Return to Transcripts main page


Debt Crisis Spirals; Goldman Grilling; Ford's Strong Quarter

Aired April 27, 2010 - 14:00:00   ET


RICHARD QUEST: Greece's reputation is junked. A rating downgrade says bye Greek bond at your peril. The Euro takes a nose a dive. Stock seller too. Take a look at the U.S. big board down more than one percent and Goldman's grilling. The golden boys of Wall Street are under fire at this hour on Capitol Hill.

I'm Richard Quest. We have a busy hour together where I mean business.

Good evening. If you thought it was the end of the Greek crisis, think again. As the country is waiting for a lifeline that's been promised from Euro zone and the IMF, the market is now making it increasingly difficult for Athens to hang on.

The ratings agency Standard and Poor's today shunted Greek government bonds into the category marked junk and the contagion is spreading as well. Portugal's bonds were also downgraded.

Tonight on this program, we're going to look at what it means for Greece and the Euro zone and also tonight, don't you also have a duty to disclose an adverse interest to your client? Do you have that duty, do you?

The darlings of the financial world face a fierce attack on lawmakers about Wall Street morality. It is the hearings on Goldman Sachs. We saw the ugly happenings in Europe where the credit ratings agency, S&P delivered a double blow to the market cutting its ratings on both Greek and Portuguese government bonds.

The news came in the final moments of trading in European stock markets. Look at the devastating effect. Later you will see exactly how the announcement at 3, 4 o'clock in the afternoon, London time took their toll. Markets in London, Frankfurt and Paris even the Zurich SMI were all down sharply.

It was the banking stocks, the (inaudible) in Paris for example. P&P Panama and Credit Agricole fell by 6 to 7 percent. Deutsche Bank off 5 percent in Frankfurt. Here in London, mining giant Rio Tinto and BHP Billiton slumped 4 to 5 percent. That was on the back of commodity prices. As you can see it has been a day of turmoil in the financial world.

The Associated Press reporting now that the Greek Finance Minister has been talking about the situation on television. George Papaconstantinou said there is no question of Greece being unable to pay its next debt installment of $10 billion. Jim Boulden is with me to talk about this. Mr. Papaconstantinou talking a short while ago, but as we look at the devastation, brings us up-to-date.

JIM BOULDEN: Well, you know, now it gets serious. With this downgrade, Greece has been taken down three notches to BB+ from BBB+ that's junk status. These bonds are now considered below investment grade. The reason for this S&P sight weak economic outlook and the policy options that means it may be very difficult for the government to meet any new stringent demands by the IMF to cut the budget deficit and raise taxes.

And this comes just a few days after Greece asked to tap $53 billion fund from the IMF and of course, from the European Union. Now, Portugal is also downgraded. Downgraded two notches from A+ to A- now, but still investment grade, that's very important to note. But the S&P says Portugal could struggle to stabilize debt.

Well, what was the reaction on the stock markets? Greek market was closed by the time this announcement came, but it had plunged 6 percent on Tuesday. This comes after a big fall on Monday as well and the yield on a two-year government spread has spiked over 15 percent. And of course, that's uncertainty over the EU and IMF bail out, and Germany taking that hard line of course.

The bank shares fell sharply. National Bank of Greece fell 10 percent, Alpha Bank fell 12 percent and their bonds as well who were also downgraded by S&P. You can imagine, of course, the Euro did have a reaction down more than a cent to 132.57 and it fell earlier in the day, but dipped sharply after that Greece and Portugal downgrade.

And that fall helped also delist the dollar and the yen because they're seen less risky and the U.S. treasuries also jumped because they're seen as a safe haven.

QUEST: OK, now hang on, one quick question to you. How inevitable was this downgrade to junk and is it the last move that we're likely to see?

BOULDEN: S&P set a negative rating as well which means they could do this again, could make it even worse for Greece, make it even harder for them to raise debt. But I talked to some people in the markets and at least one said to me, this is not a big surprise, we thought this was coming. We thought this was coming, it's the timing of when it came.

QUEST: Jim Boulden, many thanks and you keep watching this for us. So to spell out what these ratings indicate. Standard and Poor's is one of these handful of companies that publishes the opinions on ratings on borrowers and they show the verdict on how high the risk is that the borrowers will default.

Now, you will be aware, these are the same ratings agencies that were roundly criticized on Capitol Hill last week. At the top of the scale, borrowers considered at the lower risk get AAA. AAA, United States, Great Britain, Germany. AAA, it's the gold standard.

The scale borrowers already defaulted, they get a D. Anything less than BBB is considered to be speculative or in the lingo of the market, it is considered to be junk bonds. Who else is junk? Come out and look and I'll show who else is junk at the moment.

Same as Greece (BB+). Greece is an interesting company, Azerbaijan, Colombia and Egypt. None of them, of course, Panama and Romania, none of them, of course, European Union know Azerbaijan or Colombia.

Just above the borderline between junk and investment grade is Iceland. A country that just about went bankrupt and of course, is in serious financial difficulties. It's rated B. Also, Kazakhstan and Bulgaria.

Countries such as Bangladesh, El Salvador are considered more likely where you might lose your money as indeed Latvia, Turkey and Vietnam. So that gives you an idea. Now, (inaudible) of course, only Latvia as an Euro member, but no one near the like the size and scale of Greece at the moment.

That's gives you an idea of the significance of what took place today. Yannos Papantoniou is a former Greek Economics Minister. He is the man who took the country into the Euro. I asked him whether the debt downgrade would accelerate Greece's IMF bail out or put it on a path to default.

YANNOS PAPANTONIOU, FORMER GREEK ECONOMICS MINISTER: Money will come, I'm sure and for the IMF and Euro package of equal to 45 billion euros will come and this will definitely be the breathing space. But the problem doesn't end there because next year, in 2011, Greece will have to go back to the markets and be able to borrow at reasonable rates. So to achieve this, usually all these downgrades must be reversed. So Greece must regain confidence in the next seven to eight months.

QUEST: Do you see any risk that either because the Germany (inaudible) or other members or because it's not the euros fragility stability that actual Greece doesn't get the money.

PAPANTONIOU: I would exclude that because even with (inaudible) promised that she will give the money. Of course, she likes to put the tough conditions, but I don't blame her for that because it is obvious that reforms must be very, very deep in Greece, both in the fiscal side and the competitive side as to address our aid balances.

QUEST: Wouldn't the whole system be better to let Greece restructure, default and restructure?

PAPANTONIOU: No, it is not true is the way out of the euro. Those who suggest that debt (inaudible) in Greece, first of all, they will be lasting damage to Greece because Greece had a bad name and stigma in the markets for years to come as Argentina has done and more over, and for that Greece is forced to reschedule its debt then the Germans will come and say, gentlemen, unfortunately, we cannot be members of the same monetary union because your paper is undervalued while ours is strong.

QUEST: Was it a mistake for you to take Greece into the Euro in the first place without ensuring that fundamental economic reform was going to take place?

PAPANTONIOU: We did substantial fundamental economic reform. First of all -

QUEST: Not enough.

PAPANTONIOU: Not enough? Of course, not enough by present standards. The standards of the year 2000, we did enough structural reform. First of all, we reduced inflation from 14 to 2 percent. Secondly, we reduced the fiscal deficits from 13 to 3 percent and then it is our socialist government that we (inaudible) privatizations. So we've done all these, but of course, it was not sufficient after the year 2000, much more had to be done and let me be self critical.

After the year 2000, the socialist government stayed on until 2004. In 2001, we proposed a very radical socialist reform. We backed from it so there has been no reform fatigue after the entry and then these reform fatigue got really abbreviate completely in the last six years.

QUEST: As we looked to the future, there has going to have to be more reform, more austerity measures. There is probably only so much austerity measures that any country can withstand before civil disobedience breaks out. Are we close to that yet?

PAPANTONIOU: I agree that it will be very difficult for the Greek people to undergo this sort of treatment. It is basically very unfair to them because it is irresponsible policies which have led them to this position. But I think that if Greece wants to have a future (inaudible) future in Greece, we have to undergo this with the help, of course, of our partners.

And it will be better to have also financial assistance for next year (inaudible) president talked about a package of 80 billion euros and this is what I think we need to calm their markets and give us breathing space of two years so as to promote all these funds. Both on the fiscal side and the structural side.

QUEST: Former finance minister of Greece on the downgrading to junk status. In a moment, to Capitol Hill where these men are the barrage of fierce questioning and the chief executive of Goldman Sachs will be giving testimony very shortly. Quest Means Business in a moment.



FABRICE TOURRE, EXECUTIVE DIRECTOR, STRUCTURED PRODUCTS GROUP TRADING, GOLDMAN SACHS: My name is Fabrice Tourre and I work at Goldman Sachs International in London.

JOSH BIRNBAUM, FORMER MANAGING DIRECTOR, STRUCTURED PRODUCTS TRADING GROUP, GOLDMAN SACHS: My name is Josh Birnbaum. Thank you for offering me this opportunity to discuss my work in the Mortgage Department at Goldman Sachs in 2006 and 2007. I was the managing director in the Structured Products Group.


QUEST: And so it began, a gang of four on Capitol Hill that were being called into account. Getting a roasting from senators on both sides of the political aisle. Now some of the banks key players from star traders, the top executives facing fierce and (caustic) questioning from senators who are trying to get a picture of the internal workings of the most powerful financial institution Wall Street has seen.

They're trying to discover how Goldman Sachs contributed to the worst financial crisis since the Great Depression. The hearing is taking place in the shadow of accusations by the Securities and Exchange Commission that some of Goldman's activities amounted to fraud.

Those are the live pictures coming to us from Capitol Hill. We're expecting at any given moment, the Chief Executive Lloyd Blankfein of Goldman Sachs. He is going to give prepared testimony before answering questions and that happens shortly. And as soon as I hear it's underway, we'll dip into it and bring you some of that. He's already said, however, and denied that anything was done that was wrong.

But take a look at these. These are the people or some of the people particularly this gentleman. Fabulous Fabrice Tourre. He is the trader based currently in London and the only Goldman employee personally to be held accountable by the SEC civil suit. He's charged with misleading clients in the Abacus investment fund that we've talked about this empathic CDO which has become the source of the complaint. He said quite clearly that he did nothing wrong.


TOURRE: I deny categorically the SEC's allegations, and I will defend myself in court against this falls claim.


QUEST: He then went onto in long testimony and then many answers continually point out that the people he was dealing with were financial experts. It was not if you like my word, the widows and orphans of the financial world. But the core question is whether the deals were doomed. Where they designed to fail as alleged by the SEC?

Tourre and others at Goldman Sachs said they also lost money and it was never intended that Abacus should collapse.


TOURRE: Goldman Sachs also had no economic motive to design the (AC1) transaction to fail. Quite the contrary, we held long exposure in the transaction just like (ACA) and just like (IKD). When the securities referenced in (AC1) declining value, we lost money too.


QUEST: And is that losing money that they claim shows that they were not setting their clients to fail. It is the ability of Goldman's Chief Executive, Lloyd Blankfein who's going to give a testimony to convince not only the politicians but also the American investors that clients remain the companies number one priority that of course leads to the reputational issue for the future of Goldman.

On the market, let's have a look at the share price for Goldman Sachs. Having been up quite sharply by some $4 a share, they are currently up just about half of one percent. It seems to suggest that investors at least not terribly concerned because they haven't heard any new allegations or indeed a bad situation hasn't been made worse.

Christine Romans is on Capitol Hill and Christine joins me now. Isn't the truth of it, although they've had a political battering particularly by the senator from Missouri, there's nothing new in what's taken place.

CHRISTINE ROMANS: No, there's nothing that I've heard of yet. I mean, it's potentially embarrassing. I mean, it's really pulling the curtain back on how Wall Street works. You got this mortgage trading desk that's saying, well, we were just trading in a situation where the housing prices were coming down. We didn't cause it. Even American senators saying to them, it wasn't just a hurricane, you were in there helping.

It is something that happened to you, you were a part of it so you have this real culture clash between the way the senators are viewing the role of Goldman Sachs and the way the people at Goldman Sachs themselves are viewing that role, but nothing new. Nothing new here.

No new smoking gun quite yet, and Richard, you're hearing them go back and forth the questioners on the Senate panel, the subcommittee panel, really between the specifics of that SEC case and the Abacus deal as it's known. And then the broader question of where you knowingly profiting from the subprime collapse, getting really short and basically profiting on the back of American misery on purpose and that's what we keep going back.

Between the micro and the macro of Goldman's behavior during the months and years heading up to the bubble.

QUEST: Christine, it seems whenever the panel has put to them any matters concerning Abacus or matters of fact. It always seems they basically say we were dealing with experts, we did nothing wrong. But the panel keeps coming back to this question of morality and of ethics. How are the men doing on that?

ROMANS: And that is where I think there's this big culture clash. I mean, you have these senators saying, how can you stand between two customers and not expose everything to both of them? How can you be a market maker without telling everyone everything?

And basically one of the guys in the trading desk said, who run the trading desk, the mortgage trading desk. He basically said, well, that's just not the way it works. We don't - we are market maker. Everyone knows we're a market maker that means we could be on all sides of the trade and it changes so quickly.

It is as if - this is what I think is really interesting, Richard, so many of these senators, these campaigns depend on Wall Street money to fund them, right.

QUEST: Right.

ROMANS: And it's almost as if for the first time they're seeing how Wall Street works and they're surprised. The question is how much of this is how Wall Street works as usual, Richard, and you've made that point before as well. How much of it is illegal and how much of it is a moral?

The SEC is probing illegality and what these senators are really zeroing in on is, is the way it should be? Should we be regulating some of these risks out of the market?

QUEST: Christine Romans on Capitol Hill with that part of our coverage. Professor William Black is on the line now, professor of Economics and Law at the University of Missouri. He is a former executive director of the Institute for Fraud Prevention, the author of a book entitled "The Best Way to Rob a Bank is to Own One" and the good professor joins me now from Madrid.

Professor, this question of the failure by Wall Street executives to understand the offensive nature. They are looking as if they're talking a different language to politicians and the Wall Streeters.

WILLIAM BLACK, PROFESSOR OF ECONOMICS AND LAW, UNIVERSITY OF MISSOURI: It's worst than that and you have to put this in context. This is the fifth shoe to drop and it's causing the American people to redefine this crisis as one of fraud instead of risk. And so you've had Citicorp come out and show that 80 percent of the loans it sold the Fannie Mae were under phony representations.

You had Lehman Brothers come out with the examination report that showing wide scale fraud. You had (Wamoo) by the same committee. The largest failure of a bank in U.S. history back to front fraud and now you have, of course, Goldman and you had the same committee come out with the evidence on the rating agencies.

And so the American people have come to a very different understanding of Wall Street and they don't like it one bit.

QUEST: Does Wall Street care at the end of the day? Lloyd Blankfein in his testimony that we're going to hear shortly says, look, we make money for pension funds, for mutual funds. We are the companies that build the roads and the hospitals. We provide the wealth and the capitalism. He's got a point, Charlie.

BLACK: Yes and it's a point that's absolutely falls. Finance is massively too big in the United States. It is massively too profitable. It's supposed to be a lean and mean intermediary that gets funds to useful purposes. In fact, it misallocates funds, which is what we just seen in this global crisis.

It causes repeated intensifying crisis and it makes its executives very rich in the process often by blowing up their own clients.

QUEST: Right, you've been invited to give testimony yourself to one of the subcommittees, what will be the thrust of what you're going to tell them in your testimony? Because at the end of the day, this is deeply steep into U.S. domestic politics as financial regulatory reform moves its way up the agenda.

BLACK: It is, but I'm here talking in Spain about the same issues and I've been asked by Iceland to come and talk to them in three days. So the recurrent thing is this crisis isn't an accident. It isn't a hundred year storm. It isn't a bunch of black swan people couldn't anticipate. It is the creation of a criminogenic environment that is produced what in the United States was called an epidemic of mortgage fraud that the FBI warned about in 2004.

QUEST: Professor, many thanks indeed for joining us. We will talk more hopefully in the future on these issues. Professor Black joining me on the line from Madrid.

So when we come back, an oil company, a car company, a chemical company, a conglomerate and a bank amongst others. Do any of them get green or do I need to find some reds? In just a moment, Quest Means Business.


QUEST: The Q25 is underway in uncertain time for the global car industry. Ford Motor Company has reported best quality performance in six years. Q1 significantly better than expected $2 billion compared to a loss of almost 1.5 same time last.

Chief exec tells CNN a short time ago, he's optimistic about car sales worldwide.


ALAN MULALLY, FORD CEO: Clearly, the United States of America is a very important market. It's large, it's growing, same way in Europe, but the fastest, the smallest. But the fastest growing is clearly Asia Pacific and we have a good presence there, and now we're introducing all of these fabulous Ford vehicles in India and also in China. And they just love the Ford brand.


QUEST: Ford is one of six global firms that we're going to put in the Q-25 today. It's quarterly earning season gives you a sense of how corporate world is doing. Hundreds of companies reporting, we picked 25 that we believe is a barometer. You know how this thing works. We give a green for a positive performance.

That's more than just meeting expectations. It's also about guidance. It's looking under the hood if you like. On Monday, we handed three green balloons. Maggie Lake is with me in New York.

So, now we got three already, let's start with Ford because you've just heard from Alan Mullaly the results. Is there much to say other than telling me which balloon?

MAGGIE LAKE: Yes, it's definitely a green, Richard. This is a great looking report and not a surplus because Ford had been showing a lot of good momentum, but as you said, best profit in six years. They're forecasting, confirming what we suspected that they're going to be profitable for 2010. That's a full year ahead of their schedule.

The most important thing is they're taking market share. People seem to like the cars that they're building and remember that was always the problem with the American car makers. They've got a lot of good traction on some of their newer models.

People are mentioning the (Tourist). They're coming out with some smaller compact cars and so they're getting good reviews from people. In fact, I've read somewhere that they took - they outsold GM for the first time in something like from 1998 when there was a strike at GM.

So you could see that they are really outperforming in this environment so a green.

QUEST: No question about it. There goes the green. When we look at 3M, now that's an interesting company because in the past, we've (inaudible) with 3M, but as I saw one quote about them, it said, "simply an outstanding performance."

LAKE: It is very simple. They beat expectations. They raise their guidance going forward and they said across them is every sector of their business, they're seeing strength especially those emerging markets. That really a (scene) that's coming out here, emerging market, areas doing particularly well for 3M.

QUEST: I'm guessing then that we both agree it's a green for 3M. And finally, DuPont, interesting because when DuPont has numbers being a chemical giant and being a conglomerate in that sense. It tells what might be happening in wider industries.

LAKE: That's right and the upper diversity, you know, they had a hard time because they were hit on so many fronts in the recession, but that's really helping them now and all these companies, they got lean, they got efficient in the downturn and it's really paying dividends now.

Again, beating expectations, raising their guidance and here's the diversity, strength in (inaudible) and electronic materials. I laughed when I saw that and perhaps most importantly, Richard, they've scaled back so much in the downturn. They're growing so fast now. They actually have to hire back contractors to meet the need.

So that is what we've been waiting to hear so good news for DuPont.

QUEST: For that, (inaudible) having that growth of some 23 percent. I mean, the earnings numbers we come from a low point last year. It's not hard to beat, but I think they're definitely get a green when you have that sort of growth.

Maggie, we seem to have a lot of greens and the tube is filling up fast. We'll see you tomorrow when hopefully we will do more. I need to do a couple on my own here.

Daimler had swung for a net profit of 13 percent. Daimler simply - I mean, it picked up market share. It continues to consolidate its growth, all in all, as against its principle rival BMW performed extremely.

There are a couple of worries about other matters, but you got to give them a green as well. Deutsche Bank, second best quarter ever. A 75 percent profit surge with revenue of 35 percent. Q1 profits up a 135 percent. A lot of numbers, but the point of (inaudible) the market shares were down today on worries about regulatory reform and how that would impact it.

But Deutsche Bank, a powerhouse, we gave that a green as well. Are you starting to get an idea of how this thing is going to play out? We have one, two, three, four, five, six, seven, eight or nine greens, no reds. The Q-25 continues.

We will be back on Capitol Hill in a moment where the normally reticent men of Goldman Sachs are being told to reveal all in just a moment.


QUEST: Hello.


This is CNN, where we return to our top story, Capitol Hill and lawmakers are giving representatives of Goldman Sachs a grilling -- a singing -- it's an uncomfortable time for the masters of Wall Street. They're having to listen to some uncomfortable accusations being leveled against them, their ethics and their company.

At times, they've been looked quite embarrassed, as U.S. lawmakers have investigated the firm's role in the crisis and accusations that Goldman behaved fraudulently.

The hearing has been going for several hours. We're getting some pretty pugnacious questioning from lawmakers.

The hearings could have far-reaching implications for how the Street works in the future. Traders around the world, particularly in the U.S., are taking a close interest.

Kevin Cook is a market analyst with Peak6 Investments.

And Kevin joins me from Chicago.

Kevin, I mean this is...


QUEST: It's brutal what's happening, particularly the senator from Missouri, who literally has laid into these men, at points when they looked like they might burst into tears.

COOK: Yes, this is great theater. I'm calling it "CSI Wall Street" here, because you're actually getting a great microscopic view of how Wall Street works. And what stands out -- I mean we've seen these Senate hearings before, where the senators, you know, they have to take the people's view and they're waving their fingers and they're brow-beating. But what's -- what's revealed is their glaring ignorance of how markets work. They don't understand what a market making function is.

So they don't understand how a firm, like a Goldman Sachs, could have continuous long or short positions versus their client. They think there's something wrong with that. So that's one thing that stands out.

QUEST: Right.

COOK: And then -- and then, a lot of the conversation seems to verge on whatever Goldman Sachs may or may not have done wrong somehow caused the whole -- the entire U.S. mortgage market to melt down, which is just absurd.

QUEST: But, if you think -- I take your point and certainly whenever the technicalities get raised, the senators seem to be on the back foot. And they always swing immediately to say yes, but it was wrong, it was unethical.

But they have a point, don't they, these senators?

They are the ones -- they are like the people walking behind the horses in New York sweeping up afterward.

COOK: Definitely. And the -- you know, the problem is, is there needed to be more regulation. Wall Street was allowed to create exotic derivative instruments with no centralized clearing, with no rules for collateral management and they did become monstrosities. They did become Frankensteins in the -- in the words of the Fabulous Fab.

So, you know, that was a regulatory problem. And then you had the whole mortgage market problem, you know, that was...

QUEST: OK, but...

COOK: -- basically supported by Fannie and Freddie. So -- so, yes, if taxpayer money was used to bail out firms on Wall Street who were -- who were creating this kind of thing, you know, we definitely need to examine that.

QUEST: But as a professional investor, as a man who's in the markets, as a -- as somebody who -- who knows this backward, Kevin, are you put off by Goldman one jot from what you've heard?

COOK: Not really, because they were in a role where there were no rules for those types of securities. And they did the best they could. In fact, they -- they could be slightly commended for being able to survive some of the choppiest wasters, where they were allowed to create exotic instruments and -- and ride those waves out when dozens of other firms failed and did not know how to manage the risk.

QUEST: OK, but if people like you, who -- and others who may be clients of Goldman, are not put off by their activities, by the criticisms, by the accusations, then what we are left with on Capitol Hill now is nothing more than pure theater.

COOK: OK. Well, there is a solution, though. And there is heading toward something. And what it's heading toward is making derivatives regulated under a clearinghouse model. Bring them under in a centralized exchange model where the positions are mark to market. Mark to market got a bad name on Wall Street because the firms didn't want to do it. They didn't want to mark their positions every day.

On an exchange clearinghouse model, you do that everyday and losses cannot accumulate and there's no risk among trader -- trading counterparties because the clearinghouse stands in the middle...

QUEST: Is that a...

COOK: -- holds each party's money and makes sure that everyone pays their losses and is marked accounting in -- by its fair accounting standards.

QUEST: Kevin, great to have you on the program.

Please come back again and help us understand these things in the future.

COOK: All right, Richard.

QUEST: Lovely to have you.

The markets that are in New York have reacted not only to Goldman, they've also reacted to Greece and to Portugal. And they've had the earning numbers. And we're down 1.2 percent, 137, at 11067.

I have one more duty to do. Earlier, I forgot -- yes, I know it's difficult. I know you may not believe me. I forgot about BP. Bp, which made more than $5 billion in its first quarter numbers, profits up -- revenues up more than 135 percent. It was an extremely successful performance. I got rapped on the knuckles for forgetting about BP. It gets a green balloon.

We are going to have to deflate some of those balloons before the week is out.

If you think Britain's voters could spring a surprise on election day, wait and see what comes after that. It's a warning from a leading economist who says we may not be prepared for the spending cuts ahead.


Good evening.


QUEST: Just about 10 days before Britain goes to the polls in the general election, all the parties are acknowledging there will have to be some form of tax rises and spending cuts. The question is whether they are being honest about just how much they'll have to put up taxes and slash spending. The common view in the city of London is that the cuts will be bigger, deeper, nastier than any politician is actually letting on.

I spoke to Stephen King, the HSBC's group chief economist, who told me why the issues of tax and spending are now taking center stage.


STEPHEN KING, GROUP CHIEF ECONOMIST, HSBC: The key issue here is not so much the hung parliament. I know that everyone is obsessed with this idea of a hung parliament. The key issue to my mind is that none of the political parties has really told the truth about the amount of austerity that will be required after the election.

And so the question is, does any party, whether it's a hung parliament or otherwise, really have the mandate to deliver the kinds of austerities that will be required over the course of the next few years?

And I think it's going to be -- they want it as a bit of a surprise to the great British public when they discover that taxes will be rising, that spending will be cut, much more ferociously than anyone has currently suggested.

Obviously, as far as a hung parliament is concerned, the big question, especially against the background of British history, is can a hung parliament -- can a coalition government or a minority government make the kinds of tough choices that will eventually be required when it comes to reducing public spending?

QUEST: If there is a reluctance and, with a hung parliament, an inability to make those decisions and take those necessary actions, then sterling will surely feel the -- the wrath of the market. And eventually that will translate itself into bond markets and the wider economy again.

KING: Well, it -- it's clearly the case that currency forecasts are difficult at the best of times. This is not exactly the easiest of times in this day. So it's possible that a lot of this bad news, in one sense, that the financial markets regard it as bad news, is kind of priced in. People now know that the chances of the hung parliament are actually pretty high.

But the key question ultimately, of course, is can you come up with a credible plan for reducing the budget deficit?

It's going to take a while to get that through, if, indeed, there is a hung parliament, because it will take a while to actually get a prepare -- properly functioning government to come through.

So there's no credibility to the reductions in government borrowing in the years ahead. But, yes, under those circumstances, the risk is weak sterling and also the possibility of -- of higher gilt (ph) yields and people worrying about the possibility of ratings downgrades from the ratings agencies.

All those things clearly go into the mix and after the election.

QUEST: You have just written or you're about to publish a new book which deals with, if not exactly the specifics, certainly the -- the dilemmas facing mature economic systems like the European Union and the United States. And, frankly, from what I've read of your views and the synopses and you're pretty pessimistic.

KING: Yes. In fact, the -- the book is called "Losing Control." It's very kind of you to mention it.

But the point about the book is that I think most people, when they discuss globalization, tend to discuss it from the perspective of the Western model and how it spreads through to the rest of the world.

What I've tried to suggest is actually we should be asking the opposite question, which is what happens when countries like China and India become increasingly successful?

What is the impact of their success on the Western world?

And the truth of the matter is that the Western world's power and influence in the global economy will diminish over the course of the next few years.

And it does strike me that -- and this is actually in Britain and in government debates elsewhere within the Western world -- this kind of issue isn't really being discussed enough.


QUEST: Stephen King talking about the discrepancy, for example, between old and new.

So what do toy soldiers have to do with Britain's election?

It's an example of exactly what Stephen was talking about.

We've been speaking to one company that answers the question and even though it's far away from Westminster, in Hong Kong, to be truth, the man behind King & Country is watching developments from Hong Kong to London very closely.


ANDY C. NEILSON, KING & COUNTRY: My name is Andy Neilson.

I'm the co-founder and creative director of King & Country.

This is a little toy soldier company and a military miniature maker.

Of our total business, about 10 percent is UK-based. When this recession originally hit, I was very worried because this kind of product is not a necessity. It's a luxury item. These are little toys for big boys. There was a hit, but it was nowhere like as serious as we thought it was going to be. And, actually, we bounced back really fast.

We can see from the root figures for what our national distributor in the U.K. is purchasing. I would say his purchases from us are up in excess of 20 percent over the same time last year.

People love the bad guys. Even I don't entirely understand why that is. It's not that, in this case, such as World War II, it's not that they're closet Nazis or anything like that. Collectors of this kind of product are interested in history. If you're buying King & Country, probably the most expensive place in the world to buy it is in the U.K., not because our distributor there is gouging the customers for high profits, but because of the tax situation and where you've got import taxes that are fairly high. And then you get value-added tax on top of that. As it stands at the moment, it's prohibitively expensive.

I would like to see that any government that takes over actually face up to the problems that the -- the real problems the country faces. But, sadly, I -- I don't think that any of them are capable of doing it.


QUEST: The Britain election.

As regular viewers and those of us who talk every day will know, I'm a true fair weather friend. Give me a hot, sunny day with lots of nice warm weather and Guillermo Arduino is my best friend, at the World Weather Center.

GUILLERMO ARDUINO, CNN METEOROLOGIST: I think that the -- let's say - - let's change this word. I'm not going to be able to give you a hot day. But what am I -- what about a mild and sunny day in London?

Would you go for that or not?

QUEST: I'll settle for a nice spring day.

ARDUINO: You got it. You're going to be my best friend for three days, then. I'll show you what's going on.

I think that Scotland has a little bit of winds and also -- well, Scotland is where we are going to see some bad weather here, especially on the western side. It's some rain and also some windy conditions. Dublin the same thing, in Ireland.

So you see it's happening in here. I'm going to get closer so you see what's going on right now. In the last 12 hours, we have had action here, rain showers and also winds, even in Northern Ireland.

But look at England, nice; also, France. And, also, the temperatures are rebounding in that area from Spain to Portugal into France and in London. I remember, yesterday I was checking out the forecast for today and Madrid was 29, Paris was like 16 and London was like 12, 14. You're going to see what's going on, because I think things are changing. You're going to have to be a little bit patient.

In the meantime, you see some white clouds and that's about it. Ireland is OK. Then the rain comes back. The winds again into Scandinavia here on the Baltics. That where -- that's where we have some unstable weather. Poland is getting out of that nasty weather that we had before.

Winds in Dublin; Amsterdam; Paris looking fine; Barcelona; Rome; Milano; Berlin looking fine; finally, Munich looking great; Vienna looking OK.

Let's see temps then. Twenty-two for London.

What about that?

Twenty-five for Paris. And yesterday we were talking about like 15, 16 degrees. So it is improving dramatically. And we see also all across the southern parts and the central parts of Europe nice conditions.

I was looking at Athens, a little bit breezy, but we're not going to see significant rain. Italy, some thunder from Lazio into Calabria.

Now, if you're going to Asia, especially Japan, even though it's like three -- almost three in the morning in Hong Kong, Beijing and Shanghai, you will see these areas where we're going to have the problems into Tokyo, some rain showers, some windy conditions. Beijing, the same thing. But I have a little bit of good news with bad weather for the Philippines, because finally we are getting the rain, especially into tomorrow or already today, for people watching in the Philippines because the beginning of the day is happening right now.

We are going to see some rain. No significant delays at the airports.

Kuala Lumpur in Malaysia with some clouds and thunder. And then the transition into the colder -- the cooler season in the south. Let's see, Cambria, we're expecting a high of 15 degrees or so, 18 in Adelaide and 17 in Wellington -- Richard, Ellis Springs (ph) looks fine, though.

QUEST: Ellis Springs. I mean it's -- Dialis (ph) is always blisteringly hot.

ARDUINO: I know.

QUEST: All right, but it -- a wonderful place.

All right, many thanks.

ARDUINO: Thank you.

QUEST: Guillermo at the World Weather Center.

Now, when we come back in just a moment, look, this is nine carats. This is 22 carat. And this is somebody's gold tooth.

But how much is it worth and is it actually worth selling it to one of the five gold merchants?


Good evening to you.


QUEST: Welcome back.

The dark cloud of Greek government debt has a gold lining. The price of gold has hit its highest level since early December. Traders say uncertainty surrounding Greece's future is driving investors. It is, of course, it's the last safe haven. The gold bugs are out.

Gold now stands at $1,161. It was up on the day.

It's a gold party in more ways than one for my next guest.

Krista Waddell is the chief executive of Ounces2Pounds, one of these companies that organizes parties for people to sell their old gold.

Krista is with me.

And we've -- we've heard a lot about these parties. And to some extent, you know, people are seeing what gold is trading at and cashing in on what the prices are, aren't they?


QUEST: But the truth is the price they get is not the price that I just quoted of $1,161?

WADDELL: No, the price of -- that they're quoting on the stock market is for bullion that's purest of pure and hallmarked and stored away. And the -- the items that everyone is selling is scrap gold.

QUEST: Right. And it's not the best -- I mean it's gold, but it's not 20 whatever it is...

WADDELL: It's not tradable. It's not able to go out on the market and -- and retain the price that people are seeing on the market.

QUEST: Do people get very disappointed when you point this out to them?

WADDELL: Not really. The majority of people don't seem to watch the gold market day by day because it's not really affecting their life. So when they're given the opportunity to sell for a higher price than they're expecting, everyone is very, very happy.

QUEST: OK. And what about the -- the idea that people are taking advantage of basically the -- the recession is bad and they're getting rid of old gold?

WADDELL: Some people are taking advantage and I guess that's always a -- that's always a possibility when -- when there's a problem in the economy. But our company tries to offer the highest price.

QUEST: OK. Let's see what we've got here, because the other thing, what -- it's fair to say, I mean some of the -- your competitors have had a pretty disreputable time, haven't they, about how much gold they're taking, whether they're paying the right prices, all these sort of issues have been raised?

WADDELL: They have been and that's one of the things that separates us from them, is we're actually at the party, in front of our guests. They can say yes or no and say oh, I want this piece, I don't want that piece. It's -- it's all up to them at that time.

QUEST: All right. Let's -- let's actually put this to some test.

We've got -- this is nine carat gold. So this is the stuff that you were told is quite good but actually is probably Great Aunt Betty's nonsense that she's been thinking. All right, it weighs 90.55 grams. Now, for -- Aunt -- Aunt Betty.

So how much is Aunt Betty's gold worth?

How much are you going to give me?

WADDELL: How much I would give you is 584 pounds.

QUEST: Five hundred and eighty-four pounds. That's about 600 -- 600 pounds. I'll beat you up to 600. Six hundred pounds. That's about $900.

WADDELL: Um-hmm.

QUEST: For -- for 90.5.

Now, would I be at -- would I be happy with that?

I don't know. I've got this $1,100 in my mind.

WADDELL: Most people are happy with it, because it's just been sitting in their jewelry box collecting dust. Nobody has been able to buy it from them because they don't want to go to the pawn shop and send it in for postal. They want to be able to have a live interaction.

QUEST: I'm going to sincerely regret what I'm going to do next.


QUEST: Eighteen -- you have to work this out in advance. This is a gold tooth that still has the tooth in it. It is worth -- it's got four grams. But we don't know how much a tooth is. So just assume the tooth is there as well.

WADDELL: Um-hmm.

QUEST: How much -- how much -- four grams, it's 18 carats.

What's it going to -- oh.

WADDELL: It's about 47 pounds, about.


And this one, 22 carat gold. This isn't yours, is it?

WADDELL: No, it's not.

QUEST: Thank goodness. I was about to (INAUDIBLE).


QUEST: All right.

WADDELL: I guess it is now.

QUEST: Yes. Twenty-two carats and it's 13 grams.

And you're going to give me?

WADDELL: Thirteen grams?

It would be 188 pounds.

QUEST: All right. Many thanks, indeed for coming in and showing us.

Come back when gold hits $2,000.

WADDELL: Definitely.

QUEST: We appreciate it.

Many thanks, indeed.

WADDELL: Thank you so much.

QUEST: Thank you very much.

When I come back in just a moment, not gold but we're going to have the gold run -- the Goldman Sachs hearings.

A Profitable Moment in just a moment.


QUEST: Tonight's Profitable Moment.

Most of the day, I've been discussing Goldman Sachs and giving its testimony in Washington.

Watching the executives being grilled by the committee, I was stuck by the seeming inability to understand the moral dimension to this issue. Time and again the executives have justified their actions purely on financial grounds -- justifying it to the elected politicians who represent the anger of the public.

These execs did not seem to accept or even comprehend why so many people find the financial instruments being created simply offensive. Sheer gambling where the rest of us have ended up paying the bill.

Now, the politicians, of course, have their own responsibility for not regulating the industry better. But for today, at least, they were the voice of the little people.

And that's QUEST MEANS BUSINESS for this Tuesday.

I'm Richard Quest in London.

I thank you for your time and your company.

Whatever you're up to in the hours ahead, I hope it's profitable.

"AMANPOUR" is next, after your news headlines.

I'll see you tomorrow.