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CNN IN THE MONEY
U.S. Makes Timetable For Iraq to Run Itself
Aired November 15, 2003 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
SUSAN LISOVICZ, CNN CORRESPONDENT: Welcome to IN THE MONEY. I'm Susan Lisovicz, minding the store for Jack Cafferty, who's off this week. Coming up on today's program: countdown to checkout. The U.S. wraps up its timetable for making Iraq run itself, as the CIA warns of more conflict ahead. We'll look at the risk for politicians and the grunts on the ground.
Plus, battle on the home front. As Washington fights for benefits for military families, find out if we're doing enough for the people who serve our country.
And a top-dollar defense. As a millionaire shakes off a murder check, see whether big-ticket legal help brings you the best justice money can buy.
Joining me today, a couple of IN THE MONEY veterans, "Fortune" magazine editor-at-large Andy Serwer, and Allen Wastler, managing editor of our sister Web site, money.com. And gentlemen, if our viewers aren't watching IN THE MONEY on a Saturday, they're out perhaps shopping for food, for autos, for holidays.
ANDY SERWER, EDITOR-AT-LARGE, "FORTUNE" MAGAZINE: For holidays. It's the beginning, right?
LISOVICZ: But not merrily enough, according to two of the biggest retailers out this week with some forecasts.
ALLEN WASTLER, MANAGING EDITOR, MONEY.COM: Yes, Wal-Mart out with soft numbers, saying, well, we did all right. We missed a little bit. Things are soft. It might get better by the end of the year, but we don't know.
Nevertheless, you know you've got to look at the numbers and say, ah, is it coming? All of a sudden, the consumer is running out of that tax money.
LISOVICZ: And the expectations were high, though, because we got all this very good economic news. So the expectations seemed to be raised. And now the data that we're getting this week seems to be lowering those expectations.
SERWER: Well, the expectations game is just always a killer. I mean, they always ratchet up. They always ratchet back.
Dell also a little bit cautious this past week, as Target was, too. But consumer confidence numbers came in on Friday and they were actually looking pretty good. I think we're going to see the psychological battle continue through the end of the year, and I basically think things are fine.
I mean, some stores are going to complain. They're going to be a little weaker. But there's really -- if you just sort of clear through the clutter, I think it's going to be a pretty successful season.
LISOVICZ: Fair to say though that consumers are still cautious?
SERWER: You beg to differ I think.
WASTLER: I beg to differ.
SERWER: Beg to differ?
WASTLER: I beg to differ.
SERWER: All right.
WASTLER: Because I think consumers are getting crapped out in terms of their credit cards.
SERWER: Technical word there.
WASTLER: And finally, the Christmas decorations went up too soon. And I think they'll get burned out by the second week of December.
LISOVICZ: Well, the numberless will tell the story for sure. And they don't lie.
WASTLER: We shall see.
LISOVICZ: The CIA this week drew up a road map showing where it thinks the U.S. campaign in Iraq stands today and where it could be heading. The results has the Bush administration double-checking its seatbelts and keeping one eye on the nearest exit.
Now the Pentagon has brought back the big guns in its fight against the insurgents and Washington is pushing for faster moves toward a new Iraqi government. More now from Alphonso Van Marsh in Baghdad -- Alphonso.
ALPHONSO VAN MARSH, CNN CORRESPONDENT: Hi there. First, we want to talk about the military strategy. It's called Operation Iron Hammer and it marks a significant change in U.S. military strategy here in Iraq going on the offensive in the wake of increased attacks against U.S. and other coalition forces.
Now, Operation Iron Hammer is a series of ground and air assaults against targets that the U.S. military says are being used to launch attacks against U.S. forces. Now, the 1st Armed Division of the U.S. military is leading these attacks. We got a chance to see some images of that aftermath in Baghdad and other areas, like this Republican Guard building. The U.S. military says that that building was being used to launch rocket and small arms attacks against U.S. forces.
Now, the U.S. military says it's important to remember that the so-called enemy or opposition fighters are actually small in number. Only about 5,000 people, but they are well organized. Well organized, too, is Operation Iron Hammer, the fighting that's going on during the course of the evening.
And we had a chance to take one of our CNN cameras in a military helicopter over the skies of Baghdad as they hit some of the targets, not just in central Baghdad, but also a little bit west of the city, south of the city, and also against targets east of the capital.
LISOVICZ: Alphonso Van Marsh in Baghdad, thanks.
SERWER: The tougher the situation gets in Iraq, the harder Washington's choices become. For a look at the Bush administration's latest moves and where they could lead, we're joined by Fawaz Gerges. He is a professor of Middle Eastern Studies and International Affairs at Sarah Lawrence College. He's also the author of "Islamists and the West."
Welcome, Fawaz. How are you?
FAWAZ GERGES, PROFESSOR, SARAH LAWRENCE COLLEGE: I'm fine, thank you.
SERWER: Good. We want to talk about this accelerated timetable that we've been hearing so much about over the past couple of days. Does this make sense to you?
GERGES: Well, absolutely. I mean, two points here. It seems to me that the administration is naturally anxious about the deteriorating security situation in Iraq and the increasing number of American casualties.
In the last weeks, as you know, we lost more than 40 American soldiers dead. And as many wounded. Not to mention coalition casualties and Iraqis. And I don't think that the administration could politically sustain such a large number of casualties in the long term.
And I think, secondly, I think the Iraqis, the administration is coming under tremendous pressure by Iraqis who are demanding that they assume power in Iraq itself. So it's the deteriorating security situation in Iraq and demands by Iraqis to assume power which appear to have forced the administration hands to at least shift the strategy in Iraq.
WASTLER: Professor, this is Allen Wastler. If you hand off too early, I've heard concerns that there might be a power vacuum there, because the provisional government that they have, what they have isn't quite strong enough. Could that like open up the field for maybe one party or a strong man or, god forbid, a Saddam 2.0 to step in there and sort of seize control?
GERGES: You're absolutely correct. I mean, there are no quick, easy exit strategies for the United States and Iraq today. After this particular shift in the administration's strategy, the administration hopes now to basically -- I mean, expedite the transfer of power to Iraqis in a matter of day, not weeks. And of course, there are risks involved.
Any particular transfer of power must be, of course, timely, orderly and viewed to be legitimate and supervised by the United Nations. Otherwise, I think the risks could really have damaging effects on Iraq, and in this particular sense, the administration must be aware of the dangers involved in a quick exit strategy from Iraq.
LISOVICZ: All excellent questions that you pose, professor. So if were you in charge, when would you turn over the government to the Iraqis?
GERGES: Well, let's remember here that I think the entire international community and many critics in the United States of the administration have been calling for a transferring power to Iraqis as soon as possible. But first we must remember that the Iraqi Governing Council that was handpicked by Paul Bremer is deeply splintered along ethnic and sectarian lines.
I think the administration must transfer power to the Iraqis. That, in fact, it must be orderly. It must bring the United Nations to supervise elections. It must lay the foundations for the institutional foundations.
There are no easy answers in Iraq today, and even if the United States transfers power to the Iraqis, that does not mean that American troops could afford to come home. Because you're going to have still a volatile situation in Iraq.
Let's remember, American forces now are averaging about almost 37 attacks a day in Iraq. We know now that the United States is facing a serious, dangerous urban guerrilla warfare in the country. And as you know, the latest report by the CIA makes it very clear that the situation appears to be spinning out of control, and the United States is really in a race against time.
The momentum is not against it. To suggest that we need to transfer power to Iraqis as soon as possible does not mean that we have early, quick exit strategies from Iraq.
SERWER: Fawaz, that's a brutal situation you're laying out here. I want you to look in your crystal ball, though, and lay out the various possible scenarios. What kind of government could we expect? What's the best-case scenario looking forward, what's the worst case? What do you think will happen?
GERGES: Well, I mean, the best case scenario is an elected legitimate government in Iraq. A government that takes into account the complexity and diversity of the Iraqi society. Let's remember that you have 60 percent of the Iraqi population are Shiites. You have the Kurds, and you have the Sunnis. And any government that does not taken into account the various interests of the communities will not survive in the long term.
A worst-case scenario in Iraq is that the country puts (UNINTELLIGIBLE) into chaos and splinters along at the sectarian and ethnic lines. And this is really a worst-case scenario.
A third scenario is that an Islamic government could take place in Iraq. An Islamic government not along the same line as the Iranian (ph) model, but rather a moderate form of Islam. And I think this is, it seems to me, the most probable scenario: a moderate Islamic government in Iraq.
SERWER: All right, Fawaz. We're going to have to leave it a at that. Fascinating stuff. Hope you can come back and join us again.
Fawaz Gerges, he's the professor of Middle Eastern Studies and International Affairs at Sarah Lawrence College.
Up ahead on IN THE MONEY: a fight on two fronts. Soldiers trying to bring peace to Iraq want better benefits for their families at home. Find out if we're doing enough for those who serve.
Plus, see if you can tilt the scales of justice with a big pile of cash. As a millionaire beats a murder wrap, we'll ask Alan Dershowitz whether a high-priced lawyer means an easy ride.
And a roll of the (UNINTELLIGIBLE). Gambling has turned into one of the biggest draws on the Web. We'll look at why so many surfers will spend money to make money.
LISOVICZ: American troops may be stationed in places like Iraq, Afghanistan and South Korea, but for their families, there's a new fight brewing on the home front. Defense Department schools for the children of U.S. soldiers and commissaries where military families buy subsidized groceries could be a target for Pentagon cost-cutters.
Here to make sense of all this is Joyce Raezer, director of Government Relations for the National Military Family Association. Welcome, Joyce.
JOYCE RAEZER, DIRECTOR, GOVERNMENT RELATIONS FOR THE NATIONAL MILITARY FAMILY ASSOCIATION: Thank you.
LISOVICZ: There's no question about the sacrifice our men and women in uniform are making right now. We have mounting casualties in Iraq. We have increasing deployment, and yet declining benefits.
The timing is just awful. Can you briefly tell us what exactly is happening now with the budget cutters?
RAEZER: Well, I don't think we have declining benefits yet, but we have a threat out there that benefits might be cut back, or that benefits may not be increased to meet the new needs of the military family and the military community. Military families view any talk from policymakers, whether in the White House, in the Pentagon or on Capitol Hill, as a potential threat to their benefits and to the future of their benefits.
LISOVICZ: So Joyce, how real is the threat? Excuse me, Joyce. How real is the threat, then, that commissaries and these military schools for children of our people in uniform could be closed?
RAEZER: We're not really sure. There is a study going on to determine whether some of these schools, these DOD schools that are stateside, could be turned over to civilian school districts. The Department of Defense has come out with a list on the commissaries to say, we're going to close small commissaries and we're going to look real hard at some other commissaries to see whether we need them. And the folks in those communities are feeling threatened.
WASTLER: Joyce, this is Allen Wastler.
WASTLER: I can imagine on of the pencil pushers at the Pentagon going, well, we've got to look at this stuff to keep costs in line. And, you know, it seems, as a taxpayer, a fairly reasonable exercise. Is there a precedent for once they start looking they start cutting?
RAEZER: There is sometimes. I think the big question military families have right now is, why do we have to look at these things right now? This is a community has that is historically very strong and very resilient, but it is under tremendous stress right now.
And military families are taxpayers also, but they view the commissary savings as part of the compensation package promised to military members, both during their military career and into their retirement. So threats to cut the commissaries are a threat to cut a part of their compensation package.
There have been studies before looking at whether the Department of Defense should be running these schools stateside. The question is, why another study right now? What has changed since the last study, just about five years ago, that would prompt another look right now, when the community is under stress and is looking to preserve stability where it can?
SERWER: Joyce, one thing I wasn't really aware of was the so- called death benefit. Very interesting stuff here. And it was recently increased from $6,000 to $12,000. Previously taxed.
Can you talk a little about that? That's the amount that the family of a serviceman or woman gets if their loved one's killed in action?
RAEZER: This is the death -- it's called death gratuity. And this is the amount that's given to handle immediate expenses. When a service member dies, this is money that's provided right away to the family. Service members also have service members group life insurance, which is a larger payment. But this is to take care of those immediate expenses up until the president signed the change into law this week on Veterans Day.
This death gratuity was set at $6,000, $3,000 of that was taxable. Congress passed legislation to increase that death gratuity to $12,000 and to remove the tax on the entire amount. And the president, as I said, did sign this as a package this week.
LISOVICZ: Joyce, we're almost out of time, but another very promising development is that there have been changes for the good in terms of taxes.
RAEZER: Yes. And that was included in the tax bill that the president signed on Veterans Day. Not only did they increase the death gratuity and take the tax off, they provided a tax help to military home owners who before couldn't take the capital gains exclusion under the capital gains law, provided some tax deductions for Guard and Reserve members for their travel expenses when they were traveling to their drill locations. A big help for those Guard and Reserve members who certainly are being asked to do a lot more.
SERWER: All right, Joyce. We have to leave it at that. Joyce Raezer, director of Government Relations in the National Military Family Association. Thanks.
RAEZER: You're welcome.
SERWER: Coming up, a big money mouthpiece. We'll look at whether rich people like Rosie O'Donnell do better in court by hiring top-priced legal talent.
Also ahead, taking it to the street. Johnson & Johnson wants to move a cholesterol drug over the counter. See what that could do to the stock.
And straight talk. Learn about the mutual fund scandal and what it means for your money in language you don't need an MBA to understand.
LISOVICZ: Now let's take a look at the week's top stories in our "Money Minute."
The $100 million lawsuit against Rosie O'Donnell ended in a split decision with neither getting any money. Publisher Gruner + Jahr sued O'Donnell, blaming her for the failure of "Rosie" magazine. O'Donnell responded with a $125 million counter suit. The judge in the case had harsh words for both sides and said the matter should have never gone to court in the first place.
Applications for mortgages fell last week to their lowest level in nearly a year and a half, as mortgage rates rose. The boom in new mortgages and mortgage refinancing has given the economy a major boost over the last few years, and a prolonged drop-off could threaten the economic recovery.
And the biggest segment of the U.S. population isn't expecting to get much of an inheritance. A new survey by the AARP shows only 15 percent of baby boomers expect to get any inheritance from their parents. Another study shows that in 2001, 95 percent of all people who did get an inheritance received less than $100,000.
I wonder if it was because of the stock bust?
SERWER: Our stock of the week is Johnson & Johnson, a huge company that combines prescription drugs with consumer products like shampoo and Band-Aids. J & J's latest crusade is to get permission to sell some of its cholesterol-lowering drugs over the counter. Johnson & Johnson shares are trading close to their 52-week low, though the stock has been relatively stable over time.
So what do you think about this, guys? Clearly, one of the bluest of the blue chips. It had some tough times lately over the past couple of years, but it's just one of those stable, great companies, isn't it?
LISOVICZ: Well, Johnson & Johnson doesn't only benefit from being in health care, with an aging population and an obese population as well, but it has all these consumer products with the unmistakable J & J name: Band-Aids, Baby Oil, Neutrogena products. So I think it may better diversified than some of the others.
WASTLER: I'm a little bit worried about it, though. I mean, its latest hot thing has been its new, you know, drug-coded stent. But recently, the FDA was warning that, ah, there might be some deaths related with that. And that's pretty detrimental.
Its product line is getting a little bit stale. It's trying to move to the generics. But, at the same time, everybody else is moving there, too.
And essentially, its big thing is cholesterol lowering. Everybody's there already. And this week, Pfizer scored a big win, coming out with a study that said, hey, not only is ours as good, it will reverse the process. You know?
So everybody's fighting for that. It's a really competitive and volatile field.
LISOVICZ: And expensive. It's expensive to get those drugs in the pipeline and go through the process.
SERWER: Yes. It's really amazing how old this company is. Founded in 1886 by the Johnson brothers. And you know that whole thing that the family went through, and young Jamie Johnson made that film, "Born Rich," about his family and about having all of this wealth.
But you look at the products here. Band-Aid, baby care products, Pepcid, Motrin, Tylenol, and, get this, remember St. Joseph's Aspirin for children? Who can forget that? LISOVICZ: (UNINTELLIGIBLE)
SERWER: That's a long in the tooth kind of product, which is what Allen was concerned about. And you know these drug companies, you look at a company like Merck, they're having a tough time, too. You constantly have to come up with new things to fill that pipeline, even though this is not a strictly pharmaceutical company per se, but they're moving that way.
And it is a very competitive business. You've always got the government to worry about coming in, and, you know, clamping down.
They had a good little bit of news last week, though. Some changes in Medicare has made the stock pop at end of the week.
LISOVICZ: And it's not that bad. It hasn't take than much of a fall. Maybe near a 52-week trading low, but it's not that far off from -- you know, from its all-time high.
SERWER: All right. So you're saying it's going to double in a year? Well, I'm going to hold you to that. Just kidding, Susan.
When we come back, tipping the scales of justice. We'll find out whether the rich get richer and the poor get jail. A fresh look at the price of justice in America.
And talk about a stacked deck, we'll give you the lowdown on the growing mutual fund scandal that's left millions of investors on the short end of the stock chart.
SERWER: New York real estate heir Robert Durst was acquitted this week in Texas of charges that he murdered his neighbor Morris black. But in a case where Durst admitted cutting up his victim's body, dumping it in Galveston Bay and fleeing the police, some are asking an old question, do the rich, with their fancy lawyers, have a better chance at winning in court than the poor?
Joining us to talk more about this is Harvard law professor and author Alan Dershowitz. He was part of the defense teams representing O.J. Simpson, Mike Tyson and Leona Helmsley.
Welcome, Professor Dershowitz.
ALAN DERSHOWITZ, PROFESSOR OF LAW, HARVARD UNIVERSITY: Thank you.
SERWER: So this is an old thing we've heard here, a two-tiered legal system in the United States. What evidence do you have to really back up this point, though?
DERSHOWITZ: Well, we have a two-tiered legal system, we have a two-tiered medical system. If you're rich, you're likely to get better medical treatment. We have a two-tiered educational system. If you're rich, you're likely to go to better schooled. That's the tragedy of America is we have a two-tiered system. And the answer is not to deprive rich people of excellent medical care or excellent legal care, but to make sure that poor people, who might also be innocent or get the benefit of a reasonable doubt, have available to them excellent lawyers, excellent scientists, people who can probe the DNA.
The problem is not that Durst gets a very good lawyer, which he did. It's that there are hundreds and hundreds of people on death row today who have equally plausible defenses who don't have a chance to present them because they have inadequate lawyers, inadequately paid, and no opportunity to get scientific expertise in their corner.
LISOVICZ: Professor Dershowitz we know that a very sizable part of your business is done free, pro bono, and that you've also freed many innocent people because of all the science that you've discovered with DNA. But having said that, you also represented O.J. Simpson. And there's plenty of people in this country that still think he, like Robert Durst, got away with murder.
Can you take us through what you're thinking when you represent someone who is seen to many people as a criminal of a heinous crime? How you separate your legal work from, perhaps, your feelings?
DERSHOWITZ: Well, first of all, when you first get the case, you really don't know whether the defendant is guilty or innocent. They always tell you they're innocent. And I'm talking in general.
They always tell you they're innocent. And many of them are not innocent. I always start out every case with a personal presumption of guilt. That is, I assume my client is guilty, and that's why I don't let them talk to the police, and I don't let the house be searched.
Because even if he tells me he's innocent, I have to assume he's guilty. Just like if you go to the doctor with a chest pain, the doctor shouldn't presume you're healthy. He should presume you're sick and having a heart attack. You always take the worst case scenario.
And then what your job is to do is to try to question and criticize and challenge the government's case. You're doing a professional job. You don't become a friend of your client or your patient.
You try to do whatever you can to help them. It's the job of the system to find guilt or innocence, and it's the job of the defense lawyer and the doctor to be the advocate and supporter of the person who is on trial or on the operating table.
WASTLER: Professor Dershowitz, isn't it true when you walk in to the jury, everybody says, well the millionaire is going to have everything on his side. But you're there, ladies and gentlemen of the jury, meet my filthy rich client, and I'm the high-priced legal talent here to defend him. Let's bond.
I mean, aren't you sort of going against a stacked deck to begin with?
DERSHOWITZ: Sometimes that really does operate. And sometimes, when you have a fancy, high-priced lawyer, the jury will assume that you're guilty. And remember, that's the difference between medicine and law.
In medicine, it's you against nature. You against the tumor. So it doesn't matter what people think.
But in law, perception matters, too. That's why sometimes I'll advise a client to let me work behind the scenes and have somebody who is local, somebody who is more familiar with the area, somebody who's more like the jurors and somebody who is less visible present the case to the jury. So you have to think about all of those issues.
And it depends where you're litigating cases. In the Durst case, he had an extraordinarily able Texas lawyer who comes in with a strong reputation and did an exceptional job. And you just have to have praise for the lawyer in a case like that.
SERWER: Professor, let me throw this out at you, though, and ask you. I mean, what do you think? Do you think Robert Durst was guilty?
DERSHOWITZ: Well, I can tell you this, Robert Durst was certainly guilty of having dismembered the body. What I think nobody could know is what happened that led to that. Whether or not it was an accidental killing, whether or not it was a premeditated first- degree killing, or whether or not it was a killing that resulted on the impulse of the moment.
SERWER: But how can you...
DERSHOWITZ: And you can't speculate about that.
SERWER: ... dismember a body in this country and not be found guilty of murder? Even if it was an accident to begin with.
DERSHOWITZ: Well, they charged him with the wrong crime. It they had charged him with dismembering the body, he would have been found guilty. He admitted that.
But it is certainly plausible, and there was no evidence to contradict this, that it could have been a second-degree murder and still he would have dismembered the body to get rid of it. Less likely, but the defense argued that it could have been in self-defense and he panicked and he dismembered the body and got rid of it.
Remember, the key moment is when he shot that victim. Did he shoot him in a premeditated way? I mean, the challenge I would throw back to you or the jury is, if you think he's guilty, is he guilty of first-degree or is he guilty of second-degree murder?
Was it a premeditated murder or was it a murder on the spur of the moment? You can't know that because there was no evidence of what happened. The only evidence is what happened afterward, and you can work backwards on the basis of the dismembering the body.
You can assume he had something to hide, but what did he have to hide? Was it first-degree murder or second-degree murder? Once you plant that doubt in the minds of the jury, they say, second-degree murder, first-degree murder, hmm. Maybe self-defense.
Better 10 guilty go free than one innocent be wrongly confined. Proof beyond a reasonable doubt, it's not there. Were I a juror in the case, I might have come to a different conclusion. But I wasn't the jury in the case and I didn't hear all of the evidence.
LISOVICZ: Boy, we could continue this conversation for some time, but we have to wrap it up. Alan Dershowitz, professor of law at the Harvard Law School, thanks for coming by. We appreciate it.
DERSHOWITZ: Thank you so much.
LISOVICZ: Up next on IN THE MONEY, keeping your cash on the straight and narrow. Find out whether the mutual fund scandal is going to cost you money.
And virtual Vegas. Find out why online gambling is one of the top draws on the Web.
LISOVICZ: Americans have more than $40 billion hanging out with a babysitter called strong mutual funds, founded by a guy named Richard Strong. He's the latest money titan caught up in the scandal sweeping the mutual fund business.
Now, unless you're the kind of person who needs to get out more, phrases like "mutual fund scandal" don't exactly make your pulse raise. Not until you remember that your money is at stake. So we'll give it to you straight, starting with a look at Richard Strong.
And for that, Andy Serwer's on deck. You spent at few memorable days out in Milwaukee?
SERWER: That's right. I was out in Milwaukee, spending a few hours with Dick Strong, got an exclusive interview with this guy. And, you know, he really is a mutual fund titan.
Founded the company himself, built it himself, runs it, and now he is under the gun. And the reason why is because he's suspected of some of this market timing. He's been accused by Eliot Spitzer and company.
But I looked in and checked out his history. And there really is kind of allegations going back about professional and personal behavior that pushes the edge of the envelope. You know, not treating people well, having temper tantrums, and also running into problems with regulators before having to fund a money market account and put money into that.
So he sort of has a history. And now an environment like this, not a surprise to a lot of people that he's running into trouble, Susan.
WASTLER: Andy, I read your piece. OK? And you played it fairly straight down. But I walked away from that thinking, this guy's a titan?
He's a yahoo! I mean, this guy, he's like floating on the edge. And up and down, his logic is completely out the window.
And for the allegations you're talking about, we're talking about $600,000, which, you know, in the industry is chump change. Is his an anomaly, or are you thinking this is what we're seeing from all the titans?
SERWER: Well, first of all, Dick Strong is a very singular guy. And he's always been called different. I think he was a little bit on edge because of the stuff going on.
He doesn't really care about the money. That's not the big issue. He lives pretty simply. And it's a mystery to people why he would risk it all for that $600,000.
LISOVICZ: OK. Well, this is a perfect segue to bring in Janice Revell, staff writer at "Fortune" magazine, who has covered this issue extensively and can give us sort of a primer on why investors should care. It's our money and we're talking about trillions of dollars, something that was considered, up until very recently, very safe.
JANICE REVELL, "FORTUNE" MAGAZINE: Right, absolutely. And yu know, Susan, that's the real problem with this. I mean, for so long, when the market crashed in 2000, people flocked to mutual funds because they were viewed as kind of the last safe haven. And the people like Dick Strong and the people at Putnam were viewed as guardians of the money, and your money was safe as long as it was in their hands.
And that's why this is such a disturbing thing. And it's looking like it's not just one or two or even a dozen isolated cases. As Spitzer said, it looks like the whole crate is rotten.
LISOVICZ: And that is -- as disturbed as investors are about public companies, where you have this egregious behavior, when somebody says it's systemic, what happens next?
REVELL: Right. Well, that's the big question. Now, the one thing, a lot of people are saying, well, gee, should I pull out of mutual funds altogether?
SERWER: Yes, that's the thing people really want to know. If they have money in one of those companies that's been named, Janice, talk about that.
REVELL: Right. And you know, I think the most important thing is, don't panic if you're an investor. The losses that are being estimated from all this market timing activity and the late trading activity are not insignificant. We're looking at about $5 billion a year. OK? But when you consider that there are $7 trillion in the industry and 95 million investors, the loss to individual investors is not huge.
So what you don't want to do is just flee out of your mutual funds because you see a headline. What you want to do is take a calm, reasoned approach, look at the return that you've been getting in your mutual fund.
If you're happy with it, if you're happy with the manager, if you're happy with what's been happening, don't just flee to another fund, because you're going to be looking at taxable capital gains, you're going to be looking at maybe exit fees on your money. To be throwing away unnecessarily a lot of cash by getting out of your fund. So take a close look at it.
SERWER: Can you have a run on one of these mutual funds, though? Like a run on the bank, though, Janice?
REVELL: Well, that's the big fear because mutual funds -- the mutual funds themselves, you can have a criminal managing a mutual fund. But that doesn't mean the fund itself is going to decline in value. To get a run on big fund like that, right now the possibilities are remote.
LISOVICZ: Well, Putnam did see a decrease. I mean, it saw outflow, did it not?
REVELL: It saw outflows from big institutional investors. And that money is being managed separately. So it's not affecting our -- you know, you and me, the average investor.
Putnam has $263 billion under management and something like 12 million individual shareholders. So there would have to be just a tremendous run on the Putnam fund to have any real impact. So from what I'm hearing, don't panic yet. We're not there yet.
WASTLER: How about money that isn't in there yet? You're thinking about, where should I go? Are we going to see a decline in money going to actively managed funds and more into index-type funds?
REVELL: Absolutely. And that's another thing that's coming out of this issue, which is actually a good thing. And people are actually starting to concentrate on the fees that they pay, and that's what people are saying is the real scandal here.
I mean, the average actively managed mutual fund charges about 1.5 percent in operating expenses and another 1.5 percent or so in trading costs. You're looking at...
SERWER: That's a lot, right?
REVELL: ... three percentage points right off the top. When you consider that the average equity fund is going to return 7 percent or so, (UNINTELLIGIBLE) gone up in smoke. Whereas the average index funds charges about .3 percent. And if you look over a 10-year time horizon, about 75 percent of all actively managed mutual funds fail to even do as well as an index fund. So I absolutely think...
LISOVICZ: Read the fine print.
REVELL: ... these are good times for Vanguard I think, and the folks who actively market index funds.
SERWER: All right, Janice. Well, this is obviously an issue we're going to be following closely over the next couple weeks and months I think.
REVELL: There's more to come I think.
SERWER: Janice Revell, my colleague at "Fortune" magazine, thanks very much.
REVELL: Thanks, Andy.
Time to step out for a minute. But when we come back, getting lucky on the Web. No, we're not talking about that. We're talking Internet gambling, and we'll tell you why more and more Americans are rolling the dice online.
And if you feel like trying your luck with this particular program, send us an e-mail. The address is email@example.com. Back in a flash.
LISOVICZ: Online gambling sites are some of the most popular places to go on the Web. The only trouble is they're not always profitable, and there's always the legal hurdles to clear. Oh, that.
But brick and mortar Casino owner Harrah's is hoping to reverse that trend. Webmaster Allen Wastler has more on that plan and the whole online gambling -- oh, lucky me.
WASTLER: Oh, lucky me. That's their new grand plan. OK?
Now, it's illegal in the United States to be playing online games.
SERWER: I didn't even know that.
WASTLER: It's illegal. But you can get around it. That's why these big American-based casinos, like Harrah's haven't been to thrilled of it because they go -- they'll start an offshore site, which is what a lot of people do. However, when you come and you give them the credit card, the credit card companies say, wait a minute, no U.S. citizens, so you're going to have to figure something out.
You can still do it, Andy. You can start your Cayman Islands bank account. Get your credit card there.
LISOVICZ: It sounds like you're very familiar with the process, oh webmaster.
WASTLER: I do my research thoroughly, thank you very much.
SERWER: How big is this thing?
WASTLER: According to these people, the U.S. government, they came out with this report late last year, late last year. They figures about $5 billion this year that's going to be pulled in.
Now, half of that comes from U.S. sources, even though you're not supposed to do that. Which means it's going to the offshore guys, not the American guys, like Harrah's. OK?
They figure by 2006, it's going to be a $14 billion market, but three-quarters will be coming from Asia, Europe, everywhere but the United States. So Harrah's says, well, how am I going to get some of that money? I want that money. OK?
SERWER: All right.
WASTLER: So what they're doing is Lucky Me. And what this is, a few differences. One, they're not going to give you a straight cash payback. It will follow the cash for prizes kind of model that some outfits have been pioneering. OK?
LISOVICZ: And that's legal?
WASTLER: And here's number two. You pay a subscription fee. OK? And they're starting it off -- they've priced it pounds, because they're going to pilot it over in England to try to convince America. See, we can do it there, we can do it here.
So it's about $30 and upwards. You pay your monthly subscription and you can go play all the games of chance you want and cash in for wonderful little prizes. OK?
SERWER: That's the bargain.
WASTLER: You can go there. And they're going to take away the casino veneer, the vampy women and the big flashing lights.
LISOVICZ: Right, because they want to attract women.
WASTLER: Right. They want to attract women to the base and get them in there.
LISOVICZ: OK. So it's great that the big boys are trying to get in because they feel that it's being stolen piracy yet again. But will it cannibalize their traditional bricks and mortars or bricks and neon business?
WASTLER: Well, there's a general feeling, probably not. Because if you look at the buses that load up for Atlantic City right now, that's not typically your Internet crowd. OK?
SERWER: Yes. That's a little senior.
WASTLER: It's a little senior, so they're not really counting on that right now. And they did make a foray earlier, but it sort of (UNINTELLIGIBLE) profitable.
SERWER: You know what though, Allen? You've got to know when to fold up.
WASTLER: Yes. Know when to hold up.
LISOVICZ: Our webmaster, always ahead of the curb. Thanks, Allen.
Just ahead, if you send us an e-mail, it's a sure bet someone will read it. Drop us a line at firstname.lastname@example.org.
LISOVICZ: Now it's time to check your answers to our question about how long the U.S. should stay in Iraq. Colin from Ohio wrote: "I think we should stay in Iraq for as long as necessary. I don't think we can abandon these people before we help them form a new government. This is our duty as a wealthy country with a lot of power."
Ed in Louisiana wrote: "We did not turn over self rule to Japan and Germany until 1951. What would have happened if we had left after only one year?
But Lloyd in Seattle wrote: "We'll stay in Iraq until George Bush is reelected and then Karl Rove will tell him it's OK to get the troops out."
Now for our e-mail question this week. If you were on trial in America, would you rather be guilty and rich or innocent and poor? And you have to answer it that way. And you send us your answers at email@example.com.
You can also check out our show page at money.com/inthemoney. And I know I'd rather be rich and innocent. But that's not the question.
SERWER: Yes. I want to get back on that Iraq thing, because to me, that's really, really fascinating stuff. And I think it's going to be a situation where we leave Iraq but we don't leave Iraq. In other words, we won't have this military force, we'll be part of a multilateral thing. And it's just going to be so fascinating to see this thing out.
LISOVICZ: It will still be dangerous.
WASTLER: And the moment you have your little provisional government there, and they start going at it with the factions, which side do we take up? It's going to be a (UNINTELLIGIBLE), and it's probably one of the worst things...
LISOVICZ: It's such pent up frustration probably for the Iraqis after years of a brutal dictatorship and then a war and then this rising resentment over foreign military force there. You've got to feel for the Iraqis, too.
SERWER: And it's not like Germany or Japan. I mean, we're talking about a very hostile situation right now, increasingly hostile, I should say.
LISOVICZ: No question about it.
Thanks for joining us for this edition of IN THE MONEY. My thanks to "Fortune" magazine editor-at-large Andy Serwer and money.com managing editor Allen Wastler. Join us tomorrow at 3:00 p.m. Eastern, when we'll look at the rising tide of anti-Americanism in the world and whether it will hit corporate America's bottom line.
Until then, enjoy the rest of your Saturday.
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