CNN IN THE MONEY
New Report Links Saudi Spies To 9/11 Hijackers; Most Layoffs Come Without Severance Or Warning; Is The Sarbanes-Oxley Act Working?
Aired August 2, 2003 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, HOST: Welcome to the Saturday edition of the program. I'm Jack Cafferty.
Coming up on today's IN THE MONEY, Desert Storm. A new report about September the 11th sparking a standoff between Saudi Arabia and the United States. We'll look at the questions being raised about the Saudi government and about terrorism.
Plus, cold cuts. New research says most layoffs today come without a severance package or even a warning, let alone a kiss. We'll tell you about America's disposable workers.
And Street cleaners. The Sarbanes-Oxley Act's supposed to keep companies honest in their financial reporting. Right. One year later, find out whether investors are getting the right numbers. Worth pointing out, as Lou Dobbs says on "MONEYLINE," 600 days after Enron, one person is in jail.
Joining me today on the program, CNN Correspondent Christine Romans, an old buddy of mine from CNNfn -- she's making her debut here with us on IN THE MONEY -- and "Fortune" magazine editor at large Andy Serwer.
And I need your help here on something.
ANDY SERWER, "FORTUNE" MAGAZINE: Yes.
CAFFERTY: Now, on Friday, we get this unemployment rate actually going down from 6.4 percent to 6.2 percent, which is good news.
CHRISTINE ROMANS, CNN CORRESPONDENT: Yes, yes.
CAFFERTY: But then, in the second line, it says we lost 44,000 jobs.
SERWER: Don't you love that when they do that?
CAFFERTY: It sounds like a -- there's some defying of gravity here.
ROMANS: And the June number also lost more jobs than they had expected. So that what people are a little bit concerned about. It's two different reports. It's two different surveys. That's why there are two different ways to read it.
CAFFERTY: OK. SERWER: It's numerators, denominators, but these statisticians have just got me all botched up, too. They say the economy's growing. We're still losing jobs. I mean go figure, right?
I -- you know, the point is -- I think is that we may be coming out of the weeds. Here and there are some signs, but it's not completely clear yet, Jack.
CAFFERTY: There's some -- there is some other good news out about leading economic indicators.
CAFFERTY: Manufacturing came out on Friday, came in higher than expected.
First time jobless claims down for the second week in a row. That hasn't happened in five or six months.
So there's some -- some little buds begin to poke...
ROMANS: Sure. And...
CAFFERTY: ... their head out of the dirt.
ROMANS: ... GDP -- the economy grew at 2.4 percent, more than anybody thought.
There were even signs of capital spending. Maybe it's a little bit of a myth that people aren't spending on technology.
So there are some signs of strength. But, at the same time, the stock market's up so sharply this year. Is that already all factored in?
Now you've got to...
SERWER: That's the only thing we care about.
SERWER: Well, two things people care about. They care about their jobs, and they care about their 401(k)s.
SERWER: And the 401(k)s -- I mean the market's up, you know, really very strong in this area. You wonder if it's going to have anything left for the second half of the year.
ROMANS: Well, I mean the NASDAQ's up 39 percent over the past 12 months. I mean, you know, people are trying to say, you know, are we just now getting out of the bear market.
Hey, the easy money has been made now. Now you've got to figure out -- now you've got to figure out what to do next. CAFFERTY: A lot of them...
SERWER: That's when people jump in now.
CAFFERTY: A lot of them on the NASDAQ chasing the same old stocks?
SERWER: The same old tails.
ROMANS: Oh, my gosh. I literally had...
CAFFERTY: ... Bubbleicious the first time around.
ROMANS: ... somebody this week tell me -- this guy tell me this week -- he said, well, listen, you know, some of the Internet stocks have P.E.s of only a hundred...
CAFFERTY: Gee, that's swell.
ROMANS: ... and I said whoa.
CAFFERTY: We've got to move forward now.
The most controversial thing about this week's report on the September 11 attacks wasn't what it said but what it didn't say or, rather, what was left out.
President Bush refusing a request from Saudi Arabia to declassify those 28 pages of that intelligence report. The president's decision came after an emergency meeting this week with the Saudi foreign minister.
They had no trouble getting an appointment. They called, said we're coming tomorrow at 11:00, and don't you know he was waiting in the Oval Office for them.
Something -- something going on there we don't know about maybe.
The Saudi government insists that it's committed to fighting terrorism on its own soil and in the United States. Riyadh's foreign minister made that point during his visit to Washington this week.
(BEGIN VIDEO CLIP)
PRINCE SAUD AL-FAISAL, SAUDI FOREIGN MINISTER: Saudi Arabia has been very active, and may I -- even if I say so myself, very effective in its fight on terrorism in Saudi Arabia.
We have questioned thousands literally, and we have arrested 500, and we have stopped attacks before they occurred in Saudi Arabia, and we have provided information that stopped attacks before they occurred in the United States, also.
(END VIDEO CLIP)
CAFFERTY: But the relationship goes way beyond the common security interests, and you prove it every time you pull up to the gas pump. The United States likes Saudi Arabian crude oil and has for a long time, and Saudi Arabia is very fond of U.S. Benjamins, as in hundred-dollar bills, the greenbacks, the currency.
According to author Robert Baer, it makes for a troubling alliance. Baer's latest book is called "Sleeping With the Devil: How Washington Sold Our Soul for Saudi Crude." And he joins us now on IN THE MONEY to talk about this.
Your background in the CIA and various intelligence agencies. I would think you might know a little more about the relationship between Riyadh and Washington than maybe the rest of us common folks do. What is there about this thing that's troublesome and that we don't know about?
ROBERT BAER, AUTHOR, "SLEEPING WITH THE DEVIL: HOW WASHINGTON SOLD OUR SOUL FOR SAUDI CRUDE": Well, I mean it's clear. I mean it's coming out now that Saudi Arabia has not cooperated on terrorism after September 11. It has not provided a single useful lead to that plot, even until today. It's arrested people locally, fine, but how does that relate to us?
You know, you compare Saudi Arabia to Pakistan, and Pakistan's does a wonderful job picking all these people up, turning them over to us. Saudi Arabia has said this week they will not turn over Saudi citizens to the United States for justice. They've defied us.
CAFFERTY: This is despite the fact that 15 of the 19 hijackers on September 11 were Saudi citizens, that they continue to allow the preaching of hatred for Western civilizations in the Muslim fundamentalist schools, and yet we continue to go along saying these are our friends. I mean that's hypocritical, isn't it...
CAFFERTY: ... or is it?
BAER: It's worse than hypocritical, because if it was just hypocrisy, we could change our ways but it's we're dependent on Saudi Arabia for cheap oil, and that's a fact, and dependence or addiction, whatever you want to call it, changes perceptions, and the government is not willing to hold Saudi Arabia accountable.
SERWER: But, Robert -- Robert, let me ask you a very fundamental question because people like yourself are pointing fingers at Saudi Arabia, and I think you're probably right. But why would Saudi Arabia want to harm the United States? Why -- why are they funding these terrorists, if you believe that to be true?
BAER: You know, to -- boil it down to this: protection money. What they tell them is, listen, go ahead and recruit in the mosques, send your people, your militants to Africa, Central Asia, fight the war, they're sending them to the United States, just leave us alone. That's what the royal family is saying.
And if you look at it, the Saudis say we are victims of terrorism. But name one time a Saudi prince has been assassinated, kidnapped, or anything else you would expect of victims.
ROMANS: Robert, I've got to ask you about the 7,000-odd Saudi princes. This royal family is huge. And, you know, Richard Murphy, a former ambassador in the region, telling us this week that, you know, maybe there's a bad apple in the bunch. I mean the Saudi family really -- I mean how deep does the sponsorship of terrorism go?
BAER: I think it goes pretty deep. You know, you look at this guy out in San Diego, Bayoumi, who's the center of the 9/11 report. He was getting money from the Saudi government. He was getting money possibly from the bin Laden family -- this is what I've heard. I'm not sure it's true -- in Saudi Arabia who have some royal partners.
You know, they're either turning a blind eye or they're complicitous. I mean I agree with Ambassador Murphy who knows Saudi Arabia very well. There's probably not a larger conspiracy, but it's sheer negligence this happened.
CAFFERTY: How is it, though, that the House of Saud, arguably one of the most repressive regimes in the world, is unable to impose its will on the religious fanatics and clerics who drive this idea of jihad within that country?
BAER: Well, Saudi Arabia is founded on a partnership between Al Saud, the royal family, and the clerics. The clerics have been instrumental in keeping them in power. The royal family has been very reluctant to cross them.
SERWER: Robert, I've been to Saudi Arabia. A couple of years ago, I was there. And it's a very sort of cryptic society for an American to sort of penetrate. You worked there in terms of gathering intelligence.
And I want to ask you -- you -- how do you think this is all going to play out in terms of the Saudi royal family? Where you do see Saudi Arabia in -- say in five years? How will it be governed?
BAER: You know, the people that really know Saudi Arabia that are working there today -- I know them -- say, you know, the family's going to reach a crisis in three or four years. Either a second or third generation prince is going to merge, change the nature of the society, or that -- you know -- you know, this perfect storm scenario of the regime could fall.
It could go either way. It's very hard to predict in the Middle East. You know, you look at all the other factors, the price of oil, whether they can maintain their welfare state division in the families. But, you know, an FBI official said yesterday the royal family is fighting for its survival, and I believe him.
ROMANS: The whole declassification of these documents, the 9/11 report -- I mean is this a tempest in a teapot? I mean is there a much bigger issue here in declassifying these documents or 95 percent of them? I mean will that answer all these questions?
BAER: I think it -- it won't answer them, but the problem is -- for the Bush administration -- if he declassifies them, there's a pattern of Saudi complicity -- I'm not talking about the state but Saudi individuals -- in September 11.
What happens if there's an outcry for an indictment of Saudis or Saudi officials, and the Saudis don't turn them over? Suddenly, we're going to have to put them on a terrorism list, which the White House is reluctant to do.
CAFFERTY: To what degree does the United States have a role in all of this? And the context in which I mean the question is this. We said in the introduction that we are dependent -- you call it addicted, as many do -- to Saudi crude oil.
Refusing to do anything about the consumption of oil or the dependence on imported oil in this country simply leads to the continuation of this rather fractured relationship that's sort of the elephant-in-the-living-room thing that we've got going on with Saudi Arabia.
So is it -- is it unfair to say that part of this is our own damn fault?
BAER: It is -- we wish -- look, we didn't look into Saudi Arabia. I've been inside the CIA computers. We just assumed it was our ally. We assumed the royal family was going to take care of terrorism internally. We assumed that the mosques were not going to preach righteous murder. It was a bad assumption.
And we're all partially responsible because Saudi Arabia, in fact, has been an ally. Whenever there's been problems in markets, they've come through, pumped more oil.
CAFFERTY: And -- and going back to Desert Storm, of course, they were very amenable to allow to us stage Desert Storm out of bases in Saudi Arabia, et cetera, et cetera. But it seems like this troublesome aspect just keeps rearing its ugly head and it's not going to go away.
BAER: It's different world. They're forcing our bases out of Saudi Arabia. And there's also suspicions that Saudi individuals are sending help to the resistance in Iraq today. That's yet to be proved, I've seen allusions of it from the military, but it bears watching.
CAFFERTY: Bob, it's good to have you with us. Thank you for your time today. I appreciate it.
BAER: Thank you much.
CAFFERTY: Robert Baer, author of "Sleeping with the Devil: How Washington Sold Its Soul for Saudi Crude," a former CIA operative, a gentleman who knows of what he speaks.
Coming up on IN THE MONEY as we continue, the exit without any extras. Most U.S. layoffs don't come with severance or even a tipoff that you're about to get it. We'll tell you about some startling findings in a new survey.
Also ahead, bye-bye refi. Declining bond prices causing interest rates to surge. Find out whether that means. The housing boom could be headed south soon.
And taking it to the Street. New rules on corporate governance have been in place for a year now. We'll see if it's actually made any difference inn the way corporate America does its business.
Did You Know? Oil was discovered in Saudi Arabia by U.S. geologists in the 1930s. Source: U.S. Department of State
CAFFERTY: When it comes to fun, getting laid off, losing your job falls somewhere between a root canal and sitting through the new J.Lo movie.
Getting right sized or whatever weasel term the H&R people use for it these days is not getting any nicer either. A new joint study finds that two-thirds of the U.S. workers laid off in the last three years were not given any severance.
Most of them were not even told in advance that the axe was about to fall. And in some cases, that's illegal. You're supposed to get a couple of weeks notice.
Ken Dautrich was the co-author of that study, along with the Heldrich Center for Workplace Development. He's a professor at the University of Connecticut and director of the Center for Survey Research & Analysis at the same address up there in Hartford.
Professor, nice to have you with us. Thanks for joining us.
PROF. KEN DAUTRICH, UNIVERSITY OF CONNECTICUT: Good to be here.
CAFFERTY: What does this study tell us that the conventional statistics like jobless claims and the unemployment rate and non-farm payrolls don't tell us?
DAUTRICH: I think what -- what this tells us is that the problem of unemployment is much broader, particularly than what the unemployment rate suggests.
Right now, we see the new unemployment rate figures are out and at 6.2 percent, but, when we asked a sample of Americans in the workforce about unemployment, we find that within the past three years, about one in five say that they've lost a job.
So the problem of joblessness, of being laid off, and trying to find a new job is much more pervasive than what the existing unemployment rate suggests.
ROMANS: And, Professor, it's one thing to lose a job, it's another thing entirely to lose a job with little or no notice and no severance, no real -- no real warm blanket to take with you while you're trying to figure out what to do next, right?
DAUTRICH: That's right. We found that, you know, most people who had been laid off, as you suggested before, had very little notice. Only about 15 percent had two months notice, and only about 35 percent say that they had two weeks notice. So few people are warned in -- ahead of time, certainly in enough time to be able to find a job or begin to look for a new job.
But the problem runs even deeper than that. We find that people who have been laid off -- only about 28 percent of them continue to get health benefits from their employers. The -- only 25 percent get extended wages. Job training and career placement services are received by only about 15 percent of the workforce.
So, once you fall off the cliff, workers are finding a very difficult time in trying to climb back up.
SERWER: Ken, you talk about this cold, cold world out there. And, you know, it is a cold, cold world. But I wonder if it's really that different from any other period in U.S. history just over the past couple of decades. You know, the economy turns south. People get laid off. They get laid off unexpectedly. There's no job retraining. There's no benefits. I mean isn't that the way it's always been?
DAUTRICH: Well, these -- these things become much more problematic when there's higher unemployment, when there are lots of people looking for jobs, and it -- it is the way it is when the economy is in tough times, and, certainly, this economy over the past three years is no exception.
CAFFERTY: How do the recent developments concerning NAFTA, the North American Free Trade Agreement, and the exodus of thousands and thousands of service-sector jobs to places like India impact the long- range forecasting that you're looking at doing in your work? Some say that the -- that we've had a sea change in the labor landscape in this country because of those kinds of events.
DAUTRICH: Yes, the labor landscape has changed. This study in particular doesn't try to forecast what unemployment is likely to be like in the future. But it looks kind of at what workers are feeling right now.
Most workers don't understand specifically what's involved with NAFTA or some of the macro trends that are happening around the world and certainly within the job market of this country. But what they do understand is that things are tight.
Certainly, compared to three years ago, we find that concern about losing one's job, concern about the unemployment rate, concern that a family member is going to lose one's job is much higher today than it was two or three years ago.
So the American workforce is fairly tense right now. They know that things are tough. They've seen many family members and friends lose their jobs, and they're concerned about their own economic futures and particular their future in their job.
ROMANS: Funny. If the American worker is tense, he still has a pretty big credit-card bill and he doesn't save very much. The savings rate's pretty low, credit-card debt really high.
What's the advice for, I guess, people who may think that they're going along just fine and maybe could find themselves out of work in the future. You need to have some money saved. This should be a wake-up call, right?
DAUTRICH: You really need to be prepared, and there are -- you know, the study shows that it's not 6 percent of families who are affected like the unemployment rate suggests, but it's a much broader section of American society. About a third of people have had themselves or a family member lose their job. So, at times when the job market is not that great, it's important for people to be prepared for falling off the cliff
CAFFERTY: Ken, we're going to leave it there. I appreciate you joining us on IN THE MONEY. It's nice to have you with us. Thanks.
DAUTRICH: Good to be here. Thanks.
CAFFERTY: Professor Ken Dautrich, University of Connecticut in Hartford.
Coming up next on IN THE MONEY, a familiar ring. With MCI facing fraud allegations, see whether the old Ma Bell could be making a comeback. Ah, for the good old days of my youth when there was one phone company and the bill was $18 a month.
Also ahead, bestsellers. The shift in the bond market is turning down the heat on real estate -- turning up the heat on real estate, actually. Find out if the housing business still has room to boom or if what some are calling a bubble is beginning to hiss a little bit.
And don't spend it all in one place. We'll bring out the microscope and look at just how big that average American raise s going to be this year.
AT&T has approximately $37 billion in revenue and serves over 40- million residential consumers and over four-million business consumers. Source: AT&T Earnings Release
(COMMERCIAL BREAK) SERWER: Time now for our "Money Minute." The sell-off in bonds is sending mortgage rates higher. According to bankrate.com, the average 30-year fixed is at 6.26 percent, up from 5.99 percent last week. We'll talk more about rising mortgage rates later in the program.
Americans aren't as hopeful about the economic recovery as some experts thought. Tuesday's customer confidence report showed a drop in optimism in July. Economists expected recent stock-market gains to fuel a slight improvement in confidence.
And, while the stock market has shown a huge increase over the last two decades, it seems most investors have reaped little of those rewards. A new study shows mutual fund investors have averaged just 2-1/2-percent gain each year annually through 1984 -- since 1984.
That's even though the S&P 500 has averaged gains of well over 12 percent per year in that same timeframe. Researchers say it's all because consumers typically can't control their emotions enough during booms and busts and end up buying high and selling low.
ROMANS: MCI's plans to emerge from bankruptcy hit a big snag this week. Rivals AT&T, Verizon, and SBC Communications all accuse MCI of rerouting customer calls to avoid paying the other companies access fees.
AT&T is even going so far as to say that MCI is jeopardizing national security by rerouting the U.S. government's secure phone calls. MCI denies the charges, but Washington is barring MCI from getting any new government contracts at least for now.
The question is: If the company's new troubles keep MCI from staging a comeback, could AT&T recover from its own financial woes and profit from MCI's problems?
CAFFERTY: Not that I pretend to have any understanding at all of how this stuff works, how is it that they can reroute somebody else's calls. It seems to me you shouldn't be able to do that.
ROMANS: I imagine...
SERWER: They just hit a button, and they were sending these calls through Canada. This is red meat for AT&T because MCI wiped all that debt off their books, and they're coming back strong. They're going to compete with them.
Meanwhile, they have this huge problem, and the government's not going to give them any business. So AT&T is saying -- you know, pointing fingers and saying we're back.
But you look at that stock chart, and it is nasty. They had one- for-five reverse split. The stock is still way down.
ROMANS: On the New York Stock Exchange, it's known as the widow and orphan stock. I mean this is a company that -- you know, my grandma, for example, was one of those ladies who said number please. You know, I mean, the people who...
ROMANS: ... have held this stock for years and years and years...
CAFFERTY: Look at that.
ROMANS: ... you know, have seen retirements and...
ROMANS: ... inheritances go to almost nothing.
SERWER: Well -- but you've done well over time, though, Christine. I mean if you go all the way back -- because, at first, you have...
ROMANS: Lucent was...
SERWER: The SBCs and the BellSouths and all the -- Verizons, all those companies came from -- then, like you said, Lucent, NCR, Avaya, and all these other things.
But AT&T, since they've become solo, have done a pretty bad job. But then, again, you know, they're in the long-distance business. It's so competitive.
ROMANS: They got rid of all the good stuff.
SERWER: Right. Including their wireless business, you know, AWE. That's the ticker, A-W-E, which is now bigger than AT&T alone.
CAFFERTY: What happens in terms of the -- the kinds of things we're talking about here where there's stealing each other's phone calls and robbing each other blind. I mean prosecutors doing anything about this stuff? They just let it go on?
SERWER: Well, the government's investigating, and, you know, MCI says it's all trumped up. But, basically, to me, it just shows how incredibly competitive this business is.
SERWER: You think about people, Jack, using cellphones and what that's doing to the long-distance business.
SERWER: I mean you just take dollars away from these companies day after day like that.
CAFFERTY: You know... ROMANS: Government contracts are so important, though, too. You know, I mean I know that some of these government contracts have passed along between the phone companies back and forth. Because of the stiff competition, they undercut each other in prices.
But the security of these phone calls -- I mean that seems...
CAFFERTY: Yes, that's...
ROMANS: ... to be -- it's like the most important thing.
CAFFERTY: You know, I'm a lot older than either of you, and I can remember when they sold us on this idea they were going to break up Bell telephone, and they were going to create all these little regional Bells.
And then the Bell lab split off and became Lucent Technologies, and that was supposed to lead to all kinds of great new innovations, and the competition was supposed to bring the phone prices down.
CAFFERTY: It was supposed to have better service and lower phone bills.
SERWER: There's no question that service is worse. I mean I agree with you, Jack.
SERWER: I'd like to go back to the old days. It was so much easier. You got one bill. You didn't have all these stuff you had to choose. I mean who can choose which phone service is better? I mean it's crazy, and it may make more sense...
ROMANS: And you have my grandma saying number please, not please press three.
SERWER: Yes. You know...
CAFFERTY: Plus, in the old days, they had party lines. You could listen to what your neighbors were talking about...
SERWER: Oh, that was good.
CAFFERTY: ... and get right on there and find out...
SERWER: That's good. That's the good stuff.
CAFFERTY: That's good stuff.
CAFFERTY: All right. Coming up, bond markets sending mortgage rates higher, and that could mean a chill in the real-estate market for the first time in a long time. We'll find out if the sky's getting ready to fall on housing.
And it's been one year since Congress passed tough stock market reporting rules for big companies. Has anything really changed? We'll check it out just ahead.
Stay with us.
U.S. Stock Funds One-Year Highest Returns Polynous Growth A - 77.16 percent RS Internet Age - 75.99 percent Oberweis Micro-Cap - 75.13 percent Source: morningstar.com
Bond Funds One-Year Highest Returns Fid Cap. & Income - 51.79 percent AllianceBern.Em. Market Debt A - 50.94 percent AllianceBern.Em. Market Debt B - 49.89 percent Source: morningstar.com
CAFFERTY: My hunch is we're going to have to do a survey to find out who exactly is watching this program. We had our biggest response ever to last week's e-mail question which was: Should the U.S. legalize the sale of marijuana and tax the revenues? And, as you can see, 95 percent said yes, bring it on...
SERWER: Look at that.
CAFFERTY: ... legalize it. Only 4.3 percent said no.
CAFFERTY: Craig in Texas wrote this, "It seems very odd to me the government can spend billions of dollars every year fighting pot use, and the same government can't get a prescription drug program for our seniors. I say legalize marijuana, tax the hell out of it, and then buy some drugs for our seniors."
There you go.
SERWER: It all fits together, yes.
CAFFERTY: Jeff from Minneapolis, one of the very few with an opposing view -- he wrote this, "If we legalize marijuana, can you imagine how many people would be using and how many more tax dollars would then go to state and federal substance-abuse programs? I'm sick of paying for other people's chosen lifestyles."
And speaking of other people's lifestyles, maybe this last e-mail shows that, in fact, some of our viewers should ease up on whatever it is they're using. Responding to our question on legalizing pot, Scott from the Virgin Islands wrote, "What was the question again?"
CAFFERTY: This is all true. We don't make these things up here. We'll have our new e-mail question...
SERWER: That was funny.
CAFFERTY: ... a little later in the program. It probably won't be nearly as provocative, but we're going to ask it anyway. And you can e-mail is at email@example.com.
ROMANS: OK. How's this for provocative? Signs of an economic recovery and a growing budget deficit has sent bond prices falling in recent days.
But, for most Americans, that's only interesting because those falling bonds are sending mortgage rates higher and putting the brakes on the real-estate and refinancing boom. Mortgage rates surged to a nine-month high. The 30-year fixed now topping 6-1/4 percent.
With all that in mind, we thought this was a pretty good time to re-invite John Talbott to the program. John is the author of "The Coming Crash in the Housing Market."
John, welcome to the program.
JOHN TALBOTT, AUTHOR, "THE COMING CRASH IN THE HOUSING MARKET": Oh, thank you very much.
ROMANS: OK. Is a crash coming? I mean this has been an unbelievable July for the 10-year note. The worst month since 1984. What is -- what signal does that send to the housing market?
TALBOTT: Well, first of all, I was very surprised prize to here you speaking on your show about unemployment. I thought you knew the administration told you that the recession has been over for two years.
So, you know, I kind of felt like I was in -- living in a chapter in the novel "1984" where the people are walking down the street and the speakers are blaring the recession is over, the recession is over, those of you without jobs please return home.
ROMANS: John, you've heard about the jobless recovery. It's a recovery, but it's jobless, right?
TALBOTT: Yes. On the interest rate side, I think the worst is yet to come.
You know, the -- all of these mortgage rates you see are really just combinations of spreads over Treasuries, and the Treasury market has deteriorated even further. The Treasury -- the 10-year Treasury has gone from 3.1 percent to 4.4 percent, and now it's looking like Fannie Mae and Freddie Mac's spreads are starting to widen like 25 to maybe 50 basis points wide.
So, when you add that up and look at where mortgage rates used to be, down in the 5-1/4-percent range, that says that maybe -- you know, we might be seeing 6.5-percent, 6.6-percent, 6.7-percent mortgage rates, and that -- that would have a real, real, real effect.
SERWER: You know, John, you're talking about interest rates. Let's talk about housing. I mean you're talking about this bubble. We've been hearing -- bubble people like yourself have been going on for years. There's no bubble in Pittsburgh. There's no bubble in St. Louis, is there? I mean you're talking about a coastal thing, a California thing. It's a very regional market, isn't it?
TALBOTT: It's the first time I've ever been accused of being a bubble person.
SERWER: Yes, you -- you're a bubble man. You're a bubble man.
CAFFERTY: You've got to get on a better class of show.
TALBOTT: Not to bring statistics into this, but...
TALBOTT: ... Philadelphia, for example -- the latest 12 months ending March 31, they showed a 25-percent increase in home prices. But if you just look at the last six months ending March 31, their housing prices are off 5 percent.
So there's something going on, and it's going on in areas like northern New Jersey, Philadelphia, really about 60 percent of the cities in the country. It just so happens you're speaking to me in Los Angeles, and Los Angeles and San Diego and Orange County are still booming.
CAFFERTY: How much of it has to do with the kind of thing you're talking about, demographics and geography? I mean the areas you mentioned don't represent a significant percentage of the population.
TALBOTT: You're absolutely right. I mean one of the key principles of my book is that traditionally real-estate markets are -- you know, trade regionally because of regional economies.
But I'm predicting that this thing is going to trade off nationally because of problems in the underlying mortgage market and that interest rates are national phenomenas, and we're seeing that the highest foreclosure rates are in places like Indiana.
So what we'll see is as rates increase -- and, as I said, it might have already gone from 5-1/4 percent to 6-1/4 percent. If they start pushing 7 percent, you could think of that as a 30-percent increase in the level of interest rates.
Well, when a young married couple walks into the bank, guess what, they're going to be offered 30-percent less money to go buy a home with.
ROMANS: John, I bet you're like a doctor when you go to the neighborhood barbecue. People pull you aside and say, OK, listen, I think I can get 5-1/2 percent on a $600,000 mortgage, you know, should I do it now.
OK. So this is what everyone wants to know when they're talking about interest rates and they're talking about, you know, is that it, is the window closed? But is it still a doesn't time to get mortgages?
I mean, remember, last year, we had some 6-percent yields -- 6- percent mortgage rates as well, and, you know, a lot of people here remember buying houses at 18 percent.
TALBOTT: Right. I saw some numbers out of Countrywide Credit, and they're reporting their refinancings might be off 30 percent. That was when rates were just starting to tick up.
I think the refinancing business is done. It reminds me of when NAFTA passed and Ross Perot said -- talked about that great sucking sound of jobs leaving the country and heading to Mexico.
Well, now I think that great sucking sound is a vacuum cleaner at the mortgage brokers around the country as it picks up all those loan applications where people were trying to refinance at 5-1/4 percent, and they're finding out, no, it's really 6.5 percent, 6.6 percent.
SERWER: Hey, John, how about those people who took equity out of their homes when they refi? Are those people up the creek?
TALBOTT: Well, if they put, you know, 90-percent, 95-percent debt on their homes -- and we're right that interest rates going up have an effect on home prices -- then what happens for the first time in a long time in this country is home prices end up being less than the amount you owe the bank, and that's a very bad position to be in. That...
TALBOTT: That hurts labor mobility tremendously because people can't take jobs, they can't move to new locations easily and get out of their homes.
CAFFERTY: John, we're going to have to leave it there. I appreciate your time and your insight on IN THE MONEY this week. Thank you for joining us.
TALBOTT: Thank you very much for having me.
CAFFERTY: All right. John Talbott wrote "The Coming Crash in the Housing Market."
Still ahead as we continue, straight talk for Wall Street. A year after the Sarbanes-Oxley Act, we'll look at whether it's cutting out the funny numbers in the corporate financial statements.
And you call that a raise? We'll tell you how the average American pay hike shapes up against what they were getting in previous years.
We'll be back.
Mortgage Rates Weekly Rates 30-year-fixed - 6.26 percent 15-year-fixed - 5.59 percent 1-year adjustable - 3.91 percent Source: bankrate.com
CAFFERTY: Two of Wall Street's top banks this week agreed to pay millions of dollars to settle allegations about their role in the Enron fiasco. Citigroup, J.P. Morgan Chase handing over a combined total of $255 million in fines. That settlement comes a year after the Sarbanes-Oxley Act kicked into effect.
That bill was designed to raise the governance standards at U.S. publicly traded companies. "Wall Street Journal" reporter Kate Kelly is with us now for a look at how well Sarbanes-Oxley is or isn't working one year later.
Welcome. Nice to have you with us.
KATE KELLY, "THE WALL STREET JOURNAL": Thank you. Nice to be here.
CAFFERTY: It's probably too early to get the final jury verdict in on this. But, with a year under their belts, what do you think?
KELLY: I think you made a good point to start out with. I mean it is a bit early to tell how the thing is working. But a few early thoughts. There's been quite a lot of grumbling and grousing in corporate America. I mean essentially they hate it. I was looking at...
CAFFERTY: Well, that's a good sign, right?
CAFFERTY: If they don't like it.
ROMANS: If Wall Street hates it, it must be good.
KELLY: Yes, it might be a pretty tough set of reforms. Yes. I mean there's a poll that I was looking at this morning from the law firm, Foley & Lardner, where they basically pick apart every aspect of the act.
I mean they say their corporate boards were just as effective before Sarbanes-Oxley as they are now, it's increased costs, they don't necessarily think it's helping investor confidence. They don't like the way the SEC is interpreting it. So they're not thrilled.
In terms of what it's doing for investors, I also think it's early to tell. I think there is a lot of good, new information. I think a lot of people have latched on to the certification issue that CEOs and CFOs have...
KELLY: ... to certify results as something to to watch for. But I think we still need time for the SEC to interpret.
ROMANS: I think there's some skepticism, too, because when you read Sarbanes-Oxley -- you know, it's scintillating, Jack. You should take it home tonight and have a look at it.
CAFFERTY: I have it on DVD.
ROMANS: Yes, exactly. You know, there's this "knowingly and willfully" little commentary in there. You know, I mean, there's concern about loopholes or who's going to be the first one to be prosecuted. There really only is Health South, right?
KELLY: That's right. That's a key point, I think. In the last year, the only company that we know of that's actually been sanctioned for not following the certification rules is Health South, and they have been charged by the Department of Justice. They've also been sued by the SEC -- I should say some of their former officials have been -- for certifying to inaccurate results.
Now there could be...
ROMANS: Not their top guy. That was interesting as well.
KELLY: Correct, correct. He's been sanctioned for some other things. But, yes, I mean there could be other cases in the works that the Department of Justice or the SEC are pursuing, but, so far, we don't know what they are, and it almost appears as though they're not cracking down on folks who haven't certified.
SERWER: All right. Well, let me ask you about that, Kate. I mean Qwest -- those guys didn't sign. And a couple of stars, Gem and Foot, right?
SERWER: Gemstar and Footstar, dim stars. How come those guys weren't sanctioned? CAFFERTY: Dim stars.
ROMANS: So clever.
KELLY: I hear you. This is interesting. I just checked Footstar, actually, before we started chatting, and they have not filed a financial report of any sort with the SEC since last August.
SERWER: So how come they're not getting spanked?
KELLY: Well, they are subject to an informal inquiry from the SEC. They are in the process of reviewing their accounting for the last couple of years, and they basically don't have accurate results to certify.
SERWER: Wow. That's a nice trick.
ROMANS: So why aren't investors running in the streets angry? Have we gotten over it? I mean, you know, we were mad about it a year ago. Now the stock market's up, so, hey, I'm not so concerned about what's going on in corporate America because my 401(k) is positive.
KELLY: I think that's possible.
I think another thing that I've bumped into in -- simply in reporting on this is there's not like a central clearinghouse of information, for example, on certification. I mean you have to have a sense of what companies you're interested in and look them up individually.
The SEC actually recently codified how the certification is going to be presented in 10Ks and 10Qs, but, so far, there's nowhere to easily check as to what's going on.
CAFFERTY: I -- I wonder, too, how much what Christine says a little bit in jest isn't absolutely the case, that we were outraged when we were all losing money.
SERWER: Yes, that's right.
CAFFERTY: And now the market's up. The NASDAQ's up 30 percent. It's like, hey, I'm making 30 percent back on my investment, I really don't care that much.
Six hundred days have passed since the Enron story. There's one guy in jail. We've got Tyco. We've got WorldCom. We -- I mean there's a laundry list with executives associated with these companies.
They're all still out there sailing their yachts around Nantucket or wherever they are and living high on the hog, and probably laughing out loud at a system that seems powerless to do anything aggressively against them, albeit, I guess, some investigations are continuing.
But the perception is this is pretty much a toothless tiger, all this government talk. ROMANS: And the small companies are the ones who really get hurt because they have to pay so much more for the lawyers and the accountants, and you hear companies saying they're going to go private or, you know, it's costing them four and five times as much for their auditors. So it's the small guys who maybe didn't do anything wrong in the first place who get hurt.
KELLY: Although just to play devil's advocate, I know there's been a ton of grumbling in the executive suites, but I checked this out. Privatization is not happening at this rampant rate.
I mean, so far this year, there have been 40-some companies that have said they're going private. That's exactly on par with last year, and it's actually lower than the year before.
KELLY: And directors' and officers' insurance premiums have definitely gone up, and that could be an issue.
Another thought was that class-action suits are suddenly going to be over the place with shareholders suing companies.
KELLY: Not so. Not so far. So -- some of this could be just a lot of sermon (UNINTELLIGIBLE).
CAFFERTY: All right. We'll get you back here next year, and we'll do the second anniversary of Sarbanes-Oxley.
KELLY: Sounds good.
CAFFERTY: Thanks, Kate.
Kate Kelly, reporter with "The Wall Street Journal."
Just ahead, are you happy with your raise this year, monkey? Did you even get one? We'll look at the nationwide trends. It's not a whole lot of money either. And you can let us know how you think we're doing. The e-mail address is firstname.lastname@example.org.
And before we go to the break, Andy Serwer's going to give us a lesson on stock fundamentals in this week's "'Fortune' Fundamentals." Pay attention now.
SERWER: You probably heard that taxes on dividends are being cut, and that, some pundits say, makes stocks that pay dividends more attractive.
So what does it mean when someone says that a stock has a certain dividend yield? Well, that's simple. Think of the dividend yield just like the yield on your money market account or CD.
Here's how it works. A stock's dividend yield is simply its dividend as a percentage of the stock price. Give you an example. General Electric currently pays an annual dividend of 76 cents a share. GE's stock trades for around $28. The 76 cents is around 2.7 percent of the $28. So GE's stock has a dividend yield of 2.7 percent, which isn't bad if you compare it to a savings account these days.
A nice solid dividend yield is a positive thing because it means you're getting paid while you're waiting for your stock to go up.
Be careful, though, of stocks with very high dividend yields. These are companies where the dividend may be in jeopardy, and the market is sending you a signal that this is a risky situation.
DEEPAK CHOPRA, CHOPRA CENTER: If you know how much money you have, then you're not rich. And, if you have no concern about it, then you're very rich.
UNIDENTIFIED MALE (voice-over): Deepak Chopra certainly has no concerns. He has made his millions marketing the intangible.
Through the creation of the Chopra Center and being published on every continent in dozens of languages, Dr. Chopra emphasizes what he considers a crucial connection between body, mind, spirit, and healing.
His own inner journey took him from a career as a respected endocrinologist to what "TIME" magazine heralds as the poet prophet of alternative medicine.
CHOPRA: Learn to experience your own soul or spirit, if you will.
SERWER: Unemployed Americans can console themselves with this thought: At least they're not being underpaid.
Two new surveys show the average American worker only received a 3.3-percent raise this year. Usually, the rate is above 4 percent, and the numbers haven't been this low since the mid-1970s.
Next year, the top companies say they expect to hand out slightly better raises of 3-1/2 percent. That's measly.
CAFFERTY: But that's a little misleading. I mean what was the inflation rate last year?
SERWER: It was around 1, right?
CAFFERTY: One. SERWER: One and a half.
CAFFERTY: Right. So it's a...
SERWER: That's the important thing, right, is the gap.
CAFFERTY: So it's 2 points above inflation. I mean that's...
SERWER: Yes, but now it's about 2-1/2 percent, right, Chris, the inflation?
ROMANS: Right. I mean...
SERWER: So the gap is closing.
ROMANS: I guess you can console yourself that at least you have a job. I guess when everyone's so worried about losing a job, employers have the ability to say, hey, take what you can get.
CAFFERTY: Good point.
SERWER: And I'll tell you something else. I got a pay cut a couple of years ago, and that really hurts, and a lot of people...
SERWER: Yes, of course. How could you tell, Christine? Thank you. Thank you for coming on the program.
CAFFERTY: Well, based on the way...
SERWER: And I understand.
CAFFERTY: ... you've been performing here, you may get another one.
SERWER: You know, I hope the bosses are watching this program, are they?
CAFFERTY: No, no.
SERWER: Well, no, that is...
CAFFERTY: It's Saturday afternoon.
SERWER: I mean this kind of stuff you can't plan. You get no raises. You get your pay cut. You know, your kids' cost of college edu -- I mean all these things reek havoc...
CAFFERTY: Oh, I know.
SERWER: ... on the family's finances.
ROMANS: You know -- and services are going up. Medical services. And think about, you know, what it costs to go to a doctor or the hospital, I mean, for the things that are really needs in life, not wants in life. These are things that are going up, even as everything else is stagnant.
CAFFERTY: A tiny example. My 22-year-old daughter graduated from college in May. That means she's no longer eligible for health insurance on the group policy I have here as -- you know, so I have to put her on something called a COBRA plan. She's 22 and in perfect help. Costs me almost $300 a month because she hasn't found a job yet...
ROMANS: You're kidding.
SERWER: Wow. Yes, she's got to get a job.
CAFFERTY: ... that has benefits.
SERWER: She's got to get a job.
CAFFERTY: No. So I mean -- you know, the point about things you've got to pay for is well-taken.
All right. That brings to us the e-mail segment of the program once again. Our segment about the possible beefing up of military forces.
Rob wrote this, "Frequent deployments have so undermined the attractiveness of military service that a draft may be necessary. As we learned the hard way during the ramp-up before World War II, our national defense is neither option nor ad hoc."
On our segment about Sam Waksal's arrival at federal prison, Cathy from Michigan wrote this, "I've worked in the prison system, and I can tell you Waksal will not be put in with a bully. He'll be in with people of a similar class. He'll be -- it'll be a peace of cake for him."
Time now to ask our new e-mail question of the week, which is this: Does the United States' friendship with Saudi Arabia hurt us more than it helps us? And you can send your answers to email@example.com, and we'll pick the best ones and read some of them next week.
That's it for this edition of the program.
As always, thanks to my friends here on the panel. Christine Romans of CNN Financial News. Andy Serwer of "Fortunate" magazine.
Tomorrow, 3:00 Eastern Time on IN THE MONEY, the hunt for Saddam Hussein continues. We're going to take a look at where his wives may be hiding and how much they might know about his whereabouts and his operations. A look at the -- what's left of the Saddam Hussein family tomorrow at 3:00 Eastern Time on IN THE MONEY.
See you then.
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Layoffs Come Without Severance Or Warning; Is The Sarbanes-Oxley Act Working?>