Transcript: Nightly Business Report – April 10, 2017

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: United under fire. The viral video that’s sparking outrage. Why this man was dragged off an overbooked flight.

Fed in focus. How Janet Yellen is categorizing the economy in light of last Friday’s worse than expected jobs report.

And blame the culture. New details on the tactics Wells Fargo employees used to create those fake accounts.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Monday, April 10th.

Good evening, everyone, and welcome. Sue Herera is off tonight.

And we begin tonight with a public relations debacle at United Airlines that has gone viral. A disturbing video making the rounds, first on social media, now everywhere virtually, showing a man being forcibly removed from an overbooked flight in Chicago last night.

(BEGIN VIDEO CLIP)

(SCREAMING)

UNIDENTIFIED FEMALE: No! Oh, my God!

UNIDENTIFIED FEMALE: Oh, my God!

UNIDENTIFIED FEMALE: No, this is wrong! Oh, my God! Look at what you’re doing to him! Oh, my God!

(END VIDEO CLIP)

MATHISEN: The confrontation, which alarmed fellow passengers, as you heard there, has sparked a big debate over the rights of travelers of airlines to forcibly apply overbooking rules and the reaction of law enforcement officials who ejected the man. Remarkably, shares of United Airlines ended the day higher.

Phil LeBeau joins us with the very latest. Phil, let’s start with what happened. As I understand it, the flight was overbooked, and United needed the seats to accommodate crew members who had to be in Louisville today.

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Correct. And that’s not uncommon in the airline industry.

Look, it’s very common to have a flight that is oversold. If you fly a lot, you often hear the announcement, look, we’re looking for two or three people who would be willing to give up their seat for $500, or a voucher for a future round-trip ticket on this particular airline. And in this case, United was saying, we need volunteers. When they didn’t get them, they needed four seats, they then started saying, you’re going to get bumped. Two people were bumped before this passenger said, uh-uh, I’m not getting off this flight.

MATHISEN: Was the airline then acting within its rights? And what about the passenger’s rights? He was on the plane and seated.

LEBEAU: Well, even though you’re on the plane and seated, if you’re still at the gate, you have not left yet. And while it probably would have been easier to handle it before he boarded the plane, yes, the airline was within its legal rights. Now, you can make an argument, OK, they’re within their rights to eventually call airport security to remove the gentleman. On the other hand, it played out terribly for everybody involved here.

MATHISEN: Absolutely.

LEBEAU: And that’s what we’re seeing today on social media.

MATHISEN: So, how has United reacted?

LEBEAU: Well, the initial reaction was, hey, it was an overbooked flight. We had to ask passengers to leave. And that’s what happened here. I think everybody would say that it was a fairly cold, almost tone-deaf reaction at first.

Now, in the middle of today, Oscar Munoz, the CEO of United, realizing just how much backlash was out there against United, issued a statement which was much more understanding of how bad this situation is. In that statement, he eventually says, look, “This was an upsetting event for all of us here at United. I apologize for having to re-accommodate these customers. Our team is moving with a sense of urgency to work with the authorities and to conduct our own detailed review of what happened. We’re also reaching out to this passenger to talk directly to him to address and resolve this situation.”

That’s helpful, Tyler, but I have a feeling that they’re going to have to go much further in the days ahead to truly calm down some of the backlash out there.

MATHISEN: Very quickly, has the passenger been heard from today or his lawyers?

LEBEAU: No.

MATHISEN: Not at all?

LEBEAU: Not at all.

MATHISEN: Now, there’s also an annual report which ranks airline customer satisfaction, the airlines are doing better, United not so much. How did they do?

LEBEAU: Right. United game in eighth out of 12 U.S. airlines that are ranked. This is the annual airline quality ratings, which takes DOT data, which includes denied boarding, mishandled bags, on-time arrival percentage, number one with Alaska, then you had Delta, and you had Virgin America, and there you see United coming in at number eight.

One last thing, Tyler, it’s ironic that this United incident happened on the same day this report is released, because this report shows that 2016, best year ever in terms of airline service for passengers.

MATHISEN: Phil LeBeau, thanks. Phil LeBeau in Chicago.

LEBEAU: You bet.

MATHISEN: For more now about the overbooking and United’s handling of it, we’re joined by former continental airline CEO and chairman, Gordon Bethune.

Gordon, welcome. Always great to see you.

GORDON BETHUNE, FORMER CONTINENTAL AIRLINE CEO & CHAIRMAN: Thanks, Tyler.

MATHISEN: You know, I’m sitting here with my friend Steve Liesman who asked an obvious question — why didn’t the people at the gate just keep raising the price that they were willing to offer to customers there to voluntarily get off the flight? Do they have the authority to do that?

BETHUNE: No, Tyler. Actually, the government prescribes the amount. I think it’s anywhere between $800 and $1,300 depending on the fare and distance. I think they went to the $800 where you can be involuntarily removed and paid $800, that you’re accommodated according to the law.

What happened here is really unfortunate. But with the millions and millions of people that the men and women of the airport and on the airplanes deal with every day, so, it’s not unusual. But I know from personal experience that kicking and screaming and yelling doesn’t work well with the police.

And so, there’s another way to handle this and that’s —

MATHISEN: That was sort of my question here. You know, United seems to be taking all of the heat here, and obviously as you point out, this situation, on many levels, probably could have been handled a lot better. Should it be taking all the heat? After all, it was law enforcement officials who pulled the man off the plane, and we didn’t see how he initially reacted, or talked to the police officers.

BETHUNE: Yes. Tyler, I assure you, knowing the people at United, probably the most professional men and women anywhere. They went right by the book. And when the man refused to cooperate, they had no alternative but to call the police, because they have an airline to run. And they’re doing it in accordance with the law.

The gentleman, and it’s unfortunate because I understand how you can be emotional, but kicking and screaming and fighting the police is not a really good way to solve the issues. When they ask you to get out of the car, don’t try that you’re just going to escalate it.

MATHISEN: You know, one of the things that I think viewers might be surprised to learn is that in a situation like this, accommodating non-paying airline employees is a higher priority than accommodating paying customers.

BETHUNE: Well, these were what they called dead-heading people. They were working, and they were being sent down to pick up a flight that didn’t have a crew —

MATHISEN: Right.

BETHUNE: — or it wasn’t going to work. The whole flight would be canceled the next day. So, they’re actually being paid, or called positive space, and they’re must-ride. So they take precedence on everything.

MATHISEN: Yes, you’ve been captain of airliners. I’m surprised that the captain of the flight wasn’t obviously visible there in that. I’m sure he’s taking care of other things.

What would you advise Mr. Munoz to do tomorrow?

BETHUNE: Well, I think he’s on a good start. You know, there’s no more human guy to put a face on United than Oscar has. And I really know that — knowing Oscar, how personally troubled he is, he’s going to make all the apologies. He doesn’t like this at all.

And I’m sure they’re going to review everything that went wrong. And they could improve, I’m sure they can. But at the end of the day, they’re going to try to make it right with that person. Not all the people on the airplane that made the videos.

And I suspect they will. My understanding was that person actually was accommodated. I’m not sure about that.

MATHISEN: All right. Gordon, thank you very much. Gordon Bethune, former Continental Airlines CEO and chairman.

On Wall Street today, stocks closed fractionally higher and we do mean just by a little bit. The Dow rose nearly two points, big day there. NASDAQ higher by three points. And the S&P 500 was higher by 1 2/3.

Shares of energy companies and industrials led the way on this rather listless trading day.

MATHISEN: But we heard from Fed Chair Janet Yellen this afternoon, that she reiterated the central bank’s plans to hike interest rates gradually to sustain what she’s calling healthy growth.

Joining us now to discuss Ms. Yellen’s comments, Chair Yellen I should say — Steve Liesman — Steve.

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Yes, Tyler. She said the economy is pretty healthy. She likes what she sees from the consumer. She likes what she’s hearing from business in terms of business investment, as well as seeing the global economy as not being a drain any longer, even adding to growth in the United States here.

And then she gave sort of a layman’s explanation of what it means for the Fed to gradually remove accommodation.

(BEGIN VIDEO CLIP)

JANET YELLEN, FEDERAL RESERVE CHAIR: Before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now, allowing the economy to kind of coast and remain on an even keel, to give it some gas, but not so much that we’re pressing down hard on the accelerator, that’s a better stance of monetary policy.

(END VIDEO CLIP)

LIESMAN: So maybe to put that in technical terms, Tyler, the idea is to raise the federal funds rate, raise the interest rate, but not get to the point where the Fed think it’s actually restrictive. But to keep it, get to neutral is where they’re trying to get to.

MATHISEN: And at this point in time, the Fed has two things that it’s trying to jimmy and jockey here. One is interest rates. The other is the size of its balance sheet, which ballooned up as it bought bonds in what we call quantitative easing.

Now, they want to unwind that balance sheet. They have less experience doing that than with more conventional monetary policy.

LIESMAN: It’s a bit like trying to control the economy with different levers at one of those old automobiles, for example. Yes. So, she just said that it’s — the impact of it, we don’t know what it’s going to be.

The Fed has a $4.4 trillion balance sheet. Normally, it should be about $800 billion. So, call it what you want, four or times or more bigger than it should be. They want to bring that down over time.

The idea is what they’ll first do is they have securities. They mature. They get to be the end of their life. The Fed right now has been reinvesting the proceeds into that security. They’ll stop reinvestment and then overtime gradually bring it down.

But like you said, we don’t know what the impact’s going to be. There’s some analysts out there who say, you know what, that infuses more volatility into the market.

MATHISEN: Will that very fact they won’t be reinvesting raise interest rates, because a big buyer will be absenting itself from the market?

LIESMAN: That’s one of the speculations. That’s what the Fed essentially will intend, Tyler, is for interest rates to go up. What they did is took those securities off of the market, and that reduced interest rates by an unknown amount, maybe as much as 2 percentage points.

They’ll put some of it back in. Those securities will be available. There will be more supply of them. Therefore, interest rates should rise.

MATHISEN: Steve, long day. Thanks for sticking around.

LIESMAN: My pleasure.

MATHISEN: Good to see you in the evening.

All right. Still ahead, an inside look at the culture that badly dented Wells Fargo’s reputation.

(MUSIC)

MATHISEN: A high level investigation into the fake accounts scandal at Wells Fargo was released by the lending giant’s board today. The 100-plus page report blamed a sales-oriented culture for the controversy. And for the first time, we have detailed examples of how this culture played out and hurt consumers.

Wilford Frost has the story.

(BEGIN VIDEOTAPE)

WILFORD FROST, NIGHTLY BUSINESS REPORT CORRESPONDENT: Wells Fargo announcing the largest clawbacks in financial services’ history following a board report into the sales practice scandal that deemed it necessary to claim back an additional $28 million of pay from former CEO John Stumpf after he had already agreed to forgo $41 million when he resigned in October 2016, and an additional $47 million from Carrie Tolstedt, the former head of the community bank. She’s already having foregone $19 million last September. Tolstedt was also terminated retroactively for cause.

Here is Chairman Steve Sanger.

STEPHEN SANGER, WELLS FARGO CHAIRMAN: The root cause of the practices issue as determined by the investigation was the excessive sales pressure in the community bank, the excessive sales goals, and the failure to escalate the problem appropriately through the structure of the community bank. And Carrie as the leader of the community bank is responsible for all that.

FROST: Tolstedt refused to be interviewed as part of the board review. A statement from her lawyer said, “We strongly disagree with the report and its attempt to lay blame with Ms. Tolstedt.”

Meanwhile, current CEO Tim Sloan is given a pass. The report said that his direct involvement with the sales practices issue was limited until he became president and COO in November 2015.

Despite that, I asked him if there could have been more he could have done earlier.

TIM SLOAN, WELLS FARGO CEO: In hindsight, I wish we would have moved more quickly, we would have made decisions, for example, that we made last fall, which was to end the incentive compensation plan in the community bank.

FROST: Away from the individual, the report said a sales-oriented culture and decentralized corporate structure caused the issues.

And here are some examples: monthly motivator reports where it was said that some employees lived and died by the results, and retail score cards which were instituted by Tolstedt and, quote, “generated significant sales pressure.”

How did that bad behavior manifest itself? Well, the report details one instance where a district manager warned an employee during on-boarding that Wells Fargo provided a challenging and intense sales environment, and that he should be prepared, quote, “to do whatever it took to meet numbers unless it was downright unethical.”

The report also uncovered more about the tactics employees used to hide their practices within the Wells Fargo system, substituting their own e-mail address for their customers to prevent Wells Fargo from contacting customers who might provide a less than perfect survey score.

I’m Wilford Frost.

(END VIDEOTAPE)

MATHISEN: And speaking of banks, earnings season gets under way this week when Citigroup, J.P. Morgan Chase, and Wells Fargo report this Thursday.

Joining us now with what to expect from the banks, and other stock market sectors, is John Butters. He’s senior earnings analyst at FactSet.

John, welcome. Maybe one of the reasons why the market did move so little today is that we’re waiting for earnings season to really get going here. What are you looking for when we get the reports for first quarter profits?

JOHN BUTTERS, FACTSET SR. EARNINGS ANALYST: Right. Well, based on estimates submitted to FactSet, analysts are looking for 8.9 percent growth year over year for the S&P 500 for the first quarter. And this would be very strong growth. It would mark the third straight quarter of earnings growth after five straight quarters of earnings declines. And if we hit 8.9 percent growth, that would be the largest growth we’ve seen since the fourth quarter of 2013.

So, again, analysts calling for a fairly strong earnings growth in the first quarter.

MATHISEN: One of the reasons growth should stack up better this year than last, is that energy is going to, by comparison, look a lot better, right?

BUTTERS: That’s correct. We’re not calculating a growth for the energy sector, because the sector actually reported a loss in the year ago quarter. But on the down level basis, we’re looking for about $7.7 billion in earnings in Q1, versus a loss of $1.5 billion in Q1, 2016. And so, that $9 billion increase is the largest increase of any sector. And one of the main reasons energy is driving the growth of the S&P 500.

Other reason is higher oil prices. The average price of oil during the first quarter is about $52 a barrel. Last year, the average price is about $33 a barrel. So, a significant increase in the price of oil.

And as a result, energy is the largest contributor to growth for the index this quarter. If you take the energy out, that 8.9 percent drops down to 5.1 percent. So, almost cut in half in energy.

MATTHEWS: What are the other standout sectors and what are the comparative laggards?

BUTTERS: The two other sectors really driving growth this quarter, the financial sector, about 14.3 percent growth. And the tech sector at 13.1 percent. And both of those sectors are seeing fairly broad-based growth across the board. Most of the industries in each of these sectors are expecting growth for the quarter.

And on the flip side, the real laggard is the industrial sector, expecting a decline of 7 percent. And a lot of the weakness there driven by the airlines industry where earnings are expected to be down 52 percent year over year.

MATHISEN: And also, you have telecom in there down 2.3 percent. Consumer discretionary down about 2 percent.

John Butters, always great to see you.

BUTTERS: Great. Thanks for having me.

MATHISEN: John Butters of FactSet.

Well, activist investor Jana Partners wants to shake things up at Whole Foods. And that is where we begin tonight’s “Market Focus”. The investment firm took a nearly 9 percent stake in the grocery chain, calling the shares undervalued. Jana says it plans to speak with the company about exploring a possible sale, and changing its board of directors. They’ve proposed their own directors, by the way. Whole Foods shares popped nearly 10 percent to $34.17.

Well, Tesla passes General Motors to become the most valuable automaker in the country, following an analyst upgrade today. Tesla shares hit a record high, and with that, the company’s market capitalization grew to $51 billion. That makes it by market value the largest automaker in the U.S. Tesla shares were up 3 percent to $312.39.

The two largest trucking operators in the country are merging to create an industry giant. Swift Transportation and Knight Transportation say they would combine in an all-stop deal and call the new entity Knight Swift. The tie-up values the company at more than $5 billion. Shares of Swift soared 23 percent to $24.77. Knight rose 13 percent, to $34.75.

The activist shareholder Elliott Management is now calling for change at the mining giant, BHP Billiton. Elliott send BHP a letter urging the company to spin off its U.S. oil business and combine it to London and Sydney stock listings into one exchange listing in Australia. But BHP says the cost of the proposals significantly outweighs any potential benefits. Shares up 3 percent to $38.26.

Switching gears now to real estate. Despite the big headlines of store closures on Manhattan’s Fifth Avenue, and fears at Sears and other places, retail estate is not quite in as dire a strait as you might think. And there may even be some deals out there to take advantage of.

Diana Olick has our report tonight from Washington.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: If Ralph Lauren’s flagship Polo Store on Fifth Avenue can’t take the heat in big names like Sears and J.C. Penney are closing stores, retail real estate must be in trouble, right? Maybe not.

BARBARA DENHAM, REID SENIOR ECONOMIST: Because we’re not seeing the retailers that are not expanding, or we’re not paying attention to them. So, yes, those are the stores, and the announcements that are making the headlines. But you see on some retailers, you know, especially food and beverage store concepts are expanding.

OLICK: Ecommerce is taking a big bite out of brick and mortar sales, but brick and mortar is filling back up with other types of offerings.

SAM CHANDAN, NYU SHCACK INST. OF REAL ESTATE ASSOC. DEAN: The mix of stores that we’re going to see in malls, in shopping centers really does begin to change.

OLICK: Boutique fitness, especially food offerings, things that people can’t buy online. And some online stores like Warby Parker are going offline.

CHANDAN: When online retailers are opening those bricks and mortar stores, part of what they’re trying to do is showrooms. And so, a little bit of the opposite of what we saw with traditional retailers.

OLICK: That’s why in the first quarter of this year, the neighborhood and community shopping center vacancy rate was unchanged for the quarter and the year, asking rents actually increased a little. At big malls, vacancies increased just only slightly and mall rent was up a little as well.

DENHAM: We’re not seeing a lot of rent declines. Most of the rents are flat because I think retailers are somewhat confident that they will fill the stores with those retailers that are expanding with service providers.

OLICK: At so-called Class A malls, those with high-end anchor stores, business is brisk. But the stocks of the companies that own these properties are getting hit by the hype. General Growth, Macerich, Simon, and Taubman, these should have good prospects according to Green Street Advisers, which says the mall REITs stocks are a real bargain now.

Another thing helping the sector is very little new retail construction. And as some stores close, they reopen as restaurants, entertainment, health centers, boutique, fitness studios, you name it. As with all real estate, if they’re in a good location, they don’t stand empty for long.

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

(END VIDEOTAPE)

MATHISEN: Coming up, coding for convicts. How Silicon Valley is doing its part to lower the recidivism rate at California’s oldest prison.

(MUSIC)

MATHISEN: Here’s a look at what to watch tomorrow. The NFIB releases its Small Business Optimism Index. We’ll get a read on the labor market with the jobs openings and labor turnover survey, they call it the JOLTS report. And Minneapolis Fed President Neel Kashkari will give a speech in the afternoon.

New York lawmakers have approved now an initiative last night under the state budget making it the only state to offer free four-year college tuition. Under the plan, the state will supplement aid for in-state residents, starting with families who earn $100,000 a year or less, providing a tuition-free education at all in-state public two and four-year colleges. That income cap will increase over the next few years.

Well, prison has become a revolving door for about half of the inmates who leave it. There’s a drain on resources, but Jane Wells has the inspiring story of one training program in California’s oldest and maybe most notorious prison that is delivering results — thanks to Silicon Valley.

Here’s part one of Jane’s series from San Quentin, California.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: They are the least sympathetic among us.

TODD WILLIAMS, INMATE: What am I in prison for? For kidnapping, assault, and murder.

WELLS: But most of the inmates inside California’s San Quentin prison will some day walk free.

BEVERLY PARENTI, “THE LAST MILE” CO-FOUNDER: They’re going to be your neighbors. They’re going to be in your communities. They’re returning to their families. Who do you want them to be?

WELLS: In an amazing experiment, a handful of inmates here and inside three other California prisons are learning computer coding and web development, even though there’s no internet on the inside.

WILLIAMS: I’ve been incarcerated almost 20 years.

WELLS: Oh, I see.

WILLIAMS: So I didn’t know about the internet.

CHRIS REDLITZ, “THE LAST MILE” CO-FOUNDEER: They’re building complex ecommerce websites and they’ve never actually clicked a mouse in real time.

WELLS: Silicon Valley venture capitalist Chris Redlitz started the program called “The Last Mile”, after giving a talk on entrepreneurship to inmates.

PARENTI: I said — well, I won’t say what I said, but I thought he was crazy.

WELLS: Bt once his wife, Beverly Parenti, learned how expensive it is to house prisoners and how many of them keep coming back, costing even more, the bottom line changed her mind. Together, they set up mock servers to fake the Internet inside San Quentin for software training and began screening qualifying candidates.

UNIDENTIFIED MALE: This is a dashboard —

WELLS: Inmate Chris Schuhmacher has helped develop a tool for Airbnb to monitor social media influence.

HARRY HEMPHILL, INMATE: And now, we actually embedded videos —

WELLS: Harry Hemphill is working on a website for “The Last Mile” radio.

HEMPHILL: I had almost given up hope on — in myself, but I began to get more confidence in myself and realize that I still have value. And that I still have a lot to offer back to society.

WELLS: One in ten prisoners in America is in California. And the recidivism rate in this state is over 40 percent. It costs taxpayers $71,000 a year for one prisoner. But of the 20 inmates who have gone through “The Last Mile” program and left prison, so far, zero have returned.

“The Last Mile” just celebrated its third graduating class. The program is funded privately, and with sales of prison products like license plates. Taxpayers pay nothing. It is a joint venture in the truest sense.

CHRIS SCHUHMACHER, INMATE: Seventeen years feels like a lifetime. And it’s amazing the things that in a few short weeks I’ll be walking out of the gates as a free man.

WELLS: By the time you see this, Chris Schuhmacher may already be a free man. But when he leaves California’s oldest prison, he may also be a changed man, armed this time with skills that could finally turn him into a taxpayer instead of a liability.

For NIGHTLY BUSINESS REPORT, Jane Wells, San Quentin.

(END VIDEOTAPE)

MATHISEN: Part two of Jane’s report tomorrow.

And that is NIGHTLY BUSINESS REPORT for tonight. I’m Tyler Mathisen. Have a great evening, everybody. We’ll see you back here tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2017 CNBC, Inc.

 

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