E-mail a friendMaria Bartiromo
airdate September 15, 2008
One of the most influential voices on Wall Street, Maria Bartiromo is CNBC's business news anchor. She hosts the net's Closing Bell and the nationally-syndicated Wall Street Journal Report, for which she is also managing editor. She's also a writer for several business magazines and author of Use the News. Bartiromo was the first journalist to report live on TV, daily, from the floor of the New York Stock Exchange. She was previously a producer and assignment editor with CNN Business News.
CNBC business anchor sums up what today's financial news means to the economy and to everyday people. (2:20)
Full interview. (12:19)
Maria Bartiromo
Tavis: Tonight, though, we begin with the troubling economic news of this day - the collapse of one of the nation's largest banks, Lehman Brothers, and the buyout of another, Merrill Lynch. Just after the markets closed today I spoke with CNBC business anchor Maria Bartiromo from the New York Stock Exchange following a wild day on Wall Street.
Maria, nice to have you back on the program.
Maria Bartiromo: Thanks very much, Tavis, good to see you.
Tavis: Good to see you. Let me start by asking you to set up for us what happened today. It just seems like a tragic perfect storm on Wall Street.
Bartiromo: Well, I think that's pretty accurate, actually. Over the weekend there were emergency talks between regulators and bankers, and basically, regulators, being Hank Paulson at Treasury and Tim Geithner at the New York Fed got together with executives from Lehman Brothers and tried to help Lehman Brothers engineer a sale - not providing any money or any backstops the way that we saw with Bear Stearns, but tried to get Lehman Brothers together with other firms like Barclays, like Bank of America, to see if Lehman could be acquired.
Both Bank of America and Barclays walked away from the deal and Lehman was forced to go chapter 11 and declare bankruptcy protection. At the same time, after that failed Bank of America turned its attention to Merrill Lynch. John Thain, the CEO of Merrill Lynch, actually made the overture.
He called Ken Lewis at Bank of America and said, "We should talk about the possibility of doing a deal." They agreed on a $50 billion agreement where Bank of America will acquire Merrill Lynch at $29 a share - a 70 percent premium to where that stock was on Friday, but not such a big premium when you look at the stock just a week earlier.
The bottom line is the financial services industry is in bad need of capital. Tonight as we sit here AIG is struggling to put together its own rescue plan. The feds are allowing it to use $20 billion in capital from its subsidiaries to use in its main business, and they're trying to engineer a fund put together by Goldman Sachs and Morgan Stanley, of $75 billion to help AIG.
As a result of all of these concerns, the fact that the financial services industry in America needs capital and has put itself in such a corner by taking on so much risk that now they are in a hole and they will continue to see losses as a result of these mortgage-backed securities that the market tanked.
It was a tough morning. The market opened lower, continued to trade lower, and in the final hour of trading tonight things really accelerated and the Dow Jones Industrial average lost better than 500 points - the worst day since 9/11. In a nutshell, that is what happened today.
Tavis: Let me go now back and pick some of that apart, if I can. Let me start with your assessment of a moment ago that because the industry took on so much risk, this is what happens on a day like today. Explain what you mean by the risk they took on that caused all this to happen, Maria.
Bartiromo: Well, it's really a déjà vu, because we've seen things like this before when we are all in an environment of euphoria, and that's what we were seeing when the housing market was booming. Remember when we would read the papers and see on television oh, the average home in I don't know, pick a city - Phoenix - is up 40 percent year-over-year for no real reason. Nothing really happened in Phoenix that changed the environment so much.
But there was a feeling of urgency in the market, that you had to buy, buy, buy, buy, buy a home, and as a result, all of that interest sent prices higher and the housing market booming, and as a result of that lenders became lax. Lenders like Countrywide Financial and non-banks that were not regulated by traditional regulators.
These are non-banks. All the commercials that we would see on TV, "Oh, we'll give you a mortgage, don't worry that you're not going to have evidence that you even have a job, and don't worry about giving us the specifics on your salary - we'll lend you the money." All of this led people to take out those mortgages and get in over their heads.
So people took out the mortgages, they got over their heads, they defaulted, they could not pay their mortgages, because at a moment in time we had resets. In other words, interest rates reset, and so people who had adjustable rate mortgages saw their rates change and in a nanosecond they no longer could afford that mortgage.
So how did the investment banks get involved? Well, the investment banks at the same time decided to come up with innovative products - new structured finance products where they would basically package mortgages that were sold. And they had innovative structured finance products - credit default swaps is really the technical term - and subprime mortgages that they put together in securities that they would sell to other investment banks and other trading houses, and eventually investors would buy them.
But when people started defaulting on their mortgages it became clear that those mortgage securities were no longer valued at what the banks thought they were and they started plummeting in value. Next thing you know, the market shut off - there was no market to sell any of these securities.
Next thing you know, all of these major investment banks were holding the bag, and they were holding billions and billions and billions of dollars worth of so-called "tier three" assets, or the riskiest of mortgage assets imaginable. And they had them on their books and quarter after quarter they tried to value that and said, "Okay, I'm going to take a $50 billion write-down." "Okay, I'm going to take a write-down against earnings."
But it wasn't enough, because the market never loosened up. No one wants those securities anymore because there are so many foreclosures and defaults, and they are continuing to plummet in value. Now it's judgment day, so you have the likes of John Thain at Merrill Lynch looking at his balance sheet, saying, "Well, I probably will take a write-down next quarter, a write-down the following quarter, a write-down the quarter after that. Well, it looks like I'm going to have to raise more capital. Well, if I raise more capital the stock is going to plummet further and then I'll have to put up more collateral. Well, it looks like I'm going to have to sell the firm."
Now, John Thain actually did the best he could do with a very, very tough hand he was dealt, because he's not the one who took on all that risk - that would be Stan O'Neal, the former CEO. So a number of executives - and of course the next question is how is it possible that all of these firms, supposedly good firms with smart people running them, actually all did the same thing and took on all of this risk during a period that was way too euphoric and the boom in housing was unsustainable?
Well, I guess that comes down to one word, and that would be greed.
Tavis: (Laughs) Nice summation. That's about where I was going to end up, so we're on the same page there. Let me go back now to something else you said earlier which we all read about - that is this emergency meeting of all these banking industry VIPs, this meeting called by the Treasury secretary and by the fed chairman, the chairman of the Federal Reserve Bank, this meeting that took place last weekend.
Talk to me about the role that the government has decided to play and to not play this time around.
Bartiromo: Well, the government has decided to play an important role, and that is trying to get confidence to return to the market, which is a very, very important role. It really is all about confidence. If we don't have confidence back in our financial system and in these global markets, it will be very, very difficult to actually see a floor and see housing prices stop declining and mortgages stoop defaulting and the losses continuing on the books for the major firms.
Treasury Secretary Hank Paulson, Tim Geithner at the New York fed, Ben Bernanke at the Federal Reserve, they feel and felt that Fannie Mae and Freddie Mac, the two mortgage lenders, the giants in mortgage lending, really were so important and so critical because they are originating a majority of the mortgages in this country.
They felt that those two firms were so critical to the actual wheels turning in the housing market that they absolutely had to be there, and they had to have a notion in the market that - I remember Hank Paulson called it "Carrying a bazooka around" when he was testifying in front of Congress, asking Congress to give him the authority to be there and backstop and bail out Fannie and Freddie, no matter the number - whatever it took.
He said, "If you're walking around with a water gun in your pocket and nobody sees it, they may think you really don't have any wherewithal to do anything. But if you're walking around with a bazooka on your shoulder, everybody knows you've got the bazooka there and if you need it, you're going to use it."
And he said, "Look, we may not necessarily end up using it, but I need to be there so that the market feels that I will." So they deemed it necessary to be there and help Fannie Mae and Freddie Mac. There was criticism when the Federal Reserve backstopped that $30 billion for Bear Stearns. Remember, the fed and Treasury put itself on the hook that they would be there to provide $30 billion, buy $30 billion of bad mortgages on Bear Stearns' books if J.P. Morgan were to acquire Bear Stearns.
There was criticism about that because let's face it, Tavis - we don't live in a socialist economy. This is a democracy, and the free markets are supposed to rule here. And so people thought, what is the government doing? What are you going to do, bail out - well, then what about the other banks? What about the automakers? What about the airlines?
Are we going to bail out everybody who takes on all this risk instead of just look; you took on the risk, now you fail? So I believe that the fed and Treasury were actually looking for an opportunity to make a statement and send a message to the market that look, we're not going to be here at every failure, and that's basically the opportunity they found in Lehman Brothers, and that's why they were not there.
Tavis: We've talked about Lehman, we've talked about Bank of America, we've talked about Merrill Lynch, we've talked about AIG, what may be coming in the next day or two. We've talked about Fannie Mae and Freddie Mac. At the end of the day, this does have, obviously, some impact on everyday people, and that impact, Maria, is what?
Bartiromo: Well, the impact, first off, is the nervousness. People are worried - is my money safe? I've got accounts at Merrill Lynch; I've got money at Bank of America, money here, money there. Is my money safe? That's what everybody's thinking and wondering right here.
Look, let's face it - the financial system, the banks, are really the underpinning of the world economy. It's the underpinning; it's where the money is. So people right now are jittery, they are nervous, they are also upset because we're seeing job losses on Wall Street, and that's going to have wide ripple effects.
At the end of the day, I would say you need to stay calm and recognize that yes, your money is safe. First off, the FDIC does insure up to $100,000. Let's say you have more money than that in terms of accounts at various brokerage firms and in other commercial banks. That money is insured as well. It is in a custodial account. If you have money in a brokerage firm like a Merrill Lynch or a Lehman Brothers, it's in a custodial account and it will be transferred to the bank or investment bank that acquires that company.
So the money is safe and people can be sure about that. It really is more a sense of returning confidence to this market so that we could see a little stability. And I think that's what the feds are trying to do and little by little, that will happen, Tavis. These things take time. This is going to play out. I'm hearing that we probably won't see a real stability until well into '09.
Ken Lewis, chairman of Bank of America, said to me, "We probably won't see real stability until sometime in 2010. So we're in for a rough ride because the layoffs continue and the economy is slowing and the rest of the world is slowing down also, so that will impact things as well.
Tavis: No better person than you to explain this stuff to me and everybody else, so thanks, Maria, and I'll talk to you soon.
Bartiromo: Thanks, Tavis, see you soon.
Tavis: Take care, now.
Back to September 15, 2008