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Unemployment Among White Collar on the Rise; ImClone Stock Surges; Can Investors Make Money in Real Estate?
Aired June 15, 2003 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, HOST: Welcome to IN THE MONEY, I'm Jack Cafferty. Coming up on today's program: smart, experienced and unemployed. More and more white collar workers are losing their jobs and finding it hard to land new ones. We'll look at the forces driving America's top talent out of work.
Plus, ImClone's former boss packs up for prison as his old company's cancer drug sends the stock surging. Find out whether the search for a better way to treat cancer is a good place to invest your money.
And beating the house: we'll bring you ways to play the real estate boom without spending a penny on a place in which to live.
Joining us today's program, as always, CNN correspondent Susan Lisovicz, and "Fortune" magazine editor at large Shawn Tully, who's in for Andy Serwer who's on vacation.
The job market is tougher than it's been in decades and this time around the white collar job, there is a red flag up for a pink slip. A survey commissioned by the Department of Labor says more than 17% of America's nine million unemployed are managers or specialist workers. That's up from 10% of the white collar workforce out of a job during the recession in the early 1990s. For more on what's behind that trend and where it's headed, we're joined, now, by "Fortune's" senior writer, Nelson Schwartz.
Nice to have you with us
NELSON SCHWARTZ, SENIOR WRITER, "FORTUNE": Good to be here.
CAFFERTY: So, why the loss of white collar jobs? Where are they going? Is this just a productivity increase or are they sending them out of the country?
SCHWARTZ: I think some of them are beginning to move out of the country, we're not at the point where there's a -- you know, a giant sucking sound, like Ross Perot would warn about with NAFTA.
CAFFERTY: Yes.
(LAUGHTER)
SCHWARTZ: But, I think some of the same trends that hurt blue collar workers in the '80's and early 80's in terms of skilled labor going overseas, is beginning to happen with white collar jobs, especially in I.T. and financial service, things like that can just as easily be done from India or the Philippines as here in New York.
CAFFERTY: What are the implications for the domestic economy?
SCHWARTZ: I think the implications are that even when the economy recovers and growth starts up again, unemployment among white collar workers will remain much higher than it's been in previous decades and the kind of wage increases we saw in the late '90s aren't going to materialize.
SHAWN TULLY, EDITOR AT LARGE, "FORTUNE": Nelson, is part of this because of health care costs are so high and a lot of the, kind of, indirect labor costs have gone up for companies? Is this one of the things that's leading them to deal or have fewer white collar employees on staff, or to stretch the ones who are -- you know, still have their jobs, and then rehire much more slowly?
SCHWARTZ: I think that's definitely part of it. You know, all the costs, you know, associated with white collar workers in the U.S. are high. Insurance -- health benefits, any kind of ancillary costs. You can hire the same people in India or Philippines, maybe they're not quite as skilled, but they're good enough, but you can pay them, you know, one quarter of what you're paying them here and it's a huge savings for international companies.
SUSAN LISOVICZ, CNNfn CORRESPONDENT: And, you've seen a lot of companies really stress the cost cutting, that's the only way they've been able to improve their profits in the last year or so, but on the other hand, that kind of increased outsourcing is not good for American businesses. Is there any kind of move to put a cap on it?
SCHWARTZ: Yes, I mean, there are in some states, you know, state legislate -- state legislators have proposed bills that would, you know, band outsourcing on government contracts, but the truth is, I think, you know, trying to fight it through protectionism or tariffs isn't going to be any more successful than trying to save, you know, steel jobs or auto jobs through that route. I think the best thing is for American workers to kind of, you know, become more skilled, for the government to offer credits for corporations to encourage workers to learn, you know, more value-added, you know, software skills, for example, because, long-term, anything that's sort of a commodity kind of, you know, trade is going to, you know, be a victim to outsourcing.
CAFFERTY: If corporations can cut costs, and these are not insignificant savings, by shipping jobs out of the country, in times profits are being squeezed, any, then, increase in revenue, that cascades right to the bottom line and shows up on higher stock prices just like that. There's little incentive for them to discontinue doing this kind of thing.
SCHWARTZ: Exactly. I mean, it's very scary for us as, you know, American workers who, you know, might fall victim to this. On the other hand, corporations have almost no pricing power in the United States, there's, you know, deflation in a lot of industries. If you can cut costs by 50 percent, that's very, very tempting for these companies. And, I mean, if you call your American Express about your corporate card, you're almost certainly talking to someone from India for most of the day.
TULLY: But, as you point out in the story, Nelson, if these cost cutting measures will lead to higher profits, that money's going to get reinvested in expansion which, you know, could then create more jobs -- white collar in the longer term.
SCHWARTZ: Right. It's, I mean, it's not a total, you know, lose proposition, there are upsides to this, for example, if companies grow and they hire, sort of, better paid, more senior managers here in the U.S. to manage these people overseas, that could be, you know, a win in the long-term. But, that doesn't take away from the pain for people who are, you know, victims of outsourcing in the short term.
LISOVICZ: Have you seen any -- any programs that, you know, that, you know, do encourage or are, you know, that have been successful in keeping employees in the United States, and haven't gone the route of cheaper labors or any -- any kind of, you know, innovative program to counteract this?
SCHWARTZ: I think some companies, especially privately held ones, that don't have that quarter to quarter pressure on profits really feel like, you know, their best assets and most important assets walk out the gate every night at 5:00, and they want them to come back, therefore it's very important to keep people even during down cycles. I think for large public corporations, though, in this environment you've got to take that 10 or 15 percent quarterly earnings growth, the temptation is there and it's growing.
TULLY: One of the things I thought was most interesting was the example of the radiology -- radiologists in Bangalore who are then being sent all the scans to do and, you know, of course, we have a big shortage of radiologists in this country, so a lot of this is very healthy stuff and they're also paid half of what the radiologists are paid here. You see, it's a very kind of cartelized, protected profession, there's not enough capacity, there's not enough MRI's and they're trying to restrict the numbers and keep the prices up, so this really the market working and bringing the cost down.
SCHWARTZ: Yes, I mean, for instance, you know, radiologists in the U.S. are paid, you know, $300,000 or more a year, it's hard to find, you know, guys who are going to look at just chest x-rays or cat scans, do simple stuff, so this stuff can be sent out to India. People can look at it overnight and when you come into your doctor's office, it's been read. And that's actually not so -- not just cost cutting there, but there is a shortage of radiologists like you said in that...
CAFFERTY: As long as it's been read well.
SCHWARTZ: Yes.
CAFFERTY: The key being, it's been read well.
SCHWARTZ: Keep your fingers crossed. CAFFERTY: Let's hope whoever's doing the reading knows what they're looking at. You know, this is -- this recovery, such as it is, and it's pretty anemic, is characterized as a jobless recovery and so far, we haven't seen any indication of new jobs in the pipeline. To what degree is the kind of stuff we're talking about here, contributing to that, and longer term, to what degree might this country or this economy be forced to deal with some sort of chronic higher unemployment number simply because of these reasons?
SCHWARTZ: Well, I mean, I think it's definitely outsourcing, off-shoring of these jobs, it's also, you know, productivity. The same forces that drove so much of the growth in the '90s, kind of, coming back to haunt us. When, you know, one worker, you know, particularly, in a white collar area can do the work of three. So I think, we, you know -- keep in mind, even right now, at 6.1 percent, unemployment is still lower than it was on average during the '80s and early '90s, but we got used to very low unemployment in the late '90s boom. We may have to get used to chronically higher, you know, unemployment even, like I said, when the economy gets better.
CAFFERTY: All right, Nelson, we're going to have to leave it there. It's interesting stuff, I appreciate you being on the program.
SCHWARTZ: Good to be here.
CAFFERTY: Thank you. Nelson Schwartz, senior writer for "Fortune" magazine.
Coming up on IN THE MONEY, this Father's Day: from pinstripes to prison stripes. Former biotech giant, Sam Waksal, off to the big house. Well find out if the first CEO to do some time after all the recent Wall Street scandals is likely to be the last, let,s hope not.
Plus, looking for the magic bullet: some hot new cancer drugs are getting the attention of doctors and patients and Wall Street. See whether the medicines go far enough as treatments and whether they're any good as investments.
Also ahead, a mortgage you can pack up and take with you when you go. We'll tell you about one home loan that's waiting for your marching orders.
(COMMERCIAL BREAK)
CAFFERTY: A couple of firsts this week in the corporate misconduct department, out of all the former CEOs implicated in the 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 problems in his own firm. One from former SEC enforcement chief, William McLucas, says Ebbers that 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, then we'll jump to WorldCom, again 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 fate 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 for the other potential crooks out there is this was the 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's 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, 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 is what they call it. It's eight prosecutors, about two dozen FBI agents, they are working full-time, full-tilt to try and bring additional charges, of course, they've already got charges against Andrew Fastow, the CFO -- former CFO of Enron, but everybody wants to know, will 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 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'll keep track of it for us, Chris Thank you.
Chris Huntington.
As a 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, "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, "THE CELL GAME": Thanks for being -- having me own.
CAFFERTY: This guy is by reputation one of the slickest fellows out there. He is 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 the seemed?
PRUD'HOMME: 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, then there was another CV that had another birth date on it, which, you know, at the time didn't seem like a big deal, but it was a question mark, as a reporter, that's a red flag. Then I discovered that he wasn't actually raised -- born and raised in Toledo, Ohio as he claimed, but rather in Dayton, Ohio.
CAFFERTY: Why would anybody lie about Toledo, Ohio?
PRUD'HOMME: Yes, 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's in his mid 50s, very accomplished scientist, businessman, and he's lying about the most basic things that are very easy to check, so I -- these two things came up and then I -- it raised the 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 the 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 personae of Sam Waksal.
LISOVICZ: But, you know, the -- on of the -- I've read your article last year and read it again, and it is a fascinating read of a very troubled person, but 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 discovered. Going back to his early days in academia where he would start off in a given situation with tremendous promise, he'd 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 and, 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, he was very proud of that and how many scientists do you know that live in a loft in New York SoHo and hang out with Muriel Hemingway and Martha Stewart? Not very many.
LISOVICZ: Or Mick Jagger.
PRUD'HOMME: Or Mick Jagger, yes.
(LAUGHTER)
TULLY: Well, what's remarkable is, that this company, which you would have it was a fraud machine, would have been dead, has come back, the stock has soared again. How legitimate or how -- what kind of potential does Erbitux really have, the 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 on 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'll be on the market by the middle of next year.
CAFFERTY: What...
LISOVICZ: But, you know, Alex, I'm sorry. You know, Alex, one of the stories that hasn't gotten out is the fact that, you know, investors are angry, people feel misled, but there are all these cancer patients out there who -- who were really hanging on with the belief Erbitux would be approved in a very short time and these people are very frustrated, they believe that ImClone delayed it through its...
PRUD'HOMME: I would use a -- even a stronger word, I think they're -- they feel betrayed, is the word that some of them have used and more than frustrated, they're angry, because they feel that there has been no acknowledgement that at the end of the day, what this was 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 thus 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 that's called, "The Cell Game."
Thank you for being here.
PRUD'HOMME: Thanks a lot, Jack.
CAFFERTY: Appreciate it.
A few times during the program we'll take time out to look at what you're telling us through e-mail. A lot of you wrote 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...
(LAUGHTER)
CAFFERTY: We check your e-mails a few times during every program because...
LISOVICZ: You did just then.
CAFFERTY: ...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're 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)
CAFFERTY: We've been talking about Sam Waksal, the former ImClone CEO who was sentenced to seven plus years in prison this week for insider trading. But, as Waksal's future went south, prospects for his company's new cancer drug looked bright, once again.
The drug is called Erbitux, and it's solid results in clinical trials have sent shares in ImClone surging in the last few weeks. Shares in other cancer drugs are up too as biotech firms come up with new treatments that have doctors excited. For a look at cancer drug research, as an industry and as an investment, we're joined from Los Angeles, now, by Andrew Pollack, he's a business reporter for the Los -- or the "Los Angeles Times," I'm sorry Andrew, the "New York Times." How can I make such an error? There's only one "Times" and it's here on the East Coast.
Nice to have you with us. Talk to me about the run-up in biotech stock prices in the last weeks. Are they way ahead of what realistically can be expected at this point from some of these drugs?
ANDREW POLLACK, THE "NEW YORK TIMES": Well, there's two factors, I think, for the return-up. One is the positive results we've had of certain experimental drugs, one of them, Erbitux, which you mentioned; another big one is Avastin, a cancer drug developed by Genentech. Combined with that, there's a perceived shift in the attitude of the Food and Drug Administration toward being more lenient toward approving drugs, particularly for life-threatening diseases. I think it's more than a perception, I think the attitude of the FDA has actually seemed to change and we've seen some approvals of drugs, such as Millennium's Velcade and AstraZeneca's IRESSA, in the last weeks, that seemed to signal that the agency's becoming more permissive. Whether the stocks are ahead of themselves is really a judgment call. I've seen some analysis that suggests that the P/E ratios in the industry are at fairly high levels, but not the highest they've ever been, so it's possible there might be some more room to -- for the stocks to go up. But, the stocks... TULLY: But, Andrew, even -- excuse me, Andrew, even if you don't buy individual stocks and buy the whole biotech index, it's like being on a roller coaster ride. The index down 80 percent last year and now it's surged back about 40 percent. Do you think that individual investors should get involved in the sector, given the volatility?
POLLACK: Well, it is quite risky and as you mentioned, the stocks have gone in cycles of great peaks and great valleys. I think that's really up to the individual investor, whether they can -- want to take such a ride.
CAFFERTY: Let me ask you one thing, here. We've got about 20 seconds left. Why has the FDA changing its tune? Why are they suddenly allowing these things to come to market more quickly?
POLLACK: Well, I think two things. I think there's a new commissioner, Mark McClellan, who was appointed last year and he's clearly set that as part of his agenda. Also, the agency had been coming under some criticism from patient groups and from some other newspaper editorials and so on for denying drugs to people who would face you know, death, otherwise.
CAFFERTY: Sure.
POLLACK: Denying them a chance.
CAFFERTY: Makes sense. Andrew, we're going to have to leave it there. I appreciate you joining us on IN THE MONEY. Andrew Pollack's a business reporter for the "New York Times" joining us today, from Los Angeles.
Coming up, we'll talk to a woman who says affirmative action programs should be based on finances instead of race.
And, as more Americans snap up homes, we'll tell you how you can turn the hot real estate market into a stock investment if you're willing to take the risk. Stay with us, you're risking watching this thing, you might as well find out the whole story.
(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.
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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 stock market run-up convinced you to invest once again in equities?" You can give us your answer by e-mailing us 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.
Before we skedaddle out of here for another week, we have been remiss in ignoring the fact that this is Father's Day, and wishing all of the fathers and their families a pleasant Sunday out there. It's nice one day out of the year that dad gets a little recognition.
LISOVICZ: You're king of the house.
CAFFERTY: Actually, this is taped on Friday, so while we're home watching this, I'll be watching the final round of the U.S. Open. I guess probably not...
(CROSSTALK)
LISOVICZ: That's your treat. And it should be noted you are the father of four beautiful young women. And your youngest works at CNN.
CAFFERTY: Actually my second to youngest. Leslie did an internship for Lou Dobbs and the "MONEYLINE" crew last summer. My oldest daughter Julie and her family live in Tucson, Arizona. Her next younger sister, Jill, and her family live in Denver, Colorado. Leslie just graduated from Lehigh, and her younger sister, Lee, the baby, is leaving for Tulane in the fall. So it will be the first time in a lot of years there hasn't been a little girl around the Cafferty house. I'm not sure I'm looking forward to that.
TULLY: So Jack, on Sunday do you get carried around by your daughters in a sedan chair or what?
CAFFERTY: No, not at all.
LISOVICZ: Peeling grapes.
CAFFERTY: You know, maybe a barbecued hot dog, and like I said, a little chance to watch the golf tournament. But thank you for your good wishes. And to all the dads watching, you too, happy Father's Day.
We are out of time for this edition of IN THE MONEY. My thanks as always to my friends, CNN financial reporter Susan Lisovicz and "Fortune" magazine editor-at-large Shawn Tully, in this week for Andy Serwer, who's back from vacation next week. Thanks to you both. We will be back next Saturday, 1:00 Eastern time. And we invite you to tune in tomorrow for "AMERICAN MORNING," beginning at 7:00 Eastern time. We will see you then. Thanks for watching and enjoy the rest of your day.
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Surges; Can Investors Make Money in Real Estate?>
Aired June 15, 2003 - 15:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, HOST: Welcome to IN THE MONEY, I'm Jack Cafferty. Coming up on today's program: smart, experienced and unemployed. More and more white collar workers are losing their jobs and finding it hard to land new ones. We'll look at the forces driving America's top talent out of work.
Plus, ImClone's former boss packs up for prison as his old company's cancer drug sends the stock surging. Find out whether the search for a better way to treat cancer is a good place to invest your money.
And beating the house: we'll bring you ways to play the real estate boom without spending a penny on a place in which to live.
Joining us today's program, as always, CNN correspondent Susan Lisovicz, and "Fortune" magazine editor at large Shawn Tully, who's in for Andy Serwer who's on vacation.
The job market is tougher than it's been in decades and this time around the white collar job, there is a red flag up for a pink slip. A survey commissioned by the Department of Labor says more than 17% of America's nine million unemployed are managers or specialist workers. That's up from 10% of the white collar workforce out of a job during the recession in the early 1990s. For more on what's behind that trend and where it's headed, we're joined, now, by "Fortune's" senior writer, Nelson Schwartz.
Nice to have you with us
NELSON SCHWARTZ, SENIOR WRITER, "FORTUNE": Good to be here.
CAFFERTY: So, why the loss of white collar jobs? Where are they going? Is this just a productivity increase or are they sending them out of the country?
SCHWARTZ: I think some of them are beginning to move out of the country, we're not at the point where there's a -- you know, a giant sucking sound, like Ross Perot would warn about with NAFTA.
CAFFERTY: Yes.
(LAUGHTER)
SCHWARTZ: But, I think some of the same trends that hurt blue collar workers in the '80's and early 80's in terms of skilled labor going overseas, is beginning to happen with white collar jobs, especially in I.T. and financial service, things like that can just as easily be done from India or the Philippines as here in New York.
CAFFERTY: What are the implications for the domestic economy?
SCHWARTZ: I think the implications are that even when the economy recovers and growth starts up again, unemployment among white collar workers will remain much higher than it's been in previous decades and the kind of wage increases we saw in the late '90s aren't going to materialize.
SHAWN TULLY, EDITOR AT LARGE, "FORTUNE": Nelson, is part of this because of health care costs are so high and a lot of the, kind of, indirect labor costs have gone up for companies? Is this one of the things that's leading them to deal or have fewer white collar employees on staff, or to stretch the ones who are -- you know, still have their jobs, and then rehire much more slowly?
SCHWARTZ: I think that's definitely part of it. You know, all the costs, you know, associated with white collar workers in the U.S. are high. Insurance -- health benefits, any kind of ancillary costs. You can hire the same people in India or Philippines, maybe they're not quite as skilled, but they're good enough, but you can pay them, you know, one quarter of what you're paying them here and it's a huge savings for international companies.
SUSAN LISOVICZ, CNNfn CORRESPONDENT: And, you've seen a lot of companies really stress the cost cutting, that's the only way they've been able to improve their profits in the last year or so, but on the other hand, that kind of increased outsourcing is not good for American businesses. Is there any kind of move to put a cap on it?
SCHWARTZ: Yes, I mean, there are in some states, you know, state legislate -- state legislators have proposed bills that would, you know, band outsourcing on government contracts, but the truth is, I think, you know, trying to fight it through protectionism or tariffs isn't going to be any more successful than trying to save, you know, steel jobs or auto jobs through that route. I think the best thing is for American workers to kind of, you know, become more skilled, for the government to offer credits for corporations to encourage workers to learn, you know, more value-added, you know, software skills, for example, because, long-term, anything that's sort of a commodity kind of, you know, trade is going to, you know, be a victim to outsourcing.
CAFFERTY: If corporations can cut costs, and these are not insignificant savings, by shipping jobs out of the country, in times profits are being squeezed, any, then, increase in revenue, that cascades right to the bottom line and shows up on higher stock prices just like that. There's little incentive for them to discontinue doing this kind of thing.
SCHWARTZ: Exactly. I mean, it's very scary for us as, you know, American workers who, you know, might fall victim to this. On the other hand, corporations have almost no pricing power in the United States, there's, you know, deflation in a lot of industries. If you can cut costs by 50 percent, that's very, very tempting for these companies. And, I mean, if you call your American Express about your corporate card, you're almost certainly talking to someone from India for most of the day.
TULLY: But, as you point out in the story, Nelson, if these cost cutting measures will lead to higher profits, that money's going to get reinvested in expansion which, you know, could then create more jobs -- white collar in the longer term.
SCHWARTZ: Right. It's, I mean, it's not a total, you know, lose proposition, there are upsides to this, for example, if companies grow and they hire, sort of, better paid, more senior managers here in the U.S. to manage these people overseas, that could be, you know, a win in the long-term. But, that doesn't take away from the pain for people who are, you know, victims of outsourcing in the short term.
LISOVICZ: Have you seen any -- any programs that, you know, that, you know, do encourage or are, you know, that have been successful in keeping employees in the United States, and haven't gone the route of cheaper labors or any -- any kind of, you know, innovative program to counteract this?
SCHWARTZ: I think some companies, especially privately held ones, that don't have that quarter to quarter pressure on profits really feel like, you know, their best assets and most important assets walk out the gate every night at 5:00, and they want them to come back, therefore it's very important to keep people even during down cycles. I think for large public corporations, though, in this environment you've got to take that 10 or 15 percent quarterly earnings growth, the temptation is there and it's growing.
TULLY: One of the things I thought was most interesting was the example of the radiology -- radiologists in Bangalore who are then being sent all the scans to do and, you know, of course, we have a big shortage of radiologists in this country, so a lot of this is very healthy stuff and they're also paid half of what the radiologists are paid here. You see, it's a very kind of cartelized, protected profession, there's not enough capacity, there's not enough MRI's and they're trying to restrict the numbers and keep the prices up, so this really the market working and bringing the cost down.
SCHWARTZ: Yes, I mean, for instance, you know, radiologists in the U.S. are paid, you know, $300,000 or more a year, it's hard to find, you know, guys who are going to look at just chest x-rays or cat scans, do simple stuff, so this stuff can be sent out to India. People can look at it overnight and when you come into your doctor's office, it's been read. And that's actually not so -- not just cost cutting there, but there is a shortage of radiologists like you said in that...
CAFFERTY: As long as it's been read well.
SCHWARTZ: Yes.
CAFFERTY: The key being, it's been read well.
SCHWARTZ: Keep your fingers crossed. CAFFERTY: Let's hope whoever's doing the reading knows what they're looking at. You know, this is -- this recovery, such as it is, and it's pretty anemic, is characterized as a jobless recovery and so far, we haven't seen any indication of new jobs in the pipeline. To what degree is the kind of stuff we're talking about here, contributing to that, and longer term, to what degree might this country or this economy be forced to deal with some sort of chronic higher unemployment number simply because of these reasons?
SCHWARTZ: Well, I mean, I think it's definitely outsourcing, off-shoring of these jobs, it's also, you know, productivity. The same forces that drove so much of the growth in the '90s, kind of, coming back to haunt us. When, you know, one worker, you know, particularly, in a white collar area can do the work of three. So I think, we, you know -- keep in mind, even right now, at 6.1 percent, unemployment is still lower than it was on average during the '80s and early '90s, but we got used to very low unemployment in the late '90s boom. We may have to get used to chronically higher, you know, unemployment even, like I said, when the economy gets better.
CAFFERTY: All right, Nelson, we're going to have to leave it there. It's interesting stuff, I appreciate you being on the program.
SCHWARTZ: Good to be here.
CAFFERTY: Thank you. Nelson Schwartz, senior writer for "Fortune" magazine.
Coming up on IN THE MONEY, this Father's Day: from pinstripes to prison stripes. Former biotech giant, Sam Waksal, off to the big house. Well find out if the first CEO to do some time after all the recent Wall Street scandals is likely to be the last, let,s hope not.
Plus, looking for the magic bullet: some hot new cancer drugs are getting the attention of doctors and patients and Wall Street. See whether the medicines go far enough as treatments and whether they're any good as investments.
Also ahead, a mortgage you can pack up and take with you when you go. We'll tell you about one home loan that's waiting for your marching orders.
(COMMERCIAL BREAK)
CAFFERTY: A couple of firsts this week in the corporate misconduct department, out of all the former CEOs implicated in the 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 problems in his own firm. One from former SEC enforcement chief, William McLucas, says Ebbers that 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, then we'll jump to WorldCom, again 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 fate 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 for the other potential crooks out there is this was the 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's 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, 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 is what they call it. It's eight prosecutors, about two dozen FBI agents, they are working full-time, full-tilt to try and bring additional charges, of course, they've already got charges against Andrew Fastow, the CFO -- former CFO of Enron, but everybody wants to know, will 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 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'll keep track of it for us, Chris Thank you.
Chris Huntington.
As a 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, "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, "THE CELL GAME": Thanks for being -- having me own.
CAFFERTY: This guy is by reputation one of the slickest fellows out there. He is 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 the seemed?
PRUD'HOMME: 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, then there was another CV that had another birth date on it, which, you know, at the time didn't seem like a big deal, but it was a question mark, as a reporter, that's a red flag. Then I discovered that he wasn't actually raised -- born and raised in Toledo, Ohio as he claimed, but rather in Dayton, Ohio.
CAFFERTY: Why would anybody lie about Toledo, Ohio?
PRUD'HOMME: Yes, 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's in his mid 50s, very accomplished scientist, businessman, and he's lying about the most basic things that are very easy to check, so I -- these two things came up and then I -- it raised the 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 the 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 personae of Sam Waksal.
LISOVICZ: But, you know, the -- on of the -- I've read your article last year and read it again, and it is a fascinating read of a very troubled person, but 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 discovered. Going back to his early days in academia where he would start off in a given situation with tremendous promise, he'd 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 and, 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, he was very proud of that and how many scientists do you know that live in a loft in New York SoHo and hang out with Muriel Hemingway and Martha Stewart? Not very many.
LISOVICZ: Or Mick Jagger.
PRUD'HOMME: Or Mick Jagger, yes.
(LAUGHTER)
TULLY: Well, what's remarkable is, that this company, which you would have it was a fraud machine, would have been dead, has come back, the stock has soared again. How legitimate or how -- what kind of potential does Erbitux really have, the 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 on 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'll be on the market by the middle of next year.
CAFFERTY: What...
LISOVICZ: But, you know, Alex, I'm sorry. You know, Alex, one of the stories that hasn't gotten out is the fact that, you know, investors are angry, people feel misled, but there are all these cancer patients out there who -- who were really hanging on with the belief Erbitux would be approved in a very short time and these people are very frustrated, they believe that ImClone delayed it through its...
PRUD'HOMME: I would use a -- even a stronger word, I think they're -- they feel betrayed, is the word that some of them have used and more than frustrated, they're angry, because they feel that there has been no acknowledgement that at the end of the day, what this was 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 thus 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 that's called, "The Cell Game."
Thank you for being here.
PRUD'HOMME: Thanks a lot, Jack.
CAFFERTY: Appreciate it.
A few times during the program we'll take time out to look at what you're telling us through e-mail. A lot of you wrote 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...
(LAUGHTER)
CAFFERTY: We check your e-mails a few times during every program because...
LISOVICZ: You did just then.
CAFFERTY: ...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're 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)
CAFFERTY: We've been talking about Sam Waksal, the former ImClone CEO who was sentenced to seven plus years in prison this week for insider trading. But, as Waksal's future went south, prospects for his company's new cancer drug looked bright, once again.
The drug is called Erbitux, and it's solid results in clinical trials have sent shares in ImClone surging in the last few weeks. Shares in other cancer drugs are up too as biotech firms come up with new treatments that have doctors excited. For a look at cancer drug research, as an industry and as an investment, we're joined from Los Angeles, now, by Andrew Pollack, he's a business reporter for the Los -- or the "Los Angeles Times," I'm sorry Andrew, the "New York Times." How can I make such an error? There's only one "Times" and it's here on the East Coast.
Nice to have you with us. Talk to me about the run-up in biotech stock prices in the last weeks. Are they way ahead of what realistically can be expected at this point from some of these drugs?
ANDREW POLLACK, THE "NEW YORK TIMES": Well, there's two factors, I think, for the return-up. One is the positive results we've had of certain experimental drugs, one of them, Erbitux, which you mentioned; another big one is Avastin, a cancer drug developed by Genentech. Combined with that, there's a perceived shift in the attitude of the Food and Drug Administration toward being more lenient toward approving drugs, particularly for life-threatening diseases. I think it's more than a perception, I think the attitude of the FDA has actually seemed to change and we've seen some approvals of drugs, such as Millennium's Velcade and AstraZeneca's IRESSA, in the last weeks, that seemed to signal that the agency's becoming more permissive. Whether the stocks are ahead of themselves is really a judgment call. I've seen some analysis that suggests that the P/E ratios in the industry are at fairly high levels, but not the highest they've ever been, so it's possible there might be some more room to -- for the stocks to go up. But, the stocks... TULLY: But, Andrew, even -- excuse me, Andrew, even if you don't buy individual stocks and buy the whole biotech index, it's like being on a roller coaster ride. The index down 80 percent last year and now it's surged back about 40 percent. Do you think that individual investors should get involved in the sector, given the volatility?
POLLACK: Well, it is quite risky and as you mentioned, the stocks have gone in cycles of great peaks and great valleys. I think that's really up to the individual investor, whether they can -- want to take such a ride.
CAFFERTY: Let me ask you one thing, here. We've got about 20 seconds left. Why has the FDA changing its tune? Why are they suddenly allowing these things to come to market more quickly?
POLLACK: Well, I think two things. I think there's a new commissioner, Mark McClellan, who was appointed last year and he's clearly set that as part of his agenda. Also, the agency had been coming under some criticism from patient groups and from some other newspaper editorials and so on for denying drugs to people who would face you know, death, otherwise.
CAFFERTY: Sure.
POLLACK: Denying them a chance.
CAFFERTY: Makes sense. Andrew, we're going to have to leave it there. I appreciate you joining us on IN THE MONEY. Andrew Pollack's a business reporter for the "New York Times" joining us today, from Los Angeles.
Coming up, we'll talk to a woman who says affirmative action programs should be based on finances instead of race.
And, as more Americans snap up homes, we'll tell you how you can turn the hot real estate market into a stock investment if you're willing to take the risk. Stay with us, you're risking watching this thing, you might as well find out the whole story.
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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.
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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.
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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 stock market run-up convinced you to invest once again in equities?" You can give us your answer by e-mailing us 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.
Before we skedaddle out of here for another week, we have been remiss in ignoring the fact that this is Father's Day, and wishing all of the fathers and their families a pleasant Sunday out there. It's nice one day out of the year that dad gets a little recognition.
LISOVICZ: You're king of the house.
CAFFERTY: Actually, this is taped on Friday, so while we're home watching this, I'll be watching the final round of the U.S. Open. I guess probably not...
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LISOVICZ: That's your treat. And it should be noted you are the father of four beautiful young women. And your youngest works at CNN.
CAFFERTY: Actually my second to youngest. Leslie did an internship for Lou Dobbs and the "MONEYLINE" crew last summer. My oldest daughter Julie and her family live in Tucson, Arizona. Her next younger sister, Jill, and her family live in Denver, Colorado. Leslie just graduated from Lehigh, and her younger sister, Lee, the baby, is leaving for Tulane in the fall. So it will be the first time in a lot of years there hasn't been a little girl around the Cafferty house. I'm not sure I'm looking forward to that.
TULLY: So Jack, on Sunday do you get carried around by your daughters in a sedan chair or what?
CAFFERTY: No, not at all.
LISOVICZ: Peeling grapes.
CAFFERTY: You know, maybe a barbecued hot dog, and like I said, a little chance to watch the golf tournament. But thank you for your good wishes. And to all the dads watching, you too, happy Father's Day.
We are out of time for this edition of IN THE MONEY. My thanks as always to my friends, CNN financial reporter Susan Lisovicz and "Fortune" magazine editor-at-large Shawn Tully, in this week for Andy Serwer, who's back from vacation next week. Thanks to you both. We will be back next Saturday, 1:00 Eastern time. And we invite you to tune in tomorrow for "AMERICAN MORNING," beginning at 7:00 Eastern time. We will see you then. Thanks for watching and enjoy the rest of your day.
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Surges; Can Investors Make Money in Real Estate?>
