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QUEST MEANS BUSINESS
Market Responds to RBS Loss; Business Leaders Go to India
Aired November 5, 2010 - 14:30:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS.
This is CNN. And on this network, the news always comes first.
A short while ago we learned that Al Qaeda in the Arabian Peninsula has admitted it was behind the parcel bomb that triggered an international security alert. The claim of responsibility appeared on various radical Islamic Web sites.
Printer bombs sent from Yemen were intercepted in the U.K. and Dubai a week ago. They were addressed to synagogues in Chicago.
Hurricane Tomas is lashing Haiti and that's triggering mud slides and flash floods. Forecasters say the category one storm could dump 38 centimeters of rain. There are already reports of destroyed homes, downed trees and flooded rivers. Many survivors from January's earthquake are riding out the storm huddled in their tents because they have nowhere else to go.
In Northwest Pakistan on Friday, Friday prayers were shattered when explosions hit two mosques. At least 67 people were killed when a suicide bomber blew the roof off a shrine near Peshawar. The Taliban has claimed responsibility. Later, militants tossed grenades into another mosque and killed four people.
Search crews are at the site where an Air Caribbean plane crashed in Central Cuba, killing all 68 people on board. An eyewitness says she saw the plane hit the ground and then burst into flames. Authorities are trying to determine why the twin engine Turbo Prop crashed. There were 40 Cubans and 28 foreigners on the flight, which was from Santiago to Cuba to Havana.
So, the results of two bailed out businesses have taken a serious turn for the worst and that's causing concern all around.
Now, if we start with the Royal Bank of Scotland, RBS. Now, it's 83 percent owned by the U.K. taxpayer. It was one of big banks that had to be bailed out during the crisis 18 months ago.
But now, having made a profit, it's reporting a $1.8 billion Q3 net loss.
Well, it's an improvement from the same time last year, but a very disa -- a major disappointment after its Q2 results. RBS says its recovery is on track and that the accounting charges related to the government's costs for the asset protection scheme. In other words, the very thing that it needed to draw in to prevent it going bankrupt has now taken it into a loss.
AIG, which still owes the U.S. taxpayer more than $100 billion, lost 2.4 in the third quarter. It made $455 million in the same period last year.
And just like RBS, the reason is the charges that the governments are insisting upon, in AIG's case, related to the sale of two Asian life insurance units. It's all about insurance.
The RBS share price actually rose after the results came out and settled in the red.
I spoke to Ralph Silva, director of Silva Research, about the market response to the results.
RALPH SILVA, DIRECTOR, SILVA RESEARCH: We're celebrating the fact they only lost about two billion pounds, which is absolute insanity. But we do know where the losses are coming. The losses are coming, it's related to the money that they owe. The interest on the money that they owe is more than they're making profit. They simply can't pay down their debt. It's like you or I having a credit card bill and we can't even keep up with the payments. That's their problem.
The good news, however, is that they are making money in retail banking. But that's not their history. They're far more profitable in investment banking and they're still losing money there.
QUEST: So operationally, they're making money. It's only when you go to the consolidated account that it all looks nasty?
SILVA: That's correct. But they're not making enough money. They need to be making more money just to pay their debt and they're not doing that.
QUEST: OK. But they can't -- but how are they not making money?
I mean even -- everybody's making money. All right, the investment banks are not making as much as they were, down 30 or 40 percent in -- in some cases. But they're still making money.
SILVA: They are, but there's this idiosyncrasy about the financial services industry in Europe, is if the banks are not growing, they're not profitable. If they stay the same, they actually lose money. And RBS isn't just staying the same, they're getting slightly smaller year after year. And that's problematic for the bank.
QUEST: You have a view on why RBS may be having unique problems. They're 80 percent owned by the U.K. government.
SILVA: Well, that's one issue and I think that most large organizations that want to do business with a bank steer away from RBS.
There is a potential, however remote, that the government will see the books of the customers.
So why take the chance?
When you have four or five other banks offering the same products at pretty well the same price, that's where you go. They're losing business because they've lost the people and there's a risk of the government knowing what you're doing if you do business with them.
QUEST: Are you paranoid?
SILVA: I'm a little paranoid when it comes to this, because the large organizations are under attack, because they're not hiring more people, they're letting people go. They're under a tremendous amount of stress themselves and the government wants to attack some more.
So I am a bit paranoid when it comes to the corporate banking environment.
QUEST: As we come to the end of a reporting season, the third quarter, and we've got quantitative easing just coming in, $600 billion, do you head toward the rest of the year optimistic?
SILVA: Not so optimistic.
QUEST: Oh, please.
QUEST: It's Friday.
SILVA: But I can say the following. I don't think it's going to hurt that much more. We have a divide between the banks that are doing well -- HSBCs, BNP (INAUDIBLE), these organizations, they're doing incredibly well. But we have this whole subset of banks not doing so well. Those are the ones I'm concerned about.
QUEST: All right. But with President Obama having just lost the -- the -- the House and the Senate dodgy, with still so much resentment against bankers, do we end up with more banker bashing?
SILVA: We will. Of course we will end up with more banker bashing, because there's fewer people at the banks and the people that are left are actually getting bigger bonuses. And that's why the media is going to keep focusing on them, because they're making a tremendous amount of money. There are fewer of them, but they're making a lot of money. And in this current economy, that's just not healthy.
(END VIDEO TAPE)
QUEST: Ralph Silva talking common sense when it comes to the banks.
One BRIC economy has a very high profile visitor on its way. Right now Barack Obama is flying to India. He's taking important friends from the business world with him and we'll talk about that after the break.
QUEST: Accompanied by an entourage of business leaders, President Obama is now on his way to India.
The travel pown -- powels, I should say -- never mind his plans -- his plans are to go to India and get home. But the pals who are along board include the chief execs of Boeing and General Electric. They're after a larger slice of the fast growing Indian market.
Our correspondent in Mumbai is Mallika Kapur.
And earlier, she joined me.
Now, before you listen to her answers, and if you're worried about the bangs and the flashes, stay with the interview and hear about all of it at the end.
MALLIKA KAPUR, CNN INTERNATIONAL CORRESPONDENT: A lot of it is business, Richard. He arrives here in Mumbai tomorrow. And the first thing on his agenda is meeting with survivors and people who lost family members in the member terrorist attacks.
But once he's done commemorating those attacks, he spends a majority of Saturday evening meeting with entrepreneurs and with business leaders. So that is a significant part of his trip is devoted to that.
He's also traveling to India with the huge entourage of business leaders, CEOS from the United States. Some people say it's the largest U.S. business delegation to India ever.
What do these people want from India?
Well, very simply put, they want access to the Indian market.
Where else in the world are you going to find an economy that's growing at almost 9 percent, where the stock market is hitting another record high, one after the other?
Really, the U.S. companies want to be here. Many of them are still reeling from the effects of a recession back home. They're looking for new consumers. And India, they say, offers a great opportunity. Companies like Walmart, for example, they want to be here.
The problem is, while India has opened up many of its sectors, some sectors still remain closed to foreign companies -- retail, for example. The retail sector in India is quite closed and tightly regulated. And many of the U.S. companies are urging India to open up that sector so that the U.S. companies can come here, get new consumers and do business.
So that's what is really going to be the big thrust of the business delegation here in Mumbai -- Richard.
QUEST: As one of the countries that is growing the fastest, now a member of the G20, India has a certain strength in its position with the president, doesn't it?
KAPUR: It certainly does. It certainly does. A member of G20, and, of course, we have to look back at -- at the buildup to this -- this trip here. President Obama and Prime Minister Manmohan Singh, they've built up a very good rapport. And if you also look at the frequency now with which a U.S. president has been visiting India, it just shows the strengthening relationship between the two countries. When Bill Clinton came here a few years ago, well, no U.S. president had been here in almost 20 years. And now we've seen Bill Clinton, George Bush, now President Obama come within 20 years. So it is showing India's strengthening relationships.
Also, Richard, what has struck me when I've talked to a number of business leaders here is the growing confidence India has with the U.S. Earlier, it used to always be about, you know, what can the U.S. do for us, how do we get a slice of the U.S. market?
Now the feeling very much seems to be well, we're a great economy, we're going great guns, so tell me, U.S., what can you do for us?
QUEST: Finally, Mallika, just to reassure our viewers, who may be thinking you're in the middle of a war zone with all those bangs and slashes behind me -- or behind you, it's Diwali, isn't it?
Happy season of light.
KAPUR: Absolutely. It is Diwali. And I was wondering when you would wish me a Happy Diwali, Richard. It is Diwali, the biggest Hindu festival over here. It is being celebrated with tremendous enthusiasm. I'm sure you can see some of the fireworks going off behind me.
It's a very important day for Hindus. It's a very auspicious day. And a lot of people here also are saying, you know, we are so pleased that President Obama is coming here around Diwali time. It's an auspicious time he's chosen. Perhaps it will bring India good luck.
(END VIDEO TAPE)
QUEST: Mallika Kapur in Mumbai.
And, of course, if you're celebrating Diwali, then my very best wishes to you for that season. Be -- I went there once -- do you know, Guillermo, I was in India once for Diwali. It is the most extraordinary festival, quite, quite -- and quite remarkable.
Anyway, we have important matters that we need to talk about and it concerns what's happening with Tomas.
GUILLERMO ARDUINO, CNN METEOROLOGIST: Yes. And I see right now, because of the interaction with these areas, land masses, how it's shrinking a little bit.
Look at it, Richard.
You see it?
It is a wide storm getting practically into the entire country. And then it shrinks.
Now, it will continue to move northward and hit Turks and Cacois, as I told you yesterday. You see it here. So it finally became a hurricane, to the surprise of everybody, including us. It was a very strong tropical storm. Is it going to stay now on a minimal -- minimal hurricane status, but it is a big system anyway, 137 kilometers per hour. The threshold is 120. So Turks and Cacois are going to see the impact of it more intensely than Haiti.
The problem in Haiti is the rain more than the winds. And Port-au- Prince, fortunately, is toward the other side. So when the system came through, we saw most of the action toward the western parts of the peninsula.
Look at this, Richard, this picture. This is Haiti. No trees. This is the Dominican Republic, trees. You can see the border line here. It is unbelievable.
You know what numbers we're dealing with in this place?
Well, millions -- millions of trees that are affected per year because of charcoal production. So this country is using a lot of those trees for industrial reasons. And then we get the -- the soil that is practically virgin now or very depleted and it can't absorb all the water.
In the city of Gonaives, you know, before we saw 3,000 deaths. And recently, in '08, we saw 600 and more deaths associated with all -- all the floods that we got because of the rain.
You mentioned India before. We have another cyclone now in the Bay of Bengal, but it's taking aim at Chennai, a little bit farther south. It is pretty much like what we see in the Caribbean right now. We are going to see impact in two days. The clouds already there -- Richard, back to you.
QUEST: All right, many thanks.
Guillermo Adruino at the World Weather Center.
And it promises to be a busy two days for you over there.
QUEST: We'll see you again next week.
ARDUINO: Thank you.
QUEST: It merely remains for me to thank you for spending time with me this week. It wouldn't be the same if you didn't.
Because that's QUEST MEANS BUSINESS.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead, I do hope it's profitable.
"MARKETPLACE MIDDLE EAST" starts now.