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Why Is No One Looking For Saddam's Former Wives?; How Is Your Local Budge Affecting The Entire Countr?; Rising Mortgage Rates Slow Real Estate Business

Aired August 3, 2003 - 15:00   ET


ANNOUNCER: From New York City America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: Welcome to the Sunday edition of our little get-together, I'm Jack Cafferty. Coming up on today's edition of IN THE MONEY, first ladies on the lam. As U.S. troops look for Saddam Hussein in Iraq and elsewhere, the former president's two wives are nowhere to be found. We'll find out what they might know and where they might be and why no one seems to be too interested.

Plus, tough lessons: Schools and roads aren't all that's hurting as the states run out of cash. See how your local budget crunch is affecting the entire country.

And after the build-up the comedown: A shift in rates is taking some of the zing out of the mortgage market. We'll look at whether the housing surge is about to be history.

Joining me today on the program, CNN correspondent Christine Romans and "Fortune" magazine editor at large, Andy Serwer.

The interest rate market is definitely threatening the refinancing arm of the housing industry. But, I was reading where something like 75 percent of the refinancing has already been done in the private sector, enjoying what have been 40 and 50-year low mortgage rates oaf the last couple of years. So, maybe a big chunk of that business is already been...

CHRISTINE ROMANS, CNN CORRESPONDENT: If you've been waiting maybe -- you know, now is the time to...

ANDY SERWER, "FORTUNE" MAGAZINE: You waited too long.

ROMANS: Yeah. Either do or the time to do it or it's time is behind.

SERWER: Yeah, well the other thing is, of course, if rates go back down there'll be a whole 'nother cycle. In other words, if they go back down to where they were before and then go lower, it won't be -- the party will not be over because that's the beauty of the refi market, it keeps on going as long as it keeps on going, if you follow me.

CAFFERTY: I do follow you. And some are suggesting this backup in rates we're seeing over the last five or six weeks could be just a temporary spike that once we get comfortable with the fact that the fed is not going to be raising rates, probably in our lifetime at the rate this recovery is going, that maybe these rates will begin to drift back down a little bit.

ROMANS: Temporary or not it was ferocious. It was the biggest one-month move for the ten-year note since '84, Jack. 1984.

CAFFERTY: I remember 1984.

ROMANS: I do, too.

CAFFERTY: Former Iraqi president, Saddam Hussein, may be out of power and on the run, but he's still the most potent symbol of that country's horrible past. The U.S. and its allies, this week, intensified their campaign to find Saddam as guerrilla fighters launched new attacks against American soldiers. CNN's Harris Whitbeck joins us from Tikrit, Baghdad, with the latest.

We keep hearing, Harris, that the noose is tightening around Saddam Hussein. Is that still the case as we do this little visit, here?

HARRIS WHITBECK, CNN CORRESPONDENT: Well, that seems to be the case. There was another raid Friday afternoon. Two more associates of Saddam Hussein were detained. Some sources within the military referred to them as people who are have close to Saddam Hussein, but no matter how close they are they are being interrogated and U.S. military officials, on the ground here, hope that any information that might be gleaned from this latest capture might help them get closer to Saddam Hussein. Again, a lot of efforts are being concentrated around the Tikrit area since this is Saddam Hussein's homeland and some would say that logic would dictate that Saddam Hussein would try to hide around here. The raids are (UNINTELLIGIBLE) -- they occur practically every day, and again, U.S. military officials say that practically every raid gives them a little bit more information as to where the target might be.

CAFFERTY: How legitimate are you hearing the people think these Saddam Hussein tapes are? Right after the deaths of the two boys, Uday and Qusay, there were reports that Saddam Hussein was changing locations every two to four hours. That is on the run in capital letters, and one wonders how he would have time to sit down and write these little -- these little bon mots that he's putting on audiotape that are being released purportedly vowing for the return of his regime and the fall of the United States and the withdrawal of the coalition. Do people really believe these tapes are Saddam Hussein over there?

WHITBECK: They seem to, and this is -- you know, judging from opinions that I've heard after the tapes are released, not this particular one because I haven't been covering that angle, but whenever tapes have been released usually people do have very strong opinions about what is said on those tapes, and they never really question whether they're legitimate or not. They either -- you know, they might have very strong opinions on what is being said, but they dent seem to question the legitimacy of the tapes themselves. CAFFERTY: All right, Harris, I Appreciate the update very much.

Harris Whitbeck reporting from Baghdad.

As the hunt for Saddam Hussein continues, we know now that his two oldest daughters have recently arrived in Jordan, where they are guests of King Abdullah, the women brought their nine children, and they're staying at an undisclosed location in Amman, Jordan.

But, what about Saddam Hussein's two wives? The wives of the former president are not in that famous deck of cards showing the most wanted Iraqis, but they may in fact have valuable knowledge about their husband's old regime and its arsenal, and perhaps even weapons of mass destruction. For more about that we're joined by Lisa Beyer, the foreign editor of "Time" magazine, here in New York City.

Lisa, nice to have you with us.

LISA BEYER, "TIME" MAGAZINE: Very happy to be here.

CAFFERTY: Why isn't there more interest on the part of the coalition in the whereabouts of these two wives? Does anybody care where they are and what might they be able to contribute to the capture or killing of their husband?

BEYER: Well, officially, they don't care. We asked a U.S. official in Baghdad, last week, about the two wives, and he said if they walked into my office I'd give them tea. He said they were not wanted by the United States, neither for questioning nor for suspicion of involvement in the regime's crimes.

I think in the case of the first wife, the long-time wife, Sajida, that's probably an appropriate reaction, in fact, she'd been very much estranged from Saddam ever since the mid 1990s, when Saddam had two of her sons-in-law killed. But, in the case of the second wife, whose name is Samira, I think that's appropriate an inappropriate response. Our understanding from Saddam's former secretary is that they were very close, she was the one person who saw Saddam everyday, she very much had his ear, she used to tell him what people were saying in the streets of Baghdad and even give him sort of feedback on how his policies were going down. And while I think it's unlikely that she would know where Saddam, is I don't think he would be so foolish as to let her know, and it would be very difficult for him to communicate with her safely, she might have other information, for example, about where his money might be. I'm sure she'd be uninclined to give that information to the U.S., but perhaps some sort of deal could be made.

SERWER: Right. Lisa, you mentioned that bizarrely Shakespearean episode in Iraq where Saddam had his son-in-laws executed...

BEYER: That's right.

SERWER: I mean, just horrifying. That of course points us to his daughters, who we understand, are in Jordan. What information would they have? Tell us about that. BEYER: Well, I don't think they -- they're likely to have any information on the whereabouts of their father or even of the crimes of the regime. In the mid '90s their husbands, who were also brothers and who were cousins of Saddam and very important members of the regime, defected to Jordan, the wives came with them, somewhat under duress, as we understand it. And, they spilled a lot of Saddam's secrets, particularly about his biological weapons program. After that the husbands and their wives were cajoled back to Iraq, it was a crazy thing for them to return. They should have understood that they'd be killed. The wives were immediately forced to grant divorces to their husbands, and the husbands were immediately killed. Ever since then these two daughters have been very much estranged from Saddam, they've essentially been living in house arrest. They haven't really been members of the same family in any sort of functional way.

ROMANS: Lisa, this is by any stretch of the imagination a pretty dysfunctional family. And there's an awful lot of misinformation, as well. There's also talk of a son called Ali and a third wife, perhaps. Tell us about that.

BEYER: Well, I've never been able to get anything on any wife other than the second wife. And our understanding is that the marriage to the second wife was in some ways not 100 percent official in that the role of the first wife was enshrined in his contract with the second wife as the most important role, there were certain limitations on the marriage. And he did not refer to the second wife as his wife. He used a term in Arabic which means literally "bondswoman," someone who is bonded to him. Now, in almost any profile of Saddam you'll see a reference to there being a third son, Ali, who is said to be the son of Saddam's second wife. Our best understanding on that is that there is no such person, that there was a misunderstanding in the streets of Iraq. There was a young man who was actually the grandson of Saddam's second wife, and when he bought this grandson a very flashy car it was misunderstood on the streets of Baghdad that this was in fact his son.

CAFFERTY: An interesting group, isn't it?

BEYER: It is.

What is it about Jordan that they would be willing to provide safe haven to the daughters?

BEYER: Well, Jordan and Iraq have very strong ties. They're very big trading partners. They're neighbors, of course. The royal family of Jordan has long had relations with the ruling family in Iraq, they know one another. And of course, it was to Jordan that the two wives fled in the mid '90s. So I think it makes a certain amount of sense.

SERWER: Lisa, what about the role of women in Iraq? I mean, what sort of a society is it in those terms?

BEYER: Well, it's certainly not -- women are not equal members of society in the way that they are in western countries, but in the context of the Arab world and indeed in the context of the Muslim world, Iraqi women were quite liberated. You find women professionals throughout the society in Iraq. There were women lawyers, even women judges, lots of women doctors. And this was one of the, actually, points of pride of the Ba'athist regime, and I suppose legitimately so.

ROMANS: So, what happens to the women in the Saddam inner circle if a new regime -- you know, takes over and gains momentum, when that happens, I suppose? What happens to them? You know, do they seek asylum somewhere else? Is anybody going to give it to them?

BEYER: Well, our understanding is that the second wife, Samira, is already out of the country along with her sons, who were -- she had with her first husband before she married Saddam. Our understanding is that she's in Beirut, and we're told this by a former secretary to Saddam Hussein, who's been in touch with her lawyer who still manages some of her properties in Baghdad. So, that seems to be fairly decent information as this information goes. There is still the outstanding issue of Saddam's third daughter, Hala. Nobody seems to know where she is, along with his first wife, Samira. But, my guess is that now that the older two daughters -- excuse me, Sajida is the first wife. That the two daughters have wound up in Jordan safely, my guess is that it's likely that the first wife and the third daughter will probably also seek asylum.

CAFFERTY: To what degree are you aware of plans to allow women to participate in the rebuilding of that country, and perhaps the politics, the new government, and just kind of emerge as a force in whatever the new Iraqi society is destined to be?

BEYER: Well, the Americans are very much dedicated to that goal. You see in the various groups that the Americans are putting together, whether it's courts or the governing council or the various ministries that the United States is reconstituting that there is a very deliberate effort to include Iraqi women in that. In those various bodies, there's been a certain amount of resistance. There are, you know, many conservatives in Iraq. There is a big brouhaha going on this week about the appointment of a woman to a court. There will be resistance, and I think -- you know, there will be a tussle and we'll have to see how it comes out.

CAFFERTY: It will be interesting to keep an eye on. Lisa Beyer, foreign editor of "Time" magazine.

Thank you for joining us, I appreciate it.

BEYER: You're very welcome.

CAFFERTY: Coming up on IN THE MONEY, as we continue, the budget sickness that's crossing state lines, we'll look at how money troubles in individual states are starting to affect all of us.

Plus, the hurdle gets higher: Changes in the bond market are affecting what you may have to pay for a mortgage. Find out what that could mean for the housing market.

And, Wall Street without the bull, in a manner of speaking: Sarbanes-Oxley designed to make companies tell investors the truth. One year after the law took effect we'll take a look at whether or not it's working.


CAFFERTY: It wasn't so very long ago that individual states were actually giving the overall American economy a boost. But, the "New York times" reports that that's changed a lot in the last couple of years. Now, many states are running big deficits and that trend is beginning to affect the country as a whole just at the time we're beginning to see some signs of economic recovery. For a look at how state budget problems are turning into everybody's problem we're joined now, by "New York times" business reporter Louis Uchitelle.

Louis, nice to have you with us.


CAFFERTY: How bad is it? Is the nascent recovery, perhaps in jeopardy because of this? I mean, some of these deficits are large.

UCHITELLE: Yes. But the recovery -- the states don't contribute enough -- or the change in the state contribution is not great enough to endanger the recovery by itself. What happens is that it chips away at the recovery and it chips away slowly because the states are very reluctant to cut the spending, which is fine. And they try all sorts of other sleights of hand, if you will, to avoid cutting the spending. They borrow -- you want me to go on or do you want to ask another question?

CAFFERTY: That's fine.


SERWER: Well, I'll ask you a question.

UCHITELLE: All right.

SERWER: How -- I mean, how nationwide is this? How different -- we all know about -- California's in really bad shape. Are there some states -- they must be in much worse shape than others? How does it pan out across the country?

UCHITELLE: Well, California is far and away the worst. It -- nobody quite knows how much cutting there's been because there are so many ways to hide it. But say, it's between 20 and 40 billion a year over the last couple of years, and California probably accounts for half of that, or 12 to 15 billion. If I talk to California officials, they give you different numbers, and they're never quite sure. And part -- you've got to define spending cuts in a certain sort of a way when you're dealing with state spending.


UCHITELLE: It means not just -- just outright cuts, but the failure to keep up with inflation. For example, in Medicaid, that's mostly a state-funded operation, there's matching federal funds, but the outlays go up year to year based on the rising cost of medical care and the rising number of people. In a lot of states, now, that's not happening. And, in answer to your original -- your first question, if you will, there -- just about every state is having this sort of trouble. And it's a spectrum, it depends on -- some are worse off than others, but just about everyone is dragging down the economy, so that if you have state and local spending of over a trillion dollars, which is 20 percent of the economy, and it once was growing at annual rates of 4 percent and 5 percent that was a nice contribution. And now it's not -- it's either not growing at all or growing very little, less than the national economy. So that becomes a drag on the economy.

ROMANS: Tell us about some of these sleights of hands, you -- there's a classic case in Chicago, and it kind of worried me a bit, because then you move beyond this particular economic environment and -- you know, it's almost like fudging the books almost, isn't it?

UCHITELLE: Well, yeah, and they do it quite openly and before I describe some of the sleights of hand, I must say I take my hat off to the people who do it, because the alternative to sleights of hand is to fire people or (UNINTELLIGIBLE) cut the costs.


SERWER: Right.

UCHITELLE: They're stuck with their budget balancing laws, and so in Illinois, for example, in order to balance the budget they put into it a projection of $233 million from the sale of three state office buildings, one of them a very big one downtown. That alone would bring in $200 million, they haven't sold them yet, but it's in the they have to sell it or they have to do something to show income from the sale -- they have to in some way use those buildings to raise $233 million by the end of this fiscal year, July 1st. The idea is to sell it, sell the building, probably lease or rent it back. The other alternative might be mortgage it and keep the building, and if they're very lucky there will be a nice, fat upturn in the economy and other tax revenue will arise and they'll somehow or other manage balance the budget without selling the buildings.

CAFFERTY: How likely is it, in your opinion, that the politicians in the various states may be faced with the most -- their absolute worst nightmare, which is to cut spending? They can forecast rosier than expected scenarios for the future. They can count on real estate sales that haven't happened yet. They can hope the economy -- but at some point to balance the budget they're going to have to cut spending.

UCHITELLE: They are doing that now. They -- we've been sort of producing, for the last two or three years, that this would happen, but they've managed to -- most states have managed to avoid this by drawing down reserves, by doing a variety -- raising taxes, raising fees. But, now they're getting into the process of either cutting spending or not allowing it to rise at the same rate as the inflation rate. And you begin to see this in the school systems, where you have teachers' aides in large high schools are being cut out.

CAFFERTY: It's going to get worse before it gets better, too, isn't it?

UCHITELLE: Well, I -- unless the economy does some -- by some magic turns up rapidly.

CAFFERTY: All right. Lou, I appreciate you coming up by. Thank you for joining us on the program.

UCHITELLE: Thank you for having me on your show.

CAFFERTY: Lou Uchitelle of the "New York times."

Up next on IN THE MONEY, as we continue, a call to action with new problems threatening MCI's bid to break out of chapter 11, we'll look at whether AT&T's getting ready to fight for territory.

And later -- living room: Find out how recent action in the bond market could take the heat out of the red hot real estate business.


SERWER: Time now for our money minute. The sell-off in bonds is sending mortgage rates higher, according to, the average 30-year fixed is at 6.26 percent, up from 5.99 percent last week. We'll talk more about rising mortgage rates later in the program.

Americans aren't as hopeful about the economic recovery as some experts thought. Tuesday's consumer confidence report showed a drop in optimism in July. Economists expected recent stock market gains to fuel a sight improvement in confidence.

And, while the stock market has shown a huge increase over the last two decades, it looks like most investors have reaped little of those rewards. A new study shows mutual fund investors have averaged just 2 1/2 percent gain each year, annually, through 1984 -- since 1984. That's even though the S&P 500 has averaged gains of well over 12 percent per year in that same time frame. Researchers say it's all because consumers typically can't control their emotions enough during booms and busts and end up buying high and selling low.

ROMANS: MCI's plans to emerge from bankruptcy hit a big snag, this week. Rivals AT&T, Verizon, and SBC communications all accuse MCI of rerouting customer calls to avoid paying the other companies' access fees. AT&T's even going so far as to say that MCI is jeopardizing national security by rerouting the U.S. Government's secure phone calls. MCI denies the charges, but Washington is barring MCI from getting any new government contracts, at least for now. The question is if the company's new troubles keep MCI from staging a comeback could AT&T recover from its own financial woes and profit from MCI's problems?

CAFFERTY: Not that I pretend to have any understanding at all of how this stuff works, but how is it that they can reroute somebody else's calls? Seems to me you shouldn't be able to do that. ROMANS: It's like magic.

SERWER: They just hit a button and they were sending these calls through Canada. This is red meat for AT&T, because MCI wiped all that debt off the books and they're coming back strong, they're going to compete with them. Meanwhile, they have this huge problem and the government's not going to give them any business, so AT&T is saying -- you know, pointing fingers -- and saying we're back. But, you look at that stock chart and it is nasty. They had that one for five reverse split. The stock is still way down.


ROMANS: They call this telephone, on the floor of the stock exchange, it's known as the "widow and orphan stock." I mean, this is a company that you know, my grandma, for example, was one of those ladies that said "Number, please." You know, I mean, the people that have held this stock for years and years and years -- you know, have seen retirements and inheritances go to almost nothing.

SERWER: But, you've done well over time, though, Christine. I mean, if you go all the way back, because of course you have the SBC's and the Bell Souths, an all the -- Verizon and all those companies came from it. Then, like you said, Lucent, NCR, Avaya and all these other things, but AT&T, since they've become solo, have done a pretty bad job, but then again, you know, they're in the long-distance business, it's so competitive.

ROMANS: They got rid of all the good stuff.


SERWER: Including their wireless business -- you know, AWE, that's the ticker A-W-W, which is now bigger than AT&T alone.

CAFFERTY: What happens in terms of the kinds of things we're talking about here, where they're stealing each other's phone calls and robbing each other blind? I mean, are prosecutors doing anything about this stuff or do they just let it go on?

SERWER: Well, the government's investigating and you know, MCI says it's all trumped up, but basically, to me it just shows how incredibly competitive this business is. You think about people, Jack using cell phones and what that's doing to the long-distance business. I mean, you just take dollars away from these companies day after day like that.

ROMANS: Government contracts are so important, though, too. You know, I mean, I know that some of these government contracts have passed along between the phone companies back and forth because of the stiff competition; they undercut each other in prices, but the security of these phone calls, I mean, that seems to be like the most important thing.

CAFFERTY: Yeah, I'm a lot older than either of you, and I can remember when they sold us on this idea they were going to break up Bell Telephone and they were going to create all these little regional Bells and then the Bell Labs split off and became Lucent technologies and that was supposed to lead to all kinds of great new innovations. And the competition was supposed to bring the phone prices down, we were supposed to have better service and lower phone bills.

SERWER: There's no question that service is worse. I mean,

ROMANS: Terrible.

SERWER: I agree with you, Jack, I'd like to go back to the old days. It was so much easier. You got one bill, you didn't have all this stuff you have to choose. I mean, who can choose which phone service is better? I mean, it's crazy. And, they make it more expensive...

ROMANS: And you had my grandma saying "Number, please" not "Please press 3."


CAFFERTY: Yeah, plus in the old days they had party lines, you could listen to what your neighbor was talking about.

SERWER: Oh, that's the good...


CAFFERTY: Get right on there find out.


SERWER: That's good. That's good stuff.

CAFFERTY: That's good stuff. All right. Coming up, bond markets sending mortgage rates higher, and that could mean a chill in the real estate market for the first time in a long time. We'll find out if the sky's getting ready to fall on housing.

And, it's been one year since Congress passed tough stock market reporting rules for big companies. Has anything really changed? We'll check it out just ahead. Stay with us.



CAFFERTY: My hunch is we're going to have to do a survey to find out who exactly is watching this program. We had our biggest response ever to last week's e-mail question which was: Should the U.S. legalize the sale of marijuana and tax the revenues? And, as you can see, 95 percent said yes, bring it on...

SERWER: Look at that.

CAFFERTY: ... legalize it. Only 4.3 percent said no.

SERWER: Interesting.

CAFFERTY: Craig in Texas wrote this, "It seems very odd to me the government can spend billions of dollars every year fighting pot use, and the same government can't get a prescription drug program for our seniors. I say legalize marijuana, tax the hell out of it, and then buy some drugs for our seniors."

There you go.

SERWER: It all fits together, yes.

CAFFERTY: Jeff from Minneapolis, one of the very few with an opposing view -- he wrote this, "If we legalize marijuana, can you imagine how many people would be using and how many more tax dollars would then go to state and federal substance-abuse programs? I'm sick of paying for other people's chosen lifestyles."

And speaking of other people's lifestyles, maybe this last e-mail shows that, in fact, some of our viewers should ease up on whatever it is they're using. Responding to our question on legalizing pot, Scott from the Virgin Islands wrote, "What was the question again?"


CAFFERTY: This is all true. We don't make these things up here. We'll have our new e-mail question...

SERWER: That was funny.

CAFFERTY: ... a little later in the program. It probably won't be nearly as provocative, but we're going to ask it anyway. And you can e-mail is at

ROMANS: OK. How's this for provocative? Signs of an economic recovery and a growing budget deficit has sent bond prices falling in recent days.

But, for most Americans, that's only interesting because those falling bonds are sending mortgage rates higher and putting the brakes on the real-estate and refinancing boom. Mortgage rates surged to a nine-month high. The 30-year fixed now topping 6-1/4 percent.

With all that in mind, we thought this was a pretty good time to re-invite John Talbott to the program. John is the author of "The Coming Crash in the Housing Market."

John, welcome to the program.


ROMANS: OK. Is a crash coming? I mean this has been an unbelievable July for the 10-year note. The worst month since 1984. What is -- what signal does that send to the housing market?

TALBOTT: Well, first of all, I was very surprised prize to here you speaking on your show about unemployment. I thought you knew the administration told you that the recession has been over for two years.

So, you know, I kind of felt like I was in -- living in a chapter in the novel "1984" where the people are walking down the street and the speakers are blaring the recession is over, the recession is over, those of you without jobs please return home.


ROMANS: John, you've heard about the jobless recovery. It's a recovery, but it's jobless, right?

TALBOTT: Yes. On the interest rate side, I think the worst is yet to come.

You know, the -- all of these mortgage rates you see are really just combinations of spreads over Treasuries, and the Treasury market has deteriorated even further. The Treasury -- the 10-year Treasury has gone from 3.1 percent to 4.4 percent, and now it's looking like Fannie Mae and Freddie Mac's spreads are starting to widen like 25 to maybe 50 basis points wide.

So, when you add that up and look at where mortgage rates used to be, down in the 5-1/4-percent range, that says that maybe -- you know, we might be seeing 6.5-percent, 6.6-percent, 6.7-percent mortgage rates, and that -- that would have a real, real, real effect.

SERWER: You know, John, you're talking about interest rates. Let's talk about housing. I mean you're talking about this bubble. We've been hearing -- bubble people like yourself have been going on for years. There's no bubble in Pittsburgh. There's no bubble in St. Louis, is there? I mean you're talking about a coastal thing, a California thing. It's a very regional market, isn't it?

TALBOTT: It's the first time I've ever been accused of being a bubble person.

SERWER: Yes, you -- you're a bubble man. You're a bubble man.

CAFFERTY: You've got to get on a better class of show.


TALBOTT: Not to bring statistics into this, but...


TALBOTT: ... Philadelphia, for example -- the latest 12 months ending March 31, they showed a 25-percent increase in home prices. But if you just look at the last six months ending March 31, their housing prices are off 5 percent.

So there's something going on, and it's going on in areas like northern New Jersey, Philadelphia, really about 60 percent of the cities in the country. It just so happens you're speaking to me in Los Angeles, and Los Angeles and San Diego and Orange County are still booming.

CAFFERTY: How much of it has to do with the kind of thing you're talking about, demographics and geography? I mean the areas you mentioned don't represent a significant percentage of the population.

TALBOTT: You're absolutely right. I mean one of the key principles of my book is that traditionally real-estate markets are -- you know, trade regionally because of regional economies.

But I'm predicting that this thing is going to trade off nationally because of problems in the underlying mortgage market and that interest rates are national phenomenas, and we're seeing that the highest foreclosure rates are in places like Indiana.

So what we'll see is as rates increase -- and, as I said, it might have already gone from 5-1/4 percent to 6-1/4 percent. If they start pushing 7 percent, you could think of that as a 30-percent increase in the level of interest rates.

Well, when a young married couple walks into the bank, guess what, they're going to be offered 30-percent less money to go buy a home with.

ROMANS: John, I bet you're like a doctor when you go to the neighborhood barbecue. People pull you aside and say, OK, listen, I think I can get 5-1/2 percent on a $600,000 mortgage, you know, should I do it now.

OK. So this is what everyone wants to know when they're talking about interest rates and they're talking about, you know, is that it, is the window closed? But is it still a doesn't time to get mortgages?

I mean, remember, last year, we had some 6-percent yields -- 6- percent mortgage rates as well, and, you know, a lot of people here remember buying houses at 18 percent.

TALBOTT: Right. I saw some numbers out of Countrywide Credit, and they're reporting their refinancings might be off 30 percent. That was when rates were just starting to tick up.

I think the refinancing business is done. It reminds me of when NAFTA passed and Ross Perot said -- talked about that great sucking sound of jobs leaving the country and heading to Mexico.

Well, now I think that great sucking sound is a vacuum cleaner at the mortgage brokers around the country as it picks up all those loan applications where people were trying to refinance at 5-1/4 percent, and they're finding out, no, it's really 6.5 percent, 6.6 percent.

SERWER: Hey, John, how about those people who took equity out of their homes when they refi? Are those people up the creek?

TALBOTT: Well, if they put, you know, 90-percent, 95-percent debt on their homes -- and we're right that interest rates going up have an effect on home prices -- then what happens for the first time in a long time in this country is home prices end up being less than the amount you owe the bank, and that's a very bad position to be in. That...


TALBOTT: That hurts labor mobility tremendously because people can't take jobs, they can't move to new locations easily and get out of their homes.

CAFFERTY: John, we're going to have to leave it there. I appreciate your time and your insight on IN THE MONEY this week. Thank you for joining us.

TALBOTT: Thank you very much for having me.

CAFFERTY: All right. John Talbott wrote "The Coming Crash in the Housing Market."

Still ahead as we continue, straight talk for Wall Street. A year after the Sarbanes-Oxley Act, we'll look at whether it's cutting out the funny numbers in the corporate financial statements.

And you call that a raise? We'll tell you how the average American pay hike shapes up against what they were getting in previous years.

We'll be back.


Mortgage Rates Weekly Rates 30-year-fixed - 6.26 percent 15-year-fixed - 5.59 percent 1-year adjustable - 3.91 percent Source:



CAFFERTY: Two of Wall Street's top banks this week agreed to pay millions of dollars to settle allegations about their role in the Enron fiasco. Citigroup, J.P. Morgan Chase handing over a combined total of $255 million in fines. That settlement comes a year after the Sarbanes-Oxley Act kicked into effect.

That bill was designed to raise the governance standards at U.S. publicly traded companies. "Wall Street Journal" reporter Kate Kelly is with us now for a look at how well Sarbanes-Oxley is or isn't working one year later.

Welcome. Nice to have you with us.

KATE KELLY, "THE WALL STREET JOURNAL": Thank you. Nice to be here.

CAFFERTY: It's probably too early to get the final jury verdict in on this. But, with a year under their belts, what do you think?

KELLY: I think you made a good point to start out with. I mean it is a bit early to tell how the thing is working. But a few early thoughts. There's been quite a lot of grumbling and grousing in corporate America. I mean essentially they hate it. I was looking at...

CAFFERTY: Well, that's a good sign, right?


CAFFERTY: If they don't like it.

ROMANS: If Wall Street hates it, it must be good.

KELLY: Yes, it might be a pretty tough set of reforms. Yes. I mean there's a poll that I was looking at this morning from the law firm, Foley & Lardner, where they basically pick apart every aspect of the act.

I mean they say their corporate boards were just as effective before Sarbanes-Oxley as they are now, it's increased costs, they don't necessarily think it's helping investor confidence. They don't like the way the SEC is interpreting it. So they're not thrilled.

In terms of what it's doing for investors, I also think it's early to tell. I think there is a lot of good, new information. I think a lot of people have latched on to the certification issue that CEOs and CFOs have...



KELLY: ... to certify results as something to to watch for. But I think we still need time for the SEC to interpret.

ROMANS: I think there's some skepticism, too, because when you read Sarbanes-Oxley -- you know, it's scintillating, Jack. You should take it home tonight and have a look at it.

CAFFERTY: I have it on DVD.


ROMANS: Yes, exactly. You know, there's this "knowingly and willfully" little commentary in there. You know, I mean, there's concern about loopholes or who's going to be the first one to be prosecuted. There really only is Health South, right?

KELLY: That's right. That's a key point, I think. In the last year, the only company that we know of that's actually been sanctioned for not following the certification rules is Health South, and they have been charged by the Department of Justice. They've also been sued by the SEC -- I should say some of their former officials have been -- for certifying to inaccurate results.

Now there could be...

ROMANS: Not their top guy. That was interesting as well.

KELLY: Correct, correct. He's been sanctioned for some other things. But, yes, I mean there could be other cases in the works that the Department of Justice or the SEC are pursuing, but, so far, we don't know what they are, and it almost appears as though they're not cracking down on folks who haven't certified.

SERWER: All right. Well, let me ask you about that, Kate. I mean Qwest -- those guys didn't sign. And a couple of stars, Gem and Foot, right?


SERWER: Gemstar and Footstar, dim stars. How come those guys weren't sanctioned?

CAFFERTY: Dim stars.

ROMANS: So clever.

KELLY: I hear you. This is interesting. I just checked Footstar, actually, before we started chatting, and they have not filed a financial report of any sort with the SEC since last August.

SERWER: So how come they're not getting spanked?

KELLY: Well, they are subject to an informal inquiry from the SEC. They are in the process of reviewing their accounting for the last couple of years, and they basically don't have accurate results to certify.

SERWER: Wow. That's a nice trick.

ROMANS: So why aren't investors running in the streets angry? Have we gotten over it? I mean, you know, we were mad about it a year ago. Now the stock market's up, so, hey, I'm not so concerned about what's going on in corporate America because my 401(k) is positive.

KELLY: I think that's possible.

I think another thing that I've bumped into in -- simply in reporting on this is there's not like a central clearinghouse of information, for example, on certification. I mean you have to have a sense of what companies you're interested in and look them up individually.

The SEC actually recently codified how the certification is going to be presented in 10Ks and 10Qs, but, so far, there's nowhere to easily check as to what's going on. CAFFERTY: I -- I wonder, too, how much what Christine says a little bit in jest isn't absolutely the case, that we were outraged when we were all losing money.

SERWER: Yes, that's right.

CAFFERTY: And now the market's up. The NASDAQ's up 30 percent. It's like, hey, I'm making 30 percent back on my investment, I really don't care that much.

Six hundred days have passed since the Enron story. There's one guy in jail. We've got Tyco. We've got WorldCom. We -- I mean there's a laundry list with executives associated with these companies.

They're all still out there sailing their yachts around Nantucket or wherever they are and living high on the hog, and probably laughing out loud at a system that seems powerless to do anything aggressively against them, albeit, I guess, some investigations are continuing.

But the perception is this is pretty much a toothless tiger, all this government talk.

ROMANS: And the small companies are the ones who really get hurt because they have to pay so much more for the lawyers and the accountants, and you hear companies saying they're going to go private or, you know, it's costing them four and five times as much for their auditors. So it's the small guys who maybe didn't do anything wrong in the first place who get hurt.

KELLY: Although just to play devil's advocate, I know there's been a ton of grumbling in the executive suites, but I checked this out. Privatization is not happening at this rampant rate.

I mean, so far this year, there have been 40-some companies that have said they're going private. That's exactly on par with last year, and it's actually lower than the year before.

ROMANS: Really?

KELLY: And directors' and officers' insurance premiums have definitely gone up, and that could be an issue.

Another thought was that class-action suits are suddenly going to be over the place with shareholders suing companies.


KELLY: Not so. Not so far. So -- some of this could be just a lot of sermon (UNINTELLIGIBLE).

CAFFERTY: All right. We'll get you back here next year, and we'll do the second anniversary of Sarbanes-Oxley.

KELLY: Sounds good.

CAFFERTY: Thanks, Kate.

Kate Kelly, reporter with "The Wall Street Journal."

Just ahead, are you happy with your raise this year, monkey? Did you even get one? We'll look at the nationwide trends. It's not a whole lot of money either. And you can let us know how you think we're doing. The e-mail address is

And before we go to the break, Andy Serwer's going to give us a lesson on stock fundamentals in this week's "'Fortune' Fundamentals." Pay attention now.

SERWER: You probably heard that taxes on dividends are being cut, and that, some pundits say, makes stocks that pay dividends more attractive.

So what does it mean when someone says that a stock has a certain dividend yield? Well, that's simple. Think of the dividend yield just like the yield on your money market account or CD.

Here's how it works. A stock's dividend yield is simply its dividend as a percentage of the stock price. Give you an example.

General Electric currently pays an annual dividend of 76 cents a share. GE's stock trades for around $28. The 76 cents is around 2.7 percent of the $28. So GE's stock has a dividend yield of 2.7 percent, which isn't bad if you compare it to a savings account these days.

A nice solid dividend yield is a positive thing because it means you're getting paid while you're waiting for your stock to go up.

Be careful, though, of stocks with very high dividend yields. These are companies where the dividend may be in jeopardy, and the market is sending you a signal that this is a risky situation.



DEEPAK CHOPRA, CHOPRA CENTER: If you know how much money you have, then you're not rich. And, if you have no concern about it, then you're very rich.

UNIDENTIFIED MALE (voice-over): Deepak Chopra certainly has no concerns. He has made his millions marketing the intangible.

Through the creation of the Chopra Center and being published on every continent in dozens of languages, Dr. Chopra emphasizes what he considers a crucial connection between body, mind, spirit, and healing.

His own inner journey took him from a career as a respected endocrinologist to what "TIME" magazine heralds as the poet prophet of alternative medicine.

CHOPRA: Learn to experience your own soul or spirit, if you will.



SERWER: Unemployed Americans can console themselves with this thought: At least they're not being underpaid.

Two new surveys show the average American worker only received a 3.3-percent raise this year. Usually, the rate is above 4 percent, and the numbers haven't been this low since the mid-1970s.

Next year, the top companies say they expect to hand out slightly better raises of 3-1/2 percent. That's measly.

CAFFERTY: But that's a little misleading. I mean what was the inflation rate last year?

SERWER: It was around 1, right?


SERWER: One and a half.

CAFFERTY: Right. So it's a...

SERWER: That's the important thing, right, is the gap.

CAFFERTY: So it's 2 points above inflation. I mean that's...

SERWER: Yes, but now it's about 2-1/2 percent, right, Chris, the inflation?

ROMANS: Right. I mean...

SERWER: So the gap is closing.


ROMANS: I guess you can console yourself that at least you have a job. I guess when everyone's so worried about losing a job, employers have the ability to say, hey, take what you can get.

CAFFERTY: Good point.

SERWER: And I'll tell you something else. I got a pay cut a couple of years ago, and that really hurts, and a lot of people...


SERWER: Yes, of course. How could you tell, Christine? Thank you. Thank you for coming on the program.

CAFFERTY: Well, based on the way...

SERWER: And I understand. CAFFERTY: ... you've been performing here, you may get another one.

SERWER: You know, I hope the bosses are watching this program, are they?


SERWER: Well, no, that is...

CAFFERTY: It's Saturday afternoon.

SERWER: I mean this kind of stuff you can't plan. You get no raises. You get your pay cut. You know, your kids' cost of college edu -- I mean all these things reek havoc...

CAFFERTY: Oh, I know.

SERWER: ... on the family's finances.

ROMANS: You know -- and services are going up. Medical services. And think about, you know, what it costs to go to a doctor or the hospital, I mean, for the things that are really needs in life, not wants in life. These are things that are going up, even as everything else is stagnant.

CAFFERTY: A tiny example. My 22-year-old daughter graduated from college in May. That means she's no longer eligible for health insurance on the group policy I have here as -- you know, so I have to put her on something called a COBRA plan. She's 22 and in perfect help. Costs me almost $300 a month because she hasn't found a job yet...

ROMANS: You're kidding.

SERWER: Wow. Yes, she's got to get a job.

CAFFERTY: ... that has benefits.

SERWER: She's got to get a job.

CAFFERTY: No. So I mean -- you know, the point about things you've got to pay for is well-taken.

All right. That brings to us the e-mail segment of the program once again. Our segment about the possible beefing up of military forces.

Rob wrote this, "Frequent deployments have so undermined the attractiveness of military service that a draft may be necessary. As we learned the hard way during the ramp-up before World War II, our national defense is neither option nor ad hoc."

On our segment about Sam Waksal's arrival at federal prison, Cathy from Michigan wrote this, "I've worked in the prison system, and I can tell you Waksal will not be put in with a bully. He'll be in with people of a similar class. He'll be -- it'll be a peace of cake for him."

Time now to ask our new e-mail question of the week, which is this: Does the United States' friendship with Saudi Arabia hurt us more than it helps us? And you can send your answers to, and we'll pick the best ones and read some of them next week.

That's it for this edition of the program.

As always, thanks to my friends here on the panel. Christine Romans of CNN Financial News. Andy Serwer of "Fortune" magazine.

Join us next week, 1:00 Eastern on Saturday, 3:00 Sunday. And if you think this is fun, check out "AMERICAN MORNING," weekday mornings from 7:00 to 10:00 Eastern, here on CNN, the most trusted name in news. Have a good weekend.


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