Wall Street Week with Louis Rukeyser; 2042; Chaos for Financial Institutions?

Wall Street Week With Louis Rukeyser is made possible by the financial support of viewers like you by the travelers. Over 40 million Americans benefit from our insurance investment services and managed health care. The travelers by Ameritech Ameritech Sabella companies and America text other communications businesses creating better ways to communicate here and around the world and vie for eventual security is the knowledge and resources you need to help make intelligent investments rock solid market wise. Reduced Friday April 19 tonight special guest star Burt Healy president Healy and company James R. Jones chairman American Stock Exchange and George and Salem senior banking analyst Prudential Securities. Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back.

Well this was Education Week in America the week when every sitcom from here to Burbank was preaching a little lesson about staying in school. And when George Bush himself who once allowed as how he'd like to be remembered as the education president opposed what he modestly called a renaissance and a revolution in American education. By millions of Americans haven't paid this much attention to education since that cute red head showed up as substitute teacher for the sixth grade and the basketball team went undefeated. But education has always had a high priority in these precincts. And so I thought it would be appropriate as a show of patriotic support for this new presidential initiative to hand out a report card of our own for the week's events. We live to serve. For starters you have to give an aid to the stock market which also gets the special teachers prize for general improvement. For this was the week when the Dow Jones Industrial Average whose failure to join other leading

indexes an all time record territory had been darkly described by the diehard pessimists as highly ominous. Once again confounded those alarmists by doing what many of them had asserted could never be done and closing at last above 3000. Given that this renowned index of blue chip America had never closed above 2000 until 1987. And given that barely nine months later headlines were being made by frightening gloom Stu's conjuring specters of 1929 and the sense below 500. It was clearly the most spectacular comeback since the boomerang. And a time for all good little boys and girls who did what teachers said and kept the faith. To go out in the schoolyard and rejoice. The market didn't quite qualify for an A-plus because it promptly got one of its familiar nosebleeds in the stratosphere above 3000 and couldn't end the week that high. But there could be no doubt in the

mind of any rational person not trying to sell a newsletter. That the stock market was strongly signaling an economic recovery later this year. A signal that for generations has never failed to be a correct one. As for the economy itself it's grayed this week was still no better than a C-plus. The country plainly remains in recession a more serious one in some areas and some industries and others but overall we're still moving back. The good news such as it is is that the rate of decline is slowing. Industrial production had its sixth straight monthly fall for example but the smallest of the six housing starts were down but not nearly as much as they were up the month before. And there were indications on the jobs front that unemployment pressures may be just starting to ease with the prospect of better numbers by year end. It was obviously not a boom or even what could fairly be described as a recovery yet. But the signs of future strength were sufficiently convincing to persuade many nervous

bond traders that interest rates might not be coming down as quickly as they had hoped. There where we of course would be the economy's gain. And so it has a good chance to improve its grade later this year. And finally an F for the Chrysler Corporation. Which has been laying off employees having its dividend and generally acting like a company in serious trouble. But which nevertheless managed to give self-promoting boss Lee Iacocca a 15 percent raise to a presumably barely adequate four point six million dollars last year by Chrysler's arithmetic if the company goes completely bankrupt. They might give Iacocca a really big raise. We tonight are going to look at something much closer to home your home and your money and see how safe it really is in the troubled American financial system. But first let's see what set off all the cheering in Wall Street. The Dow Jones Industrial Average climaxed a six day win streak on Wednesday by recording its first ever close above

3000 at three thousand four point forty six. The excitement was too much to bear however and profit taking set in. Though the index of 30 major corporations still ended the week with close to a forty five point gain in it twenty nine sixty five point five on. The New York S&P and over-the-counter composites move to new records of their own during the week. The late profit taking in the OT see its first loss in four weeks. Also taking a loss was our elves index. As chief elf Ralph Acton Pora downgraded from bullish to neutral on the next six months removing the indexes outright buys signal but leaving it at a still bullish plus 4. Assuming that is that you believe in elves. Now before we meet tonight's special guest let's see why frightened Americans looking at the financial scandals of recent years have begun to ask is it safer under the mattress. In the past four years alone more than 750 U.S. banks with deposits of

70 billion dollars have closed so far this year there have been 22 more bank failures representing assets of another 25 billion. The Federal Deposit Insurance Corporation fund which guarantees that deposit is won't be left in the lurch has steadily dwindled in recent years. In 1905 the fund had a dollar 19 to cover every hundred dollars of deposits. Today it has only 17 cents per hundred dollars and is scrambling to borrow 10 billion dollars to rebuild the fund. Meanwhile in what has been described by one bank analyst as the worst year for banking since the Great Depression problem loans rose in 1990 to more than 3 percent of assets a post-World War to high. Largely because of disasters in commercial real estate. But the debacle of the decade is surely that of the Savings and Loans. If a check could be written today to resolve the problem it would cost taxpayers at least 175 billion dollars by the

time you add in expected future interest payments. The total will easily exceed half a trillion dollars. As for Wall Street 1990 was the worst year on record for the securities industry. The three hundred thirty three firms that are members of the New York Stock Exchange reported a combined loss of well over 100 million dollars. Smaller bonuses and outright layoffs were the order of the day. Even though this year's first quarter has shown a solid turnaround how fragile is the financial system of the United States and other further catastrophes just waiting to explode. With me tonight are three men in the middle of the milestone. Burt elite president of the company that bears his name has been perhaps the most accurate voice in America in calling the turn on the savings and loan crisis. George Emsellem has been a renowned bank stock analyst for 22 years and is currently senior banking analyst for Prudential Securities. James R. Jones as you know the nation's financial problems from two quite different perspectives

as chairman of the House Budget Committee and now as chairman of the American Stock Exchange. Gentlemen let me start by asking each of you what other issues if any are waiting now to drop on the American taxpayer or save it what do you think. Well Lou despite all the bad news about the banks I don't think there's going to be a taxpayer bailout of the FDIC. However I'm pretty concerned about the some segments of the insurance industry. And I think we'll hear growing cries There may be a need for a federal bailout of some aspects of that industry. George what do you think. Well from the perspective of my industry Lou I have to disagree with Bert. I feel that the FDIC fund is so thin right now with only a few billion dollars in it and the need is for several maybe tens of billions to replenish it. And the question banking industry cannot provide that without severely hurting itself. So I think that the Congress will have to pony up some money to replenish the FDIC will give her chance to come back in a minute but first let's hear from Jim.

I guess I'm more optimistic. We were so excessive in the 80s we still have to work her way through the excesses of real estate and the financial institutions but I think the combination of fiscal policy being kept on track Fed's monetary policy being expansive I think we're going to see the full recovery coming in the first quarter of 92 at the latest. Let's get back then to this issue in which we had this immediate spark of disagreement. You have suggested birth that there's an easy way out that doesn't cost the taxpayer money would you explain that to us. Well the thing we have to remember is that the banking industry is now going to be paying 6 billion dollars a year in premiums over the next fifty six years with the resources that are there now will be 50 billion dollars available to deal with bank insolvency survey failures. And I think that if the regulators can promptly close failing banks that that is going to be more than enough and it will not have to be a need for taxpayer money before Georgia comes back.

Haven't you suggested that the banking industry itself should handle its own insurance. Yes I have but I think that that's a longer term reform of deposit insurance. There's over two hundred twenty billion dollars of capital in the banking industry there are strong earnings potential there. And that's more than enough to protect taxpayers against any losses in protecting depositors. George you've been on target and been downbeat about the prospects of the banking industry didn't win you many friends within the industry. You say the worst is not yet behind us is that right. Well I think the worst is over for the banking industry but it's going to be a long workout I think that we'll still have problems for banks next year and the year after but I think the crisis atmosphere that we had last year won't return. Jim will the United States Congress endorse major reform in this area or they will stay with the present system. I think it's going to take a major push by the White House I don't think the Treasury Department can do it and Congress won't do it on its own. But I think in answer to both Byrd and George I think it's fundamental to have some reforms in the financial structure and allow banks to do

interstate banking that cut some of their cost a major part. And that's fundamental to getting the banks healthy again. The banks are in competition with among others the securities industry which you now represent. So you've got some resentment from old Oklahoma bankers. Well actually I think if we close our eyes to the fact that we're in a global marketplace we're doing ourselves a disservice globally. We're going to be looking not at segmented financial institutions but by financial institutions. And so we're going to have a financial restructuring plan at some point in the next two to three years if we're going to be globally competitive so I don't I don't think that they have to be mutually exclusive or one in one fight the other global has certainly been the thrust of your own activities at the Amex including some new derivatives warrants that allow you to speculate on foreign stock indexes and so forth. All that is exciting. All that is interesting and many people are glad that the American Stock Exchange is not going to evaporate. But what does this do for the small investor. The

IMAX traditionally had a role there because smaller companies smaller investors were attracted. But all the institutions going to take over the whole securities business. Well no I don't think so as a matter of fact we're the only market place where the individual investor still has the majority of our volume and that's because we also have as a market niche for equities midsize growth companies and they're coming back strong. But these equity derivative products play a very important role. First of all is capital formation tools. And then secondly is sort of a relatively inexpensive insurance policies particularly as individual investors and institutions are more involved in global trading. We found that out with the Nikkei warrants. Two factors brought the individual investor into those. One was was one of the few ways you could be involved in Japanese stocks and number two it was an inexpensive way to hedge against a Japanese portfolio or those of us who believe in the in the individual investor just talking about the buggy whip

industry or is this in fact the trend against the individual investor can be reversed. I really think it can be reversed and I think it should be reversed. All the time I was in public policy I thought the magic of the marketplace where the multiple fingers of a lot of individuals owning corporate America and I think that is still a fundamentally important part at the amount American Stock Exchange we very much we don't want to ignore the institutional investor but we very much want to get an individual investor back you want so that you know more about markets and other members of Congress I'm sure that's true although I'm not sure that's a great distinction. If I say Can I also say there was a great is this Congress seems loath to vote for example for capital gains tax cut. Do you see that coming as a feasible political possibility. I don't see it coming in the present political atmosphere in Washington. And I think that's a dumb mistake quite frankly. As you know I authored along with the late Bill Stiger the seventy eight tax bill that cut capital gains in half and it was the most

important factor in the release of entrepreneurship in the high tech industries. I think that you have to have incentives to invest capital in productive. Enterprise's one last question before on this area before we go back to the banking system the capital gains cut in 78 you coauthored produced significant revenue for the government. That's right. The early one couple against tax cuts produce significant revenue for the government. But every time I pick up a newspaper I read that it's a money losing tax cut. What's going on. Well I mean it it's those who use the linear model that says if you cut taxes this much you'll cut revenues this much or the ones that say it's a money loser. What they don't factor in these in these projections is the effect it has on people's behavior. The effect of turning over assets for example and the proof is in the pudding as you say after the 78 tax bill. Well the Treasury Department said you're going to lose revenues

on this. The capital gains portion after it was cut from 49 to 28 percent actually increased revenues to the federal government. I think that's a bogus argument. Is the president pushing hard enough on this one. No I don't think he is but the partisan atmosphere in Washington right now makes it virtually impossible and I think that's why this commission whether Alan Greenspan is the right person to head up or whomever has to look at it in a nonpartisan way to get it out of that partisan political arena. I think he's the right person is against a couple against acts. But first let's go back to the SNL for a minute. Is it time to bury them. Is the industry going to evaporate in this decade. Yes the industry definitely has in fact there are many arsenals who are ready to say regulators just as if we were bacon I'm disappointed in the Treasury legislation this year didn't deal with the needed overdue regulatory phase out of the separatist male industry I think that it may come within the next couple of years because the marketplace has already put the brakes on this and all together you have that choice.

Yes I do a lot of the SNL is a folding right into the banks. Banks have acquired them for their deposit bases and have converted them almost instantly into commercial banks. George you gave our viewers a good lead last June when you were negative on most bank stocks and they in fact performed very badly although some of your competitors were recommending that at that time. Are you still so negative on the upswing. No. At the worst point last year Lou I had only one buy rated stock and 15 sell rated stocks. Today I have five buy rated stocks. Nine holds and nine cells. That's relative you for your and your for I want to host this. I find Pfizer JP Morgan singularly Among the money centers and then among regional banks. Bank One pokemon bank shares. First we're cold here and I forgot one. It's that you're not going to get it from me. Oh it's NBG Bancorp.

I have allergies to the Michigan folks. Very good form and beauty for National Bank of Detroit right holding up is that too downbeat and analysis for you. But no not necessarily because while I feel that the industry is going to be able to pay for cleanup its problems there's still a lot of uneven and mixed news out there about banks not all the shoes are dropped in individual banks in terms of loan loss revisions and the banks it George's side are considered to be the really quality institutions who are more clearly than the others coming through without serious problems so I don't think it's. That downbeat at this time. But we don't have an hour or two hours or five hours to discuss the SNL as we could use all that time and more. But I just want to focus on one thing which you have said which is in disagreement with some of the kind of conventional wisdom you don't think of Freud was a significant part of the reason for this problem. No I don't speak to that.

The basic reason that the industry failed is a whole set of public policy failing time identified 16 yes and L's were doomed to fail by virtue of the fact that a traditional SNL far short term and long it's a recipe for financial disaster. By 1980 the industry was ready to collapse high interest rates did you know and the federal government the Congress the ministration mismanaged the problem the unities and it reached the point that the fraud came along largely because the government let insolvent situation stay open too long. And my estimate is that fraud may account for maybe 3 percent of the losses. Not an insignificant amount of money but hardly the cause of the crisis and the future is the same kind of regulation for all some other type financial institutions such as banks that's now without question this is the direction to be moving in. In particular the last couple years is to narrow the regulatory differences between banks and SNL. Now it's up to the Congress just to finish that job so that people don't lose sleep tonight.

Let me ask if any of the three of you think that. That the positive was funs under $100000 in an insured institution needs to worry about the safety of those deposits. I don't do no good you all except now and then let me ask the other question. How about the big deposit with more than $100000 should sit here she worry and there's a good public policy that they're not worried. Well I would say that first of all large depositors and large banks is a pack of matter don't have to worry because of the so-called too big to fail policy. How many banks are said to be too big to fail. No we'll put a number on it my estimate is that any bank of a billion dollars or more is probably not going to be liquidated by the federal government so this frankly is discriminatory to the smaller banks but no one's figured out a good way to get rid of that policy. And so that's why large depositors as a practical matter have very very little risk. I do think it's good public policy that we have a list of banks. Too big to fail. Well it probably is theoretically no.

Practically yes. But having said that I also believe that those who do have larger than hundred thousand dollars should not be protected. There ought to be some risk in that. And that's the thing that they're wrestling with I don't know how they're going to get around it. Well I'm talking with you I mentioned earlier that many of those indexes hit all time highs this week. The conspicuous exception was the American Stock Exchange Market Value Index. Why is that lacking. Well considering where we started the beginning of the year it's up considerably It went from about 300 to 360 or so. And our all time high I think was 390. So we are in the right direction and we expect we expect to do well. The conventional wisdom is that the many energy companies there but you dispute that. Now they're only about 10 percent of the companies or energy companies. We have a much greater diversity than we had say 10 years ago. And. Let me get back to Bert because you threw in some of the beginning that I don't want to just leave there which is that the next big problem may be

the insurance industry which would give us some detail on that and the other two don't come in. OK well we've certainly seen it recently with the regulatory takeover of the first executive of life insurance company that had a vested very heavily in junk bonds. But there are other major insurance companies have had some problems also some growing concerns about the property casualty companies. Right now there is a set of state mechanisms in place to protect policyholders up to a certain level. There's a concern that the state systems are going to break under the burden. And that's why the problem may go to the federal policyholders worry. I think policyholders do need to worry any even small individuals individual policyholders because often the state plans only protect policyholders up to $300000. And people are asking more and more questions about how strong their insurance company is and it's good. George what's your view. I'm going to pass because I work for an insurance company.

Well I hope that they can meet your paycheck each week. Well I'm not really an expert in the insurance business but it appears to me that many of the smaller companies are going to get a much closer look and that this is going to be an opportunity and also responsibility for the larger insurance companies. Jim you obviously believe in the future the American stock adjourns the Nasdaq over-the-counter market system is a very strong system. We have too many regional exchanges. I think you're going to see among the exchanges it's the same thing is happening among the security firms and that is a contraction. There will be fewer of them five years from now. I think there will be either consolidation as joint ventures or some just will have a reason for being. I think the the two basic auction markets will continue to exist and will continue to grow stronger because I happen to think that that's a preferred system obviously. You had a gutsy and controversial campaign in which you took on the over-the-counter people you said that their spreads were much wider than yours have evidence of that.

Oh yes the research is very clear on that and I think one of the one of the projects I said in your jargon myself that meant that the gap between what people boarded out and what they saw that was too. Yeah well there are two entirely different concepts. One the over-the-counter system is a professional dealer system and essentially they do what Will Rogers said you buy low and sell high. And the auction market system is where the specialist steps in on behalf of the public investor. So yes the public investor gets a better deal I think in the auction market. So we're nearly out of time. Burt says we have to keep our eye on the insurance companies. George says the banking industry is scarcely thriving Jim says the American Stock Exchange is on the rebound it is thinking globally. Obviously it's going to be an exciting decade I thank you all three of you for helping us get a handle on some of the ways it's going. Hope you'll all be back with us next week. And we're going to focus on a long neglected area. Who is our many believe has come round at last in this

1991 market small growing companies. I guess foster free is a man who has made it big by regularly thinking small. And he now runs more than a billion dollars in investments. So join us as we say you have little things can mean a lot. And why was it been Wall Street Week. I'm Louis Rukeyser. Good night. Wall Street Week With Louis Rukeyser has been made possible by the financial support of viewers like you by the travelers over 40 million Americans benefit from our insurance investment services and managed health care. The travelers by Ameritech Ameritech Sabella companies at America other communications business is creating better ways to communicate here and around the world. And by Prudential Securities the knowledge and resources you need to help make intelligent investments rock solid market wise for a printed transcript of this program send $5 to transcripts Wall

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