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Quest Means Business
Obama Takes on Banks; Downside of China's Growth
Aired January 21, 2010 - 14:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Time to get tough. President Obama takes on the banks.
Golden earnings for Goldman Sachs, despite strong political headwinds.
And hubble- bubble, toil and trouble, does China's rapid growth have a downside?
I'm Richard Quest. One thing I can promise you, a busy hour, as I mean business.
Good evening.
An embarrassment of riches, on the day Goldman Sachs profits blew away forecasts President Obama has declared his intent to take on the banks with a raft of new proposals which could lead to the break up of Wall Street.
Is this Glass-Steagall part two?
So, now to the Dow Jones and how it has been trading, because of what President Obama announced. Look at that. The Dow is off 1.7 percent, 184 points, 10,418. And the significance, of course, it is banking stocks, in particular, that has been hit hard. And a much of those falls, or many of those falls, happened after the president spoke. Because one of the financial reforms President Obama has been talking about for some time, no private sector should be too big to fail.
In other words, in a position where taxpayers have been bailing out banks if it is too much of a mess, today, President Obama announced the sweeping plans, that in future, he believes would head off that danger. No more too big to fail.
This is the idea. Stop the risky trading. It is the cornerstone, no propriety trading, or at least limiting the banks activities. In other words, if a bank was to speculate with its own capital, it could not be part of a deposit taking institution. That seems to be the thrust and seems to be the core of exactly what this is all about.
President Obama says the banks need to focus, instead, on serving their customers.
(BEGIN VIDEO CLIP)
BARACK OBAMA, PRESIDENT OF THE UNITED STATES: That is why we are seeking reforms to protect consumers. We intend to close loopholes that allowed big financial firms to trade risky financial products, like credit default swaps and other derivatives, without oversight; to identify system- wide risks that could cause a meltdown; to strengthen capital and liquidity requirements, to make the system more stable; and to ensure the failure of any large firm does not take the entire economy down with it.
Never again will the American taxpayer be held hostage by a bank that is too big to fail.
(END VIDEO CLIP)
QUEST: So the small is beautiful concept becomes the idea. With new rule restricting mergers and consolidations. Now, the banks that will be affected - and it all depends on the exact wording, if you like of this- Morgan, Goldman, Citigroup, Bank of America, Morgan Stanley. If you take the widest definition of deposit institutions then these all are affected. If you narrow the definition down then perhaps something can be done and you don't have to break up the big and the bold, and some would say, the beautiful.
Talking of big bold and -well, you can make your own judgment about that. Todd Benjamin, good to see you.
TODD BENJAMIN, FINANCIAL ANALYST: Good to see you, as always, Richard.
QUEST: What do you make of these proposals?
BENJAMIN: Well, look I think that they are definitely needed. I think that they are long overdue, because basically you have the same rules in place that got us in this mess to begin with. So, I think, you know, the present -
QUEST: They say they are not Glass-Steagall, too, which of course was the split between commercial and investment banking.
BENJAMIN: But the intent, I think, is pretty much the same, which is basically make those banks which take commercial deposits, they wouldn't be allowed to use that money to trade for their own account. And they shouldn't be able to do that, because obviously, it is what caused the huge mess that we're in.
Now, why is Mr. Obama doing this now? Well, obviously, they have been thinking about these proposals for a long time. But, you know, Mr. Obama really is behind the curve here I think in really sensing the public's anger.
QUEST: Now, you say, behind the curve?
BENJAMIN: Yes.
QUEST: He would say it is not politics to have this proposal.
(LAUGHTER)
BENJAMIN: Oh, that is complete - come on now.
QUEST: You don't come up with a plan like this since Tuesday's defeat.
BENJAMIN: Not at all. But he announced it two days after the Democrats had a very bad loss in Massachusetts, which no longer gives him the supermajority they had in the Senate, puts health care in jeopardy. I mean we could go on and on. The bottom line is the Democrats know they are in big trouble come the mid-term elections and they have to look like they are kicking the banks in the teeth.
QUEST: So, if you take a strict definition of investment banking and .
BENJAMIN: Yes.
QUEST: deposit institutions. Then they don't manage, then you don't have to break up any of these banks. If you take the widest definition then companies like Goldman Sachs are in deep trouble. They are going to have to decide what they are. And remember, Goldman, of course and all those banks like Morgan, changed their definitions of what they are during the crisis.
BENJAMIN: Well, especially Goldman. That is absolutely right.
QUEST: Yes.
BENJAMIN: You know, they became a commercial -they got a commercial license, right?
QUEST: Absolutely.
BENJAMIN: But here is what the interesting thing is: Look at what the banking stocks are doing. You mentioned it at the top of the hour, but you didn't give percentages. Bank of America off 5 percent. Morgan Stanley off 5 percent. Why? Because people know that they are going to get squeezed. Goldman Sachs had great earnings today. But where did those earnings come from, right? Proprietary trading is very important to all these institutions. If you take that away, investors know that is going to be less profitable.
And so this is not the first blow. This is the second blow in less than a week. Because, of course, just last week President Obama suggested a tax on the banks that you know - loans.
QUEST: Right, but does it make -OK, so to take your point, he's got the tax to repay the TARP, or the levy to repay the TARP.
BENJAMIN: Yes, he should raise $117 billion.
QUEST: And he's got this now, to break up. Is it economic sense doing this stuff? This is what we need to know tonight.
BENJAMIN: No, I think he is taking the right moves. Because I think you have to reign in the banks. Look, the levy in a sense is a political shot, all right?
QUEST: Yes?
BENJAMIN: He says he wants to recoup the money, but it is a very easy way to try and basically help the public's anger be soothed. But on the other hand, he's got huge problems politically, in terms of high unemployment, his ratings are declining in the polls, and he's got those mid-term elections. And he has to look like he's kicking Wall Street hard, as he should.
QUEST: Will you stay where you are while we talk about some earnings, because I need to have your - I'd like to have your analysis.
BENJAMIN: Yes.
QUEST: The focus at the moment, on Goldman Sachs. Some of the best results in the bank's history. Goldman made nearly $5 billion in the three-months at the end of the year. $37,000 a minute. Profit for the whole of last year, $13.4 B. Employees will take home more than $16 B in salaries, benefits, and bonuses.
Goldman wasn't the only one. eBay tripled money in Q4, $1.4 B, up from $260 mill, in a year ago. Starbucks, also beat expectations. Earnings of more than $240 million. You are going to be sick of the bell. Continental sprang back to profits for the fourth quarter. And that was even after -that was even after cheaper fuel bills, and exceptional items.
We put this into perspective on QUEST MEANS BUSINESS. You need more than the nuts and the bolts. But numbers don't really tell you anything about it. What you need to know is whether or not it was better than expected, worse than expected, and by the end of our Q25 you get a good idea of where we stand.
Maggie Lake, is in New York.
Maggie, let us begin with Goldman Sachs, and I think - I mean, let's put everybody out of their misery. Goldman is going to get a green. Maggie, I assume you don't disagree with that?
MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: Yes, no, absolutely, Richard, I mean, listen, they did fantastic. Some people pointing out that they beat estimates by $3 a share. They wouldn't have beat it by such a wide margin if they didn't reduce some of that compensation, trying to soothe some of the anger out there. But even discounting that, I mean, they are head and shoulders above their peers. Had a record quarter, just fantastic, absolutely a green.
QUEST: Todd Benjamin, who is still here with us. Todd?
BENJAMIN: Maggie, you know, you are right at the heart of it right now, on Wall Street, what is the sense of these proposals that President Obama is taking onboard. Because he's punching Wall Street really hard. There is a lot of comeuppance that is coming right now. I mean, you look at these banking stocks, they are just getting hammered today.
LAKE: They absolutely are, Todd. And I'm not sure its going to end. I was just on the phone with a money manager. People, investors are very spooked by this. They understand that it is political rhetoric, but there is a huge amount of uncertainty about exactly what this means for bank business models. And there are an awful lot of people who think, because of the public anger the Obama administration is really overreaching. And even though their intentions are good, it is going to do more harm than good.
They actually don't agree with some of the things he's talking about. As you can imagine, but from an investor point of view, that idea of uncertainty, where the earnings are going to come from, is a huge problem for the financial sector. Remember, the health of the financial sector, key to not only the stock recovery but also the economic recovery.
QUEST: I'm going to pause for breath and get rid of a couple of other balloons and stock. Because today was one of those days that, frankly, there were lots of numbers but none that would tickle your fancy.
For instance, United Health Care. That had interesting numbers, but not so interesting. They performed well in the market while out there. They automatically get a green.
Southwest Air, they actually made good money, whilst cut their costs, and still on lower fuel hedging. They also managed to get a green.
You are starting to see the way things are going.
And Xerox, Maggie Lake, what did we think of Xerox? And wasn't this the one - I think we've got this down as a grudging green.
LAKE: Yes, it was a grudging green, but they are doing OK. They are still struggling to shift away from hardware to services. That is a process that is going to go on, but you have to give them a green.
BENJAMIN: Look at this, here, Rick.
QUEST: Yes?
BENJAMIN: Let me just jump in here, while Maggie is right there. You have the Dow down 204 points, all the markets are down sharply right now, in New York. And you know, despite some of these good earnings. Because of what is going on with these banking proposals.
LAKE: Yes.
BENJAMIN: That is basically overshadowing everything else. And if you look at the earnings season so far, you know, IBM was a disappointing. Morgan Stanley was disappointing. And what is going to hold up this economy?
QUEST: They are the isolated ones, Todd. Look at our Q25. I'm gong to jump in here, because I can see the way the debate is going. I'm going to throw eBay's green in, and I'm going to throw Starbuck's green in, because we had a vote on that earlier.
Maggie Lake, it is now becoming overwhelming that companies are performing better than expected.
LAKE: Yes, and for a change. Remember, last time we talked about the fact that it was all about cost-cutting. You are starting to see the fact that sales are picking up. Let's take both eBay and Starbucks. They did well on sales. They are executing. They re-jigged their business when things were difficult. They came out with products that people liked. They got their stores back in order. They got their marketplace business back in order. So there are managing well, these companies and they are doing well, but as Todd points out, getting no credit for that today. Because everyone is focused, once again, on banking and financials.
BENJAMIN: Absolutely. And I think that focus is not going to go away anytime soon. And as long as banks hold back credit, all right? And as long as unemployment remains high. And then at some point when the Fed exits, what is going to help this market? Not much, at all, Richard.
QUEST: All right. So you basically think this -all these greens are a shot in the dark?
BENJAMIN: Down the road, absolutely.
QUEST: All right. Maggie, many thanks indeed. Maggie Lake who is in New York. Todd Benjamin, who is with us.
I'm going to still say, you can't beat the balloons. We have only got five of the red. The greens will have to do a bit of jiggering -
BENJAMIN: Balloons are made of hot air.
QUEST: What?
BENJAMIN: Balloons are made of hot air.
QUEST: Talking of hot air, there is enough of that going on at the moment.
(LAUGHTER)
All right.
QUEST MEANS BUSINESS, as you can see. Busy day, so it is time turn our attention to Becky Anderson, is at the CNN news desk, where we have serious news to report from Haiti.
(NEWSBREAK)
QUEST: A bit of order has been restored in the studio. Thank you very much, Becky.
And now, in a moment, we considered whether China's economy was heading for a slow down a year ago. It has actually done the opposite. Activity has risen, the question becomes about the asset/price (ph) bubble that is probably building up. In a moment, QUEST MEANS BUSINESS.
(COMMERCIAL BREAK)
QUEST: China's economy is motoring at an extraordinary rate. Last year when most of the world's major economies were deep in recession, China was growing on near 9 percent. In fact, at the point of crisis, the lowest point of China's growth was just about 6 percent. You can see there the accelerating growth of China.
Q1 from 6.1 to 7.9, to 9.1, to the latest numbers of 10.7 percent in the final three months of the year, it was back to double digit growth, a turbo charged performance, even though we're back to, basically, the point of 2007. So, we still have some way to go before the really heady days or 10 or 11 or 12 percent. But 10.7, it all works out at a target busting 8.7 percent, for the whole of 2009.
Now the authorities in Beijing know one thing. If they don't get a grip on this sort of growth, the two things will happen. Firstly, inflation, which is already bubbling under. And talking of bubbling under, those asset bubble, because this number, is made up largely from certain asset classes. CNN's Jon Vause is in Beijing with that part of the story.
(BEGIN VIDEOTAPE)
JOHN VAUSE, CNN INT'L. CORRESPONDENT (voice over): The sales pitch promises a residential development like no other. It is called The World, luxury villas, homes and apartments, all divided into five continents. And linked together by smaller replicas of iconic bridges. The world's biggest indoor ski ramp, the biggest water park in Asia, even a seven-star hotel.
That is the seven-star hotel, there, Shi Rui, in charge of marketing tells me. It will have full water views in every room, even the rest rooms. It will be the most comfortable hotel in the world.
The entire project will take five years to build on almost 2,000 acres on the outskirts of Tianjin, a second tier city, three hour's drive south of Beijing. Total cost around $4billion U.S. Funded mostly by one of China's biggest state-owned banks. Construction is well underway on phase one, called North America.
(On camera): Villas like these started selling back in March for around $300, 000 U.S., the developer says now, less than a year later they have doubled in price. But that is nothing compared to the luxury high-end properties they are trying to sell.
(Voice over): This house, made of glass, and still on the drawing board, and it could be yours for close to $60 million U.S.
(On camera): So, an indoor ski slope, seven-star hotel, luxury villas, if it all sounds like you have heard it before, that's because you have.
(voice over): Think Dubai, with its seven-star hotel, indoor ski ramp, massive developments, and more recently, a real estate bubble, which burst.
That is what economists are predicting for all of China's property market as well. A massive government stimulus package and more than $1 trillion in bank loans, have fueled a boom in house prices this year.
XU XIAONIAN, CHINA EUROPE INT'L. BUS. SCHOOL: The nature of our landing, not so different from Japan, (ph), the nature, OK? Not so different, OK? In such a short period of time you granted so many loans, did you do your homework?
VAUSE (voice over): The developers of The World insist they have no shortage of buyers and almost all of them are Chinese.
"Before we started we did very detailed planning and analysis," she says, "We are certain our project will develop very quickly."
But more and more economists say China is facing a double-dip next year and warn the bigger the boom, the bigger the bust. John Vause, CNN, Tianjin.
(END VIDEOTAPE)
QUEST: Now, let's pause from our business agenda for the moment. Soledad O'Brien is in Haiti and joins me now to discuss and bring us up to date with a rescue attempt.
Soledad, I don't have many more details than that. So, please, bring me up to date.
I'm not hearing Soledad O'Brien. I do beg your pardon, I thought we had Soledad on the line. I think it is probably worth us trying one more time, to see if she is, often these connections can be a little dodgy for understandable reason. So bear with me.
Soledad, can you hear me?
No, we seem to be having trouble with the -we'll try and get Soledad back. And we will be back in just a moment. This is CNN.
(COMMERCIAL BREAK)
QUEST: Welcome back.
Now, let's continue with our business agenda. And we are talking about China. And the 10.7 percent growth in the fourth quarter the country experienced. It is largely and there are great concerns about the asset bubbles that are starting to fall, if they haven't already, have formed within the Chinese economy. It is a messy business when bubbles burst. We thought you needed to know a little bit more about it. Jim Boulden, now demonstrates what happens when you pump and economy full of hot air.
(BEGIN VIDEO CLIP)
JIM BOULDEN, CNN INT'L. CORRESPONDENT (voice over): It is all very simple. Of all the G20 countries China is once again the fastest expanding economy in the world.
Money is being pumped into the economy across all the major sectors, especially construction. International investors now see the best returns in China. They are pouring in funds, hoping to ride this rising tide of growth.
When there is such demand the worry about the classic bubble begins, fueled by excess leverage and easy debts. The Chinese authorities have tried to take some air out of this bubble by raising bank liquidity requirements and short term rates.
These small actions have already had the market squealing in protest. At the moment, China remains the best game in town, of course, and hot air keeps this balloon expanding. But if the doomsayers are right, and this rapid growth isn't tempered, well, we all know who that scenario will end.
(BALLOON POPS)
(END VIDEO CLIP)
QUEST: Kerry Brown is a China expert from the independent research organization Chatham House, and he joins me now.
Gary, Jim's demonstration where the balloon finally bursts. Is it likely that it is going to burst, the Chinese bubble. That is the one question everybody wants to know.
KERRY BROWN, CHINA EXPERT, CHATHAM HOUSE: Yes, I think the statistics are pretty impressive, this growth rate. I think there problems with property prices being very, very high in China now. So there is a potential bubble there. And there is also this big, big problem of China trying still get a away from reliance on export lead GDP growth, which was 15 percent of the whole GDP growth, to you know, a consumer market. It is still only 35 percent of the whole GDP figure in China, the consumer spending.
QUEST: How risky is the - risky is the wrong word. How precarious is this current Chinese growth, I suppose is what people -because it is the only game in town, after India and whatever, of the emerging markets. And people are plowing into it, expecting higher growth rates, which is the classic definition of the bubble.
BROWN: Well, the government is willing to put a lot of money into achieving its targets. And I think its target this year is still 8 percent, in 2010. I mean, this is a government with $2.4 trillion U.S. dollars in the foreign reserves. So it has put its will, it has put its focus onto that. I think the problem is that it has quite a narrow sort of range to rely on. It has got to have, continue to have, export markets. There won't be the kind of consumer market we look for in the West, in China, for probably another seven or eight years. So, you know it has got not a lot of room for new building.
QUEST: And the size of the Chinese economy. In absolute terms, it is big. And it will be the second-largest economy after the United States. But relative Chinese economy is very different?
BROWN: Oh, yes, it is like the Chinese Premier Wen Jiao Bao, said you put something, you know, China is big, but if you divide it by 1.4 billion, in fact it is small. So, per capita, China still ranks over 100, 120. It is no where near the per capita figures for America or Japan.
QUEST: OK, we have to pause there. Many thanks indeed.
We do now, need to return to Soledad O'Brien, who is in Haiti. And Soledad has been following a group of orphans who have been promised emergency visas by the United States. Soledad is at the airport.
Soledad, let's firstly let's test the connection. Can you hear me?
(DAIL TONE)
QUEST: Well, I think that is the answer that we go on that one. Soledad O'Brien is clearly -we are having difficulties with connections to Haiti at the moment. We will be back with more in just a moment. This is CNN.
Good evening to you.
(COMMERCIAL BREAK)
QUEST: Good evening, I'm Richard Quest. QUEST MEANS BUSINESS, this is CNN. Our top story tonight, President Obama has announced new proposals in which he says he'll cut the U.S.'s biggest banks down to size. Hours ago, the president laid out a series or proposals that have shaken Wall Street hard. The Dow is down nearly 2 percent at the prospect of a break up of some of the biggest names on Wall Street.
Let us talk about this, Peter Morici, joins me now.
Peter, first of all, it is good to have you with us tonight. But President Obama's proposals. He says it is not Glass-Steagall II. It is not going to split the banks. Do you believe him?
PETER MORICI, PROFESSOR OF BUSINESS, UNIV. OF MARYLAND: Oh, I don't believe him. I think at the end of the day they are going to have to separate those institutions that take deposits and make loans, from other financial activities, and limit what they do.
Not just prohibit them from trading, as he has proposed today, but you know, a lot of small banks around the country, not big ones, got involved in holding securities. Banks shouldn't be making bets like that. That has nothing to do with trading. It just has to do with bad investment practices. Thinks that banks ought not do.
QUEST: All right. So, now let's split them out. Because a lot of the banks did actually change their designation during the crisis. So, let's take for example, JP Morgan Chase. It made good money on its proprietary trade in but it is a deposit taking institution. You are effectively saying, Morgan, make your mind up.
MORICI: Absolutely. I think, at the end of the day, what institutions like Morgan will have to do is divide themselves, create two institutions. They might be held by a common -- a common company, an overall company, but their books would be separate. And the assets that bank up the banking activities would be separate. They wouldn't be able to hold risky securities and things of that nature.
There's nothing wrong with JP Morgan continuing to have an investment bank that trades and does whatever it wants. But the trick here is we shouldn't be guaranteeing the success of that entity.
QUEST: But that wouldn't have saved, for example, the Lehman example. It was the Lehman count up -- it was the Lehman counter-party risk. It was the -- it was the depths of which these assets, CDOs, CDSs and above -- have got into other banks was the problem.
MORICI: Absolutely. That's -- that's exactly what was wrong with what was said today. The president really didn't acknowledge two things. The banks got in trouble because of the kinds of loans they made and the kinds of engineered products that were made from those loans by entities that weren't banks at all. It wasn't just JP Morgan, which owns a bank. It was Lehman Brothers, Merrill Lynch and others. That's what's got to change. And the president simply didn't speak to that today.
You know, it was as if he was rolling out on the -- on the White House lawn to say something in the wake of Massachusetts to show that he was concerned about the economy. There really wasn't a lot of new or encouraging. And that's one of the reasons the stock market is tanking.
QUEST: Peter, are you bluntly saying this is politics, it's not economics and it's not business?
MORICI: I'm bluntly saying this is politics, it's not economics and, you know, it didn't show a good grasp of the problem. So many months after he was elected -- 15 months after he was elected, a year after he took office, the statement that he made today was wholly disappointing. It didn't show a clear grasp of the problem or what -- or a plan toward a solution.
QUEST: OK, so -- so, we've now got fights left, right and center and in this maelstrom, we have a market that is down 2 percent.
I am wondering what's going on.
MORICI: What's going on is the Clinton -- the Carter administration redux. Every time the Carter administration got in trouble, the president or one of his cabinet secretaries would announce some bold new program, but it would really be just a few generalizations. And if you look at what he released today, it was really some generalizations. A week or two later, nothing came of it.
Financial regulatory reform is tied up in the Congressional committees. It's not likely that the president, at this point, can influence it very much and it's not likely that those committees are going to come up with something that really changes what goes on on Wall Street.
We may have a consumer protection agency. The president wants that to payoff some political debts. But, really, it won't solve the problem.
QUEST: Peter, great, as always, to have you.
You have a standing invitation to come on our program and discuss these matters.
Peter Morici joining us from the U.S.
Now, I have alluded to what the earnings we've seen and the reaction on the market, despite the fact of whether it was Goldman, eBay, Starbucks, Continental -- a raft of companies that all made good money, that beat expectations and had impressive forecasts, the market is still very heavily down.
Let's go straight to Wall Street.
Susan Lisovicz on the floor at the Stock Exchange -- that's the over arching view, Susan.
So why is the market down the best of 2 percent?
SUSAN LISOVICZ, CNN CORRESPONDENT: Because it doesn't like government intervention and, you know, you -- you have a lot of different things that are happening, a lot of information. And as you said, there's a lot of good information, encouraging things, whether it's Starbucks or some of the airlines posting surprise -- surprisingly good results.
But, you know, the bottom line is that, you know, you're seeing the financials and you need the financials in a recovery. And some of the things that the president is proposing would certainly hurt their bottom line at a time when you need the banks to lend.
So, you know, what you're seeing is banking -- banks -- financial stocks like Goldman, Morgan -- JP Morgan, Citi, Bank of America, are all down about 5 percent. And you're seeing the Dow with its worst two day sell-off since last summer.
QUEST: There will be -- and, Susan, you -- you're a woman of the world who has her finger on the pulse of the -- of the people -- Susan, you don't -- the Obama plan may not be liked on Wall Street, but it will certainly be liked in Middle America, perhaps.
LISOVICZ: Well, I mean it's a -- it's a difficult position to be in. You know, I mean, Goldman Sachs made a record amount of money and, you know, I mean there are so many different arguments here. I mean Washington is partly to blame for the financial crisis. I mean, you know, when it -- it did away with regulation that was put in place after -- after the stock market crash of 1929.
So, you know, Washington has a direct culpability here, as well.
But, you know, one of the things the president proposed today was basically doing away with the proprietary trading desk. And I think that when you have a big investment bank like Morgan Stanley or Goldman Sachs, you know, you can have big institutional clients that think one way on commodities or stocks or the direction of currencies and -- and it can bet differently for its own -- for its own benefit. And I think that's something that will affect the bottom line and that's why they're getting hit really hard.
QUEST: Our Q25 is now overwhelming green. Tomorrow, Susan, you'll join us, I hope, to talk about it -- from the Stock Exchange, about how we've ended up as we have been.
OK, on the road to recovery, but still counting the costs.
When I return in a moment, a warning that the financial crisis will de -- delight the developing world for years to come. The World Bank in just a moment.
(COMMERCIAL BREAK)
QUEST: Welcome back.
The World Bank says the global economy returning to growth in 2010. It's raised its estimate of the pace of growth in its latest report on '10 and beyond. The bank says worldwide growth will hit 2.7 percent in 2010. Now, that's an impressive number, indeed, despite the risk that governments will ease up on the stimulus measures that helped kill -- kill off the recession.
In '11 -- 2011 -- 3.2 percent. By the time you get to there, you're looking at trend growth. Of course, it's not all rosy in the economic garden. The developing economies will be stuck in the weeds. But they will, in some cases, the developers will grow by 5.2 percent. But poverty within many of those developing countries -- and that's where the weeds come in -- is expected to spiral, as well.
The World Bank estimates 64 million more people will be living in extreme poverty in 2010 than if the crisis hadn't occurred. The Bank warns the lenders will take -- are inclined to take risks. Developing countries will find it harder to get expensive loans in order to grow out of poverty.
Fascinating but dire -- Mick Riordan is the director of the World Bank's Development Prospects Group.
And he joins me now from Washington.
Mick, the interesting thing is, isn't it, it's those developing countries that are both the bane and the beauty?
They get the best growth, but they also have the poverty trap.
MICK RIORDAN, DIRECTOR, DEVELOPMENT PROSPECTS GROUP, THE WORLD BANK: You're absolutely right. I -- I think you have to look at the -- the diversity of developing countries, however. We're talking about countries from China to Burkina Faso. And it -- it is the Chinas and the Indias -- I won't say the BRICs, because one of them, Russia, is not doing so very well at the moment -- that have really been the drivers of the recovery since the trough about a year ago and who are pushing the recovery in 2010, as well.
At the same time, as you noted, it is developing countries, but a different set of countries, for a large extent, those in Sub-Saharan Africa, several in Central Asia, that are having these poverty effects, where the losses in per capita income are pushing people back down over that absolute poverty line.
QUEST: I -- I'm desperate that you don't take me into the WTO/Doha round and suggest that that's an answer to a settlement, because if you do that, we'll both be here until long since the program is off air.
Instead, tell me what the solution is.
Is it -- we know that trade is part of it. We know that aid is part of it.
But what's the solution to it?
RIORDAN: It's a -- it's a tough question, but the solution, at least in -- in the immediate term, is for the Group of 20 countries, who've done well, to work together on the up side of -- of this stimulus package, the - - the fiscal and the monetary -- to work together to -- to see that these stimulus measures are taken off at the right time so that we don't have a slippage into a so-called double dip recession here.
QUEST: OK, let me -- let...
RIORDAN: It's really dependent on -- yes?
QUEST: Let me interrupt you on that, because Dominique Strauss-Kahn at the fund has warned of double dip. Others have warned of double dip.
Do you -- do you see double dip?
And if you do, where do you see it?
RIORDAN: It is -- it is not our -- our baseline or our most likely forecast. This would be a -- sort of a down side scenario. But the risk or the -- or the slippage is -- is really in, over the next six months, if the activity in the private sector across the industrial countries and developing countries picks up the momentum that's been passed to them by the public sector, then we're in much better shape.
The -- the down side scenario comes if we have slippage...
QUEST: Right.
RIORDAN: ...in private activity, as it's removed.
QUEST: Are you at all optimistic?
Because I -- I sometimes think I can't see much optimism for a successful continuation of the G20 process?
I think it worked very nicely in crisis, but I do wonder whether, when you have recovery, suddenly it splinters because of the disparity of economies?
RIORDAN: Well, I think the days of -- of the G7 as -- as being the -- the controlling organization or institution for the global economy are -- are over. I -- I think something closer or akin to the G20, where you're bringing on board China and India, that have much larger voices or much larger shares...
QUEST: Yes.
RIORDAN: ...of the world economy now, is something we have to move to.
QUEST: Mick Riordan joining us from Washington.
Many thanks to you, Mick.
Please do come back.
Lovely to talk to you.
Happy to have you on the program.
Nice to talk to you.
Now, so China's red hot growth numbers that we were talking about gave a glaring contrast. When you think of the major economies that shrank in 2009, with so much uncertainty still around, China's renewed strength is providing a glimmer of hope for some of Asia's biggest exporters, because - - this is the fascinating part -- they are the ones that benefit from the economic growth within China.
So Eunice Yoon sat down with Thailand's finance minister.
(BEGIN VIDEOTAPE)
EUNICE YOON, CNN CORRESPONDENT: Do you think that China is going to grow enough over the next couple of years to offset that sluggishness in the United States?
KORN CHATIKAVANIJ, THAI FINANCE MINISTER: Probably not immediately. The -- the statistics doesn't support it. In the longer-term, for sure. But having said that, I mean, if you look at the most recent economic data out of my country, Thailand, in December, our exports grew, year over year, almost 30 percent. And very interestingly, our exports to China, on a year over year basis, grew over 100 percent, which is indicative of the fact that China has become a much more significant market.
YOON: How do you think the new free trade agreement between much of Southeast Asia and China will impact growth in the region?
CHATIKAVANIJ: I think it will add to the trend. But having said that, you have to note that -- the fact that tariff rates has been decreasing for several years now. So, basically, I think this just confirms that there will be zero tariffs for, you know, thousands of -- of food items, which I think will accelerate the -- the pace of closer trade links between the whole of Asia and -- and mainland China.
YOON: Do you fear Chinese economic dominance at all?
CHATIKAVANIJ: No, I don't. I -- I do see it as -- as an opportunity for co-prosperity. I think the Chinese attitude, diplomatically, politically and economically, with the rest of Asia, has been wholly positive. I think it's important to continue to work with each other, rather than to be concerned about, you know, potential impact of -- of their, you know, economic rise.
YOON: Some people locally see that trade pact more as a threat.
Are their concerns justified?
CHATIKAVANIJ: In any free trade agreement, there are bound to be, at the micro level, winners and losers. The trick is to make sure that the government has measures ready in place to look after the losers. Preparation is important. That means better federation (ph) of -- of the containment and -- and basically policies that will take care of those who find themselves losers in an agreement.
But the big picture, at the macro level, I think, will be increased trade in the region and, I think, broader prosperity across-the-board.
(END VIDEO TAPE)
QUEST: That's Thailand's finance minister talking to Eunice Yoon.
Well, now, if you've been traveling around Europe, you'll know, of course, there has been the snow that we've promised was going to arrive. Whether it's come in the dimensions and depth that Guillermo had threatened, well -- Guillermo?
GUILLERMO ARDUINO, CNN METEOROLOGIST: If there is -- I actually -- I was right. You know, we were talking about people trying to find their cars.
QUEST: Ah.
ARDUINO: I mean in England, but come on. I think that -- see...
QUEST: Ah.
ARDUINO: Have you been to Scotland much?
QUEST: Oh, well, not recently.
ARDUINO: OK. Because they have quite a lot of snow and they're going to see a little bit more.
Well, let me tell you what's going to happen in your city.
It's going to be mild. I think that we were talking about the cold air. Today, we're going to see some gray conditions. You know, you see here on the satellite picture how we have that stuff -- you know, low clouds and -- that's going to stay -- it's going to stay mostly dry.
But then the front arrives and it's going to bring more rain. But it's going to be felt especially here in the Isle of Man -- I'm dying to go to the Isle of Man, I've never been there -- and in Northern Ireland, also, we're going to see some significant rains.
Well, then, the snow is here in the east. It will continue there. I have an example of people here lined -- lining up waiting for the bus, you know, in Bucharest under piles of snow. And near Frankfurt, we don't see that much, but we see some on the ground over there. This is a picture from today.
This system is already up almost over Greece. And we're going to see severe storms there popping up with some heavy rain. And in the Aegean Sea and coastal parts of Turkey, as well.
It continues to be very cold, indeed, here, you see in Russia. And I think I have a picture of Russia. Soon, I'm going to show you Moscow with a lot of snow.
Dublin with the winds -- the arrival of the new system. London will be fine. Paris with some snow showers likely.
So let's go and fish on ice here in Moscow. Boof -- that feels cold. And, also, the temperature is around minus 20 in some spots. And we're going to see some more snow in the Ukraine, as you see; Moldavia here in the northern parts of the Black Sea; and in -- more in Romania and Bulgaria; Munich, some more snow; Copenhagen; Zurich, Vienna.
I've got reports right now of Innsbruck, Lindtz (ph), Graz (ph), Sarajevo and Helsinki with snow.
Look at the temps. We can't complain. If you're in London, eight; Kiev, minus 15.
And this, Richard, look at this picture. This is in Shenyang, China. Next month, we celebrate the lunar new year.
Do you have any idea how many travelers we're going to have?
One billion or more. But 210 million are facing ticket shortages, so we have a big problem coming up -- weather and lots of travelers.
Stay with us.
After the break, more QUEST MEANS BUSINESS.
(COMMERCIAL BREAK)
QUEST: So much has been said about Goldman's profits. Even more is being said about how much Goldman pays its people. Goldman says it's putting aside less in compensation than in the record year of 2007. The public uproar is louder than ever.
Christine Romans with more.
(BEGIN VIDEOTAPE)
CHRISTINE ROMANS, CNN CORRESPONDENT (voice-over): Goldman Sachs alumni have a tradition of public service, like former Treasury Secretaries Henry Paulson and Robert Rubin. Goldman alumni often go on to become top players in government and in the world's leading financial institutions.
So when the financial industry almost collapsed 16 months ago...
BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: We are acting with unprecedented speed, taking unprecedented measures that we never thought would be necessary.
ROMANS: It was a former Goldman Sachs CEO who, as Treasury secretary, helped push through a $700 billion bank bailout known as TARP. Ten billion went to Goldman Sachs.
But now, that bailout money has become a thorn in Goldman's side.
(BEGIN VIDEO CLIP, COURTESY CNN/"FORTUNE" MAGAZINE)
LLOYD BLANKFEIN, CEO, GOLDMAN SACHS: Had I known it was as pregnant with this kind of potential for backlash, then, of course, I wouldn't -- I would really not have liked it.
(END VIDEO CLIP)
ROMANS: The firm paid back the public's $10 billion with interest. But to some, the story doesn't end there. When the government rescued insurance giant AIG from the brink of failing last year, Goldman Sachs received a full payout of what it was owed -- nearly $13 billion.
Critics say Goldman and other banks should have taken a haircut.
ELIOT SPITZER, FORMER NEW YORK GOVERNOR: Goldman Sachs has figured out how to take advantage of the guarantee that we have given them to -- to internalize the profit and hold onto it.
ROMANS: Former New York governor, Eliot Spitzer, faults Goldman Sachs and other banks for not passing along the benefits of billions in government-backed loans they received at nearly zero interest. For Goldman, it amounted to a $21 billion security blanket. Critics claim all of these taxpayer financed programs allowed Goldman Sachs to reap bigger profits.
SPITZER: Those of us who save go to the bank, get zero percent. The banks take that guaranteed money, invest it in Treasury bills and make money and keep it.
Now, the real problem is the banks are not lending to the businesses that could create jobs.
(VIDEO CLIP)
ROMANS: After mounting public backlash, Goldman's CEO apologized and told the commission investigating the crisis...
BLANKFEIN: Anyone who says I wouldn't change a thing, I think, is crazy. Of course I'd go back and wished we had done whatever it took not to be in the position that we find ourselves.
ROMANS: CEO Lloyd Blankfein's mea culpa is not enough for Janet Tavakoli, a finance expert who wrote a book in 2003 about collateralized debt obligations, CDOs, complicated investments whose value fell with the housing market.
JANET TAVAKOLI, TAVAKOLI STRUCTURED FINANCE: Goldman was creating securities, along with a lot of other people on Wall Street. These were value destroying securitizations spewing out of their financial meth labs. And today, they're trying to pretend that they weren't responsible for massive systemic risk.
ROMANS (on camera): Goldman Sachs disputes that, priding itself in being a top manager of risk. As far back as 2006, it saw trouble ahead and began selling off its mortgage-back securities.
The problem is, critics say, Goldman continued to sell those toxic assets to others while at the same time investing in bets that they were going to tank.
(voice-over): Goldman says it was just executing prudent risk management.
BLANKFEIN: We didn't know at any moment if asset prices would deteriorate further or had declined too much and would snap back.
(END VIDEO TAPE)
QUEST: The report there from Christine Romans.
As you can see, on the earnings calendar, the greens are clearly ahead of the reds. The earnings are much better than expected. But those Obama principles and proposals on banks has taken the Dow Jones down 193 -- its largest losses since the summer of last year.
We will have a Profitable Moment in just a moment.
(COMMERCIAL BREAK)
QUEST: Tonight's Profitable Moment.
The message might finally have got across. Goldman Sachs became the latest Wall Street bank to seriously pare back the amount of compensation it's paying to staff. At 38.5 percent, the ratio of pay to revenue is the lowest since the bank went public.
Don't celebrate just yet. Top earners at these banks will still be making very large sums of money, mainly on the back of low interest rate environment and cheep money necessary because of the problems that they created in the first place.
President Obama weighed in today, promising legislation that will reign in the banks. If his proposals win the day, the banks will reduce their risks and ultimately might not make so much money.
The banks will scream. The lobbyists will cry.
As we continue to pay the bills, we need to ask whether it is a good idea that the banks are finally beaten down?
And that's QUEST MEANS BUSINESS for tonight.
I'm Richard Quest in London.
Whatever you're up to in the hours ahead, I do hope it's profitable.
Christiane Amanpour after the headlines from the I Desk.
END
