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CNN IN THE MONEY

Critics Say Saudi Arabia Stabbing America In Back; Starbucks On Growing Binge; Is Homeland Security Tought Enough?

Aired September 14, 2003 - 15:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

ANNOUNCER: From New York City, America's financial capital, this is IN THE MONEY.
JACK CAFFERTY, HOST: Good afternoon. Welcome to the program. I'm Jack Cafferty. Coming up on today's edition of IN THE MONEY: Good friends or bad company? Critics say the Saudis are making nice to Washington while stabbing the United States in the back. We'll look at whether they're really committed to fighting terrorism.

Also ahead today, watching the watchdog: The Department of Homeland Security is winning a few and losing quite a few. We'll find out if it's tough enough to stop a terror attack on the United States.

And the bottomless cup of coffee: Starbucks has been growing for 140 months in a row. Not many businesses can say that. We'll see whether that's turned into grande income for investors or not.

Joining me today, as always, a couple of our regular couch jockeys. CNN correspondent Susan Lisovicz, "Fortune" magazine senior editor at large Andy Serwer.

ANDY SERWER, "FORTUNE" MAGAZINE: Where's the couch?

CAFFERTY: Uh?

SERWER: There's no couch. Where's the couch?

CAFFERTY: Well, we're going to get a couch.

SERWER: We should actually get a couch.

CAFFERTY: Actually the couch is over there.

SERWER: Oh, OK.

SUSAN LISOVICZ, CNN CORRESPONDENT: We will be using a couch.

SERWER: All right.

CAFFERTY: This last week, we marked the second anniversary of the terrorist attacks on September 11, 2001. The stock market since March has been anticipating an economic recovery. I'm -- I'm just wondering whether or not the effects of that horrible day are still not in this economy at least to a degree. What do you think?

SERWER: Well, some people would suggest, Jack, that we've recovered -- you know, economically, even with the war that we're pursuing, and you know, they can -- they've got a pretty good argument. On the other hand, the psyche has not.

I was down in Texas on 9/11. I was flying around. I flew back from Houston to New York and people were glued to their TV sets. People were talking about 9/11 -- very, very powerful stuff. So on the one hand, the country's over it. On the other hand, they're not -- kind of an interesting dichotomy.

LISOVICZ: Yeah, the world has changed. I happened to be down by ground zero on the anniversary, and the wounds were reopened as if they ever healed, perhaps, but there's no question that we're -- our world has changed, and it has changed economically. The war in Iraq is something that would not have occurred, it's a billion dollars a month. There's still -- the economy is still just stuttering along. We are seeing some encouraging signs, but I don't think the airlines have completely recovered. And we have a deficit.

CAFFERTY: Huge deficit. One of the reasons expressed for the economy, perhaps not growing any faster, is this caution on the part of business, in particular, to commit large amounts of money to capital spending or begin hiring new workers, even though there are some very solid signs of economic recovery, there's still that very cautious approach to committing new capital on the part of business, and I wonder if some of that isn't rooted in September 11.

SERWER: And, you can feel it personally, too, Jack, sometimes, particularly here, living in New York City. You know, should I commit to buying this new house? Should I do this, do that? Should I do that? What's the world like? What's the future hold? That weighs on people's individual psyches and companie's balance sheets and future plans, as well.

LISOVICZ: No question. The restraint is still there.

CAFFERTY: All right. For President Bush, moving on to other things, it must seem like a bad dream at times. Osama bin Laden keeps popping up on television and the United States seems, at times, no closer to catching him. The al Qaeda mastermind still out there somewhere, we think. What appears to be the latest bin Laden sighting came in the form of that videotape that surfaced in the middle of last week. CNN's Mike Boettcher joins us now from Atlanta with more on what that tape may or may not tell us and perhaps even more importantly, Mike, what it may or may not communicate to bin Laden's followers.

Nice to have you with us, by the way.

MIKE BOETTCHER, CNN CORRESPONDENT: Well, thanks a lot, Jack. Certainly it was part of al Qaeda's information operations campaign. You talked about the uncertainty whether the Americans have gotten over the attacks of 9/11. They want to keep this boiling at the top of the agenda in the United States, so they keep issuing these threats. Now, it had been 17 months since we had seen the al Qaeda leaders in a videotape. The question about the videotape is when was it made? It showed both bin Laden and Ayman al-Zawahiri on -- it looked like a picnic up in the mountains on a volksmarch with their canes, wandering around looking healthy. That tape is being analyzed to find out when it was actually made. We do know through our sources that the coalition is closing in on where bin Laden is in an area about 150 miles southeast of Kabul. He is supposedly there with Ayman al-Zawahiri, his No. 2 as well, the problem is it's in Pakistan. So, as this year comes to a close we should see more operations in the area on the border to try to get to bin Laden, but it's going to take Pakistani cooperation, as well.

In terms of the audio on that videotape, bin Laden didn't say much. There was no time reference. The CIA cannot completely confirm that it was his voice. But, they can confirm it was Ayman al- Zawahiri, and he was very, very threatening, saying basically --you haven't seen anything yet. What the attacks are that are coming will be much greater than the attacks on 9/11. And, then a day after that the State Department issues a global alert, saying that al Qaeda is striving for more serious attacks and that they could possibly want to use chemical or biological weapons in those attacks. S,o certainly another week of pins and needles. It ended that way, and it will continue on in the coming weeks -- Jack.

CAFFERTY: And, if nothing else, it's just very unsettling, I think, to see him walking around and hear those voices. It just brings back a lot of bad memories, perhaps that was their intent all along.

CNN's Mike Boettcher joining us from Atlanta. Thanks, Mike.

BOETTCHER: You're welcome.

CAFFERTY: As the nation marked the second anniversary of those attacks of September 11, questions remain about the role of Saudi Arabia in the global fight against terror. "Time" magazine takes a revealing look inside the kingdom in its current issue. And joining us now is Lisa Beyer, foreign editor of "Time" and an expert on terrorism and Islamic extremism.

Welcome, nice to have you with us.

LISA BEYER, "TIME" MAGAZINE: Nice to be here.

CAFFERTY: The hypocrisy of the American relationship with the Saudi family is breathtaking. We had a guest on this program, yesterday, saying that the Saudis have contributed 87 billion -- with a "B," dollars to the building of the infrastructure used by groups like al Qaeda to recruit terrorists. They continually tolerate the preaching of the Islamic fundamentalists who teach little children to hate the United States and their country, and yet the United States, Washington, D.C., the Bush administration continues to call them "our friends."

Who's lying here, and by how much?

BEYER: Well, it sounds like you could have written our cover story.

CAFFERTY: (LAUGHING)

BEYER: It's very much along the lines of our own reporting. Who's lying? Well, I don't think that the bush administration can make the argument or has even made the argument that Saudi financing has not been extremely critical to the al Qaeda network. Certainly everybody recognizes that. I don't think the bush administration can make the argument that Saudi ideology is very much the basic ideology of al Qaeda extremists and that -- you know, kids who grow up in Saudi schools and individuals who go to Saudi mosques and even Muslims or non-Muslims in the rest of the world who are exposed to Wahhabi, that is to say, Saudi missionizers, can't help but get the message that non-Muslims are to be hated, if not actually acted violently against. But the Bush administration's position has been that it's better to try to work with the current royal family and at least moderate its ways instead of risking alienating them.

I wish I could say that this is a policy that the Bush administration and other administrations have come to purely out of political pragmatism, but it's not. We all know that we rely on Saudi Arabia, to a great extent, for its oil. But, I think we have to remember that there's an at least equally important factor, which is the way the Saudis have thrown money around in this country, giving massive donations to presidential causes, to presidential libraries, to the causes of first ladies. After presidents have been in office or -- not just presidents but ambassadors, various cabinet ministers, putting them on boards with very lucrative deals boards of companies that are related to Saudi Arabia. And this accounts for the situation we're in.

SERWER: Lisa, let me ask you, terrific article, by the way.

BEYER: Thank you.

SERWER: You know, I'm reminded of General Patton at the end of World War II when it was winding down, the Germans were beaten and he took a good look at the Russians and he kind of said, "You know what, I kind of think we're going to be going after them at some point." Aren't we ultimately going to have to confront the Saudis? And, you know, there are some maybe radicals, here in the United States, who suggest maybe we invaded the wrong country. I think you touched upon that in your piece, didn't you?

BEYER: Yes, I did. I think that -- my personal opinion is that yes, in one way or another we've got to confront the very basic problem that Saudi Arabia practices a form of Islam and exports a form of Islam, this is one of the things that our cover story really documents chapter and verse, it exports this Islam and it's a form of Islam which instructs Muslims to hate us. I mean, people say why do they hate us? Because they're taught to.

LISOVICZ: Lisa -- OK. So, the Bush administration has made -- believes that the unknown is scarier than what it has to deal with,

BEYER: Right.

LISOVICZ: And, President Bush has sat down with Crown Prince Abdullah with the hopes that this terrorism could be curtailed...

BEYER: That's right.

LISOVICZ: ...that this Islamist nature could be moderated, somewhat. Is there any sign of that happening, anything at all?

BEYER: Well, yes. The short answer is yes. Since may 12th, when al Qaeda actually struck for the first time in Saudi Arabia, attacking three different housing complexes and killing a score or more of people, the Saudis have actually waged, what they call, their own war on terrorism. They are going after al Qaeda cells, they are disrupting them, they are arresting them, they are knocking doors down, they are killing people. In this respect they're going after the threat which has acted against them. Something that -- but it's important to remember that after September 12 -- excuse me, September 11, although our other allies went after al Qaeda cells immediately and started uprooting them, even if those cells weren't plotting against them, this is something the Saudis didn't do. So it remains to be seen whether the Saudis are only interested in protecting their own kingdom, whether they're only interested in preventing terrorism within their own borders or whether they're going to really sign up for the global war on terror and a tenet of that campaign is that you have to fight terrorists wherever they are and wherever they may be plotting to strike.

CAFFERTY: It's kind of a takeoff on that old phrase NIMBY, "not in my back yard." All of a sudden the bombs go off in Riyadh and the royal family has a little different view of things. Do you think it's enough to affect a sea change in the way they deal with the cancer that is terrorism that grows unabated inside their country?

BEYER: It has effected a sea change in their willingness to go after sleeping cells within their own kingdom. But, there are some other important considerations that have not yet, really been sufficiently addressed. One is the extent to which Saudi money finds its way to terrorist organizations outside of Saudi Arabia. And what American investigators will say is that they've seen a lot of improvement in the Saudi cooperation, but that they'll get to certain points in the investigation where the Saudis will go no further and their suspicion is that the Saudis are protecting members of the royal family. And then again, you get to this ideological issue.

The Saudis have said that they're going to revise their schoolbooks and take out incitement to hatred and incitement to violence among -- toward non-Muslims. They say that they have instructed their imams to stop preaching violence and hatred toward non-Muslims. And we've seen and we report in our cover story that this has had some effect, but as even the American ambassador to Saudi Arabia told us, and he's actually quite positive about Saudi counterterrorism cooperation, what you're finding is the preachers in the mosques are giving relatively mundane sermons and at the very end they'll slip in, you know, and Allah, we pray to you to destroy the infidels.

CAFFERTY: Lisa, it's a great piece. Thank you for joining us. I appreciate having you on the program. We'll talk more in the future.

BEYER: Thank you.

CAFFERTY: Lisa Beyer, foreign editor of "Time" magazine.

Coming up on IN THE MONEY: Hard times in the hot seat. Tom Ridge's Homeland Security Department up against a world of trouble. Find out whether Ridge and company are making you as safe as you ought to be considering what you're paying to fund that monolith.

Also ahead, Starbucks and your bucks: See if the company that taught America to say latte could give your portfolio a little caffeine shot.

And counterculture meets corporate culture: We'll tell you about the supermarket chain that's keeping both the suits and the tree huggers blissfully happy.

(COMMERCIAL BREAK)

CAFFERTY: Mention the Department of Homeland Security and most of us think of that roll of duct tape gathering dust in the closet. I actually never bought any, but a duct tape thing was pretty dumb. I think we'd all agree on that. But, Tom Ridge and the little department that could or hopes it can, actually have done some things to make our country safer. Improving airline security is a big example.

But, the department is still short on money, short on prestige, and short on support. And, depending on who you talk to, their not exactly long on results, either. For more on all of this we're joined by "Washington Post" national reporter John Mintz from the nation's capital.

John, nice to have you with us.

JOHN MINTZ, "WASHINGTON POST": Thank you.

CAFFERTY: What kind of bang for the buck is the taxpayer getting when it comes to the Department of Homeland Security?

MINTZ: We're getting some bang for the buck, but we could be getting a lot more. You're right that the Department of Homeland Security, six months old, has made some accomplishments in making us safer, making airline travel safer is one of them, addressing problems with shipping containers that enter our country is another one, but there are many, many things they're failing to address. The main reasons are severe understaffing and undercapitalization in many of the tasks that they're undertaking as well as some serious disorganization at the top that has hobbled their ability to address these important jobs.

LISOVICZ: Doesn't -- John, doesn't the Homeland Security Department have its -- sort of the cards stacked against it? In other words, you have these fiefdoms known as the CIA and the FBI, and they really don't work well together, they're just not playing well together.

MINTZ: That is precisely right. These are proud agencies of our government that are devoted to doing their jobs and protecting their turf, and along comes this new agency created by are Congress and the White House sort of reluctantly went along. Organizations like the Department of Defense, CIA, FBI, and the Justice Department do their own thing, and in some ways do cooperate with the department and in other ways somewhat drag their feet behind the scenes and are somewhat dismissive.

SERWER: John, why don't we take a step back? Because I'm a little curious to know, exactly what is the Homeland Security administration? I mean, you know, what is their mandate? How big are they? How many people work there? What's their budget? Can you spell that out a little bit?

MINTZ: They have a -- this new department has a budget of about $36 billion. There are 170,000 people who work there. It is a combining of 22 separate agencies, a number of them are well known to us -- the Coast Guard, the Customs Service, the former INS, which has been broken up, the Secret Service, and a lot of other organizations which have, incidentally a lot of other jobs besides countering terrorism to focus on, too.

They -- they really -- it was an incredibly difficult task asking Tom Ridge to bring all these people together and to reorganize them in the biggest government reorganization in 50 years since the Pentagon was created and at the same time to undertake the extraordinarily hard job of trying to prevent actions by a secret cult like al Qaeda, it's a thankless job.

LISOVICZ: Yeah, and that job is headed by Tom Ridge, who has become something of a lightning rod. Civil libertarians, for instance are up in arms about him. How is he doing and what kind of support does he have from the White House?

MINTZ: He, I think, by most accounts, people on the inside of the government believe that Tom Ridge is working extremely hard and is very focused at his job and is quite effective in trying to create a new culture at his agency and trying to create some momentum and reaching out to the public and various constituencies. He gets really only mixed support from the White House. Now, the White House says, "Oh, no, we support him absolutely, 100 percent." But, in some respects there are people in the White House who snipe at him and who think that he has not brought together his management team, a very lean management team...

CAFFERTY: John...

MINTZ: I will add...

CAFFERTY: Excuse me for interrupting. I got -- I'm out of time, but I want to ask you one last question, here. Did you get any sense, while you were working on the story, that anybody is going to do anything concrete to extract a higher performance and a greater pay pack for the taxpayer investment from the Homeland Security or -- Department, or is it just going to be status quo and we'll go along and kind of take what we get there?

MINTZ: It's not going to be status quo, whatever we get. It's very dynamic. They're constantly shifting and moving and reorganizing and whether it's for good or whether it's useless, we'll know in a few months or a year. But, it's not going to be the same. It's quite a fast-changing agency.

CAFFERTY: All right. Good stuff. Thank you, John, for joining us. I appreciate it.

MINTZ: You're welcome.

CAFFERTY: John Mintz, national reporter for "Washington post" in the nation's capital.

Still ahead on IN THE MONEY: Cafe society. The world's on a coffee binge and that means big business for Starbucks. Find out whether the stock could kick start your portfolio.

Plus, sleazy does it: Americans getting more and more comfortable with being less and less honest. We'll look at the boom in cheating from the classroom, to the corporate boardroom, to the conference room.

And honestly, we'd like to know what's on your mind. Well, we think we would. We change our minds somewhat after we read the mail. But, at this point we think we want to know. Send us an e-mail at inthemoney@cnn.com. Back after this.

(COMMERCIAL BREAK)

LISOVICZ: Now let's look at the top stories of the weekend in our "Money Minute." It took about two years, but there's finally someone going to jail in connection with the Enron scandal. Former Enron treasurer, Ben Glisan, pleaded guilty to criminal conspiracy this week and the judge sentenced him to five years in prison.

The nation's biggest record companies have begun legal action against thousands of people they say have downloaded music illegally. The company has filed 261 lawsuits on Monday, including one against a 12-year-old girl that they settled a day later for $2,000 out of her piggybank. Just made that last part up.

Mortgage rates eased off this week, sending homeowners running back to banks to refinance. Applications for those refinancing soared 45 percent, but mortgage bankers are expecting things to slow down over time. Reports say mortgage lenders will cut more than 150,000 workers in the next six months.

CAFFERTY: And, Susan, another big story this week: The growing controversy over New York Stock Exchange chairman, Dick Grasso and his enormous package -- pay package. Joining us now with the latest on this story, CNN financial correspondent Christine Romans.

Christine, we keep hearing calls that this is just ridiculous. Ironic that people on Wall Street are complaining about somebody making too much money, but there's a growing chorus saying this just ain't right.

CHRISTINE ROMANS, CNN FINANCIAL CORRESPONDENT: You're absolutely right, Jack. That's what we're hearing. And the fireworks in the stock market, this week, having nothing to do with blue chips and techs, all about NYSE chairman, Dick Grasso.

Now, we knew about the $140 million payout announced a couple weeks ago, now more cash and more questions. Grasso was entitled to another $48 million, which he said he will forgo. Now, at the request of the SEC, the Stock Exchange released some 1200 pages of documents pertaining to Grasso's pay over the past few years. A pile of data, an SEC source, characterized to me as a "document dump."

Now, among the details: Grasso's total pay climbed from $2.2 million in 1995 up to about $6 million in '98, and then look at the boom time 1990s, in the end. More than $11 million in 1999, almost $22 million the next year $26 million in 2001, and $12 million last year, and that doesn't include at least two $5 million retention bonuses, two years in there as well, that he said he's giving up. Now, that's a lot of money, Jack for a regulator, but Grasso defended his pay this week, saying much of his job is that of a businessman, as well.

(BEGIN VIDEO CLIP)

DICK GRASSO, NYSE CHAIRMAN: More than two-thirds of the companies that we are today, privileged to trade, have joined us in the last 13 years, and so it is both, and it is both that we are very proud to do on behalf of America's 85 million investors.

(END VIDEO CLIP)

ROMANS: Still, the sheer size of this pay has infuriated some NYSE members, who said, Jack, they had no idea how much their chairman was being paid. Grasso, last year, Jack, earned about $250,000 a week.

CAFFERTY: Oh.

ROMANS: More in one week than the SEC chief or the fed chairman earns in a year. Now, he's paid more in line with financial service company CEOs, and depending how you read the documents in this five- inch stack of material the NYSE sent to the SEC, he may have even surpassed many of the financial services CEOs in his peak earnings years -- Jack.

CAFFERTY: How tough was it to get in and get a look at this 1500-page document? I mean, did you get like one of those embossed invitations special delivered with a dozen roses to your door or exactly how did they work that?

ROMANS: Well, it was interesting because Carl McCall, who runs the compensation committee said -- you know, they wanted to -- sort of quipped, they wanted to save some trees, you know, they weren't going to make copies for everyone of these 1200 documents, they were going to have it -- you know, in a room at the Stock Exchange, you could make an appointment, two hours to come look at it.

CAFFERTY: Two hours -- read 1500 pages.

ROMANS: Well, yeah -- you know, so this is actually part of the problem. A lot of people are saying in terms of the strategy from the Stock Exchange to do this, you're going to have stories every single day about the revelations in those pages because reporters keep having to go back over and over and over and dig through it.

You know, a lot of folks are saying -- why didn't the Stock Exchange just put all this information out back when it was $140 million pay package a couple weeks ago, and you might have this thing over by now. And another question, another reason why people think this story is going to go on forever, is because there are other top executives at the Exchange, those documents suggest, are paid about a million dollars, and they don't outline what their bonuses were. So, some of the members are grumbling, you know, you could have a situation where the top management of the New York Stock Exchange together, their earnings exceeded the actual earnings of the exchange, some of those years. That's what some people are betting on.

CAFFERTY: To be continued no doubt.

ROMANS: Sure, Jack.

CAFFERTY: Christine, thank you. Christine Romans, who covers the New York Stock Exchange.

The other part of this story that's interesting to me, is taking a look at who decided he was going to get all this money.

LISOVICZ: And where they were, what they were doing. You've got some public protestations now saying that they really weren't aware of the extra $40 million, of all the perks. Well, why not? I mean, these are very smart people, a lot of them coming from Wall Street, where excessive pay packages are the norm.

CAFFERTY: So, Andy, there's a bit of a conundrum, here. On the one hand people think there should be accountability because it's the New York Stock Exchange, and they trade public -- shares of publicly traded companies.

LISOVICZ: And regulate them.

CAFFERTY: But in reality, it's a private enterprise down there.

LISOVICZ: Not for profit.

CAFFERTY: Yeah.

SERWER: It is a mixed beast. I mean, but the bottom line is the NYSE has been secretive, the people who work there have been vindictive to reporters, to floor brokers, to other people trying to get information. You can see their attitude toward the SEC. And I think Dick Grasso has been getting in touch with his inner pig.

CAFFERTY: Woo.

SERWER: And I'll tell you what, I don't think this looks good at all and you wonder -- how can this guy lead the NYSE -- you know, at a time when people are so concerned about openness, so concerned about conflicts of interest, and so forth. I really think that this guy's got to really look at leaving.

LISOVICZ: And just a quick note before going on to our next subject, is that there is a -- right now, a letter -- a letter to change the constitution. This is something that really could be a landmark because there's a lot of fear on the floor. Typically, you never say anything against the chairman of the New York Stock Exchange. The fact that there are over 100 signatures right now -- I believe it's 700, that need to be signed.

CAFFERTY: All right guys. We have to leave it there. Speaking of stocks, our stock of the week someone of those companies that just seems to defy logic in its success. Starbucks Coffee posted its 140th consecutive month of sales. How many years is that? Growth at stores open at least a year. Now the company is expanding its food menu and preparing to offer coffee at several national banks.

Starbucks shares are up almost 50 percent in the past year and there seems to be no end in sight.

LISOVICZ: I think that's a problem, though, right? For Starbucks? They're going -- now they've made this deal with a bank to go in all these banks, several hundred banks? Who hangs out at a bank any more? Don't you just go to your ATM, use your debit card?

SERWER: I don't think it's a problem. I think this company -- every once in a while there's one of these retail operations that comes a long. Every one's always saying, what's the next McDonald's? Hey, Starbucks is the McDonalds, and has been for the past decade.

CAFFERTY: Tell me though, what's the secret to what they do? We kid around about this. I make jokes about it all the time, that they can sell you a 20 cent cup of coffee for $3.50 and you're only too happy to wait in line and put your money on the counter and be waited on by some indifferent counterclerk and walk out, having in effect been ripped off. If you look at how much it costs for a cup of coffee. And yet, they've created this cache somehow. How did they do it?

SERWER: Well, they were there first, Jack. They do do it better than a lot of place. I mean, some of these regional brands, they pour this flavored junk and spill some grounds and it's terrible. Whether you like it or not, think they've got a better product. They do it better. They do have these stores going. And, you know, it's just one of those things.

Why was McDonald's so much better? Why did they succeed? It's execution, getting out there, being organized, having a plan. I don't really think there's any stopping this thing.

CAFFERTY: Yes, but in the beginning, you could get a hamburger at McDonald's for 39 cent. There ain't nothing in Starbucks cost 39 cents.

SERWER: Inflation adjusted. It's still too expensive.

CAFFERTY: Any way, just ahead, student cheating is on the rise. We'll talk to an expert who says the kids are all right. That's from the who.

And for fresh profits, try fresh merchandise. We'll take a closer look at a company that's turning health into wealth with organic foods. Stick around.

(COMMERCIAL BREAK)

(NEWS BREAK)

CAFFERTY: Cheating is on the rise in this country. And we're not talking about what went on at Enron and Worldcom. New reports show that more kids from grade school right on through college are pledgerizing their papers using sophisticated crib sheets on tests and a whole lot more.

But our next guest says it isn't entirely the kid's fault. I'm not sure I agree with that. He says we should take a good look at the adults if we really want to solve the problem. Joining us now from Washington D.C., Gary Pavela, academic ethics expert at the University of Maryland. Gary, nice to have you here.

GARY PAVELA, ETHICS EXPERT, UNIVERSITY OF MARYLAND: Thank you.

CAFFERTY: What do you mean it's not the kid's fault. If I catch my kid cheating on a test, you bet I'm going to hold her responsible. It is her fault.

PAVELA: Well, it is her fault when she's cheating. She ought to be held accountable. Take the Jason Blair case as an example of "The Times." Jason Blair was responsible for he did. But "The Times" has followed through and made significant changes in their culture. That's what colleges and schools need to do as well.

CAFFERTY: More specifically, what kinds of changes?

PAVELA: Well, I think the biggest one is to give students more responsibility, more authority to manage the whole area of academic integrity. That may sound counterintuitive, but the man -- the researcher, Don McCabe, a friend of mine who did the research that was reported in "The Times," also wrote an article recently called "Some Good News About Academic Integrity." And that good news is schools like Maryland, Kansas State, Colorado State, Cal Davis, have this implemented modified honor codes. And by that it means, we keep some kind of proctoring, but we create a student honor committee and give them real authority. What McCabe found is there is less academic dishonesty at those schools. So we can make a difference

SERWER: Gary it's nice to hear about honor at the University of Maryland good to hear that.

PAVELA: Thank you.

CAFFERTY: Spoken like a real Terrapin.

SERWER: Being from the state of Maryland that is. One thing I want to ask, all this emphasis on testing -- I think this is has something to do with it. We place so much emphasis on tests year after year. Tests become more important. The be all to end all. Wouldn't it behoove the educational system to place a premium more on original thinking, trying to get kids to think originally, somehow testing them that way, which would be a more subjective test, rather than just a multiple choice thing?

And that's what people are cheating on, writing on the back of the hand kind of deals.

PAVELA: Exactly. And just like Jason Blair was kind of a canary in the mine shaft to tell "The Times" what it needed to do better, these higher levels of cheating, particularly in high school, indicate that we're relying too much on memorization. We're not challenging people to think.

People ought to, when they give a paper, for example, they ought to discuss it and answer questions about it in the classroom. If we approach with that kind of pedagogy, we'll reduce academic dishonesty.

And also, if we develop better relationships between students and teachers, if students and teachers get to know each other more -- we know one key fact is there is less cheating in smaller classes where teachers and students get to know each other better.

LISOVICZ: OK, let's talk about a really large classroom now, Gary. Let's talk about the real world. When you get out of school -- you mentioned Jayson Blair twice now. Well, Jayson Blair got fired from "The Times." But guess what, he just recently got a big book deal. And there are plenty of corporate crooks who still have not gone to prison as Jack remains his viewers every single day.

How influenced are students by this? Thinking, so what, I borrow a little bit -- I go to the Internet and I put something in my essay or term paper. How influenced are students by this?

PAVELA: Well, they are influenced. From time and memorial, people have wrung their hands about the upcoming generation. I tend to wring my hands about the current generation in charge. And -- but one interesting thing is that there is a significant cohort of this younger generation coming up, so-called Millennials.

By the way, they are good. They are very solid people. I think we're in good hands with them. A significant component of them sees the corruption you're talking about and is repelled by it. Those are the folks we have to work with and put them in leadership position and they'll do just fine.

CAFFERTY: Isn't this a copout, for the kids who say, oh, I cheated on my final because of what the guys at Enron did? Or i, you know, pledgerized my term paper because of what Bernie Ebbers and that crew over at Worldcom.

I mean, people know right from wrong. In your heart of hearts, when you're doing the right thing and when you're not. Laying it off on somebody else -- I can watch an old Edward G Robinson movie, doesn't mean I'll pick up a machine gun and walk into a bank and kill people -- isn't it a bit...

PAVELA: Of course it's a copout. People who make that argument should be held accountable. Those aren't the people I'm talking about. I'm talking about the kids kids who say I'm not gonna cheat because I'm repelled by the level of cheating I see in the larger society. that's what I'm talking about.

CAFFERTY: There you go. Good stuff. Gary, nice to have you with us.

PAVELA: Thank you.

CAFFERTY: Come back and we'll do this again.

PAVELA: OK.

CAFFERTY: Gary Pavela, academic ethics expert from the University of Maryland, in case you didn't get that Andy, from Maryland.

SERWER: I got that.

CAFFERTY: Coming up next on IN THE MONEY, turning granola into cash. We'll look at how the Whole Foods supermarket chain proves going organic can be good for the business.

And whether you are into Earth shoes or wing tips, send us an email and tell us what's on your mind. The address is inthemoney@cnn.com

(COMMERCIAL BREAK)

LISOVICZ: Looking for a way to beef up your portfolio? How about an organic food company? It sells beef, as well as vegetables. Whole Foods is a growing, fast growing grocery chain that's moved from a hippie favorite to national profit machine.

Joining us now to tell us why is Julia Boorstin, reporter for "Fortune" magazine. Welcome.

JULIA BOORSTIN, "FORTUNE": Good to be here, thanks.

LISOVICZ: And I have to say that I have been to whole foods and disappeared for hours. It's not liking going...

SERWER: Jack's not been there.

BOORSTIN: We'll have to get Jack to go.

LISOVICZ: It is, as you described, it's like going to spa. I get lost in the candles the aromatherapy...

CAFFERTY: Oh, come on.

LISOVICZ: I swear. It's a whole experience, not just about the groceries.

BOORSTIN: It's holistic just going there.

LISOVICZ: Is that part of the success?

BOORSTIN: Well, it sells an experience. It's not just selling the food, but it's selling you the feel-good feeling you're doing something good for the environment, doing something good for your family...

CAFFERTY: Disregard Jack's laughter.

SERWER: It's a business that makes a lot of money, Jack, that's something you can chew on.

CAFFERTY: Well, let me ask you a question. Do they make money because the food is organic and people want to buy organic? Or do they make a lot of money because they don't have unions in that place?

BOORSTIN: It's a combination of the two.

CAFFERTY: Oh, oh.

BOORSTIN: Well first of all, there's a huge demographic shift, aging baby boomers wanting to take better care of their bodies, better care of their...

CAFFERTY: It's a little late now, isn't it?

BOORSTIN: Well, they can spill protect themselves by not having food with pesticides. And it's not just organic food, it's also natural food. So, you can go there and buy a steak or buy ice cream, but it won't have, you know, the chocolate mint chip ice cream won't be green because it won't have that green number 44.

CAFFERTY: But does it taste as good?

BOORSTIN: It tastes great. People come back to the company and to go shop there, not because it's organic, but more people shop there because the food is gourmet, than because it's good for them.

SERWER: And the thing about is, you're used to these health foods store going back -- and again, this this is all news to you, Jack. You used to go to a store -- can you see him in a health food store? It cracks me up. A health foods store, you can buy a few things. You can buy some veggies and that's it. The thing about Whole Foods, you can buy everything. Buy paper towels, buy soap, buy everything, dog food even, natural dog food, I love it.

Here's the question, can this company -- how big can they get? Can they really compete against Kroger, Albertson, all the rest of them?

BOORSTIN: Well, it's not necessarily competing directly with those other companies. But it has plenty of room to grow. Right now, Whole Foods is only in 35 of the top 50 markets. Markets where people would want to go shop there. But it cannot only expand to those additional 15 markets, but it can keep adding stores within those 35 markets.

For instance, one store in Manhattan alreayd, and they're building another one in the new AOL Time Warner building.

CAFFERTY: We'll have one close by. When we move in a couple of years.

SERWER: Yes, finally get some...

LISOVICZ: And in the metro area...

CAFFERTY: Are they sensitive to the geography of the country? And what I mean by that is, there are parts of the country that eat overdone roast beef and mashed potatoes and that's what they eat and a little apple pie and ice cream for dessert and then go to bed and get up at 5 in the morning and they work in the fields and they come in and eat over done roast beef.

LISOVICZ: And his name is Jack Cafferty.

CAFFERTY: No, I mean, my wife's family comes from the midwest. That's what they eat there. You couldn't tell them you know, bean sprouts from sunflower seed. They say, you got any roast beef? Do they have to target like areas where there's a sensitivity to this? I would think they would.

BOORSTIN: They are very smart about how they target where they're going to put their stores. And in fact, Goldman Sacks and other investment banks look at where they put their stores to get a sense of where they should invest in different real estate areas because that's -- they're so good at finding hot real estate where there's a lot of traffic, where it's highly educated people with a lot of money to spend. They've done a fantastic job of finding those properties.

CAFFERTY: Well this is interesting. I'll have to check out...

SERWER: Oh, come on, check it out one time, Jack. Expand your mind.

CAFFERTY: What did you say, it's a holistic experience? They got candles and everything. A lot of people take this seriously. I don't mean to make light of it.

Julia Boorstin, "Fortune" magazine reporter. Someone who learned a good deal of what she knows at the knees of Andy Serwer who taught her a lot.

SERWER: I hope not. CAFFERTY: Up next, we'll get on to whether college football players ought to be paid. That was the question of the week last week.

First, Andy's got the skinny on index funds in this week's edition of "Fortune Fundamentals." Watch.

(BEGIN VIDEOTAPE)

SERWER: It may sound crazy to wish you were just average, but in investing, being just average makes you a winner. I'm talking here about the beauty of index funds. Let me explain. An index fund buys a basket of stocks that match a specific stock index, like the S&P 500 or the Nasdaq 100.

In other words, an S&P 500 index fund would own the exact same stocks as the S&P 500. So the performance of this index would almost exactly match the performance of the S&P 500, which is a pretty good indicator of the overall market. So if the market goes up, say, 12 percent, this index fund goes up 12 percent or actually slightly less because of fees.

So, you see the point. In this case if you buy the index fund, you're always going to do just what the overall index does. So why would you want to do that when you can go and buy some spicy hot mutual fund? Because 99 times out of 100, hot mutual funds go cold, meaning they underperform in the market overtime. One year fund A beats the market. The next year, fund B beats the market.

Overtime, there's little chance an investor can pick and choose the right mutual fund. That's why index funds and being just average makes such good sense.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

CAFFERTY: I don't have any cameras at my house. I don't take a lot of pictures. If I was going to have a Cafferty photo album that reflected this life, this picture would be in it. This is the Million Dollar Quartet shot at Sun Records back in probably about 1955, Elvis Presley, Jerry Lee Lewism, Carl Perkins and the late Johnny Cash. And Presley and Cash, in particular, were gods to this 13-year-old in Reno, Nevada, and all his buddies.

When Elvis sang, we all tried to be a little sexier. When Johnny Cash sang, we all thought we were a little tougher than we were. There was a line in "Folsom Prison Blues" that went like this, "I shot a man in Reno just to watch him die." Well, we all lived in Reno and we thought that was pretty cool when that line came over the radio. He's gone now, and there won't be anybody to replace Johnny Cash, or for that matter, Elvis Presley either.

When it comes to John Ritter, the other celebrity who died, his dad wax Tex Ritter, and he was a country and western singer I listened to as a kid, too. And he did a tune called "The Hillbilly Deck Of Cards". And it chronicled the previous generation of great country singers like Jimmy Rogers and Hank Williams and Bob Wills and people like that, and how when they passed there'd be nobody to replace them.

Well, they're all passing now. And that's a terrible thing. When it comes to Johnny Cash, there won't be anybody to replace him. And I take that loss personally. I really do. I couldn't wait, when we were taping this thing on Friday to get out of here, so I could get home, get my Johnny Cash CDs loaded into the car immediately and begin to remember how much he meant to me when I was growing up. And we all have figures like that in our younger lives.

LISOVICZ: And I think, that's one of the things that his music lives on and continuously is rediscovered. Who would have thought that Johnny Cash, nominate for MTV Video of the Year just a couple of weeks ago for a remake of this really, kind of avant garde rock band, Nine Inch Nails.

So it's something that a lot of people, a lot of musicians appreciate it. And going back 50 years, how many artists can you say, of this generation, are going to be around 50 years later?

SERWER: You're dead on. A couple things, instantly recognizable voice. Stoic, a real icon and an incredible amount of integrity. So many people in the music business who are so full of you know what. Here's a guy who wasn't. And to me, putting him on the save level of John Ritter -- I'm sorry they both passed away, but he's bigger guy than John Ritter was, I'm sorry.

CAFFERTY: I'm inclined to agree with you.

(AUDIO GAP)

Question of the week, when we asked whether college football players should be paid to play college ball. Nathan wrote this, "College football players should be payed for their services. The revenue generated for their enrollments and sponsorships is reaped by the schools and the coaches. College football is a business, not an educational tool."

C.G. wrote this, "Are you kidding? These jocks are already getting paid by getting scholarships while the rest of us have to pay back loans for 20 years."

And Jay in Washington checked in with this, "The schools should pay the athletes so their parents can not only afford tuition, but be able to retire in their 40's"

SERWER: Yes.

Now, for our e-mail question of this week. continuing the very high tone of this broadcast, in light of the continuing controversy surrounding NYSE Chief Dick Grasso's pay, here's the question, should he step down? Should he step down and give back the $140 million?

LISOVICZ: Those are two questions. CAFFERTY: Actually, there are two questions. And you can answer either/or both or neither. Send your answers and other comments to inthemoney@CNN.com.

And with that we thank you for joining us for this edition of the program. My thanks, as always, to my good friends on the panel. CNN financial correspondent Susan Lisovicz and "Fortune" editor at large, Andy Serwer. Just back, by the way, from the Rio Grande valley and a great story to come in "Fortune" magazine on what's happening to the textile industry down in that part of the country.

Join us tomorrow 3:00 Eastern time as we reexamine Saudi Arabia's role in international terror. It's large. We'll talk to the author of a fascinating "TIME" magazine cover story on whether the Saudi's have changed course on the war against terror.

Thanks for being with us. Enjoy your week. We'll see you soon.

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



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