Nightly Business Report - Wednesday June 26 2013

7/28/2019 Nightly Business Report - Wednesday June 26 2013

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ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and SusieGharib, brought to you by --

(COMMERCIAL AD)

SUSIE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Watershed moment. TheSupreme Court rules on gay marriage and the impact on business big and small may be farreaching.


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TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: A call to arms. Whyadjustable rate mortgages popular during the housing boom may be on the verge of a come back.

HERERA: And financial fraud. Why today it s being fought by everyone, from theManhattan U.S. attorney to a former Enron fraudster.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, June 26th.

MATHISEN: Good evening, everyone. Along with Sue Herera, I m Tyler Mathisen. SusieGharib has the night off.

Well, the Supreme Court ruled in two cases involving gay rights today in the historicdecisions could have a massive impact on, among other things, what businesses pay in benefitcosts and what the federal government collects in taxes and pays out in certain entitlements. Oneruling upheld a lower court s decision striking down a ban on gay marriage in California. Theother declared the 1996 Defense of Marriage Act unconstitutional. That law effectively deniedfederal benefits to gay couples married under state laws.

Hampton Pearson was at the Supreme Court today and has more on today`s rulings and what

they mean.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):

The two landmark rulings from the Supreme Court were greeted by cheers from the huge crowdof mostly gay marriage supporters who gathered. The justices giving new legal options to samesex couples. It`s forcing the federal government to recognize same-sex marriage in the 12 statesand District of Columbia, where it is legal. In a 5-4 decision, the justices overturned the Defenseof Marriage Act, DOMA, that denied benefits to same- sex couples.


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Speaking for the court`s majority, Justice Anthony Kennedy said, "DOMA writes inequalityinto the entire United States Code." But on a blistering dissent, Justice Antonin Scalia said, "It`sone thing for a society to elect change, it`s another for a court of law to impose change byjudging those who oppose it as enemies of the human race."

President Obama while in route to Africa released a statement applauding the court`s DOMAdecision and directed Attorney General Eric Holder to review all relevant federal laws related totoday`s ruling.

Constitutional law experts say that`s just the beginning of impact in the real world.

JUDITH SCHAEFFER, CONSTITUTIONAL ACCOUNTABILITY CENTER V.P.: Not somuch in the workplace. I mean, for employers but their employees who will now benefit interms of Social Security, health insurance, state taxes.

There are more than 1,000 federal laws that affect spouses and now gay and lesbian couples whoare legally married will be able to take advantage of those protections for their families, as well.

PEARSON: A second ruling clear the way for California to become the 13th state to legalizegay marriage, much to the delight of cheering crowds on the streets of San Francisco andSacramento, the state capital.

The justices let stand a lower court ruling that has struck down Proposition 8, which bannedgay marriage in California back in 2008. The effect is to let California and other states set theirown policy on same- sex marriage.

That California couple that brought the marriage ban to the high court had quite a moment --a congratulatory phone call from President Obama outside the court just moments after the

landmark decision.

UNIDENTIFIED MALE: Thank you, Mr. President.


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PEARSON (on camera): The impact of the two cases, a giant step forward for marriageequity at the state level, but the high court stopped far short of declaring same-sex marriage to bea fundamental constitutional right.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson at the Supreme Court.

(END VIDEOTAPE)

HERERA: And for more on how that ruling will impact the business community, JamesKlein joins us. He`s president of the American Benefits Council.

Welcome, Mr. Klein. Pleasure to have you here.

JAMES KLEIN, AMERICAN BENEFITS COUNCIL PRESIDENT: Thank you for havingme.

HERERA: We heard a little bit in Hampton`s report of some of the broader issues facing

American businesses as a result of this decision, but tell me what you think the biggest impactwill be.

KLEIN: Well, we praise the court`s decision. We had actually filed a friend of the courtbrief. I think we were the only national business organization to join that friend of the courtbrief, asking the court to strike down section 3 of the Defense of Marriage Act, because it puts --it put employers in the position of having to treat some of their legally married employeesdifferently than other of their legally married employees in those states that recognize same-sexmarriage.

It also created various administrative burdens on the employer.


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MATHISEN: What will the biggest effect of striking down of DOMA, the Defense ofMarriage Act, be for American companies? I understand what it`s going to do for federalbenefits and taxes and so forth, but how would companies be effected by this?

KLEIN: Well, for example, companies have to have different payroll functions, andadministrative matters in the same state to treat some of their legally married employeesdifferently than others. That problem is not, by the way, totally done away with now because ofcourse, the situation remains essentially the same in those 38 other states that don`t recognizesame-sex marriage.

There are a number of administrative challenges now facing employees as a result of thischange, even though, you know, the vast majority of the very large employers who we representwere in favor, obviously, of our asking the court to strike down the Defense of Marriage Act.

But, you know, there are issues related to making changes in employee benefit plans now.Do they have to go back and -- and ask for spousal consent in various instances where that`s arequirement? To what extent will any of this be retroactive? Do both employers and theemployees have the right to ask the IRS to refund the payroll taxes and the tax incomes onemployer provided healthcare coverage that until today did not enjoy the same tax free treatmentaccorded to opposite sex couples?

HERERA: So, obviously, it`s very complicated. But if I`m hearing you correctly, the resultof this decision will make it easier for most American companies to be in compliance with thelaw, which then would make them less likely to be open to lawsuits by employees that perhapsunder DOMA might have felt, as though, they were treated unfairly?

KLEIN: No, I mean, employees were in compliance with the law as it stood prior to today.The issue was it created some inconsistencies and inequities for some of their employees andemployers didn`t like that.

They sponsored benefit plans in order to serve their employees and their family members, andDOMA in many respects impeded that ability.

MATHISEN: In those states, I believe there are 13, that recognize same-sex marriage, whathas the experience been of companies with respect to their benefit costs when those laws wentinto effect? Did their benefit cost increase? And if so, by how much? Do you know?


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KLEIN: They didn`t really increase amongst the employers who we represent, who alreadyare providing this coverage. You know, obviously, that was a voluntary decision on the part ofthe employers. Now arguably, employers in those states that recognize same-sex marriagewould be required to provide the same degree of benefits, but most of our member companieswere doing that.

So, it`s not so much that when the states recognized same-sex marriage that it increased theircost, other than some of those administrative costs that I mentioned earlier, whereby there had tobe separate payroll functions and things of that nature.

HERERA: All right. Mr. Klein, thank you very much for trying to clarify a complicated

situation -- James Klein.

KLEIN: My pleasure.

MATHISEN: And to the markets now. Stocks moved higher for a second straight session,despite a downward revision in first product. The economy grew at a pace of just 1.8 percent inthe first three months in the year, a third below forecast, and it was because of lower spending byconsumers and businesses and a sharp drop in government spending because of those mandatorybudget cuts known as the sequester.

But that slower growth appeared to convince investors, for today at least, that the FederalReserve could delay pulling back on stimulus. So, many plowed into equities and bonds astreasury yields fell.

In the end, the Dow was up 150 points, the NASDAQ gained 28, the S&P

500 added 15 to close back above the 1,600 mark.

Another tough session, though, for gold, which fell $46 an ounce today -- a fresh three-yearlow. Gold is now down 26 percent this year as the dollar strengthened and investor fears aboutinflation have fizzled.


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HERERA: The Federal Reserve needs to be more clear about what it intends to do. That`swhen the Minneapolis Fed president said today. He also expressed surprise about the recentturmoil in the markets and the run-up in bond yields, after Fed Chief Ben Bernanke announcedplans to pull back on the Central Bank`s asset-buying plans.

(BEGIN VIDEO CLIP)

NARAYANA KOCHERLAKOTA, FEDERAL RESERVE BANK OF MINNEAPOLISPRESIDENT:

As the economy improves, people should expect interest rates to go up because the Feds should

grow as the economy improves. And that`s as I say a good thing, but I think a lot of themovement and this is where I think we have to do a better job of communicating our intentions, alot of the move, in fact, is due to people thinking we`re going to be having a higher path of theFeds fund rate, then they thought for a given set of economic conditions.

(END VIDEO CLIP)

HERERA: And as for treasuries, they made some gains today after a recent slump to yields

to 2-year highs in the first few weeks. The benchmark 10-year treasury note was up 11.32 inprice, which puts the yield at 2.569 percent.

MATHISEN: And meantime, Bill Gross` PIMCO, that`s the world s largest manager bondfund, is seeing a lot of investor money leave on worries about the Fed`s plans to taper its assetbuying program. Net outflows so far in June at PIMCO`s total exchange traded fund are triplewhat were they in May, $387 million yanked out so far this month. Now the ETF is down 2.7percent year to date but it still has more than $4.5 billion in assets under management.

HERERA: Another kind of interest rate looks to be doubling in just a few days. That afterlawmakers failed to make a compromise on rates for new subsidized Stafford student loans,which are set to double from the current 3.4 percent, to 6.8 percent on July 1st. Now, it lookedlike a bipartisan group of senators were close to a deal linking that rate on all new Stafford loansto the 10-year treasury note until they hit a roadblock.


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MATHISEN: Mortgage applications fell by 3 percent last week as mortgage rates edgedhigher just a bit. Request for new home loans rose slightly. But applications to refinanceexisting loans -- well, they were much lower.

HERERA: Last night, NIGHTLY BUSINESS REPORT introduced you to a home buyerracing against those rising mortgage rates, eager to buy a home quickly, she`s considering nowturning to a riskier type of loan -- one that was popular during the housing boom and she`s notalone.

Diana Olick has more on this new move in mortgages.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Alicia Dieterichshas been frantically touring homes with her realtor, eager to get her family out of the crampedtemporary rental they`ve been living in since her job transfer, she`s running out of time as bothhome prices and mortgage rates rise.

ALICIA DIETERICHS, PROSPECTIVE HOME BUYER: I feel like we re going to bepriced out of buying.

OLICK: Since every penny counts for this family of five, Alicia is now considering a riskieradjustable rate mortgage.

DIETERICHS: Ideally, we would do a 30-year fixed but it`s all going to be depending onthe end mortgage payment of what we can afford. So, we would have to look at an ARMpotentially if rates continue to rise.

OLICK: Record low fixed rates over the past several years pushed ARMs out of favor.During the housing boom in 2006, they accounted for 36 percent of origination. Today, justaround 4 1/2 percent, according to Lender Processing Services (NYSE:LPS).


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But in just the past week, the rate on the 30-year fixed surged to around 4 1/2 percent andlenders like Quicken Loans say they are suddenly getting more requests for ARM.

BILL EMERSON, QUICKEN LOANS CEO: Over the last week or two we seen our ARMproduction double because folks are actually looking at it and saying to themselves, I have a 30-year fixed rate that`s gone up maybe to 4

1/2 percent range and I can look at a seven-year or ten-year adjustable that would have a half to3/4 of a percent lower interest rate.

OLICK: Adjustable rate loans have been often blamed for the housing crash. Their lower

teaser rates were based on the assumption that home prices would only go up. Their delinquencyrate is still more than twice that of fixed rate loans.

But Quicken CEO says the loan product is fine especially now that it`s much harder toqualify.

EMERSON: It really does give you certainly, as well as a lower rate and it has nothing to dowith what took place in the `07, `08 time frame.

OLICK (on camera): While some borrowers are considering ARMs, others are being forcedinto them, in order to save deals and process. They signed contracts to buy homes before ratesspiked and now need that lower rate in order to close.

For NIGHTLY BUSINESS REPORT, I`m Diana Olick in Washington.

(END VIDEOTAPE)

HERERA: And for more on the move into adjustable rate mortgages, log on to our Web siteNBR.com.


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MATHISEN: Coming up: are U.S. defense companies losing their edge to foreigncompetition? We have the results of a new report.

But first, a look at how some of those widely held stocks closed today.

(MUSIC)

MATHISEN: Microsoft (NASDAQ:MSFT) unveiling Windows 8.1. It introduced the freeupdate to its much criticized Windows 8 operating system, acknowledging that the company

pushed too hard to get users to buy its more modern looking interface which worked well onmobile devices but not so well for desktop users.

CEO Steve Ballmer thinks customers are going to be happy this time.

(BEGIN VIDEO CLIP)

STEVE BALLMER, MICROSOFT CEO: What you`ll see and what we will show you as wedemonstrate Windows 8.1 to you is you see a heck of a lot of movement, a heck of a lot ofinnovation, a heck of a lot of responsiveness, all coming to the market in a rapid, rapid timeframe.

(END VIDEO CLIP)

MATHISEN: Microsoft (NASDAQ:MSFT) was one of the best performers on the Dowtoday. It was up about 2 percent at $34.35.

HERERA: Media and retail are some of the companies in tonight`s "Market Focus".


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Amazon (NASDAQ:AMZN) expanded its licensing deal with PBS subscribers, to Amazon`sprime rewards. They will be able to stream past seasons of children`s programming from PBS.Amazon (NASDAQ:AMZN) shares gained more than 2 percent, closing at $277.57 up 23percent over the past year.

Apollo Group (NASDAQ:APOL), the for-profit education company, was a bottom dwellertoday, despite increasing its full year profit guidance.

Investors sold off the company because of enrollment declines and other problems. Apollo lost10.75 percent today to close at $17.39, on five times its normal volume. Shares dropped 51percent in the past year.

MATHISEN: And, Sue, Bed Bath & Beyond (NASDAQ:BBBY) reported a gain in profits

of 4 1/2 percent. That matched what analysts have been looking for. The company said it`scomparable stores sales increased 3.4 percent and it restated its guidance for the year. Shareshad gained 1.7 percent during the day to close at $70 on the button and they moved up in afterhours trading.

Paychex (NASDAQ:PAYX), the payroll company for smaller businesses, reported a flatquarter after the bill and missed estimates because of a charge to settle a tax issue. Revenues up6 percent, and the company is looking for 8 percent to 9 percent profit growth in its new fiscalyear.

Shares had gained almost a percent in the regular session but they did drop off after thatreport was released.

And earlier today, General Mills (NYSE:GIS) posted a 13 percent increase in profits andincrease in revenue, as well, but gross margins shrank because of raw materials cost and thecompany did trim its profit outlook of the future.

Shares of General Mills (NYSE:GIS) traded in a narrow range. They closed a half percentlower at $48.10.


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HERERA: Yesterday, we showed the American CEO of the medical supply maker heldhostage by his workers at a plant in Beijing, China. They say they haven`t been paid in monthsand that the company is moving their jobs to India. Today, that executive, Chip Starnes ofFlorida-based Specialty Medical Supplies, says he`s not planning on pulling up stakes even afterhis ordeal is over.

(BEGIN VIDEO CLIP)

CHIP STARNES, SPECIALTY MEDICAL SUPPLIES CO-FOUNDER & PRES.: I got alot of machinery. I`ve got about 100,000 square feet of facility. You know, so I m stuck hereand, you know, I think it`s in the best interest of the local area here. It`s definitely in the bestinterest of the people that I employ. For us, it`s come to some sort of solution.

(END VIDEO CLIP)

HERERA: Well, Starnes says that he hopes the, quote, "pretty good negotiations", endquote, that are underway right now, will bring his six days of captivity to an end.

MATHISEN: U.S. Defense companies have long been the envy of the world. Our

technology was the best. Our manufacturing prowess, second to none. But now, there is risingconcern that international competitors are closing the gap fast.

Jane Wells has more.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: U.S. defensecompanies remain the 800-pound military gorilla in global arms trade. But look out, the east isrising both in spending and selling. That`s the bottom line from an exhaustive study by IHS(NYSE:IHS) Jane`s Defence which says global defense trade has risen much more thanpreviously thought, now reaching $73 billion, a number it expects will more than double by2020.


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Defense is seeing, quote, "the biggest explosion in global trade the world has ever seen."

Now, the number one category for trade is jet aircraft. It`s the hardest segment for most todevelop domestically, so they need to buy from the outside. This is why the number oneexporter by company is Lockheed Martin (NYSE:LMT), where sales to other countries grew 64percent in four years, to $6.4 billion. Boeing (NYSE:BA) is in second at $5.6 billion, followedby Russia`s United Aircraft.

Up and comers include Israel. Jane`s Defence says Israel UAV manufacturers will beexporting more unmanned aircraft than the United States by the end of the year.

Brazil is also on the rise, selling trainer aircraft to several countries and building new marketsin Africa.

South Korea is, quote, "one to watch". While still a relatively small player, it is growingquickly and as for China, a huge player. The report says, nevertheless, the outlook isn`t as rosyas you might expect.

China does well selling products to countries like Pakistan, like these jet fighters, also

Venezuela and Bangladesh. But Jane`s Defence says it does not do well in markets where it hasto compete with the west. In fact, the report says some Chinese surveillance systems sold toSouth American companies had been returned.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

HERERA: Still ahead, remember this guy? Why Enron`s former chief financial officerAndy Fastow is now talking about the big business of fighting fraud?

But first, how commodities, treasuries and currencies all fared today.


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(MUSIC)

HERERA: Well, it looks like there is finally something to smile about over at Kodak. Abankruptcy judge has approved the photography pioneer`s plan to restructure itself into acommercial imaging business, bringing it a big step closer to coming out of Chapter 11bankruptcy protection.

Kodak`s creditors will vote on that proposal in just the next few weeks.

Ty?

MATHISEN: And there is likely nothing but smiles coming from John Hammergren, theCEO of the drug distributor McKesson (NYSE:MCK) Corp.

That`s because regulatory filings showed he had secured a staggering $159 million pension,which by the way, is far and away the largest pension package on record, more than double the$74 million package for News Corp`s CEO Rupert Murdoch.

Since Mr. Hammergren began running the company in 1999, the results have been good.McKesson (NYSE:MCK) stock price has more than tripled, easily out-performing the overallmarket.

HERERA: And with that kind of money, let`s Mr. Hammergren is a good tipper, whichwould be good news for Starbucks (NASDAQ:SBUX) employees in New York state. A courtthere ruled today that Starbucks (NASDAQ:SBUX) baristas have to share any tips they get withtheir shift supervisors. The New York state court of appeals ruled that supervisors do much of

the same duties as those coffee servers and that both jobs are part time and those workers deservethat extra money. The panel also ruled that full-time assistant managers of those Starbucks(NASDAQ:SBUX) will unfortunately get nothing.

MATHISEN: A new report by the Council on Foreign Relations says U.S.


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oil and natural gas companies are increasingly at risk of cyber attacks and those malwarehackings can lead to costly outages at pipelines, refineries, drilling platforms. The CFR says thatthe energy industry was hit by more targeted attacks from April to September last year than anyother industry.

HERERA: Vicious malware and computer viruses aren`t the only attacks computercompanies have to worry about these days. Financial fraud is a constant worry for businessesand it`s even worse when those firms don`t have much money to lose and that could explain therecord attendance this week at a convention of fraud examiners in Los Angeles.

Scott Cohn was there and has this report.

(BEGIN VIDEOTAPE)

SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):

There`s the latest technology for spotting fraud.

UNIDENTIFIED FEMALE: So these are all the cables you need.

COHN: Workshops on how to detect it.

UNIDENTIFIED FEMALE: Fifty percent of all crimes are uncovered by tips or byaccidents.

COHN: A famous fraud fighter, Manhattan U.S. Attorney Preet Bharara.

PREET BHARARA, MANHATTAN`S U.S. ATTORNEY: The job of the fraud fighter ismore difficult I think that`s ever been.


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COHN: And famous fraudster, former Enron chief financial officer, Andy Fastow, whosespeech was closed to cameras. This wasn`t to glorify him, the group says, but to get into hishead.

JAMES RATLEY, ASSOC. OF CERTIFIED FRAUD EXAMINERS PRES.: What he islimited to doing is coming in front of our people and talking about his thought process that ledhim to commit the fraud.

COHN: Formed in the wake of the 1987 stock market crash, the Association of CertifiedFraud Examiners is now a global organization, and it`s annual conference, a big attraction.

RATLEY: In effect, if an organization has assets, they have a fraud problem.

COHN: No wonder, the organization says, attendance this year set a record.

(on camera): Business is good?

MICHAEL HANSEN, H-11 DIGITAL FORENSICS: Yes. So business is great.

Business is booming. And that`s sad.

COHN (voice-over): Inside the exhibit hall, companies are selling tools to scrape data fromsmart phones.

TATIANA PANKOVA, OXYGEN FORENSICS: (INAUDIBLE) the data, all applications,

Skype, delete these messages, delete face time calls.

COHN: These guys will send your company phony invoices to put your account`s payabledepartment to the test.


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UNIDENTIFIED MALE: We`re hoping to save a lot of money and cut some of the waste.

COHN (on camera): And to put everything in prospective, there is this traveling fraudmuseum, with everything from a 1940s chain letter to this, a promotional cigar box that wasgiven away to clients of Bernie Madoff.

(voice-over): For attendees that come from all types of businesses and companies their goal,compare notes.

MIKE TIMONEY, BANK OF AMERICA: My goal is to protect our customers and makesure they aren`t defrauded. So, anything I know what is going on in the industry helps better

prepare myself.

COHN: And with fraudsters getting smarter all the time, fraud fighters will never run out ofthings to talk about.

For NIGHTLY BUSINESS REPORT, I`m Scott Cohn in Las Vegas.

(END VIDEOTAPE)

MATHISEN: Pope Francis has named a new commission to look into the Vatican Bank`sgoverning structure, amid charges of corruption, and a new investigation into a moneylaundering ring there. The Vatican Bank not only handles millions of dollars to run theVatican`s operations and finance charitable works, it also manages the pension system forthousands of Vatican employees.

HERERA: And finally tonight, Christie`s Auction House in London sold Elizabeth Taylor`svery first wedding dress to an anonymous buyer for more than twice its original estimate,$187,000. The Oscar winning actress wore the dress which included 25 yards of satin and a 20-inch waste at her 1950 wedding to the hotel magnate Conrad Nicky Hilton, Jr.


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MATHISEN: That`s a beautiful dress.

HERERA: It is a beautiful dress.

MATHISEN: And congratulations to our Susie Gharib, who today received a Gracie Awardfor outstanding interview or feature for her profile sometime ago of Harvard University`s firstwoman president.

Congratulations. Makes you proud of her.

HERERA: And so well-deserved, right?

MATHISEN: Absolutely, yes.

HERERA: She does a fantastic interview every time.

MATHISEN: Yes.

HERERA: All right. That will do it for us on NIGHTLY BUSINESS REPORT. I`m SusieHerera. Susie will be back here tomorrow. Thanks so much for watching.

MATHISEN: And I`m Tyler Mathisen. Great to be with you, Sue.

Thank you all for watching. Have a great evening everybody. We`ll see you back heretomorrow.


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END

Nightly Business Report transcripts and video are available on-line post broadcast athttp://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may beposted at a later date. The views of our guests and commentators are their own and do notnecessarily represent the views of Nightly Business Report, or CNBC, Inc. Informationpresented on Nightly Business Report is not and should not be considered as investment advice.(c) 2013 CNBC, Inc.

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Nightly Business Report - Wednesday June 26 2013