>> tom: importing economic worry. worldwide concerns about europe's debt problems continue building. now, it's the european banking system under scrutiny. >> susie: those new fears are hitting shares of u.s. banks and taking a toll on investor confidence. you're watching "nightly business report" for monday, may 24. this is "nightly business report" with susie gharib and tom hudson. "nightly business report" is made possible by: this program is made possible by contributions to your pbs station from viewers like you. thank you.

captioning sponsored by wpbt >> susie: good evening, everyone. more selling on wall street today with all the major indexes closing in the red on new worries about the european financial system. tom, this time investors reacted to the bailout over the weekend of a troubled savings bank in spain. >> tom: susie, caja sur is a small bank, but it could spell bigger problems for european debt crisis. the bank of spain took it over, giving it access to about $690 million in emergency money. >> susie: the euro today also fell sharply again against the u.s. dollar and other major currencies. it has dropped 7% in the past month alone. the big question here is whether these cracks in the european system will affect american companies and our economy. joining us now to talk more about this, mohamed el-erian, c.e.o. of pimco, the world's

largest bond fund. nice to have you on the program. >> thank you, susie. >> susie: let me begin by just asking you what are the risks of all these events, that spanish bailout, the debt crisis in greece, the falling euro. what's the intact and the risk of all of that to american businesses and our economy? >> susie, we went into the weekend knowing that europe had a debt issue and europe had a growth issue. we come out of the weekend with the news that europe may also have a banking system issue. the minute you bring in the banking system it's like an amplifier, something that we discovered in this country a couple of years ago. banks have a way of amplifying shocks in the system because banks are like the oil in your car. they link up so many different parts. and the problem for the u.s. is that not only is it going to have to cope with a growth issue out of europe. europe is an important export

market. we sell a lot to europe. europe is going to grow less. now the strains in the banking system. and the minute you introduce strains into the banking system there's always a fear that governments will be behind the curve and that you can get contagion. you can get widespread disruption. that's what we started to price in today. >> susie: in terms of american banks that have just been coming out of our own financial crisis, how exposed are u.s. banks to what's going on in the european banking system? >> they are not as exposed to the european banks as they are to each other but they are all exposeded to the global banking system. banks are very inter-linked. and the minute you start having disruptions, the minute the flow through the pipes starts to be interrupted, then everybody suffers. and the concern is that europe's banking system may come under pressure. those of us that are in the trenches, those of us who look at the plumbing for the last

couple of weeks we have started to see some strains and the news out of spain this weekend was really the announcement to the rest of the world that the european banking system is coming under pressure. >> susie: you were talking about global growth. if there's a recession in europe, does that mean another recession here in the u.s., what you economists call a double dip? >> hopefully not. but it certainly means that the v, this very rapid continuation of the growth, the full percent projection will not materialize. we're looking more at a 2%. unfortunately, the v was priced into a lot of assets in markets around the world and in the u.s. >> susie: let me ask you another way because you've written a lot on this. you wrote recently that-- and i'm quoting you-- the world is on an uneven road having already used its spare tire. and the spare you're talking about here is the spare tire that was used to prevent the collapse of our banking system and to stimulate our economy. if there's no spare tire, let

me come back to the question about how vulnerable are we to these new developments in europe? >> we are more vulnerable, susie. the notion we had is that the spare tires have been used to get us as far as we got. so we avoided a major depression by using the spare tires. there's very little room right now, either for policy mistake or for market accidents. there's little political tolerance for having more bailouts. so the system has become very vulnerable. and every little echo, no matter how small-- so think about it, the saving banks in spain is a small bank in a small country but it's repercussion can be large because we no longer have tolerance for many shocks. we have used the spare tires and now we have to cope with not only t bumpy journey but the uncertain destination. >> susie: let me ask you, mohammed, a little bit about the european union itself. as you know, it's now being

openly debated whether some countries will drop out of the european union. first of all, how likely is something like that happening? and why should we, our viewers at nightly business report, pay attention to whether or not the european union can keep itself together? >> think a little bit about someone who is drowning in an ocean. the rescuer comes out. and the hope is the rescuer can pull out the person who is drowning. the risk is that the person drowning will pull down the rescuer. what people in europe are starting to worry is that maybe the countries that have fiscal problems, maybe the countrys that have weak banking system, maybe the bad will contaminate the good. now if that happens, it will mean that an important part of the world gets contaminated. the hope is that there will be a separation between the good and the bad and that the good does not get contaminated by the bad. but the concern you're seeing

in markets is there's a risk that the good gets contaminated by the bad. >> susie: we just have a few seconds. for the markets, are they overreacting and what should investors do? can you give us a real quick answer because we're running out of time. >> no, the markets are starting to recognize the reality of how difficult the european issue is and how it can contaminate us. what you want to do right now is you want to be careful awe want to retain options because there will be a lot of value down the road. >> susie: thank you so much for coming on the program. always a pleasure to have you here. >> thank you, susie. >> susie: my guest tonight mohammed el. arien, ceo of pimco. >> tom: here are the stories in tonight's "n.b.r. newswheel." as we mentioned earlier, that anxiety about europe's debt dragged the markets down. the dow lost 126 points, the nasdaq fell 15 points, and the s&p 500 was off 14. big board and nasdaq volume both dropped markedly from friday's pace. some encouraging housing news: sales of previously owned homes

in april jumped more than 7.5% from the previous month as buyers rushed to take advantage of the government's tax credit. year over year, existing home sales were up nearly 23%. state and federal officials are increasingly frustrated with b.p. and its response to the oil disaster in the gulf. today, interior secretary ken salazar said, quote, "we will keep our boot on their neck until the job is done." others are stepping up the pressure. the e.p.a.'s administrator says fines and penalties against the company are likely. louisiana's governor is also demanding a quicker response. b.p. says the federal government is clearly within its power to take over operations. later this week, b.p. plans to try a procedure known as a top kill which involves using heavy drilling fluids to stop the flow of oil. still ahead, making choices with your money. how decisions are presented, or framed, has a huge influence on how you invest. we'll have tips on how to make the move that's right for you. >> susie: the dust had barely settled on what was quickly

named the flash crash on may 6 when the finger pointing began. one of the targets: high frequency traders. they were depicted as out of control computer geeks who triggered the market's lightning collapse and equally rapid recovery. but what exactly is high frequency trading? and what connection does it have to market turmoil? we sent new york bureau chief scott gurvey to investigate. >> reporter: from the second floor of this nondescript building in red bank, new jersey, the high frequency trading firm tradeworx buys and sells huge volumes of stocks in the blink of an eye. tradeworx uses computers programmed to detect small price movements which can be exploited by nimble trading. founder manoj narang says the strategy can be traced directly to decimalization, a rule change in 2000 requiring quotes in dollars and cents instead of fractions. that cut profits for market makers from several cents to a fraction of a penny per share. the only way to make money was to increase volume. >> that's something that humans would never be able to pull off. computers are able to pull it

off because they can hedge their risk on a portfolio-wide basis and they can react to information very, very quickly. so they can manage their portfolios much more decisively in a real time environment than humans can. >> reporter: in effect, these computers have replaced many of the human specialists and the locals in the commodity trading pits. to cut down on the transmission time for orders, some trading firms place their computers right alongside the stock exchange's computers, which are in secure data centers similar to this one. some critics charge that placement-- called co-location-- is unfair, giving those who can afford it a market advantage. but as joseph mecane of n.y.s.e. euronext explains, many retail brokers use these systems to provide rapid order execution with very low commission charges. >> a lot of retail and little investor trade activity, whether they realize it or not, actually comes through servers that are co-located.

so i think, you know, it is something that is available to a big part of the market, whether people realize it or not. >> reporter: during the flash crash on may 6, tradeworx, like many other high frequency firms, stopped trading when price swings appeared irrational to the humans monitoring the computers. >> the only responsible thing to do when clearly erroneous prices are being transacted is to stop trading. and instead of breaking trades after fact, which is a terrible practice, what the exchanges should be doing is preventing those trades from ever taking place in the first place, and that is what these circuit breakers would do. >> reporter: narang says he fully supports the circuit breakers so that the machines can take a time out while humans review the situation. scott gurvey, "nightly business report," new york.

>> susie: another down day in the markets and it looks like the dow is just holding on to that 10,000 level. >> tom: in fact the lowest close for the dow since february. still above the flash crash lows though we saw a few weeks back. let's take a look at tonight's market focus. a late session sell-off sent stocks lower with all ten of the major stock sectors lower, led by financial and energy stocks, with health care stocks down the least. the worries about european banks hit financial shares here in the u.s. bank of america and j.p. morgan were the two biggest percentage losers inside the dow industrials. each lost more than 3.5%. regional bank suntrust was among the sector's biggest losers after a goldman sachs analyst

cut its rating. suntrust stock is now at a ten-week low. among the most active was popular, which shares slipped after announcing its chief operating officer was not longer with the bank. no specific reason was given for david chafety's departure after more than 30 years with the bank. as oil prices remain under some pressure, energy stocks continue dropping. oil today was up fractionally, but take a look at this trio of oil giants. with the 1% drop in exxon shares, that stock is at a new 2010 low. this year, x.o.m. shares have lost almost 12%. chevron and conoco both are at their lowest prices since early march. weaker demand and plentiful gasoline supply have raised concerns about their profit margins on gasoline. meantime, british petroleum shares continue sinking. here's a look at the stock since the fatal explosion on the deepwater horizon rig in the gulf of mexico. the stock has lost almost a third of its value in the five weeks since the blast.

over the past year, shares are down 12%, and with the sell-off since the disaster, the stock is at a new 13-month low, and hitting those lows on heavier than usual volume. health care was spared the heaviest of the selling today. one bright spot is a merger to create the biggest home health and hospice provider in the u.s. gentiva health will pay almost $1 billion for odyssey health care. the market clearly likes this combo with the price of both the buyer and seller moving up in a weak market. gentiva is paying $27 a share in all cash for odyessy. gentiva will issue just over $1 billion in bonds to raise the cash. overall, health care played its traditional role in a down market, providing some level of defensiveness. the health care spider exchange traded fund along with the pharmaceutical holders e.t.f. and the biotech e.t.f. all saw just slight losses today. all have sold off with the market this month, but are not down as much as the overall s&p 500. biotechs focused on cancer may

be in focus in the week ahead with a huge industry meeting. the american society of clinical oncology conference begins june 4. a few of those seeing some action today include dendreon, abraxis bioscience, and pharmacyclics. dendreon's new prostate cancer treatment is the subject of some new studies. abraxis also has a pancreatic cancer therapy. and pharmacyclics is working on a leukemia treatment. a trio of tech titans fought back against the weak tape today, helping limit the losses on the nasdaq. google, apple, and dell were pointed higher. apple was the second best nasdaq 100 performer. google bounced up from a 2010 low hit late last week. and dell found buyers after its earnings call last week, which sent the stock down to three month lows. it may not officially be summer yet, but it is for the movie business.

it hasn't started out too hot for dreamworks animation. the fourth installment of "shrek" didn't encourage shareholders. dreamworks stock fell almost 11% on heavy volume, falling to its lowest price since last summer. shrek brought in just over $71 million, which was below forecast. and that's tonight's "market focus."

>> tom: do you invest in this fund or that one? when should you sell? how an investment choice is framed can have a big impact on what we decide to do with our money? what can you do to keep you from leading you to making the wrong investment decisions? we'll discuss that with a professor of psychology and behavioral economics at duke university and author of the new book, the up side of irrationality. welcome to nightly business report. >> good to be here. >> tom: how do outside forces influence our investment decisions? can you give us a real life example. >> i can give you a few. i can give you 18 actually. let's start with one. so often when they give us a particular portfolio, they tell us over how long of a period the calculator returns. sometimes it could be ten years, five years, 30 years. it turns out that's the input

that we take and figure out whether this is a good fund or not a good fun but somebody else decides it for us. this is one example. >> tom: i want to talk about time frame in a moment. we'll have a visual example of that. when you talk about the they, you're talking about professionals here, mutual fund salesman or whomever. we know that buyers are usually concerned about not buying too high or at least not making... not losing money. how does that play in to that kind of marketing? >> so part of the interesting thing is is that people really hate losing much more than they enjoy gaining. here is what happened. if you buy a particular financial product, even if you think you're just going to buy it for a while and see what happens, the moment it goes down, you get attached to it. you don't want to sell it. you don't want to realize your losses. therefore you actually get locked in for much longer than you think you would. >> tom: assuming that is acting irrationally, holding on to a losing investment, how

do we break that chain and act more rationally? >> one particular advice is to imagine every day or every time that you want to rebalance your portfolio is as if you have everything in cash. here's the situation. usually you buy things and sell things. you're holding some stuff in your portfolio. when you start thinking about the next period, you start prosecute the perspective of what you've been holding so far. if you're going to sell something that you've lost money on, you'll feel very miserable about it. imagine that somebody went into your account every night or every quarter and basically sold everything and left you just with cash. now all of a sudden you don't have any particular loss or attachment to individual stock. you can decide to allocate from the start. >> tom: let's talk more about the time frame issue here because this is best illustrated by looking at, for instance, a chart of the s&p 500. when you look at that chart from march of 2009 through today clearly the direction has been very positive if you've bought stocks back in 2009. but if you look at it from

march of 2000, boy it's been a choppy ride and a disappointing one for a lot of long-term investors. how should investors approach time frames? should you disregard them entirely? >> this is a very hard question. often when we get advice from financial advisors they he will us what this period is based on. so the first thing to do is to apply this same kind of time frame to all of your decisions. right? you don't want to be looking at one decision in a one-year framework and another one with a ten-year framework. you want to look at all of them from a similar perspective. the other thing to realize is that historical gains are just very loose and imprecise indicator of future gains. don't rely on them too heavy as well. >> tom: thanks so much. professor dan ariely of >> susie: here's what we're watching for tomorrow. trends in home prices, from the s&p case-shiller home price

index for march and the conference board's consumer confidence index for may. analysts expect both numbers to be higher. also tomorrow, say cheese! we pay a visit new york's oldest cheese shop, it's a "gouda" way to look at trade between the u.s. and europe. there's an electric ford in the future of two factories near detroit. ford motor is investing $135 million in the plants to design and build parts for electric and hybrid vehicles. that work is now being done in mexico and japan, so the move will create 220 jobs in the u.s. over the next two years. the plants getting the green light are in sterling heights and ypsilanti, michigan. >> tom: half of british airways' flights out of london's heathrow airport never left the gate today, grounded by a cabin crew strike. the walkout is expected to last five days, the latest move in an increasingly nasty spat between the carrier and one of its unions. the dispute centers around a pay freeze, staffing issues, and cabin crew perks. british airways is already in financial hot water.

on friday it said it had lost more than $600 million in the last year.

>> susie: the treasury has lowered its estimate of how much money taxpayers will lose from the controversial bank rescue plans. the new total for tarp costs: just over $105 billion. that's $11 billion lower than the last estimate. tonight's commentator has more proof that tarp could be less risky than you might think. he's alan blinder, professor of economics at princeton and former vice chair of the federal reserve. >> amidst all the tea parties and assorted screaming from left and right, here's a thought you may not have heard: the tarp-- that's the troubled asset relief program-- was a huge success. wait a minute. didn't we spend $700 billion of hard-earned taxpayer money saving bankers who don't deserve it? of all the things the obama administration has done, wasn't tarp the worst? the answer is no, on both counts. first, tarp was actually a bush administration initiative, inherited by obama. second, only about $300 billion ever went to banks. most important, tarp did not spend taxpayer money, it lent it, mostly in the form of preferred stock. and most of that has been paid back with interest plus capital gains on the stock.

the latest estimate is that tarp will eventually lose only $117 billion. and that estimate keeps falling. okay, but $117 billion is still a lot of money, right? yes, but lets remember what was at stake. when treasury secretary paulson and fed chairman bernanke asked congress for the money, our financial system was teetering on the brink. if it fell, the recession would have been much worse. with a $14 trillion economy, it made good sense to put $700 billion at risk, not to spend it, in order to tilt the odds in our favor. and now, with the dust settling, the net cost looks likely to be under $100 billion. that sounds like a success story to me. i'm alan blinder. >> tom: finally, here's an interesting question: is the national football league one business? or, is it 32 of them, each run by an individual team? the answer could be worth billions of dollars in merchandise. the u.s. supreme court today let an anti-trust lawsuit against the league go forward, filed by

a clothing maker claiming the n.f.l. was wrong to sign an exclusive merchandise licensing deal with reebok. that merchandise-- caps, t-shirts, and other items-- brought in almost $8 billion in 2008, susie. >> susie: sounds like there will be a lot of blocking and tackling over that one. >> tom: it was a shutout as well. the nfl losing the unanimous decision in the supreme court >> susie: that's "nightly business report" for monday, may 24. i'm susie gharib. goodnight everyone, and goodnight to you too, tom. >> tom: good night susie. goodnight everyone, we hope to see all of you again tomorrow night. "nightly business report" is made possible by: this program was made possible by contributions to your pbs station from viewers like you.

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