CNN IN THE MONEY
Critics Say Money For Iraq Will Be Wasted; Demand For Gastric Bypass Surgery On The Rise; Michael Eisner Tops List Of CEO's That Need To Go
Aired September 28, 2003 - 15:00 ET
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ANNOUNCER: From New York City, America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: Welcome to the program. I'm Jack Cafferty. Coming up on today he's edition of IN THE MONEY: The White House asking congress for billions of dollars to help secure Iraq, but critics say most of that money might be wasted unless we have more accountability.
And dying to be thin, as America gets fatter, demand for gastric bypass surgery, that's where they staple your stomach shut, soars. The treatment sometimes costs more than money, though. We'll explain some of the risks.
And than, Michael Eisner, the guy who runs the mouse house, and other CEOs overstayed their welcome. We'll take a look at a new list of corporate America underachieving CEOs.
Joining us, as always this week on our program, our regular gang Susan Lisovicz of "CNN Financial News" and Andy Serwer, editor at large over there at "Fortune" magazine.
And, we'll be gathering around that court TV on Monday morning because they're going to drag some of the corporate fat cats right in there in front of the judge and say let's get it on.
SUSAN LISOVICZ, "CNN FINANCIAL NEWS": This is big drama, and this is what a lot of investors have been waiting for. Dennis Kozlowski, he of -- ex of Tyco of the $6,00 shower curtain, the $15,000 umbrella stand, much of the purchases purchased through the company goes on trial as does Frank Quattrone, the biggest investment -- investment banking deal honcho in silicon valley, him for obstructing justice. Two big trials, going to be difficult to prove, some experts say, but they're going to be squirming.
CAFFERTY: Yeah, yeah. Yeah, that's the problem the prosecution has.
ANDY SERWER, "FORTUNE MAGAZINE": See that's the problem. That's very difficult, with Koslowski -- you know, he looted the company, the prosecutors charge, but if he has anyone who stamped and signed off on those payments he's going to be scot-free, but remember, he still has that artwork that he claimed to ship out of town, but didn't and has the tax problem, there. Quattrone, very, very difficult, it has to do with friends and family and payment, I'll scratch your back and you scratch mine. So, that is, I think, going to be even tougher for the prosecutors, the Quattrone case.
CAFFERTY: You know, they had trouble getting Al Capone too, until they started looking at his taxes.
SERWER: Taxes always gets them in the end, doesn't it?
LISOVICZ: Leona Helmsley, as well.
SERWER: That's right.
CAFFERTY: Well, we'll have to see. Should be interesting viewing, as they say.
SERWER: You bet.
CAFFERTY: The White House this week, asked congress for an extra $87 billion, most of which will go to pay for rebuilding Iraq. We'll look at how some of that money might be spent. We're joined from Baghdad, by Harris Whitbeck.
Harris, what can you tell us?
HARRIS WHITBECK, CNN CORRESPONDENT: Hello, Jack. As you know, the president asked for $20.3 billion for -- purely for reconstruction measures in Iraq and some of the requests have raised eyebrows, not only in Washington, but in Baghdad as well. Most notably $900 million to import kerosene and to petroleum-related products to the country that has the second largest oil reserves in the world. No, granted, Iraq's infrastructure had been severely damaged, not only during the war, but before the war and several acts of sabotage since the end of major conflict, here, have continued to affect Iraq's oil pipelines.
Now, the U.S. says it also needs money to spend on building new prisons, revamping Iraq's post office and financing the efforts to investigate crimes against humanity. Now, several Iraqis still feel, however, that money that should be spent here, should be spent on more basic services. Although things have improved dramatically in the Iraqi capital, electricity, for example, is still off about two hours a day. There are reports of the small cholera epidemic in one of the outlying Baghdad neighborhoods due to poor water conditions. And, in security and common crime are still a major problem in major cities. There are more than 6,000 Iraqi police officers on the streets now, but the coalition and Iraqi leaders say that they need more resources just to combat common crime.
CAFFERTY: All right, Harris Whitbeck reporting from Baghdad. There are continuing questions about how U.S. dollars are being spent in Iraq and whether the money's being wasted. Joining us to talk about how effectively U.S. funds are being spent there, is Anthony Richter, the director of Iraq Revenue Watch, a group that says congress should not approve it additional funding without more accountability.
Anthony, nice to have you with us. Thanks for joining us. ANTHONY RICHTER, IRAQ REVENUE SERVICE: Hi Jack.
CAFFERTY: Let's see, they're opening hospitals, they're reopening schools, they're getting the water and the electricity turned on, they're repaving the roads, they're training the police officers, they want to get an army started. I mean it sounds to me there are a lot of very legitimate things going on with this money over there. What's the problem?
RICHTER: Well, first of all, I think that there's a legitimate sense of sticker shock, you know, just a few months ago the administration came looking for $65 billion. Now there's another $87 billion, $20.3 million of which for reconstruction. So, just the costs themselves are rising and people are wondering why this is all so expensive. At the United Nations, they say that they can do it for half the price or a third of the price, the reconstruction tasks. Iraqis in town this week, have said that they could save American taxpayers on a factor of ten to one. So there's a definite sense of sticker shock, here.
SERWER: Anthony, let me ask you a little bit about your organization, though, Iraqi Revenue Watch. My understanding is that it's bank rolled or backed, in part at least, by George Soros -- billionaire George Soros, nothing wrong with that, but of course, Soros has been a critic of President Bush and supported democratic candidates and the democratic party. So, to what extent is your organization a partisan one?
RICHTER: Not in the least. The research that we do is strictly professional, and nonpartisan. We've been analyzing the documents put out by the Coalition Provisional Authority about how it plans to use Iraqi oil revenues. That's really the focus of our work.
SERWER: But -- OK, all right. Go ahead Susan.
LISOVICZ: Anthony, when we talk about the reconstruction of Iraq we obviously have to talk about its oil, that's of the few great resources that it has, but it's a very unstable area, right now. We've seen all this sabotage, all these explosions, it's not -- it's not secure. Your view is, as I understand it, is that if the Iraqis were led to believe that, they could take control of this, they wouldn't be blowing it up in the first place. Isn't it a little bit too late for that now, that there is such a mistrust of the Americans there?
RICHTER: No, it's not too late to start putting Iraq's more and more in control their own assets. The big question, when Americans are looking at how much money they ought to put in when the international community is also being asked to contribute money to reconstruction, is how much money is going to come in from Iraqi oil revenues, an estimated $12 billion to $20 billion and how is that going to be spent? We're just beginning to get some figures now of how the U.S. is spending Iraqi oil money and it's vital to know how that money is spent so that we know whether we're paying enough or too much in the reconstruction effort.
CAFFERTY: Is there reason to believe that the money's being misspent?
RICHTER: I don't think necessarily we know enough that it's being misspent, but there's some -- just very general information out there. They spent $350 million or recommended to spend $350 million to U.S, AID, $50,000 to pay the Baghdad zookeeper's salary. So, we're just getting a very little bit of information now, several months into the game. They had $1.5 billion of Iraqi oil money when they started and so we're just beginning to see how they spend it.
SERWER: Anthony, I mean, in a way you can sort of cherry pick through anyone's budget and find funny little things like that, I mean, fair enough, but. What do you guys propose to do? I mean, you're criticizing the administration's program. What's your plan?
RICHTER: Well, we suggest three things. First of all, there's got to be a clear political strategy for bringing the international community on board, and that means plans of various kinds that will give them the confidence in the transparency and accountability of the coalition provisional authorities such that they will feel comfortable putting their money into Iraqi reconstruction. A second effort is that the Iraqi public has to get more fully involved in the public finances. They've got to sit on the boards that approve the expenditures, they've got to be able to supervise and audit the process so the Iraqi public and the people in the Middle East also are assured this is not just about American companies trying to get their hands on the oil business, and third, we think that the Coalition Provisional Authority has to be more transparent, published regularly the minutes of what it's doing. If have you these three things, then we're -- it's not too late to start building confidence. In fact, it's high time.
CAFFERTY: Are your people in country in Iraq getting this information together? Or how are you -- how are you getting your figures?
RICHTER: We have colleagues from Iraq. We have information that we get by corresponding directly with the Coalition Provisional Authority from their published documents and so on.
LISOVICZ: Anthony, Walt Rogers, one of our correspondents in Iraq, last week, talked about price gouging. How big of a problem of that in a country that is still as chaotic as Iraq.
RICHTER: Price gouging by?
LISOVICZ: By Iraqis.
RICHTER: Yeah. Well, look, you know, obviously in an unstable environment there's going to be -- there's going to be great difficulty getting fair prices, because when security is so in question -- with stability so in question, that's going to add a premium to whatever services that are bought. Getting a confident Iraqi public to start seeing the future, confidence in the Coalition Provisional Authority and the way that it's running things will decrease the instability and decrease the high premiums that any company, whether Iraqi or foreign, is going to require to operate in that environment.
LISOVICZ: Anthony Richter, we'll leave it at that. Director of Middle East initiatives thanks so much for joining us.
RICHTER: Thank you.
LISOVICZ: When we continue, fat, profits, gastric bypass surgery, or stomach stapling, is one of the hottest procedures around and it makes a mint for some hospitals, but we'll find out if the risk is worth the reward for patients.
Plus CEOs to go: Disney chief Michael Eisner tops the new list of dubious distinction. Corporate executives who just might deserve to be fired.
And retirement on hold: More and more Americans are planning to spend their golden years on the job. We'll tell you why when we come back.
LISOVICZ: America, unfortunately is fat and getting fatter. About 60 million people in the U.S. are now considered obese, and with the country's collective waistline growing, so too, are treatments for this problem bariatric surgery, commonly referred to as stomach staplings is the latest and one of the most drastic weight loss procedures and that worries our next guest.
Here to discuss the facts and dangers of the bariatric surgery is eating disorder specialist Jennifer Berman, she joins us from L.A.
JENNIFER BERMAN, EATING DISORDER SPECIALIST: Thank you for having me.
LISOVICZ: This was really shocking to me. I mean, I've heard about some of the celebrities who have had the stomach stapling, like Carney Wilson and Al Rocher, but 126 -- 126,000 people had this surgery last year, that doubled in the number in 1999. You don't like this trend at all?
BERMAN: No, it just keeps increasing and increasing, and you bring up a great point about the celebrities. We're seeing the best case scenarios with the celebrities who can afford the top treatment and the best follow-up. And, America thinks that everyone will get those kind of great results when that is, in fact, not the case.
SERWER: Jennifer, exactly how dangerous is the surgery? I think you're right, if people don't realize that they read about Al Rocher in "People" magazine a great article, success story, I'm happy, now and that great for Al, but there are serious risks involved, right?
BERMAN: Absolutely, one in 200 patients who have this surgery die, although the rate goes up higher, it goes to 7 percent for patients who already have problems with their health as a result of the obesity that they're suffering from, which is very ironic. Also, one in five patients who have this, experience terrible side effects, which can range from minor side effects like vomiting and dehydration and diarrhea to severe osteoporosis and anemia, to fatal.
CAFFERTY: Are there statistics about how many people who are grossly overweight die from conditions related to that obesity?
BERMAN: Well, that is one of the key issues in weighing the risk for the surgery for the individual who wants to do it. Every person has to figure out, for themselves, whether their health risks versus the risks of the surgery, which one is worse. And it's something that must be figured out with doctors and also -- one of my problems with this surgery is that most people don't try all of the other alternatives first, and insurance companies who cover the surgery oftentimes don't cover counseling, they don't cover meetings with nutritionists, they don't cover exercise physiologists, and that's one of the key problems. There's a lot of preventative measures that can be taken that aren't covered by insurance whereas this is covered by insurance.
LISOVICZ: Yeah, your point on preventative measures, of course well taken, but let's talk about insurance companies. Because, the way I understand it, they are, in fact, accelerating this trend. They think or they're betting all of those medications that obese people routinely take whether it's diabetes, hypertension, what have you, will in fact go away if they have this surgery. It's sort of a done deal afterwards.
LISOVICZ: That has contributed to these surgeries.
BERMAN: Yes, it has and, but there are also some other statistics that are coming into it, which is 20 percent of people who have this surgery actually have so many complications they have to have other surgeries as a result of it. So, it's not that clear-cut, and because bariatric surgery is such a money maker, many doctors who aren't qualified to do it are doing it and the results are just terrible. It's so, so scary and there is no certification process for bariatric surgery and I'm hoping insurance companies will focus in on that so we don't have to see terrible results.
CAFFERTY: Wait a minute, when you say no certification procedures for bariatric surgery, presumably these are qualified surgeons in these operating rooms, I mean they don't...
CAFFERTY: What do you mean by that?
BERMAN: Well, any surgeon can do this surgery. They don't have to take specific classes; they don't have to pass specific tests.
SERWER: Jennifer, let me ask you...
CAFFERTY: Wait a second, so what do you mean? BERMAN: It's pretty amazing, isn't it in
CAFFERTY: No, but I mean, what's wrong with that? If I'm a surgeon, I'm a surgeon. If I can operate on a stomach ulcer is or an appendix. I mean, I don't understand -- I don't understand what the criticism is.
BERMAN: Would you want your heart surgeon doing a nose job for you?
BERMAN: Of course not.
CAFFERTY: We're talking about stomach surgery, people who operate on the abdomen, what's the difference between doing this procedure you're talking about and operating on a stomach ulcer, for example. I mean, I still don't understand what you're getting at.
BERMAN: Well, first of all there's a big difference and it's not just specialists who are doing stomach surgery who are doing this. There are a whole variety of other surgeons who do nothing related to the stomach who are now doing the surgery...
CAFFERTY: Oh, I see, all right.
BERMAN: Because it's $25,000 for a surgery and that's the medium. There are many charging double and triple that.
SERWER: Jennifer, let me ask you a question about obesity, generally. How genetic is serious obesity and if so wouldn't that suggest there'd be other treatments, sort of, down the road -- genetic treatments?
BERMAN: Absolutely, and look, more and more studies are showing that there is a genetic component. But also, Americans have a lot of misinformation and Americans tend to eat -- we eat because it's time to eat, we eat because we're cued by visual cues, we eat because the super size is cheaper than the smaller size. And, less and less Americans are eating because they're actually physiologically hungry, and in addition, we've become such a sedentary nation and that's a huge part of the obesity problem.
SERWER: All right, we're going to have to leave it there. Jennifer Berman, eating disorder specialist joining us from Los Angeles.
Coming up next, they've got your number; the nation's telemarketers are still dialing for dollars despite some surprisingly quick action on Capitol Hill. We'll tell you whether you can expect a call.
And, Michael Eisner may need some serious magic to keep his job at the mouse house. We'll tell you why Eisner and some other CEOs are strong candidates, perhaps, for the unemployment line. Stick around.
LISOVICZ: Time now for our "Money Minute." Interim New York Stock Exchange chief John Reed starts work on Monday. Reed is taking a $1 salary to avoid any conflict of interest. How refreshing and how rare. But, there's still fallout from the Dick Grasso affair. The man who headed the committee that approved Grasso's $140 million salary has resigned. H. Carl McCall stepped down from the New York Stock Exchange board, Thursday. McCall says, Reed and the new team should be able to make their reforms without being, quote, "encumbered" by the past.
And just when gas prices were starting to level off, OPEC says it's cutting back on crude oil production by 900,000 barrels a day. OPEC cites the still sluggish global economy as the reason for the cutback.
And, here's one way to make up the losses in your 401K. Work until you're 80. A survey conducted by the American Associates of Retired People shows 45 percent of those asked planned to work beyond age 65. It was a given for me. 27 percent planned to work into their 70s and 18 percent said they'll show up for work even when they're in their 80s, With their walker and all.
CAFFERTY: Oh man, you talk about OPEC cutting production because the economy is still sluggish, baloney. Oil prices fell $6 a barrel in the last two weeks and then they went in their meetings and said -- you know what? We can't have this.
LISOVICZ: And that's a huge problem for business? Energy prices.
CAFFERTY: Of course.
Just when thought it was safe to eat dinner at home without being disturbed by some clown ringing your phone trying to sell you a vacuum cleaner when you got three in the closet, it may not be the fate of the "Do Not Call List" aimed at telemarketers is still very much up in the area. Greg Clarkin joins us with the latest.
Greg, nice to have you on the program. We got ten of millions of people who said -- please put me on the list; we got two judges saying nananano.
GREG CLARKIN, CNN FINANCIAL NEWS: Yeah, Jack an incredible series of event. This list -- the "Do Not Call List" was scheduled to take effect on Wednesday, October 1st. More than 50 million people have already signed up to be protected from those unwanted telemarketing calls and then all of the sudden a judge out of Oklahoma City, a federal judge handing down a decision saying that the FTC, the Federal Trade Commission, the folks that created this list did not have the authority. Well, that triggered just, what has to be described as dizzying speed in Washington. Within 24 hours, both the House and the Senate, drafting and then passing legislation to correct it and make it very clear the FTC does indeed have the authority to create that list. Hours after that happened, what we did see was a judge, a federal judge in Denver handing down a decision striking down the list once again on entirely different rounds. This time around the judge in Denver saying that it violates the free speech rights of the commercial folks, the for-profit businesses that want to call you up and sell their variety of products. Now, what the judge is getting at here, is that the FTC "Do Not Call List" really does differentiate it. What it will do is it will block calls from commercial enterprises, but it does allow calls from charities as well as political calls and pollsters, people doing over the phone surveys. So, the judge is saying here is that you can't differentiate between the commercial folks trying to get through you and all of the other folks, and that is a violation of the free speech amendment protected under the constitution. So, really the question now is whether or not this list will indeed take effect on October 1st. And does also, this really shift the debate to the courts? And, we don't know if we'll see the same speed and rapidity of movement as we did in congress.
CAFFERTY: Good luck. That won't happen. You know what was encouraging, though? You mention that congress actually can do things.
CLARKIN: It was incredible, Jack. Within 24 hours, legislation drafted...
CAFFERTY: Never seen it before.
CLARKIN: ...passed overwhelmingly in the House and then on to the Senate. And then these guys were celebrating, and then "boom," out of Denver comes this other decision.
CAFFERTY: What do you think the courts are going to say about this? I mean -- you know, the conventional wisdom is -- hey, the phone is in my house, that's a private place. You got no right to come into my house whether it's through the front door or through the telephone line, and interrupt my life unless I invite you in and if I don't want to you come into my house, then I put my name on this list and you're not allowed to come in my house. That seems very simple, but then, hey I'm just a dumb country boy from Reno, Nevada, you know?
CLARKIN (LAUGHING): Exactly, Jack. Well, that's really is what
CAFFERTY: What do you mean "exactly, Jack?"
CLARKIN: How good of you to pick that up. That really is the problem, here. You're a very smart country boy from Reno, Nevada. Exactly, refers to the previous part of your question, is that it really does become much more problematic for the "Do Not Call List." The problem now is that you've got a much more complicated argument, here, rather than whether or not the FTC had the authority to make the list in the first place. That was cleared up, now you're moving this to a much more complex debate whether or not it is protected by the Constitution. The telemarketers, all along have said, listen this is kind of an all or nothing debate. Either everybody's barred from this or -- you know, nobody is. And, that's what they're driving at. And, so far, they've got a victory and believe me, no questions at all about the fact that you are a very smart country boy from Nevada.
SERWER: Listen Greg, you know what, I'm against the "Do Not Call List," I'm serious. You know why? Because, I'm pro-jobs. It's going to throw a lot of people out of work.
Some of these politicians -- first of all I'm suspicions of anything that gets through congress that quickly. Everyone in congress agrees on it? I'm against it, I'm serious. Some of these politicians are going to wake up on Monday and realize they just got rid of 60, 70, 80,000 jobs in their district and their going to be all upset about that. The other thing is, these people call you up -- I mean, what's the big deal, you guys? You hang up the phone. I use it to teach my kids phone etiquette. Right? No, no thank you. Hang -- click. No thank you. Click. I mean, it's not a big deal, just hang up.
CLARKIN: Andy, let me tackle that one and make it clear. I'm going to address the first part of the statement on this one. You know, interestingly enough, that's an excellent point about the jobs. Some of the -- there were eight folks in the House who voted against this, a lot those were representatives of Midwestern cities, Youngstown, Ohio, and the like, who -- where a lot of these call centers are located, and these guys are saying -- listen, you know, our cities have lost countless thousands of jobs over recent decade. These call centers do provide tens of thousands of jobs and there was eight people to that voted for it, actually in an effort to save some jobs. So, that is an interesting flipside, to all of this. There are other people on the other end of that line, as annoying as some people may find them that are being employed in this industry.
As for phone etiquette, you know Andy, it's interesting, we kind of used that, as well.
SERWER: Just call me "flipside," Greg. "Flipside."
CLARKIN (LAUGHING): You got it.
LISOVICZ: OK, well I think this issue clearly touched a nerve.
SERWER: Yeah, yours.
LISOVICZ: Greg Clarkin from "CNN Financial News," thank you. We have to hang up on this conversation, unfortunately.
When IN THE MONEY continues: Have you seen this man? Thank you. Disney's CEO Michael Eisner used to top the list of the nation's most admired CEOs, now he's headlining a list of losers. We'll explain shortly.
Plus, funny business in the fund industry: New accusations say some mutual funds favor big investors at the expense of the little guy. We'll take a closer look.
CAFFERTY: Once upon a time, boys and girls, CEOs in corporate America had jobs for life, or so it seemed. But it's all changing thanks to companies like Enron, Worldcom and Tyco. Of course, that doesn't mean that every CEO fails to deliver these days, automatically gets the boomm, nay, nay.
In the latest edition "Fast Company" magazine looks at some CEOs who the magazine says have overstayed their welcome. Joining us today with his list of corporate chiefs who should be on the chopping block, "Fast Company's" editor-in-chief John Byrne. John, nice to have you with us.
JOHN BYRNE: "FAST COMPANY" MAGAZINE: Nice to be here.
CAFFERTY: If I understand the rules correctly, these CEOs serve the pleasure of the board of directors? Presumably they know how to read the financial statement too. They can see the declining stock price, the declining profits, yada, yada, yada, the crummy pot (ph) -- why are these guys still running these companies?
BYRNE: Well, you know, it's interesting. If you look at the worst performers over the last five years, 78 percent of those companies, the CEOs are gone. In 22 percent of the cases they're not. And that's where we are really focused like a laser.
And the major reason is, look, the boards are complacent. They're still filled with cronies and friends of the CEO. There are lots of side deals still going on, even after all we've read about Enron and Worldcom and Health South and you just go on and on. Then there are other institutional reasons why there's no change and these guys are Teflon CEOs.
There's the mystique in the founder. In some cases, if you found a company and you're there a long time and you're the heir of the founder, in the case of Chris Galvin who just left Motorola, you're given a second, third, fourth chance.
Other thing is, look, if you were a whiz, like Michael Eisner at Disney in the early days, people are in the board saying, wait a minute. Maybe the magic will come back. Maybe he'll be able to do this after all.
CAFFERTY: Once a whiz doesn't necessarily mean always a whiz. You can become whizless at some point.
LISOVICZ: And his tenure has now been, I think, about 20 years.
BYRNE: Yes, 19 years. LISOVICZ: So, his glory days are over for now. He had his, according to an article, architect, Sidney Poitier, a friend from the movie studio days.
BYRNE: The principal of the elementary school where his children went were all on his board. He's cleaned up the board a little bit, but the board still deserves an F.
And here's the other thing about Eisner, since 98, which is when he had the biggest payday in the history of business, he collected over $500 million. Basically exercised his stock options. Everything has gone down. Right? He's come out with succession of slumping movies. The ratings at ABC have gone down. He had the ill-timed effort to launch an Internet portal which went nowhere. The Disney stores are going nowhere, and he basically wants to get rid of them.
And you know, we talk about Dick Grasso, right? And everyone is hammering and crying and moaning about the $140 million-plus he collected. Well, you know, Eisner has collected, as CEO, well over $1 billion. That's a lot of money.
SERWER: That's the thing. That's what kills me, John. I don't begrudge someone like Bill Gates or Larry Ellison who makes a ton. They found this great company. They built it up. They own a lot of stocks. It's the people who didn't found the companies who become billionaires, that is just truly amazing.
This guy Eisner, by the way, of course, keeps killing his successors, That's the other thing, he keeps getting rid of them. But I want to ask you about shareholders. I mean, that's the big question -- the owners. Where are the owners here? How come they're not ticked off? There's 2 things you could do. Vote by your feet, but what about getting rid of the guy?
BYRNE: I think, that's the other reason why there is some indifference in why these guys are able to stick around. Institutional investor, by and large, are more interested in managing the pension funds of these corporations than they are in performing the fiduciary responsibilities to the people who invest in them.
And they're enacted because of that. It is easier just to walk with your feet and walk away from it, and just buy into another stock. That's what happens.
LISOVICZ: John Byrne, editor-in-chief of "Fast Company." It's a fascinating article and good call. Michael Eisner, No. 1 on this list, but Chris Galvin of Motorola No. 2 and he was sacked just a few days ago. Thanks for joining us.
BYRNE: Thank you.
LISOVICZ: When we come back, Wall Street's Mr. Clean has a new target in his crosshairs. New York Attorney General Elliott Spitzer is now going after mutual funds. Find out if your fund is on his list. Plus, divided we stand. A new study shows the gap between rich and poor Americans is just what you thought. It's getting bigger. We'll take a look.
First, though, Andy's got this week's edition of "Fortune Fundamentals."
SERWER: Do you know exactly what a bond is? Pretty simple, really. Bonds are a way for a company or a government agency to raise money. Company A needs $100 million to build a plant. It doesn't have that much cash in its bank account. On the other hand, it's generating earnings of $25 million a year. So company A sells $100 million of bonds at an interest rate investors find attractive. Let's say 5 percent.
So investors buy the company's $100 million in bonds, meaning they give the company $100 million and in return, the investors are paid 5 percent a year for the life of the bond. An example would be ten years. Every year invest, gelt paid 5 percent of their money by the company, and then in year ten they get all their money back. Makes sense. Right? The company gets its $100 million and the investors, get paid 5 percent for lending the company the money.
The U.S. government does the same thing with treasury bonds and local government sell what are called municipal bonds. Hey, it's how America works.
SERWER: The mutual fund business is a $7 trillion industry and it's seen by many as the best way to level the investment playing field. New York Attorney General Elliott Spitzer now says some funds have been cheating to bolster profits and benefit their largest customers. Here with more on whether your mutual fund is clean is Dan Kadlec, staff writer for "Time" magazine. Dan, welcome.
DAN KADLEC "TIME" MAGAZINE: Good to be here.
SERWER: Here's my question, a lot people are wonder whether the fund businesses are still safe. Morningstar, which monitors mutual funds and rates them came out recently suggesting selling some of the funds under scrutiny. What do you think?
KADLEC: Right. I don't think it's really possible for everyone to just dump mutual funds. Okay? It remains probably the best game in town for the little guy. The issue here is how deep does Spitzer's investigation go, and how egregious were these infractions?
At the margin, people lost some money here in the wrong funds, but this is not a disaster. This is not a disaster. And, besides, there's not a lot you can do. If you sell your mutual funds, what are you going to do? Go to a broker?
SERWER: God forbid! (LAUGHTER)
LISOVICZ: But you know Dan, some of these funds are huge funds. I mean, Bank of America's, Nations Funds, you've got Janus.
KADLEC: And Strong (ph)...
LISOVICZ: They're giants in the business.
KADLEC: You bet. That's what makes this thing so particularly painful. Is if these funds are doing it, you don't know where the ball stops here. And to his credit, Elliott Spitzer, I don't think he's going to stop until he sees how deep it goes. You know, people are criticizing him for characterizing this thing as systemic, yet not many funds have stepped up and said we are so clean that you don't have to worry about us.
LISOVICZ: Well, one of the problems is it's hedge funds, which, by their very nature, are very secretive, right. They're un -- marginally unregulated?
KADLEC: Of course, now we see this week, the hedge funds are going to get new scrutiny from the SEC it looks. But it's not really the hedge funds that are the problem here. They're doing their thing. It's the mutual funds that allow the hedge funds this special access to do lay trading.
SERWER: Betting on yesterday's ponies is how Elliott Spitzer put it.
LISOVICZ: I want to get an idea.
KADLEC: You get a 4:00 price at 6:30 it's pretty tough to lose.
CAFFERTY: You mention that people are criticizing Elliott Spitzer. He's embarrassing the hell out of a lot of federal regulatory people who probably should have found this out long before Elliott Spitzer became the attorney general of the state of New York.
KADLEC: Interesting that the SEC and some others have started to quiet criticism of Spitzer, because he's been on the money and he's not going away. I think they decided they better just work with this guy, because he means business and he has embarrassed them.
SERWER: It is true, Dan, of course, this is not under his jurisdiction. I mean, mutual funds, not under his perview, and yet he's taken it upon himself. I want to get back to the systemic thing that you mentioned, I mean it is one hedge fund. What's your take. I mean, how systemic is the problem?
KADLEC: Well, that's a very tough one. Obviously, the stuff isn't a perspective. We don't know how much is going on. We know of at least one other hedge fund that Spitzer's is looking at very closely. He has suggested that are others. He has suggested it's going to go beyond
LISOVICZ: Millennium you're talking about?
KADLEC: Millennium we're talking about. He has suggested it's going beyond the four fund families that he's cited, Strong Nations funds and the others. So we know it's bigger than what is out there. Spitzer is saying it's bigger. I don't think he'd say it without having something forthcoming.
He has been criticized for not bringing the evidence out right away. His point of view is, by talking about it now, he thinks he's maybe eliminating some of the problem.
CAFFERTY: Is there any way to tell how much money a small investor may have lost as a result of this kind of activity? If you took an arbitrary figure, I've got $10,000 in mutual fund X that's accused of doing this, is there any way to know?
KADLEC: It's all ballparking at this point. There are some studies that suggest maybe up to 2 percent of assets is lost to market timers every year on $10,000. What would that be? $200.
SERWER: That's real money though.
KADLEC: Absolutely real money. But that is an estimate. It may be at the high end. We don't know. But there are some crumbs falling off the table. We'd like to keep them, if we can.
CAFFERTY: Absolutely. You get enough crumbs, you make a cookie!
SERWER: Give me my crumbs. Bring them back.
LISOVICZ: And that very sweet, indeed. Dan Kadlec, senior writer "Time" magazine. Thanks for stopping by.
KADLEC: Any time.
LISOVICZ: Time for a break, but when we come back, rich man/poor man, the gap between the nation's haves and have nots grows wider. We'll take a look at what's fueling the divide.
And if you have something to say about this fine little program a tidy program in Jack's words, drop us a line. The address, inthemoney@CNN.com.
ERIC SCHURENBERG, DEPUTY EDITOR "BUSINESS 2.0": What works for Innocentive is the Internet. The way it works is, you pay $2,000 to list a question on Innocentive's Web site and then offer a reward for anyone who can solve the particular scientific or research question. You've got.
The rewards might range from $5,000 to $100,000 depending on the complexity of the question. Then researchers from all over the world can have at it. The success rate is 40 percent for solving these problems, which is great. The cost is usually much cheaper than it would be going the regular way, which is calling your own freelancers or outsource research lab to solve the problem.
CAFFERTY: America's rich continue to get richer. And that stretches the gap between them and the poorest Americans. And that's troubling news to many. This is a study done by the Center For Budget and Policy Priorities, a group that lobbies for new tax policies to help the poor.
The center says in the year 2000 the richest 2.8 million Americans had about $950 billion. The poorest, 110 million American, almost 55 times as many, had about $892 billion. Tax cuts and a huge jump in executive pay are getting the blame for the gap, which is the largest between rich and poor since the government began gathering these figures in 1979.
And that brings us back, I guess, to the Democratic debate that I watched a little bit of last week, where they're all talking about rolling back the Bush tax cuts, particular focus on the tax cuts given to people who make more than $200,000 a year. The sense being, that's throwing money away. Those people don't need it and other people at the other end of the spectrum could use it.
SERWER: I don't know, part's it. Look at the whole problem. It's a disturbing trend, unless you're in the upper 1 percent. It's a very disturbing trend, because we don't want to turn this country into a place that becomes polarized. And it leads to a phrase that Americans don't like to use. Redistribution of wealth. People don't like to talk about that, because it means doing all kinds of socialistic monkeying around.
SERWER: Exactly. But you ahve to look at other things, like raising the minimum wage. I mean there are other ways to do it that aren't so poisonous, so anti-American, as people would say. It's a lightning rod issue.
LISOVICZ: And it's interesting that, in addition there was a study that found that in 2000, the top 1 percent income group had the largest share of before-tax income for any year since 1929.
SERWER: I got a good idea, though. A way to redistribute the wealth everyone who watches this program gets 10,000 bucks.
SERWER: What do you think?
CAFFERTY: That's good. Are you going to pay it though? SERWER: I was going to suggest that Dr. Cafferty, in all of his wisdom.
CAFFERTY: Depending on which week you look at the ratings, you might only be out 50, 60 grand.
SERWER: Oh, get out.
CAFFERTY: Time to look at e-mails. Last week end we asked if your family could survive on one income?
Anite wrote this, "We'd managed to survive just over one year on 1 income after I was downsized but we've had our van reprocessed and we're are at least three months behind on every bill."
Marine Corporal Rory writes, "as young enlisted marine I don't make a lot money. And it's difficult for my wife to get steady work because we're forced to move so much. Now Congress is taking away some of our benefits. We are used to seeing politicians approving pay raises for themselves, but ignoring the military."
Jeff in Vermont writes this, "my wife and I have survived on 1 income on more than a decade. When we wanted something extra, one of us has worked a part-time job instead of using a credit card and paying huge extra charges."
Time to ask our e-mail question of the week for this week. Once again a two-part deal. "Can the public school system be fixed? And if so, how?" There's a little something for you to chew on for the next seven days. E-mail your answers to inthemoney@CNN.com.
LISOVICZ: And your spelling will be graded.
CAFFERTY: Yes. And we'll grade all the letters and send them back to you.
That's it for this edition of IN THE MONEY. My thanks to the regular members of the panel, Andy Serwer and Susan Lisovicz.
Join us next week, Saturday 1:00 Eastern time, Sunday at 3:00. And during the week, if you're up early and have a fairly limited schedule, you can watch Andy and me on "AMERICAN MORNING," beginning at 7:00 Eastern time. We'll see you at some point during the next week or so. Thanks.
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