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CNN IN THE MONEY

A Look at Iraq's Shattered Oil Industry; Sam Waksal Gets 7 Years for Insider Trading; Can Money Be Made in Real Estate?

Aired June 14, 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: Good afternoon, welcome to the program. I'm Jack Cafferty. Coming up on the little show today, Iraq's shattered oil industry and how it's affecting U.S. moves to put that country back together.
One former CEO heads for the slammer, another one gets slammed on paper. We'll look at Sam Waksal of ImClone, Bernie Ebbers of WorldCom, and find out who's going to field the heat next.

Real money from real estate. Find out how to play the property boom without spending a penny on buying a house.

Joining us on today's program, as always, my good buddy CNN correspondent Susan Lisovicz, and in for Andy Serwer, Shawn Tully, senior writer at "Fortune" magazine.

Stock market rolling merrily along, until yesterday when an out- of-left-field consumer confidence number kind of knocked the (UNINTELLIGIBLE) out from the under the opening bell.

SUSAN LISOVICZ, CNN FINANCIAL NEWS CORRESPONDENT: Well, you know, consumer confidence, there's a lot of data that came out over the past week, but consumers are really the engine that drives a nation's economy, and it came in much lower than expected. And this is a very tentative recovery, so it's not surprising that investors would get a little skittish on that news.

SHAWN TULLY, "FORTUNE" MAGAZINE: The longer term problem, Jack, is that stocks are just overvalued now, that the Wall Street crowd wants us to revisit bubble territory, and we're getting back there, so I think the gravity is going to pull these prices down, or hold them pretty much where they are for a long time.

LISOVICZ: But so far, six months into the year, the Dow up 10 percent, year to date, Nasdaq up better than twice that.

CAFFERTY: Yes, we should all take advice from Shawn Tully. This is the man who sold his AOL Time Warner stock the day the merger between the two companies was announced. What was the price that day?

TULLY: It was in the 90s.

CAFFERTY: Oh, OK.

TULLY: (UNINTELLIGIBLE) Veuve Clicquot and caviar. LISOVICZ: With a tall blonde.

CAFFERTY: From now on you're my financial adviser.

TULLY: You should go into the PR business. That's pretty good.

CAFFERTY: We begin today with a couple of energy shortages that could wind up affecting all of us. One is bogging down the United States in its ongoing effort to rebuild Iraq after the war, and the other may be about to hit us all in the checkbook.

First, Iraq. One key U.S. objective during the war there was to protect the oil fields. The White House insisting all along that Iraqis' oil supply would be used after the war to pay for the country's reconstruction. Nice idea, except the system isn't up and running as it should be. The "New York Times" reports this week Iraq's oil industry is a shambles, wrecked by sabotage, looting and years of sanctions.

For a look at what's wrong and how long it might take to fix, we are joined now from Baghdad by Jane Arraf. Jane, a little bit, I guess, of good news this week when the first international oil sale since 1991 was announced.

JANE ARRAF, CNN CORRESPONDENT: Well, Jack, it was good news, except that those oil sales came from oil in storage in (UNINTELLIGIBLE), Turkey. Now, they hope to start production that will actually allow companies to start lifting new oil production in a few weeks, but there's a real fear that that won't happen as quickly as maybe the Iraqis think.

Now, one of the reasons that you referred to is the terrible state of the oil industry. And part of that has been not just a problem with looting when the oil fields were left partly unsecured before, during, and after the war, but also what appears to be incidents of sabotage.

Now, we went with senior Iraqi and U.S. oil officials down to the southern oil fields this week, and they were pointing out things like an LPG, liquid propane gas plant, that had virtually been looted down to the ground, and not just looted, destroyed in places that would indicate that it was deliberate sabotage.

Now, also, in the north, trouble there along that main pipeline to Turkey. There are flames coming from two places in the pipeline on Friday. That appears to have been naturally caused rather than deliberate sabotage, but it is an indication that the pipeline, as well as other parts of the oil sector, are really in very bad shape -- Jack.

CAFFERTY: Jane, any indication on how soon the coalition may be able to get its arms around the oil industry problem over there and get the industry up and running, as they had envisioned?

ARRAF: I suppose it depends by what you mean by up and running. I suppose one would think that that would be back to pre-war production levels, which we're running at about three million barrels a day, but in the industry, there's a lot of skepticism that can be done by the end of the year, as officials here have indicated.

Now, they have said that it could be -- production could be back within the third or fourth quarter, at 1.5 million barrels, but right now it's running at less than half of that, about 700,000 barrels a day, and a lot of that is going to domestic consumption, so it's still a ways off, but there are signs of progress. Mina Al-Bakr (ph), the main oil terminal in the Gulf, is due to open in about a week, and officials here say that they are ready to export, they are just waiting for companies to be ready to lift.

Now, it does look like as if these are going to be very small amounts at first, and a lot will depend on how much money comes in, how quickly to build up that infrastructure. We've seen that the industry is really very bad shape, and it's been sort of a marvel to the rest of the world that the oil industry here had been able to keep running as well as it did under sanctions, and Saddam Hussein -- Jack.

CAFFERTY: Jane Arraf, joining us from Baghdad, thank you for that.

Back home, Federal Reserve boss Alan Greenspan predicting this week that United States natural gas supplies will be low for quite a long while, and prices will remain high. Natural gas, America's third biggest means for generating electric power, and this summer electricity prices are expected to hit their highest level in 20 years.

To give us a sense of what's ahead, we are joined now by natural gas specialist Charles Lucas-Clements, who is the head of strategic consulting for IHS Energy Group in Houston, one of the world's top energy consultants. Nice to have you with us. Thanks for being on IN THE MONEY.

I recall, and perhaps times have just passed me by, but during the Arab oil embargoes, and other times of oil shortages, I recall the company line being, there's two things the United States will never run out of -- coal and natural gas. What happened?

CHARLES LUCAS-CLEMENTS, NATURAL GAS SPECIALIST, IHS ENERGY GROUP: We have been using natural gas for the whole time. It's really a question of how fast you drill, as to how much you are going to use. It's one of the biggest consumers of natural gas, so eventually you get to the point where you start running out.

TULLY: Charles, what specifically has lead to these shortages of natural gas? Is there shortage on the production side, is the consumption running at higher levels than anticipated? What specifically is behind these shortages?

LUCAS-CLEMENTS: The issue has been building for about three to four years, in terms of visibility. We have certainly seen it that long. It really is an issue of getting to a point where you are going to peek, and when you start peaking, you -- effectively the price will go up. TULLY: Define peaking for us.

LUCAS-CLEMENTS: Well, that's when the price that you have doesn't justify drilling any more. Therefore, the decline in production takes over. So effectively, peak is the quantity at which, given the price you are at today, the declines will overtake new wells coming on.

LISOVICZ: So the Bush administration has been talking a lot about drilling in Alaska, and obviously environmentalists are up in arms about it. Does this make a difference at all in the energy equation?

LUCAS-CLEMENTS: The answer is, in each of these areas, and it's not just ANWR, will put off the day you go into that peak, so -- but the trouble is, a lot of these things are actually too far away to affect you today. So it will take, you know, two to three years, maybe even four or five, to be able to see anything at all, if you were to start in Alaska.

LISOVICZ: So do we have to import? Is that what you're saying? That's the short answer?

LUCAS-CLEMENTS: Well, imports. Certainly, you need to have a program where you mix import with developing your own production. That is definitely the answer. How you go about it is much more difficult.

CAFFERTY: The Americans have a long history of don't worry be happy, and we were warned for years and years about our dependence on Middle East oil and we didn't pay any attention, and Detroit kept building cars that got four mills to the gallon, and then one day in 1973 they shut down the spigot. Are we headed toward that kind of a crisis when it comes to natural gas, and if so, what do we do to head it off?

LUCAS-CLEMENTS: Well, the answer is gas is a different business, it has a different response. The answer is you've got to secure long- term supplies, which in the gas business, everywhere else in the world, they behave like that. Japan has been dependent upon gas for 20 or 30 years. So it really is a question of foreseeing where you want to go, and actually planning through the process, so you make sure that things like that don't happen.

CAFFERTY: Where do we go to get these supplies? Who has got the most reserves, and who is the easiest to do business with? Who do we have to suck up to here?

LUCAS-CLEMENTS: At the end of the day, there is gas in many, many places, and you should look at your securities supply so you balance the goods and the bads, and the haves and the have-nots, and you make sure that you get a good balance that covers you for sort of typical eventualities.

CAFFERTY: Charles Lucas-Clements, of IHS Energy Group, joining us from Houston, Texas, thank you very much for being on the program. LUCAS-CLEMENTS: Thank you.

CAFFERTY: Appreciate it.

Coming up on IN THE MONEY, with the former boss of ImClone, Sam Waksal, headed for the big house, we'll find out which CEOs might be next in line to do some time.

Also, one of the world's richest men goes shopping and gets the door slammed in his face. We will tell you about Oracle's Larry Ellison and his bid for PeopleSoft, which so far has gotten him nothing but a lot of headaches.

And checking your green as opposed to your jeans, we will her from an activist who thinks that affirmative action should be based on what you have got in the bank instead of on the color of your skin. We'll explain that a bit later.

(COMMERCIAL BREAK)

LISOVICZ: Now, let's get you updated on the week's top business news in our "Money Minute." Freddie Mac cleaned out its executive suite as investigations of the firm continue. CEO Leland Brendsel resigned, along with the company's chief financial officer, and the president was fired outright. Federal prosecutors and the SEC are looking into accounting questions at the nation's second largest mortgage lender.

America's top banks may be working to rebuild Iraq's financial system. "The Wall Street Journal" reports that JP Morgan Chase, Citigroup and Bank of America are working with the U.S. Treasury Department to help Iraq set up a banking system.

And the nation's consumers seem to be spending just a little bit more. Retail sales rose by .1 percent in May after falling in April. Financial experts credit consumer spending for keeping the economy from slipping back into recession.

CAFFERTY: And another big story this week, is Oracle's hostile takeover bid for rival PeopleSoft. PeopleSoft has rejected the $5.1 billion cash offer from Oracle, saying it's too low. PeopleSoft also said it thinks any combination of the two companies would probably face challenges from antitrust regulators. And there's another wrinkle. PeopleSoft was already in the process of merging with another company, a software company called J.D. Edwards, and J.D. Edwards didn't like the fact that Larry Ellison and Oracle came along to try to mess up the deal, so they're suing Oracle now, $1.7 billion in a Denver court, saying that Oracle's hostile takeover bid is simply an attempt to stop the Edwards-PeopleSoft merger.

So, are you following this? We are going to ask questions when I get through. Wall Street expects Oracle CEO Larry Ellison to simply raise the offer and take it to the shareholders. As the drama plays out, we've made Oracle our stock of the week.

So is Ellison simply a spoiler in this thing, or is PeopleSoft a good fit, and if it is, why did Oracle wait until now to make a move?

LISOVICZ: Why even answer those questions, Jack? It's just a juicy read. I mean, the guy who runs PeopleSoft used to work for Larry Ellison at Oracle, and he's an easy guy to dislike, he is a guy who's got yachts, and planes...

CAFFERTY: You're talking about Ellison?

LISOVICZ: ... and fancy suits. Right. Compares him to Genghis Khan.

CAFFERTY: He speaks highly of you.

LISOVICZ: You know, it's just very funny, and on a more serious note, I mean, you know, this is bullish. M&A is coming back, and hostile takeovers are coming back. You've got to look at that as a positive sign.

CAFFERTY: The good old days.

TULLY: Yes, this is a rare sign of life in that market. It's been dead for a couple of years.

CAFFERTY: I saw Larry Ellison interviewed on another network, as they say, and he sort of laughed off the $1.7 billion lawsuit, saying something to the effect, well, those kinds of things, litigation is very common in takeover situations. He didn't seem too worried about it.

LISOVICZ: He's seething.

CAFFERTY: $1.7 billion, I mean, that's something to worry about, isn't it?

LISOVICZ: Yes, he's very smooth on camera. He doesn't like rejection and he won't stop there.

CAFFERTY: How do you think this thing plays itself out? Who wins, who loses, what's the final outcome?

TULLY: I think it's going to get into just a matter of money in the long term, because it's going to go to the shareholders, and money is going to talk. And if he can raise that offer up to the point where management is going to have -- either J.D. Edwards is going to have to come back with a bigger offer, there could be a bidding war here. But if not, the board is going to be hard pressed, given the kind of corporate governance rules that we are seeing, and the uproar from shareholders, they have got to take the money, and eventually if it gets high enough, the board is going to have no choice but to take Ellison's offer, as much as they may not want to have their people working for him.

LISOVICZ: And speaking of money, Oracle reported its earnings after the bell Thursday and beat projections on both profits as well as sales.

CAFFERTY: So they've got a few extra dollars to play with to make that takeover bid.

(CROSSTALK)

CAFFERTY: All right, we'll see what happens. We will follow the story for you on IN THE MONEY, let you know what happens.

From high times to hard times, former ImClone chief Sam Waksal, the first CEO sentenced to prison over the recent Wall Street scandals. Let's hope he's not the last. There's a long string of folks that probably ought to be following him.

We will look at whether or not he is the last and what the status of some of the other cases is.

Also, when less cash equals more breaks, we'll look at an idea about whether schools should base their affirmative action policies on something besides race and ethnicity. That story is coming up.

(COMMERCIAL BREAK)

CAFFERTY: A couple of firsts this week in the corporate misconduct department. Out of all the former CEOs implicated in the recent wave of Wall Street scandals, one finally got sentenced to prison. Sam Waksal of ImClone, more about him in a minute. The other guy, ex-WorldCom boss Bernie Ebbers was linked for the first time to the company's $11 billion accounting fraud scandal. Two reports allege that Ebbers was not blind to the problems in his own firm. One from former SEC enforcement chief William McLucas says that Ebbers knew WorldCom was boosting revenues through financial trickery. The other came from one-time U.S. Attorney General Richard Thornburg, says that Ebbers unloaded stock despite outside advice that it might be a bad move ahead of a negative financial report about WorldCom.

So let's go back and pick up the Sam Waksal story, and then we'll jump ahead to WorldCom in a minute. Waksal, of course, the former golden boy of the biotech scene, ordered this week to spend over seven years in a federal prison. The question now is whether Waksal's state represents a sign of things to come for other corporate crooks; let's hope so. Chris Huntington has that part of the story. Hi, Chris.

CHRIS HUNTINGTON, CNN FINANCIAL NEWS CORRESPONDENT: Jack, hi. Well, what makes Waksal's sentence relevant to the other potential crooks out there is that this was a sentence at the high end of the recommended sentencing guidelines, so it sends a serious message that anybody else who's nailed for their crimes is going to spend a lot of time behind bars.

The difference is that Waksal's crime was an individual, personal crime of insider trading. There is no corporate fraud alleged in Waksal's problems there.

CAFFERTY: What about these other high profile cases? I'm talking about WorldCom and Enron. WorldCom, of course, multi-billion- dollar potential fraud situation there. The Enron deal smacks of political connections to the Bush administration. Kenny boy Lay and all that group still out there walking around, and the cynics among the public say, well, they're politically connected, nothing's going to happen to them. Where do those investigations stand?

HUNTINGTON: The Enron -- there's an Enron task force at the Justice Department, and that's what they call it. It's eight prosecutors, about two dozen FBI agents. There are working full time, (UNINTELLIGIBLE), to try and bring additional charges. Of course, they have already got charges against Andrew Fastow, the CFO, former CFO of Enron, but everybody wants to know, will the charges go up to the top of the ladder, to Kenneth Lay, the former chairman, and Jeffrey Skilling, the former CEO? Very difficult there, because a lot of what is at question at Enron, these off-balance sheet transactions were actually legal in the sense that they charted all of the loopholes in the legal structure, so the feds are having difficulty putting those cases together.

But by all accounts, they are working overtime. They do have a little bit of help from David Duncan, the former accountant at Arthur Andersen who pleaded guilty and is cooperating with the Justice Department.

CAFFERTY: All right. I know you will keep track of it for us, Chris. Thank you, Chris Huntington.

As the CEO, Sam Waksal was equal parts shrewd businessman, tech geek, and party animal, big time. The writer Alex Prud'homme knew Waksal well at his height, watched him fall, and profiled him for a fascinating piece in "Vanity Fair" last year. His book on Sam Waksal and ImClone, called "The Cell Game," is due out in a few months, and Alex joins us now with a bit more. Nice to have you with us.

ALEX PRUD'HOMME, AUTHOR: Thanks for having me on.

CAFFERTY: This guy is, by reputation, one of the slickest fellows out there. He's a doctor, he's a corporate CEO, very smooth, very polished, but you began to pick up indications that he might be a weasel. What were they? What were the early hints that he might not be what he seemed?

PRUD'HOMME: Well, I'll tell you, Jack, it started with the most basic thing. I first met him in October of 2001. He was extremely charming. We always had a great time together, always lots of laughs, even in a business context, and he gave me a CV that had his birth date on it, and then there was another CV that had a different birth date on it, which, you know, at the time didn't seem like a big deal, but it was a question mark. You know, as a reporter, that's a red flag. Then I discovered that he wasn't actually born and raised in Toledo, Ohio, as he had claimed, but rather in Dayton, Ohio.

CAFFERTY: Why would anybody lie about Toledo, Ohio?

PRUD'HOMME: For me, the difference escapes me, but obviously it meant something to him, and that was just odd, because you know,here's a guy who is in his mid-50s, very accomplished scientist, businessman, and he's lying about the most basic things that are very easy to check. So these two things came up, and then it raised a question for me about the more complex questions of finance and science and law that he was involved in, and I did the basic reporter 101, I went back through his CV and started calling the places he had worked, and started hearing stories about him from 30 years ago that didn't match the public persona of Sam Waksal.

LISOVICZ: I've read your article last year, and I read it again, and it is a fascinating read of a very troubled person, at the same time a very talented individual. And he always had this great promise in a lot of his projects, but a lot of them ended spectacularly bad.

PRUD'HOMME: Yes, that was the pattern that I've discovered, going back to his early days in academia, where he would start off in a given situation with tremendous promise. He would get people to open doors for him. He was a golden boy. And then inevitably something would go wrong, and it would end in acrimony and sometimes in lawsuits. And this was in every facet of his life, from his personal friendships to his business dealings, and it was really remarkable.

So I asked him about this once, and he said, you know, I just don't do things the way people generally do, and especially scientists, he's like, I am not a normal scientist, you know, and he was very proud of that. And how many scientists do you know that live in a loft in New York's Soho and hang out with Mariel Hemingway and Martha Stewart? Not very many.

LISOVICZ: Or Mick Jagger.

PRUD'HOMME: Or Mick Jagger, yes.

TULLY: What's remarkable is that this company, which you would have thought it was a fraud machine, would have been dead, has come back, the stock has soared again. How legitimate, or what kind of potential does Erbitux really have, the main cancer drug for ImClone?

PRUD'HOMME: Well, the data indicates that there is some potential. The question is how great is the potential. There are many problems still in the way. The ImClone stock is up 300 percent since February, when it was trading at around 5, and now it's up in the high 30s, mid 40s. Bristol-Myers Squibb, which was their partner, who paid $2 billion for a deal to distribute Erbitux, has its own set of problems, but they have sort of taken control of ImClone and its Erbitux application. The notion is to file again with the FDA by the end of this year. Presumably if everything goes according to plan, which is always a big question with this company, they will be on the market by middle of next year.

LISOVICZ: Alex, I'm sorry, you know, Alex, one of the stories that really hasn't gotten out is the fact that investors are angry, people feel misled. But there are all these cancer patients out there, who were really hanging on with the belief that Erbitux would be approved in a very short time, and these people are very frustrated. They believe that ImClone has delayed it...

PRUD'HOMME: I would use even a stronger word. I think they feel betrayed is the word that some of them have used, and more than frustrated, they're really angry, because they feel that there has been no acknowledgement that at the end of the day what this is really about was supposedly saving lives. And by delaying the drug for so long, it has affected their health.

CAFFERTY: Alex, appreciate you being on the program with us this afternoon, talking a little about one of the high profile corporate fraud cases that is in the news of late. Alex Prud'homme, who wrote a fascinating piece in "Vanity Fair," and his new book coming out soon is called "The Cell Game." Thank you for being here.

PRUD'HOMME: Thanks a lot.

CAFFERTY: Appreciate it.

A few times during the program, we will take time out to take a look at what you're telling us through e-mail. A lot of you wrote us in the last week on the Martha Stewart-Sam Waksal scandal. Keith from California wrote this: "Is the reason Sam Waksal was the only corrupt CEO prosecuted because he contributes to Democrats?"

There was similar sentiment from Dick in Florida, who wrote: "Martha Stewart has been singled out because of her politics. Why don't we devote more time on TV to force the Justice Department to prosecute Ken Lay?"

But perhaps the most astute comment from this writer in Houston, Mark, he wrote: "Every time you show Martha Stewart, you picture her with a hoe."

Remember, we check your e-mails a few times during every program because they are fascinating. You can e-mail us at inthemoney@cnn.com.

More to come on this broadcast. As we continue, still ahead, equal opportunity. We are going to look at whether affirmative action ought to start with class instead of color. And the home loan that will move to the next town with you. Find out about the pluses and minuses of something called a portable mortgage.

Back after this.

(COMMERCIAL BREAK)

(NEWSBREAK)

LISOVICZ: The Supreme Court is about to hand down its decisions in two key affirmative action cases. The cases focus on the University of Michigan's policy of giving favorable treatment to applicants from minority communities, but our next guest says the student's financial background and not race should be the criteria schools look at when they try to promote diversity.

Amy Ziebarth is the executive director of New Jersey Seeds, an organization that helps disadvantaged students. She also just wrote an op-ed piece in the "New York Times" making her case for class based affirmative action.

Welcome.

AMY ZIEBARTH, NEW JERSEY SEEDS: Hi.

LISOVICZ: It's nice to see you, Amy. So go ahead, make your case to us, how can affirmative action based on economic need as opposed to ethnicity in fact ensure racial diversity?

ZIEBARTH: Well, let me tell you about how our program is working in New Jersey. New Jersey Seeds is going into our 11th year. And we are looking for very smart, motivated students from economically disadvantaged families, and we are in all the big cities in New Jersey -- Camden, Patterson, Newark -- and our students stay with us for two years in an academic enrichment program, and then we work with them to head off to independent secondary schools, where they secure, this past year close to $2 million in financial aid, and then onto colleges and universities like the University of Michigan.

CAFFERTY: I was going to ask you, excuse me for interrupting, Amy, this is Jack Cafferty. How does what you do apply to this case at the University of Michigan, where minority students are out and out given extra points on the admission questionnaire based on race, and have been sued by people who claim that amounts to reverse discrimination, when perhaps kids who have scored higher on the tests, the LSATs, are denied admission because they are not members of minority groups. Apply what you do to that scenario. Can you do that?

ZIEBARTH: Whatever the court decides with Michigan, I think after that decision, we all need to start talking about class-based diversity programs. Because looking in New Jersey, for instance, 85 percent of our students are students of color, and we are looking at where we are recruiting, we are looking at the demographics of New Jersey. We are able to offer admission directors wonderful, strong candidates, many of whom are black and Hispanic, and deserve to be at universities like the University of Michigan.

TULLY: But what you are doing is you're really bringing these students up and compensating for the inferior training that they have been getting in the urban schools, and making them really on a par with some of the best applicants so they can compete on an equal footing. What you are really suggesting, though, if these cases are lost by the University of Michigan, that you go to, once again, kind of a point system. You get extra points, simply because the family's income is lower. Wouldn't that effectively undermine confidence of people who are more qualified but perhaps have a slightly higher income profile?

ZIEBARTH: I think people get caught up on the points, and that's obviously what the court is looking at. But I ran a financial aid office for years, and has been doing this work at New Jersey Seeds, and what I want people to talk about is that admissions officers need the flexibility to be able to design equitable and diverse classes, and with that freedom, looking at the class system in this country, and looking at class-based affirmative action programs, the admission directors have the freedom to create really dynamic and diverse classrooms, and I think everybody believes that and wants that in this country. CAFFERTY: But isn't that exactly what the University of Michigan is staying, that the status quo allows them to do? By giving extra points to minority students, they are allowed the freedom to build diversity on that campus as they see fit, almost regardless of outside influence.

ZIEBARTH: I think, again, people are getting -- are talking about these points. I think what people want to talk about is to be sure that your daughter, my daughter, my son, is in a classroom freshman year at Harvard and Yale, and enough of economically disadvantaged kids are in that classroom with those students who would automatically attend those schools.

CAFFERTY: But is it enough to address just economically disadvantaged kids? I guess, maybe I didn't ask the question the right way. What's going to prevent your system from excluding blacks or Hispanics because their economics don't dictate that they get the consideration that maybe they get now under the existing rules?

ZIEBARTH: Well, my -- our organization addresses the issue of income. And so our students, our students of color, their median income for our families is $24,000. So we would not be able to provide the University of Michigan with high-end upper middle class students of color. And we would -- we are really working to get lower class, low-income black and Hispanic students into the schools like the University of Michigan.

CAFFERTY: You think the program in New Jersey is something that can be applied nationwide or not?

ZIEBARTH: Absolutely. And I have gotten 100 e-mails after this op-ed piece from people all over the country saying, please, let's start talking about class, let's start talking about class-based affirmative action programs.

CAFFERTY: I thank you for being with us. Amy Ziebarth, executive director of the New Jersey Seeds. Good luck with the program, and we will talk again.

ZIEBARTH: Thanks very much.

CAFFERTY: All right.

Time to check your e-mails again. We had a huge response to our segment on tort reform. Many of you feel the insurance companies are the real villains in all of this. James wrote: "If the insurance companies get the damage payments capped, will they drop the cost of premiums for the doctors? Answer: Yeah, right! Who are they kidding?"

And about our story on companies that use the L-1 visa to import employees at lower salaries. Ilan wrote to us, quote: "If companies can get foreign labor cheaper, I think they ought to hire foreign CEOs also. They make a lot less than American CEOs make."

Once again, our e-mail address is inthemoney@cnn.com. Back after this.

(COMMERCIAL BREAK)

LISOVICZ: E*Trade is trying to revive a portable mortgage concept. The idea is pretty simple: When a homeowner moves, his or her 30-year mortgage moves, too. A few banks tried the idea about 10 years ago, but E*Trade is betting the hot real estate market will make portable mortgages a hit this time around. Joining us now for more on the plan is CNN Financial News correspondent Mary Snow. Hi, Mary.

MARY SNOW, CNN FINANCIAL NEWS CORRESPONDENT: Hi there, Susan. Yes, it's called mortgage on the move. The whole idea behind it is to take advantage of record low interest rates, lock them in now, and then take them with you when you pack up and move to your next home, and that will eliminate the risk that rates will have gone up when you decide to move.

Now, it's similar to a 30-year fixed rate, but on the portable mortgage, you will pay an interest rate of 5.875 percent, that's currently about .6 higher than the going rate.

The idea being that you pay a premium now to lock in the lower rate you pay down the road, and it can't be used for refinancing, and it can only be transferred one time.

However, if you take a look at the fine print, there are limitations for borrowers when you check the details, and that's especially if you want to upgrade and buy a more expensive house later on. Say, in that case you have to apply for a second mortgage and pay the market rates. So if interest rates are higher at the time, then you'll have to pay a higher interest rate.

And speaking of higher rates, when they do go up, this type of mortgage really isn't so appealing, and E*Trade has already said it will offer this product on a limited basis as long as it makes sense to do so -- Susan.

TULLY: Let me jump in, Mary. One of the big issues here, of course, is closing costs, and anyone who has bought a house knows how much you pay in mortgage taxes, and especially in New York State, the states that have mortgage taxes, attorney fees et cetera. Isn't that one of the biggest advantages of this portable mortgage, not only saving on the rate, if rates are rising in the future, but also saving on the closing costs?

SNOW: Yes, that's certainly true, because that is one of the big advantages, but you don't have to go through the whole process over again, if you want to buy another home and do the process all over. So that is certainly one of the big advantages.

CAFFERTY: Thank you, Mary. Mary Snow on the subject of portable mortgages.

Big question a lot of investors are asking these days, how do you turn the hot real estate market into a Wall Street investment? Joining us to talk about that now, and to give us some words of caution along the way, "Fortune" magazine senior writer Justin LaHart. Justin, nice to have you with us.

JUSTIN LAHART, MONEY.COM: Hi, nice to meet you.

CAFFERTY: So, should I go out and buy a house?

LAHART: Do you already have one?

CAFFERTY: Well, let's assume that I don't and I'm thinking about whether or not I should go out and get into the housing market now, or is it too late?

LAHART: This is probably a great time to buy a house, just, you know, on a rate perspective. Mortgage rates are down to 5.2 percent now.

CAFFERTY: What about prices, though? They have gone up astronomically in the last couple of years.

LAHART: Yes, they can keep on going up, I think, if rates continue to come down, and the way things look, rates could continue to stay low, or even go lower, just the way the Fed is.

CAFFERTY: Maybe a better way to ask the question is, if I'm going to buy a house, should I look to do it as an investment with the idea I'm going to get rich owning this house, or should I make the decision based solely on whether or not it's a good idea for me to go out and own a home as shelter for my family just as an endemic idea?

LAHART: Definitely the latter. It's not -- you know, you don't flip (UNINTELLIGIBLE).

CAFFERTY: Can't chase the high prices.

LAHART: Yes.

TULLY: I agree with both of you that it's a good time to buy if you want shelter and if you want to live in the house. But one of the things we are seeing is a lot of speculative froth in this market, and prices are always going to follow the fundamentals in the long term. We have such a weak job market, we have got very highly, steeply rising property taxes, which no one is talking about. Property taxes are 80 percent -- equivalent of 80 percent of interest payments in this country.

And although interest rates have been going down, property taxes are rising in a lot of places 10, 15, even 20 percent this year, so you have exactly the opposite effect. So if you look at the cost of carrying a house, it's not just the mortgage payment. The other big factor is the property taxes. And that is a major negative for housing prices.

Eventually, housing prices are going to conform to the force of gravity, like stock prices. So I think the potential for them to rise a lot from these levels -- when anything is very expensive, it does not keep on rising. This is the great misconception about the stock market, too. You know, when a bond price goes way up, the future return does not go up; it goes down. The same is true of a house and the same is true of a stock, but people don't seem to ever get that through their heads.

LISOVICZ: So, Justin, for a second house, let's say for a person who's lucky enough to stash some cash, and is thinking instead of going into stocks, maybe I am going to take advantage of these low rates. Is that something that you find favorable, or no?

LAHART: Well, I guess if you really want a second house and that's something that you want...

LISOVICZ: And a source of revenue, I mean, where you'd actually rent it.

LAHART: OK, now, let's say you are a homeowner. Most Americans who are -- American home owner is about 30 percent of American assets (ph) is the house, so you are going to go out and you are going to buy a second house and you are going to load up on more of real estate as an asset. What you are doing is you are doubling down, right? It's a Texas hedge. It's, like, just what happened in Houston in the 1980s where people were buying Houston office space and buying oil stocks at the same time. So the idea that you were going to double up on something, that's probably not a safe investment ever.

CAFFERTY: What's the safest way to profit from the boom in real estate. I mean, do you buy REETs (ph), do you buy home building stocks? How do I make some money on this thing without investing in the actual real estate itself?

LAHART: Well, probably the best way to play it right now in terms of the stock market is within the home builders. They have appreciated a lot over the last year. I guess early on this year I think a lot of people were discounting the idea of a housing crash, and the stocks were incredibly cheap. Now they've gone up a lot. They are still looking quite cheap, if you are looking at them on a valuation basis, compared to the way the rest of the market trades. And a lot of people think that while they will never carry the same sort of valuation as the entire stock market, they're just not that good a business, they could carry a higher valuation than they do now, and we could see some gains.

LISOVICZ: They are still outperforming the Dow, the S&P real estate index outperforming the Dow this year to date.

LAHART: Yes, absolutely, and yet their P/Es are about half of what the S&P's P/Es are right now.

CAFFERTY: All right. Justin, we've got to leave it there. Appreciate you come on right now, talking a little about the real estate boom. Justin LaHart, a senior writer at CNN Money, thank you.

LAHART: Thank you very much.

CAFFERTY: Still ahead, if you are looking for love, you are looking in the wrong place, baby. We will tell you what city has been voted the best to live and work in if you happen to be single. Stick around. There is a survey out on this, and we'll share in a minute.

(COMMERCIAL BREAK)

CAFFERTY: "Forbes" magazine says it's found the very best U.S. cities to live in if you are single, and if you are one of those who lives in Austin, Texas, well congratulations to you, because Austin, Texas is No. 1 on the list, followed by Denver and Boulder, Colorado, then Boston, Massachusetts in the No. 3 shot.

"Forbes" rated the cities on seven different factors, including the size of the singles population, night life and culture, and the cost of living alone there.

Incidentally, the cost figure reflects the average apartment rent, plus the price of a Pizza Hut pizza, a movie ticket and a six- pack of Heineken.

Here in New York, we came in eighth on the list. Raleigh-Durham, North Carolina is ninth, and Austin's cross-state opponent, Dallas-Ft. Worth comes in at No. 10. My hometown of Reno, Nevada was not on the list, but I got to tell you, when I was single, it wasn't bad. Pretty good place.

LISOVICZ: Should I do a follow-up question on that?

CAFFERTY: Yes, absolutely. Where did you guys live, that it occurred to you, hey, being single here would be a lot of fun?

TULLY: Unfortunately, I never lived in any of those places when I was single. Maybe that's why I'm still single. But I lived in Princeton, New Jersey, in a swinging apartment complex, and I kind of made up for it, but living in New York and being single, you can't get away with Heineken or beer and pretzels. It's expensive.

CAFFERTY: Oh, yes.

TULLY: It's an expensive dating place, Jack.

CAFFERTY: Very expensive. What about you?

LISOVICZ: Well, I lived in Atlanta. And Atlanta is much less expensive, and yes, I have to say that it was a lot of fun.

CAFFERTY: Good singles scene?

LISOVICZ: Good singles scene. I will leave it at that. But I was in Austin, Texas in December. It's said to be the live musical capital of the nation...

CAFFERTY: Country music, right?

LISOVICZ: Yes, and I was there but I was there with my 85-year- old uncle, so...

CAFFERTY: That's OK, everybody has to be some place.

LISOVICZ: We had a lot of fun.

CAFFERTY: Our last check of our e-mails for this program. Raymond wrote to us this last week: "My question is why doesn't CNN advertise your show? I think CNN needs to let people know about your show." Well, I agree with you, and I don't know why they don't advertise it.

LISOVICZ: We like Raymond.

CAFFERTY: Yes, Raymond, we'll send you something. Actually, we won't. We'll be asking an e-mail question of the week from now on, too. This week's question is: "Has the recent run-up in the stock market convinced you to invest once again in equities?" You can give us your answer by e-mailing at inthemoney@cnn.com. And we will pick out a few letters of response to that question, for next week's program and read them on the air.

We are out of time for this edition of IN THE MONEY. My thanks to CNN financial report Susan Lisovicz, as always, "Fortune" magazine senior writer Shawn Tully for filling in this week, so ably for Andy Serwer who is on vacation. We invite you to join us again tomorrow. We'll be back 3:00 Eastern time. And at that time, we will talk about the shrinking number of white collar jobs in America.

Are they going the way the manufacturing jobs did in the '70s and '80s, and if they're going, where are they going and why? That's tomorrow, 3:00 Eastern, on CNN. See you then.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com



Years for Insider Trading; Can Money Be Made in Real Estate?>


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