tv Nightly Business Report PBS July 16, 2009 7:00pm-7:30pm EDT
captioning sponsored by wpbt >> no one was tougher than i was in trying to protect the american taxpayer. >> paul: former treasury secretary henry paulson gets grilled on capitol hill for his role in the sale of merrill lynch to bank of america. the tough questioning and his answers ahead. >> susie: the bankruptcy countdown is on for c.i.t. tonight. the nation's leading small business lender is poised to fail. now that uncle sam has put away his checkbook. coming up, what c.i.t.'s failure could mean to small businesses that depend on it. >> paul: j.p. morgan chase checks in with record second quarter revenues. analysis of the results and a preview of what's ahead for the financial sector in the second half. >> susie: google continues to search out profits. the company posted a near 20% rise in second quarter earnings. but the giant web search engine isn't firing on all cylinders. we'll explain.
thank you. 7//& >> susie: good evening, everyone. hank paulson was back in the spotlight on capitol hill today, but it wasn't the kind of homecoming he expected. testifying before a house committee, the former treasury secretary was grilled on his role in bank of america's controversial purchase of merrill lynch. facing harsh accusations from lawmakers, paulson defended his decisions and actions in the deal. in the past month, fed chairman ben bernanke and bank of america ceo ken lewis also faced tough questioning from this committee. but as dana bate reports lawmakers are still looking for answers. >> reporter: former treasury secretary henry paulson may be out of the office, but he's still under the gun. lawmakers slammed the treasury's handling of the bank of america deal-- saying paulson bullied executives into completing the
purchase of merrill lynch. but paulson gave little ground as he defended the pressure he put on bank of america c.e.o. ken lewis. >> i was attempting to send a very strong message to ken lewis in terms of how strongly the fed and treasury viewed this matter. >> reporter: they viewed it strongly because they worried a cancelled deal would throw the markets into turmoil. significant losses at merrill lynch were giving lewis second thoughts. but paulson says pulling out would have been a bad call. >> it would have shown a lack of judgement, and i think it would have really undermined the viability of b. of a. and merrill lynch and the financial system. >> reporter: last month, fed chairman ben bernanke told the committee the government did nothing inappropriate to intimidate bank of america executives. today, paulson went further saying he was never told by the fed to threaten lewis. congressman dan burton wasn't convinced.
>> if you came away from those phone calls, somebody must have said, "hey! we can't let them do this!" and i would suggest that it might have been mr. bernake. >> what i would say to you. i do not know whether someone in the conversations or calls expressly said it, or if my understanding came from just the tone and the forcefulness. >> you know, you're a very smart man, and i don't think anybody's buying what you're saying right now. >> reporter: other lawmakers lashed out at paulson for his lack of transparency in bailing out wall street-- whether it was by financing the bank of america deal, or selling the tarp to congress. representative stephen lynch says he thinks lawmakers have been misled. >> if you had come up here with mr. bernanke and said, "i got a plan, i want to take $800 billion in taxpayer money, i want to give it to my pals in the nine biggest banks in america," how many votes do you think you would have got up here? >> reporter: in this case of "he said, she said," many lawmakers still feel taxpayers picked up
the tab for the merrill lynch- bank of america deal. but paulson says what taxpayers really got was a financial system that is still working. dana bate, "nightly business report," washington >> susie: c.i.t. is inching closer to bankruptcy the small business lender is expected to file for chapter 11 protection as soon as tomorrow. and that will leave hundreds of thousands of firms scrambling for financing. erika miller has more about the impact of a c.i.t.'s failure on small and medium sized businesses. >> reporter: the difference of just one letter makes all the difference. citi is too big to fail. c.i.t. is not. the government has decided that c.i.t. is not important enough to the financial system to save and the company is expected to file for bankruptcy as soon as tomorrow. that could mean big trouble for hundreds of thousands of small to medium sized firms that depend on c.i.t. for loans. c.i.t. is the nation's largest supplier of factoring, a lifeline of the retail industry.
if c.i.t. goes under, the national retail federation's mallory duncan says shoppers will feel the impact. >> if suppliers cannot provide merchandise, then that means that the retail shelves are essentially empty. if you walk into a retail store now, you'll see there is very little merchandise. but we know that with the christmas season coming up, it's important that that merchandise be there to help the economy get back on track. >> reporter: but many small banks say don't worry, they can pick up the slack if c.i.t. goes under. chris cole at the independent community bankers association says his members are chomping at the bit. >> i think most needs will be met. i think there may be a transition period. there may be a period the communities banks will need to get up to speed with the kinds of lending-- that very specialized lending that they do. i think we can do that. >> reporter: wall street doesn't seem too worried about the impact of a c.i.t. bankruptcy on the financial markets.
in fact, n.y.u. economics professor larry white says this is the way capitalism is supposed to function. >> it's clear that c.i.t. made serious errors in their investment decisions. and somebody bear the consequences. i do not think they are so important for the financial sector economy that the general taxpayer ought to be bearing the consequences. >> reporter: but it won't just be c.i.t.'s creditors and clients who suffer from the company's collapse. c.i.t. is a major corporate supporter of the arts ranking in the top 10 in new york city. erika miller, "nightly business report," new york. >> paul: wall street got off to a slow start but ended with a late day rally. not much change in the early going as the broader market shrugged off the looming failure of c.i.t. group and strong results from j.p. morgan chase.
we'll have more on those chase earnings in a moment. at noontime the dow was nine points higher, then big technology stocks powered higher ahead of google and i.b.m.'s after the bell results. and that gave the rest of the market a solid late lift. the dow jones industrial average closed up 95.61 t 8,711.82. the nasdaq gained 22.13 to 1,885.03. the s&p 500 rose 8.06 to 940.74. in the bond market, the 10 year note rose 11/32 to 96-10/32 putting the yield at 3.57%. >> susie: j.p. morgan reported
today second quarter profits rose 36%. much stronger than analysts expected. the nation's second largest bank earned 28 cents a share-- way ahead of estimates of four cents. big gains in investment banking offset losses in the bank's consumer lending and credit card operations. revenues surged 41% to $27 billion. the strong results came even though the bank repaid the u.s. government $25 billion it received in tarp money. joining us now to analyze the numbers, moshe orenbuch, bank analyst at credit suisse. moshe, welcome to "nightly business report". >> thanks,. >> susie: i. >> susie: when you look at j. p. morgan's results and what the bank said today about the outlook, what's your take on this? >> basically the investment bank earned about a dime more than we were looking for and that's very strong return on equity. and credit quality continued to worsen particularly on the commercial side. but they had to add less in reserves because they started the quarter with a strong
reserve. >> susie: so the c.e.o. said today he doesn't expect the credit card business to make money this year or in 2010. and also there's a lot of these nonperforming loans that they have on the books. so when you add it all up, what kind of shape is j. p. morgan in? >> it has an extremely strong balance sheet in capital and reserbs, and it is profitable, so it's adding to both of those, so it quite strong despite the losses that you're refering to. >> susie: goldman sachs reported strong earnings on tuesday, today we have these numbers from j. p. morgan. when you add up what we've heard so far, how would you characterize the financial health of the banking system, from these two outfits? >> well, there's certainly the revenue side of the equation which remained quite strong in the second quarter, got a little weaker in the third quarter as things slowed down. but the fixed income markets and equity markets have been relatively healthy. >> susie: we have some bank reports coming up, we have bank of america tomorrow, also
citi tomorrow and next wed wells fargo. what should we expect those firms to report? >> well, tomorrow's report, bank of america and citi also both have strong capital markets, so we're likely to see those to be relatively strong on those lines. in bank of america's case they added about 13 billion to their reserve in each of the last two quarters, so their operating results will be a little weaker, they had somewhat higher credit costs than their peers. wells should have a strong quarter on the mortgage front next wednesday. >> susie: how about citi? >> we're looking for their quarter to be on an operating basis, a little above break even, which is better than last quarter. and they've got a bunch of gains in there, so their reported number could be quite large. >> susie: i understand that you're recommending the stock of j. p. morgan, but none of the other banks. tell us your analysis on that. >> basically what we like
about j. p. morgan is diversified, each of the businesses appears to be well managed, despite the losses you refer to in the credit card business. and i think it's one of the banks that will be, its best position given its capital base, the fact that it's repaid the tarp money to take advantage of this current environment and make another assisted acquisition sometime later this year or during 2010, given the fact that its washington mutual acquisition is fairly close to being fully integrated. >> susie: can you give us your disclosure on j. p. morgan, do you own the stock or does the firm have any relationship? >> i did do not and they do not. >> susie: you her our report been c. i. t., we were looking at the impact on small businesses if the c. i. t. can't come up with the financing. but what would be the impact on the financial system? everybody always talks about systemic risk. what's the risk here? >> i think the digs purely on
that basis i think was correct. c. i. t. does not present a systemic risk to the financial system. you're going to have some hurting retailers and one should really question whether this was the time in the economic cycle to make this stand, if you will, on the too big to fail and systemic risk doctrines, because you will have economic impacts that will be negative. >> susie: thank you for coming on the program and sharing your thoughts with us, we appreciate it. >> thank you. >> susie: my guest tonight, moshe orenbuch, bank analyst at credit suisse. >> paul: lavish executive pay packages left investors unhappy as the financial crisis unfolded. now the obama administration wants to beef up shareholder input. the treasury sent congress legislation today that would let shareholders vote on executive pay. the votes wouldn't be binding and they wouldn't put a dollar limits on salaries. but, the new rules would give compensation committees more independence avoiding conflicts of interest with management.
>> susie: google says its second-quarter earnings jumped 19% despite slowing ad sales. excluding items, google earned $5.36 a share easily beating wall street expectations. revenues rose 3% to $5.5 billion. it's slowest sales growth rate since the company went public. that drop is due to the overall decline in spending on online advertising. but its search engines are still going strong. two out of every three online searches, paul, are done on google. >> paul: google shares closed up
investors aren't the only ones benefiting from the boom. >> reporter: company boss yin mingshan got a shot in the arm just before the financial meltdown, by selling 13.5% of his motorbike to auto manufacturing lifan group to none other than a.i.g. for a cool $90 million. then, as a consequence of a.i.g.'s bail-out, the american taxpayers became, effectively, this chinese carmakers second largest shareholder, after him. now with china's stimulus measures bearing fruit, a bullish mr. yin is throttling up production. and he expects more us strategic investments to follow. >> ( translated ): i think that after experiencing this financial crisis, especially the deal with lifan, they will invest more in china either with other companies or if they are willing and lifan agrees, they can have more shares in us. >> reporter: in the first five months of 2009, china's auto
industry sold almost five million vehicles-- a million more than in america. attractive subsidies for first time buyers, promotions across the countryside, a 50% sales tax cut on smaller vehicles and slashed showroom prices have helped return the industry to growth. but that's not to say everyone has a model balance sheet. the fact is, china's auto industry is badly in need of consolidation. of the country's 150 registered manufacturers, just 20 account for 95% of all sales. the big winners, are the foreign brands with their state-owned joint venture partners. they produce the cars of choice- - commanding over two thirds of the market. china appears to offer the global badge makers a future, while the u.s. sorts out its own restructuring. ford's china based car sales in june were up 55% year on year. while general motors plans to double its china production to over two million units by 2014. stefan kracht is executive
director of the china market intelligence consultancy, fiducia. >> those who are successfully operating in china, i believe, we will see further investments. and rather than being new investments, they are deeper investments into joint ventures that they have already set up or within the value chain: component manufacturers or suppliers. >> reporter: this positive outlook rests on the government's continued auto industry support plus, at the operational level, maintaining low wages. here at lifan, xu yanping works nine hours a day with an hour off for lunch, six days a week. holidays amount to 16 days per year. her monthly take home pay is $190. in new china, an assembly line couple would be hard pressed to buy an apartment or own a car. >> ( translated ): if he's an engineer or in management, i think we could afford one.
if he has the same salary as me, i'm afraid we couldn't. >> reporter: the u.s. auto unions may shudder at this hard reality but, for the big brands that build in china, it's their lifeline. although the government is effectively driving growth and the consumer class is expanding, shop-floor wage hikes would slam on the brakes. and china's communist party, won't let this happen. which is promising news for those linked or linking-up with china. take the case of lifan: in april, mr. yin paid a.i.g. a dividend. nick mackie, "nightly business report," chongqing. >> paul: tomorrow, our friday market monitor guest is gary motyl chief investment officer at templeton global equity. >> susie: u.s. homebuilders are starting to feel better about the housing market. the national association of homebuilders said today its confidence index inched up slightly from june to july. that's due in part to low
interest rates and incentives boosting sales of new single family homes. july's reading of "17" is the highest since last september. but it's still well below "50," which shows market conditions as favorable for sales. >> paul: meanwhile, home foreclosures are still hitting record levels, despite the adminstration's $75 billion plan to help homeowners at risk. over the last six months, one in 84 households got a foreclosure- related notice, a 15% rise from last year. that's according to foreclosure listing service realty-trac.
>> susie: with the failure of small business lender c.i.t. group on the horizon, many people are wondering why talks for additional federal help failed. tonight's "two ways to play" has two takes on whether c.i.t. is too small to save. here's kevin depew of "minyanville" and "minyanville's" kevin depew. >> c.i.t. group, one of the nations largest commercial lenders, is on the brink of failure after being unable to secure additional government backing. the obvious question is why isn't c.i.t., with more than a million small business customers, too big to fail? well, the lesson in all of this is you can save one bank, or as many as 10, even 20, but inevitably there will come a
point when the lifeline just won't reach any farther, and that's what's happened to c.i.t. it's unfortunate, but not every bank can be too big to fail. >> no, no, that's not the lesson at all. let's get something straight. on one side you have a firm like goldman sachs where executives sold $700 billion worth of stock even as they were taking in $10 billion in tarp money; on the other side the small business lender c.i.t., which needed just $4 billion to keep the doors open. one firm, thanks to a little government help, just posted the richest quarterly profit in its 140-year history, the other is now doomed to failure. does that make sense? not at all. so what's the real lesson here? too big to fail has been replaced by too connected to fail. >> susie: that's "nightly business report" for thursday, july 16. i'm susie gharib goodnight, everyone. and good night to you paul. >> paul: goodnight susie. i'm paul kangas wishing all of you the best of good buys. "nightly business report" is made possible by: