficult to get out. stephanie dhue, "nightly business report," washington. >> tom: here are the stories in tonight's n.b.r. newswheel: citi's strong earnings helped wall street start the week with some modest gains: by the close, the dow jumped 80 points, the nasdaq added 11 and the s&p 500 was up 8.5. trading volume was light at the start of the week, with less than a billion shares changing hands on the big board and under two billion on the nasdaq. stocks moved higher despite a pullback at the nation's factories last month. the federal reserve reports industrial production fell 0.2% in september. economists had expected a gain in output. and european union finance ministers agreed in theory today to penalize member countries that overspend. they're hoping to nip debt problems in the bud before they
become full-blown crises. e.u. leaders are expected to adopt the new rules next week. >> susie: still ahead, with the housing industry still struggling and the jobs picture still bleak, we talk with morgan stanley's chief economist richard berner about the outlook for the u.s. economy. from no those job needed home mortgages brian if he height of housing bubble to robo signing foreclosure document mess is something broke when the way the home mortgage system works in america. susan wachter joins us tonight from philadelphia. welcome to nicely business report, nice to see you. >> pleasure to be here. >> tom: so is the u.s. home mortgage system broken today? >> yes, tom t is broken. the foreclosure documentation crisis is just one more example of a system that is, in fact, broken. >> tom: one of the reasons why you say it's broken and what exactly is broken is
the loss of control that has happen in the mortgage market. control by whom. who lost control? >> underwriters lenders, securitizers across-the-board. there is a lack of control and a partial lack of control reflects a lack of oversight as well by regulators. >> paul: . >> tom: talk about the lack of oversight it is usually seen as mortgages are regulated at the state level, that there is not a lot of federal oversight, ought there be? >> absolutely there needs to be. the systemic risk that is generated is not a state-by-state although i'm not saying there shouldn't be state oversight as well it is clearly in this case and very well can be going forward nationwide so there needs to be oversight by regulators that are able to see the entire markets, federal regulators. >> tom: i want to ask you about how to rebuild confidence but do you think it ought to be part of the new consumer financial products commission where that kind of oversight lies? >> that could very well be
there, absolutely. >> tom: let's look at some of your ideas to rebuild the mortgage system. you first say keep securitization, this is the idea that banks can tell mortgages into the secondary market and allow them to be securitized with mortgage-backed securities, why do you think it is important to keep this system in place? >> securitization is necessary and worked for decades, without securitization we won't have a long-term fixed-rate mortgage. now is not the time to rely only on short-term rate mortgages because that puts the homeowner, the borrower facing interest rate risks that they can't really deal with. interest rates eventually are likely to go up and we will have another crisis. so we need securitization but we need a securitization system that is transparent where there are controls and oversight. >> tom: you talk about more transparency as well as an idea to rebuild confidence in the mortgage system. transparency how and provided by whom by the home buyer, by the lender. >> by the lender and by the securitizer.
information needs to be available, provided for mortgages and for mortgage-backed securities by both lenders, originators and securitizers in ways that can be analyzed by investors and overseen by regulators. >> tom: what exactly would you like to see, more fica scores or credit scores to pay the mortgage, talking about appraisals? what types of transparencies do you think would help? >> that information, absolutely. but more actually, the key point is that the information needs to be standardized. so that the information can be compared across mortgages and can be tracked over time. and the transparency that would then allow, that would allow transparency for investors and regulators to monitor what is happening to the mortgage system. monster-- monitoring which we completely failed newspaper this crisis. >> do you think that more uniform standards, more transparency would ultimately increase the cost of securitization thus increase the cost of a mortgage? >> not necessarily.
in fact, quite the reverse with more transparency, the more information, the risks should be less. >> tom: our guest taking a look at the mortgage system in the united states as it has been in trouble here, susan wachter along with us, a professor he real estate at the wharton school. >> tom: most stock sectors are higher tonight. in fact the dow industrials had a new six month high. we'll get you updated in
tonight's market focus. >> tom: stocks drifted higher with a full schedule of corporate earnings this week, led by two tech giants after the close tonight. get you updated. apple turned in its results for the first full quarter to include sales of its ipad. this latest quarter also saw the release of the latest iphone, each driving results. earnings easily beat street estimates, and they were up almost 70% from just last year. iphone was one of the biggest contributors, with sales up 91% compared to a year ago. ipad sales totaled 4.2 million. of course, the ipad did not exist a year ago. ipod sales, though, continued slowing-- down 11%. some analysts point to the ipad and ipod sales as a bit disappointing. apple stock came into the report hitting new all-time highs, but sold off after the earnings release.
apple stock was down as much as 6.5% after hours, dropping below $300 per share. clearly one to watch tomorrow. big blue was the other big techie out with results after the close today. i.b.m. beat street estimates. the company said a fifth of its revenue came from emerging markets such as brazil, russia, india and china. the bric countries. shares came into the report similar to apple's, hitting all time highs, but they sold off 4% in after-hours action. that came despite the company's hiking earnings guidance for the third time since july. taking the lead during the trading session was the big banks. trying to repair some of the losses last week as the foreclosure documentation problem gathered more steam. citigroup led the sector gainers, up more than 5% on huge volume, even for it. as we mentioned earlier, citi's earnings were better than expected. bank of america led the way higher for the dow industrials as its biggest gainer, up 3%. b. of a. earnings are due out tomorrow morning. and j.p. morgan was the second best dow component, up almost 3%. the energy sector was higher today, but quarterly results from a couple of players sapped their stocks. halliburton and m.c. moran exploration each fell after
their earnings. halliburton stock fell from a six-month high-- despite beating the street thanks to a pick-up in energy drilling business. some analysts voiced concerns about high expectations for future earnings. mcmoran exploration also fell from a six-month high after reporting a worse-than-forecast loss. oil and natural gas production dropped as revenues fell at the company. while we're talking about energy, in the utility industry a multi-billion-dollar buyout on this monday. the massachuessetts-based northest utilities wants to buy nstar, based in boston, for $4.3 billion in stock. the deal didn't create many sparks for investors. both northeast and nstar dropped about 1%. the purchase values nstar at $40.28 per share, about $1 above its closing price tonight. one other possible deal in energy. natural gas producer quicksilver jumped 17%. the firm's ruling shareholder family is looking at alternatives, including taking it private. in medical devices, st. jude is
looking to beef up its product pipeline, making a $1 billion play for a.g.a. medical. a.g.a. saw huge volume on this 41% pop. the deal values a.g.a. at $20.80 per share, just below tonight's closing price. and that's tonight's "market focus." >> susie: just two more weeks until the next meeting of the federal reserve, and investors expect policymakers will announce a plan to pump more money into the financial system. will that strategy give a boost to the economy?
joining us now, morgan stanley's chief economist, richard berner. nice to you have back. >> nice to be with you. >> susie: so it looks like the fed is going to go ahead to add more money into the financial system come november. six to nine months after that, will we be saying that the at that time gee paid off? >> well, i think we will, susie, although the benefits to quantitative easing are probably going to be pretty limited. and that's because the transmission mechanism and monetary policy is not functioning as well as it should be. in your earlier piece you heard susan wachter talk about our housing finance system that's not functioning well. and that's one of the key reasons that the benefits are likely to be limited. there is one channel, there is one channel through which policy could have a boost though. and that is the global or international channel. as the dollar weakens in foreign exchange markets, and perhaps as other central
banks decide also to adopt a more accomodative policy, that could be a boost forth u.s. economy. >> but going back to the fed, are you saying that this strategy then will accomplish little and if so, what are the alternatives it to get the economy, u.s. economy growing again? >> well, let's look at what the fed is facial. the fed as you know has a dual mandate. they're missing on both sides of that dual mandate. unemployment rate is too high. inflation is a little too low. and for what we've seen in the marketplace, the fed i think has accomplished a lot without really doing anything, just talking about quantity at that timeive easing. because long-term rates have come down and in particular, rates adjusted for inflation or real ratess have come down very significantly. and that should be a boost to the economy. second, the fed has already also accomplished another of its goals which is to boost inflation expectations. and that is part of the
process of raising inflation back to where they think it should be. >> so at least from those two points of view, they have already accomplished something. but i think that the headwinds that are out there in the economy mean that the benefits to the economy itself are probably going to be somewhat limited. >> the key thing for most people the proof that they want to see is what happen to its unemployment rate and even the fed is saying that that is priority number one to get people working again. where do you see the unemployment rate in 2011? >> well, by the end of 2011 susie it is probably going to be half a point lower than where it is today and it could go up in the meantime. >> that's not much of a change. what about in terms of growth. right now the economy is growing at less than 2%. do you see any pickup there? >> we think that next year we'll see about a 3% growth rate compared to two to two and a half percent in the second half of this year. >> susie: all right, so just for most of americans and people who are watching this
program, they flip through-- put through a lot of pain with this economic crisis over the last couple of years and want to know when are things going to get back to normal if at all. when do you see that happening, if ever? >> well, if ever is a long time. i think will happen in the next few years. but it's pretty clear that we have some longer-term issues out there to solve in our economy, some problems. and monetary policy is only part of the solution. we have structural problems. they require structural solutions. and monetary policy can only be a partial help. >> all right. we're going to have to leave it there. thank you so much for coming on the program this evening. >> thanks, susie. >> susie: we've been speaking with richard person, chief economist at morgan stanley. >> tom: here's what we are watching for tomorrow. we will see september's housing starts and building p
ermits along with quarterly results due in from bankamerica as we mentioned. also coca-cola, goldman sachs and johnson & johnson. also tomorrow our word on the street, oil also tomorrow, our "word on the street" is "oil." it's about 300 million years old, but the energy stocks you want in your portfolio depend on how old you are. >> susie: if you can't sell it, make it better. general electric today said it will spend $432 million to update its appliance division. the focus on designing and building new energy-efficient refrigerators will add 500 jobs at new plants in kentucky, indiana, alabama and tennessee. g.e. spent much of 2008 trying to sell its appliance unit, and has since invested nearly $1 billion total on upgrades. >> tom: negotiations over program fees resumed today between cablevision and news corp. cablevision says it currently pays $70 million a year for fox programming and news corp now wants $150 million. fees, cablevision's 3 million viewers have already missed playoff baseball and yesterday's
new york giants game. euquu >> susie: with the mid-term elections just over two weeks away, tonight's commentator believes there are really just two issues facing voters. here's glenn hubbard, dean of columbia's graduate school of business and former chairman of the council of economic advisers under president george w bush.
>> to listen to the tax debate in washington, the nation is having a tug of war over whose taxes should rise to cover the federal government's large budget deficits. president obama argues that raising taxes only on individuals earning over $250,000 per year will return us to fiscal health. that is simply not true, given the large current and future deficits. many republicans argue against raising taxes on anyone. but what spending reductions would they recommend to stop the spiraling public debt burden? memo to washington: we're actually all in this together. the real questions: how big do we want government to be? and how can we pay for it with the least cost to economic growth and job creation? keeping the government we now have will require major tax increases on all americans. the budget holes of 5% of g.d.p. in the near term, growing to twice that in the long term, cannot be fixed by raising taxes on high-income families.
alternatively, we can reduce the growth of entitlement spending, while keeping a strong safety net. what do we do now? we should extend the current tax code through 2012. such a move will provide support to the struggling recovery and reduce uncertainty holding back business and household decisions. and, the 2012 elections permit the tough conversations about those real questions. we all have a stake in the outcome. i'm glenn hubbard. >> tom: that's "nightly business report" for monday, october 18. i'm tom hudson. good night everyone, and good night to you too, susie. good night tom. >> susie: i'm susie gharib. good night everyone. we hope to see all of you again tomorrow night. "nightly business report" is made possible by:
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