CNN IN THE MONEY
Martha Stewart Indicted; Stock Markets Up; Is Tort Reform Necessary?
Aired June 7, 2003 - 13:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JACK CAFFERTY, HOST: Welcome to the program. I'm Jack Cafferty. Coming up over the next 60 minutes or so, head to head with the feds. Martha Stewart getting ready to fight insider trading charges against her. We'll look at hat that may mean for America's top homemaker and her brand.
Plus taking it to the street. After years on the downside, Wall Street rises again. We'll find out whether now is the time to get back in.
And to borrow a line from Bill Haley, see you later, litigator. States are taking action to cut the money on trial lawyers that they're making on these big lawsuits. We'll tell you if it's time for tort reform. Or not.
And here to keep us on our toes as we proceed through the next 60 minutes, my good friend, CNN correspondent Susan Lisovicz, and filling in this week for Andy Serwer, who is doing a story about doughnuts, I believe, last I heard, "Fortune" editor-at-large, Justin Fox. Nice to have you both with us, and, Justin, you brought props. What do you have there?
JUSTIN FOX, EDITOR-AT-LARGE, "FORTUNE" MAGAZINE: Well, I've got the new "Martha Stewart Living".
CAFFERTY: Oh, boy. It may be a collector's item, you know..
FOX: Well, I don't know. They will be publishing for a while yet. The main thing, I was just looking for what's different, and the first thing in the calendar, there are a lot more people's birthdays mentioned, and I think this might be...
CAFFERTY: Prospective jurors?
FOX: Yes, I think..
SUSAN LISOVICZ, CNN CORRESPONDENT: SEC commissioners? Federal prosecutors?
FOX: Yes, I don't -- do you know Kevin Berger (ph), Laura Akuna (ph), Edward Booth Clifford (ph)?
CAFFERTY: No, but happy birthday.
FOX: Their birthdays are coming up the end of July. LISOVICZ: Well, I think that this was a real pivotal week for Martha Stewart, not because she was indicted, but because this media mogul finally started talking. Here is a woman who has her own TV show, her own magazine, regularly appears on "Letterman". She established her own web site, marthatalks.com, and guess what? People are e-mailing her.
CAFFERTY: All right, onward and upward. Martha Stewart building an empire on the premise that now matter how good your life is, you will pay to find out how to make it just a little bit better. While Stewart was telling us how to turn a milk crate into a table lamp, her own life running into big problems.
This week she pleaded not guilty to charges that she tried to cover up an illegal sale of stock in ImClone, a hot biotech firm. Those shares, by the way, on the rise big time, as their cancer drug, Erbitux, is set to go before the FDA for approval sometime in the not too distant future, and the stock is trading up in the mid 40s, as of Friday, when we tape this little program.
Next week Stewart's old pal, Sam Waksal, the former boss of ImClone, is expected to be sent to prison for insider trading. Ironic isn't it that if they had both held on to the stock, perhaps they would have been in the black in the whole thing by now, and none of this would ever had happened. But it did, and on we go.
The big attraction in the Martha Stewart case, of course, is Martha herself, the very visible face of one of America's best-known brands. Chris Huntington has been moving the legal moves this week. He joins us now with the latest on what is arguably the best soap opera to come to Wall Street in a very long time. Hi, Chris.
CHRIS HUNTINGTON, CNN FINANCIAL NEWS CORRESPONDENT: Hi, Jack, good afternoon. Well, Martha is out of her company, but she is certainly not down. And as you mentioned, she has this new web site, marthatalks.com, that in concert with a full page, open page letter in the "USA Today" on Wednesday, basically says she's going to fight this to the end, and she is sticking to her story that she and her broker at Merrill Lynch, Peter Bacanovic, who has also been charged both in insider trading by the SEC and the criminal counts from the Justice Department, that she and Bacanovic had a standing order to sell ImClone stock if it fell below $60 a share.
FOX: Chris, Justin Fox here. That's not what she's being charged with, right? The charges don't have anything really to do with the insider trading. It's everything she did afterwards.
HUNTINGTON: Oh, well, no, actually, the SEC charge is directly an insider trading charge. And the fact is if she and Bacanovic can successfully stick to their story that they had this standing agreement to sell ImClone at $60 or below, that pretty much wipes out everything else. In other words, if they can get a jury to believe in a criminal case, that it's beyond a reasonable doubt, or that there is reasonable doubt that the government can't prove this, then all this notion of them -- the other charges that they obstructed justice, that they lied, that also becomes much more difficult to prove. Now, the obstruction of justice charge does have two bits of serious evidence against Martha and Peter Bacanovic, and that is tampering with records. The fact is that the government is saying that Martha altered her phone records and Bacanovic changed his Merrill Lynch work sheet with a little blue pen to put "at 60" next to a notation about ImClone.
LISOVICZ: You know, Chris, there is where Doug Faneuil comes in, the assistant broker, because, you know, Peter Bacanovic has been stoic, he has been successfully, up until this past week, evading the press, hanging out with his friends, not even seen at his New York City townhouse, but the assistant broker is critical now, isn't he?
HUNTINGTON: He is the government's ace in a hole. He has already pleaded guilty to a misdemeanor. He has basically already flipped his story, and he's going to tell the government -- he already has told the government -- he could tell everybody in a trial that there was no standing sell order at $60, and of course he, Faneuil was the one who actually was on the phone with Martha giving her the news that the Waksals were selling their shares. So, he's a very key element in this whole chain of events, and, of course, he's on the side of the government right now.
CAFFERTY: Talk for a minute, Chris, about how the company is handling all of this. The stock, when it began trading as a public company, I think on the first day, traded at something around $40 a share. It's never been that high since.
HUNTINGTON: Never been that high.
CAFFERTY: And she has lost a ton of money. There's a look at the stock chart over the last three years or so.
HUNTINGTON: Yes, well, as you can see from the chart, the stock came in at the high point, and it has pretty much chopped its way south since. If you go back a year to last June, when this whole hubbub about the ImClone sale became public, the stock has fallen from $19. It is now trading about $10.50. It got as low as $5.25 at the low point. So, at the low point, she was down $400 million on paper at least. She's made a little of that back now, but the company is in trouble. It's lost money for a couple quarters in a row. It's warning of another quarterly loss right now.
Of course, Martha is the company. In fact, the prospectus of the -- from when the company went public, said the company brand is tied inexorably to Martha Stewart. So, they have got a problem on their hands.
CAFFERTY: Chris Huntington, thank you very much for the update on Martha Stewart.
Laura Ries, a national branding expert, president of the marketing strategy firm, Ries & Reese, in Atlanta. She's worked with major corporations, including Merck, Ace Hardware, and Frito Lay, and she joins us now to assess the damage that is being done to the company, Martha Stewart Living Omnimedia, and if you would, address this idea that if she should happen to win this thing, some people say she will be back bigger and stronger and meaner than ever.
LAURA RIES, RIES & RIES: It's not so much if she wins in the court, you've got to win in the court of public opinion. I mean, look at O.J. Simpson. He stuck it out. He went to trial. He won, but everyone still believes he's guilty, and he hasn't resurrected his brand.
So, she is really -- she finally got to the public, at least an attempt with the web site to get her message out there, and people were swarming. They are dying to hear from her.
CAFFERTY: Was it a mistake to wait this long to say anything?
RIES: The biggest mistake she made was waiting this long. The firs thing she should have done is gone right to the people, talk out. You know, people want to forgive. They know people makes mistakes. She had a problem that her so image was tied into Ms. Perfect, Ms. Goodie Two Shoes, but, you know, she has to admit that she is like everybody else, and she has faults.
And do like Sammy Sosa did. I mean, he had a very Goody Two Shoes reputation, hit a snag, and he came right out said, I'm very sorry, I'm to blame, it was a mistake, and I think he's...
LISOVICZ: But there's a big difference between Sammy Sosa and Martha Stewart. Martha is not apologizing. In fact, far from it.
RIES: I know.
LISOVICZ: She is as fiery, defiant as ever. In fact, I'm looking at that open letter in "USA Today" and on her new web site, marthatalks.com, and she says, "I simply returned a call from my stockbroker." There's a lot of people out there, even among her supporters, who simply don't buy that.
RIES: I don't think anyone buys it. I would -- I mean, it's an attempt, I think, with the letter. I think she should have gone immediately -- we need to hear from her. I don't think anyone's going to buy that story long term. There's something smelly, there is something fishy about it.
And, you know, she can stick with it, and maybe she'll win in the courts, but she has to get her message out there.
FOX: So, what does she do that doesn't get her thrown in jail?
RIES: Well, that's the problem. That's a real problem. And, I'm obviously not a lawyer, but I would have thought, you know, somehow, if she had gone in there early, she could have made some sort of deal and gotten herself out of this a lot easier. I mean, dragging it out is really the worst thing you can do, not going to the media. This has been going on for years. It was 2001 this thing hit, and we've only heard from her now? It's 2003, my gosh.
CAFFERTY: One can only speculate that, you know, had she done as we're talking about, hindsight being 20/20, but gone to the public right up-front, she might have already won the battle of public opinion so that with the trial coming up, the sympathy would have clearly been on her side going in. As it stands now, that's very much an open question, isn't it?
RIES: Yes, well, you know, as soon as you hide behind lawyers and don't make any statements, people assume you're guilty immediately.
CAFFERTY: Laura, we're going to have to leave it there because we have a lot to do in this hour, and the clock is ticking, but I appreciate your thoughts on what is arguably one of the best stories to come along in the world of high finance and skullduggery in a good long while, and my sense is we may be talking to you and getting an update on the brand, Martha Stewart, as this thing proceeds toward trial. Thank you for being with us.
RIES: Thank you, Jack.
CAFFERTY: Laura Ries, who is the national branding expert and the president of Ries & Ries.
Coming up on IN THE MONEY, street signs. Stocks breaking out of a three-year slump. Find out what's triggering the rally and whether or not it's time to get in.
Plus a threat too small to see. We'll hear from a researcher who says the danger of a flu pandemic could leave SARS in the shade.
And altered suits. Some states are putting caps on the money lawyers can make from damage claims. We'll have a debate on whether attorneys who argue well should be free to earn very well. Back in a minute.
LISOVICZ: The Martha Stewart indictment wasn't the only big story this week. Here's a look at the key developments in our Money Minute.
The key jobs report was mixed for May, and the markets interpreted the news favorably. Unemployment did rise to a nine-year high of 6.1 percent, but the economy lost fewer jobs that expected.
Federal marshals arrested the man prosecutors say was the architect of the illegal schemes that caused rolling blackouts in California two years ago. The U.S. attorney's office in San Francisco says ex Enron trader, John Forney, fraudulently drove up California's energy prices between 1999 and 2001.
WorldCom founder and former CEO, Bernie Evers, may soon have to face the music for the company's collapse. "The Wall Street Journal" reports that a new report details how WorldCom accounting fraud began in 1999 when Evers was still running the company. Last year, the now bankrupt telecom giant admitted to covering up more than $10 billion in losses. The report could help prosecutes charge Evers with a crime in the case. And a record number of people applied for mortgages last week, thanks to the lowest rates in over 40 years. Loan demands surged 13.6 percent. We'll talk more about mortgages and the hot real estate market in just a few minutes when we're joined by John Talbott, author of a new book that predicts a crash in the housing market.
CAFFERTY: I'm sorry to hear that. I have a house, I hope he's wrong.
LISOVICZ: I do, too.
CAFFERTY: Instead of choosing a stock of the week, we decided that the continuing rally in the stock market calls for looking at all stocks and the markets in general. Even if you were burned by the stock market collapse, and if you were in the market, you were, you may be getting tempted now to get back in, given the recent run up in the markets.
Since the market lows of October, 2002, the Dow's up 24 percent, the Nasdaq's up 47 percent. So, is it time to get back into stocks? Joining us now to talk about it is a man most Americans recognize, whose many movie appearances, his role as the host of "Win Ben Stein's Money" on Comedy Central, which I think is one of the cleverer programs on cable TV, although I no longer get it on my cable system in New Jersey. I'll talk to them about getting it fixed.
He's the coauthor of a new book on investing. It is entitled. "Yes, You Can Time the Market", and Ben Stein joins us now from Los Angeles. You know, bankruptcy court, Ben, is full of people who thought they could time the markets. A lot of experts say it can't be done, and if you want to lose your money quickly, all you have to do is start trying to timing the ups and downs of the market. What make you say we can?
BEN STEIN, AUTHOR: I think short-term you are going to wind up in bankruptcy court if you try to time the market. It can't be timed day by day, month by month, even year by year, but over very long periods of time, 10 years, 15 years, 20 years, there are certain measurements that tell you when the stock market is cheap and when it's expensive.
LISOVICZ: If you can't do it day to day or week to week or month to month but over years, isn't that buy and hold? I mean, you look...
STEIN: No. No. No. No. It's buy, but it's buy at certain times. We have a whole bunch of charts that tell you -- and we also have a web site that's free, www.yesyoucantimethemarket.com. It tells you when the market is below 15-year averages of cheap and expensive, and we can just tell you -- I'll save you a little trouble by saying it, except in the one metric of price to book value, it's very much too expensive right now.
And if you buy, you might still make money, but over long periods of time, you will make a lot more money if you wait until either earnings rise a bit or the market goes down a bit. CAFFERTY: The market, Ben, has made a substantial move up in the last couple of months, one that we haven't seen in, you know, a couple of years. Let me ask you about the metrics that might have been driving that market.
We have interest rates at 45-year lows, and there's no indication that they are going to go up anytime soon because the economy is struggling to get out of this recession. We've got tax cuts that are in the works that should be showing up in people's paychecks, probably as early as the next month or six weeks. We are running huge deficits, which are stimulative to economies that are trying to come out of recession.
Why aren't the metrics, giving the fact that the market tries to tell us what's coming ahead, why aren't the metrics this time telling us that the economy is poised for a rather robust recovery and that earnings are going to recover and stock prices are going to continue to rise, at least in the short term?
STEIN: Because there are also a whole bunch the metrics that say the economy is still weak, that it's still losing job, that the profit recovery is extremely excruciating slow, that profits on the Dow is still 40 percent below what they were at their high, that profits on the Nasdaq are nonexistent.
So, I mean, yes, it's true, we have very low interest rates, so if you discount the flow of dividends back to the present, you will get a much higher number with low interest rates than with high interest rates. But on the Nasdaq, there are no earnings to discount, so that's a big problem.
Yes, we've had a big cut in the dividend tax, and that is an enormous stimulus to the stock market, but for stocks that pay dividends, why are they rallying? The tax cut doesn't affect them.
I would say we do have metrics that should prove a big boost in dividend-paying stocks, and dividend-paying stocks are, I think, going to be very much at a premium in the future. But for the Nasdaq, it's a mystery to me, it just is a second bubble waiting to blow up in somebody's face.
LISOVICZ: OK, so, Ben, if the Nasdaq -- and a whole lot of stocks are overvalued, we have a guest on who's saying that the housing market is going to crash. Where is Ben Stein putting his money? Tell us.
STEIN: Well, Ben Stein has a son in private school who just bought his first car, so that takes part of it. But I'm putting it in income. See, I'm 58 years old. I don't anticipate being able to work forever. I'm putting it into income. REITs still pay a very good dividend. It's taxable to be sure, but it pays a very good dividend.
Dividend-preferred funds pay a very, very good dividend, large part of which is tax -- affected by the cut in the tax rate. Emerging market bond funds pay a stupendously high rate, and they've also provided some excellent capital gains in recent years, and there are funds that just specialize in high dividend stocks.
I like income. I think that for the huge baby boom bubble in the population, that 70 million people, they're going to be craving income. I want to get in on that now before they bid up the price of the income stocks to levels that won't yield as much income.
CAFFERTY: The book is called, "Yes, You Can Time the Market". The author is Ben Stein, who is actor, game show host, writer, former speech writer for President Nixon.
STEIN: And student, graduate student in financing at Yale, too.
CAFFERTY: A renaissance man, perhaps?
STEIN: No, just a fool.
CAFFERTY: I really liked the "Win Ben Stein's Money when Kimmel was on. You guys were good.
STEIN: Oh, I loved it. Jimmy Kimmel was like a brother to me. I miss him desperately.
CAFFERTY: All right, Ben, thanks for being with us. I am going to go put some money in the market on your advice. Take care. Ben Stein joining us from Los Angeles.
Still to come as we continue, the bug that scares the experts more than SARS. We're overdue for a flu pandemic that could ravage the global economy and leave millions dead. There's a cheerful thought. A World Health Organization doctor will tell us about the risks of that.
Also ahead, courtroom roulette. Even some lawyers say there's too much money for attorneys in certain kinds of lawsuits. We will see if you agree.
Plus house beautiful or house of cards? The real estate market has been hot hot hot, but a new book warns of a chill. We'll talk to the author about whether there's a bubble in housing. Stay with us.
CAFFERTY: Well, we got some good news this week. SARS appears to be peaking, maybe even slowing down. One researcher, though is warning an even more dangerous bug could be ready to strike. As of this week, the World Health Organization 800 deaths, just a little short of that, to SARS worldwide. WHO says the virus has passed its peak but could stage a resurgence.
Even so, the financial damage, a lot of it, has been done. Fear of SARS has hit Asia's business very hard, especially tourism. One World Health Organization official this week reportedly called it Asia's biggest economic disaster in 30 years, and the World Bank is estimating the total cost of damage done to the economies by SARS in the range of $20 to $25 billion. SARS may have passed its peak, but one World Health Organization doctor says we could face an even bigger threat from a much more familiar virus. It's the flu, as in influenza. It sweeps the world in what's called a pandemic about once every 25 years, although it comes around about once a year to most of us. The last pandemic occurred 35 years ago, and officials believe the next one is long overdue.
Dr. Stohr, is a project leader of the World Health Organization's Influenza Program, and he joins us today from Geneva, Switzerland. Doctor, welcome. It is nice to have you with us. Why should I be that concerned about the flu? I get my flu shot. Even if I get a little case of it every year, it seems to come and go in a few days. Why should I be concerned now?
DR. KLAUS STOHR, WORLD HEALTH ORGANIZATION: That's correct. Most of the people who do have an influenza infection will certainly not have to be hospitalized. But there are in the United States, more than 100,000 people every year who have to be hospitalized because of influenza, and up to 40,000 dies.
So, influenza is not just a bit of fever and coughing. It's really a disease which affects many people, particularly those with chronic disease and over 60.
CAFFERTY: So, is SARS -- all the fear about SARS is simply a result of the alarmist approach to a new and unknown virus that the news media got a hold of and blew into something bigger than it is? Or is it potentially the kind of disease that you're talking about with influenza?
STOHR: Well, with us, we are being faced with new emerging diseases. We have no drugs, we have no good diagnostic test, we have no vaccine, and the disease has certainly the potential to cause a global health emergency, as it has shown in the past. The disease can be controlled now.
We believe if we continue with the drastic efforts which have been taken, it can be certainly put back in the box, but if we don't move now, it could certainly become a disease which we will have to deal with for the next years, and that is the threat which we are facing.
FOX: OK, with the flu, is the issue that every quarter century or so it's a new kind of flu? Is that what makes it so dangerous? That's what creates the pandemic?
STOHR: Well, we have our annual epidemics, which are bad enough. More than a million people are dying every year from influenza. Now, this influenza virus has other surprises. It does not only change a little every year, it can, every 25, 30 years, it's unpredictable when, make a big genetic change. Then the new virus which emerges will be deadly, no one is going to have immunity, and during the big outbreak, during the last three times, during the last century, up to 50 million people died within a very short period of time. LISOVICZ: OK, so, Dr. Stohr, there's a lot we don't know, and you're certainly saying that we're overdue for this pandemic, but there is a lot we do know, as well, as to how to prevent ourselves from getting sick with influenza. One of them is to get our flu shot, like Jack does dutifully every year. Another is to keep our hands clean. What else can we do?
STOHR: Well, we can receive ever year our influenza vaccination. It makes sense for everyone who is over 50, over 55, to get the influenza vaccine, but this vaccine, which we are producing now, will not be effective when the pandemic comes, and the pandemic will travel around the world within three to six months.
Up to 50 percent of the population will be affected. Millions of people will die. This is -- this is something which we have seen in the past, and what is worse, it is going to lead certainly to a global health emergency because of the burden to the health care system and to hospitals.
CAFFERTY: Why does so much of the stuff come out of Asia, Doctor? We have the Asian flu, SARS originated in China. What is it about Asia that provides the rest of the world with these little organisms?
STOHR: Well, first of all, we must not forget that most of the people in the world are living in Asia, so it's -- and the same applies also to animals. So, it's perhaps a question of statistical probability that many diseases are coming from a place where many people and many animals are living.
In addition, we know that, for instance, some viruses need very close contact with animals, as well as humans, like the influenza virus, and the conditions appear to be more conducive to that interaction in Asia.
CAFFERTY: All right, Doctor Stohr, we are going to have to leave it there. Thank you very much for being with us. Dr. Klaus Stohr, the project leader for the Global Influenza Program at the World Health Organization joining us today from Geneva, Switzerland. What am impressive program. We've got on all the way from Switzerland.
Coming up next on IN THE MONEY, drawing the line. More and more states putting limits on payouts and lawsuits, with everyone from surgeons to burger flippers calling for protection from high claims. We are going to have a little debate on that.
Plus your home is your castle, and it's probably your biggest investment. But some people think the value of that investment could soon head south. We'll talk to the author of a new book who says that there is a crash coming in the housing market.
And law and order to home and hearth, if you have something to say about something on this program, write and tell us all about it. Our e-mail address is firstname.lastname@example.org. Back after this.
(COMMERCIAL BREAK) (NEWSBREAK)
LISOVICZ: A personal injury suits get bigger, so does the fight over scaling them down, according to "The New York Times", people who want change say nearly 20 states are considering restrictions on medical malpractice and other suits, and in at least 11 others, lawmakers are reported to have already signed off on tighter rules.
The battle over medical malpractice claims may be the hottest of all. Doctors say liability insurance costs so much, it's putting many of them out of business. One medical group says the average price of coverage runs as high as $71,000 a year for neurosurgeons.
CAFFERTY: Changing the system might mean more cash for all of us. A Congressional study out last month reportedly says that tort reform could save U.S. taxpayers $15 billion over a decade to taxpayers. Then again, if you're in pain from a doctor as mistake, and they do make them, do you really want a cap on the amount of money you'll be able to collect?
Joining us to debate that issue, a trial lawyer and someone who thinks the trials lawyers ought to be reined in. Barry Nace is a medical malpractice and liability lawyer and a partner in the Washington, D.C. law firm of Paulson and Nace, and Philip Howard is the chairman of Common Good, a group which says it wants to reform what it calls America's lawsuit culture.
Let's begin with you, Mr. Nace. Susan alluded to the fact that, in her intro, that among other things, physicians are being faced with malpractice insurance premiums that are cost prohibitive, and, in fact, many of them are being driven out of the profession. Isn't it past time that something be done about the cost of the insurance, which is directly dictated by the size of the settlements that are being awarded?
BARRY NACE, ATTORNEY-AT-LAW: Well, I would agree with you that it's time that something should be done, but it -- and it should be with respect to the insurance industry, which -- the rates are not being dictated by the size of the awards.
There's a lot of data that shows that the awards have not gone up. If anything, the median has going down. The number of lawsuits being brought in medical malpractices isn't going up, it's going down. What we've seen over the years is that every time the insurance companies have a crisis of their own, because they're not making enough money, primary through their investments, what they want to do is raise the cost of insurance premiums.
CAFFERTY: But the cost of premiums is driven by their expenses, right? I mean, the more they have to lay out to pay damages collected against the policies they write, the more they wind up having to charge in the way of premiums, so there is a cause and effect thing to a degree, is it not?
NACE: No, it's not a cause and effect. A very small amount of that is what you would call a cause and effect. They lose their money in the stock market like a lot of other people do, and they've got to try to recoup it some way.
But when you know that the number of malpractice lawsuits is not going up, we know that the median awards are not going up, there's only one thing that's left, and that's the insurance companies not taking care of their house like they should.
PHILIP HOWARD, CHAIRMAN, COMMON GOOD: You know, that's just not accurate. Most of the -- over half the doctors are insured by companies that are actually owned by the doctors themselves. They are hardly gouging themselves. And most of the leading patient safety experts and consumer groups are now coming out for an overhaul, not only because doctors can't afford these premiums, which are driven by the increases in verdicts, which have doubled in the last 10 years, but also because it's making doctors paranoid. So, they are ordering -- they are wasting billions in unnecessary tests and procedures that could be used to take care of people who are really sick.
NACE: This idea that they're wasting money doing unnecessary studies -- something's been around -- people talk about that a lot, but there's no data that shows that. And the data clearly shows that the malpractice awards are not going up, they are going down. This is the same thing that we hear year after year after year, and the data doesn't support it.
HOWARD: Right. And so what you have is insurance companies going out of business. The largest insurer, St. Paul, went out of business not because it was making so much money. It's really costing us much.
LISOVICZ: Can I put a question to both of you? One of the complaints, other than that we, by nature as Americans, are litigious, is that oftentimes the juries simply are overwhelmed by the complexity of the information, especially in medical malpractice suits, and that it's highly specialized information.
I would like both of you to quickly address whether you would be in favor of a special court just dealing with medicine, special courts that, say, already exist for other highly specialized area like taxes and patents? Would that be the answer to end the clogging in the systems and end these crazy awards and appeals?
NACE: Well, let's say first of all, there's not a clogging of the system. We have to start with that. Civil lawsuits make up a very small percentage of lawsuits. Most of the lawsuits that are filed are from companies suing companies, not individuals, not tort case and not malpractice cases.
But as far as who should decide these issues, the juries have been able to do this, they are intelligent people, they are able to figure these things out. If the jury makes a mistake at some time, and awards, quote, too much, end quote, we have safeguards in our system. We have procedures in which the trial judge has the ability to reduce the award to the amount that he thinks is fair and reasonable that a jury could award.
HOWARD: So, Mr. Nace, you're saying everything works perfectly now?
NACE: I think the system works very well. I have a lot of faith in the juries that do this. I have a lot of faith in our court systems to do it right, and they have been doing it right. These crazy awards that you hear about really don't occur. It's very seldom you hear anything like that in a medical malpractice case. They're very difficult cases for lawyers to put together, to start with.
HOWARD: You know, there are at least two problems with the jury system. One, the studies done by the patient safety experts show that the results are practically random. Doctors who did nothing wrong sometimes get hit with huge verdicts, especially in babies who are born with terrible problems, because the jury is very sympathetic to them, and often doctors who did something wrong get away with it. So, it's unreliable for both sides.
And the unreliability of the system is exactly why we need a special court. It's better for the people who are really injured, and it's better for the people who have their lives on the line every day and in every examining room. The doctor, they deserve a system that's reliable to distinguish between right and wrong.
CAFFERTY: Let me ask you both this question, and Mr. Howard, I know you're in favor of change, and we'll get Mr. Nace to weigh in on this also. But, if, in fact, the system needs changing, how do you change it? How do you fix it? What do you do?
HOWARD: Well, we have a brought coalition of consumer groups and others who come together calling for a special medical court system. And so, we have their bills in Congress being drafted to -- for pilot projects to restore reliability to the system.
So, it will be better for consumers. Maybe they won't get rich, but they'll get money sooner without having to pay half of it to lawyers. And it's better for doctors who won't live in fear of being ruined every time a sick person gets sicker.
CAFFERTY: Mr. Nace, what's your answer. If you accept that it's an imperfect world, what needs to be altered, in your opinion?
NACE: Let's correct a few things. First of all, the lawyers don't get half of the money. That just doesn't happen, number one. And number two...
HOWARD: How much do you get?
NACE: I'm sorry?
HOWARD: How much do you get? A third?
NACE: Anywhere, depending if you're taking a federal tort claim case, you would get 20 percent, you may get as high as 40 percent, and please let me finish. If you are taking those -- you have to remember that the courts have to approve the attorneys fees. Right now for any minors, most places in wrongful death cases, they have to be approved. Nobody is getting -- the people aren't getting rich. HOWARD: The total fees are between a third and 40 percent for the plaintiff's lawyer, and there's also a lot for defense lawyers, as well. If you add it all up, it ends up being more than half the money goes to lawyers. If you had a reliable system, that money could be freed up to go to people who really are injured.
NACE: Well, you know what? When I'm involved in a case, and it's me on one side, and I see the other side having six lawyers involved in the case, which frequently happens, there's not a lot of sympathy to say that, well, the doctors and the hospitals and the insurance companies have all these lawyers that they want to pay. They don't have to have six lawyers in these cases, so don't talk to me about the fact that they have expenses. They choose to have those expenses.
HOWARD: Great, so let's go to a more reliable system where the court appoints the experts. It's much more efficient. You get the verdict sooner, and people could count on it.
NACE: The fact that a court would appoint an expert doesn't make anything more efficient or more satisfactory. We always have experts on our cases, and the defense always comes in with more experts because they can afford more, and they can pay more on these things.
CAFFERTY: Gentlemen, we are going to have to interrupt and bring this to a close here. We're not going to get this solved today, but I think we'll go away enlightened about some of the dimensions of the discussion that maybe we weren't aware of. Barry Nace, medical malpractice liability lawyer, and Philip Howard, chairman of the Common Good. Thank you very much, gentlemen, for your input.
HOWARD: Thank you.
CAFFERTY: Perhaps we will revisit this at a future time.
NACE: Thank you very much.
CAFFERTY: All right. Coming up on IN THE MONEY, the big chill. We will hear from an economics expert who says the hot housing market may soon be headed south.
And a chance to tell us what's making our day, or we'll tell you what's making our day, or something along those lines. It's about the e-mail. You've seen this clip before. It's all about the e-mail.
CAFFERTY: Borrowing money to buy a house got even more painless this week. Mortgage rates dropped to their ninth record low of the year. Money has never been cheaper. Mortgage lender, Freddie Mac says you can get a 30-year conventional, fixed-rate loan for 5.26 percent.
Loan numbers like that just one factor driving a booming housing market that continues to reach new highs. However, some say the rapid acceleration in home prices has created a bubble, and our next guest says it's ready to burst. John Talbott is the author of the book, "The Coming Crash in the Housing Market". He's a visiting scholar at UCLA. He's a former investment banker with Goldman Sachs, and he joins today us from California.
John, nice to have you with us. Thanks for joining us.
JOHN TALBOTT, AUTHOR: Well, thank you very much. It's good to be here.
CAFFERTY: What makes you say we have a bubble? A couple of things that occur to me off hand, the regional nature of housing prices and the fact that we are probably going to have pretty cheap mortgage money around for a good long while. There's no indication the Fed is going to be raising rates any time soon. Why do you say we have a bubble?
TALBOTT: Well, those are both very good points. You know, traditionally, real estate is thought to have been a very localized industry, location, location, location, being the first three rules in real estate.
TALBOTT: But I argue in my book there's a systemic problem in the financing of mortgages and residential real estate today, and I give some very strong evidence. Thirty-nine years in a row, housing prices in the United States on average have increased. The last five months they're absolutely flat.
Last year, 199 out of 200 metropolitan markets in the United States showed an increase. This year, first quarter of this year, 60 percent of those markets are showing a slight decline. So, there's some evidence that we might be peaking.
FOX: Why is it not just going to stay flat? Why are you so worried that we're headed for some sort of big drop?
TALBOTT: Well, you know, my theory is that this isn't a real market. A real economic market you have to have lots of willing buyers and sellers, and although there's millions of home buyers and home sellers, I think they're all being driven by the same economic formula, which is the amount of money the banks will lend them, the qualifying formula.
And so, all the banks end up lending the same amount of money to everybody, and I know very few people who are willing to spend less than what they qualify for a home.
LISOVICZ: So, you're talking about bad credit here? You're saying there could be a lot of people who will default on their mortgages? Is that what you are really worried about?
TALBOTT: Absolutely. Absolutely. The personal bankruptcy rate in this country has gone from 200,000 individuals to 1.5 million over 20 years. The foreclosure rate is increasing every quarter and is up to 1.2 percent, and that's during the biggest housing boom in history. So, could you imagine if prices peaked or started heading south what would happen to that foreclosure rate? It's a very serious problem.
CAFFERTY: Have we ever had a dramatic housing bubble in the history of this country? I ask that in all honesty. I really don't know the answer.
TALBOTT: I don't know if nationally we have, but obviously, regional markets have. Houston did with the oil and gas. Boston did with the high tech. Here in Los Angeles, we had in -- right around the recession of 1989. I would say 1989, 1990 was the most recent.
CAFFERTY: Silicon Valley I guess had one, right?
TALBOTT: Absolutely. And I have brothers and sisters in Seattle and Portland, and they're seeing prices trade off there with the high- tech sector trading off.
FOX: Here's my problem. I've got a big down payment sitting around, still waiting to buy a place in New York, and everybody keeps telling me that there's a bubble and that prices are going to drop. And they just -- when is it going to come? I mean, I know this is schadenfreude on my part, I shouldn't be wishing for it.
CAFFERTY: Are you wishing for the rest of us for our homes to go in the porcelain facility so you can pick up a house at a bargain? What is this?
FOX: There's something to that, yes.
CAFFERTY: Since you ask.
TALBOTT: It's very interesting. You know, the people that interview me, they fall into two distinct categories, the renters and home owners. You can imagine which group is happy to talk with me.
But I don't pretend to be able to call exactly when markets can crash, but I can tell you a story about this market that will scare you and make you think that maybe prices aren't going to head to the sky, and this is good news for potential home buyers. I mean, for the first time, instead of thinking they have to buy in now or they won't be able to afford to, here they can take a different tack and say maybe trees don't grow to the sky.
LISOVICZ: But, you know, John, this isn't day trading. I mean, people buy homes, and they keep them for a long time typically. So, if prices come down a little bit, that would only be natural. In fact, housing moves in cycles just like the economy, just like the stock market. What's wrong with that?
TALBOTT: You know, if you substituted the words for "high-tech stocks" for the word "housing" in your last sentence, you would have exactly what I heard in 2000 for how the stock market reacts. People were convincing -- brokers were convincing investors that stocks are long-term investments and that over the long term, stocks do better than bonds, and so what is your risk in the short term?
And that's sort of extending a logical economic argument to its absurd extremes. I mean, you don't want to be buying in at the peak of any market, and all my analysis shows this is near the peak.
CAFFERTY: On the other hand, though, John, I mean, take a look. Where you make some money these days? Stock market for the last three-and-a-half years has been doing nothing but going down. There's been a couple of little vibrations that indicate there might be something going on, but the economy certainly isn't rolling back just yet. Bond market is, if anything, way overbought, and interest rates being as low as they are, how much more upside is there in bonds?
So real estate, in addition to being a shelter for American family, has become the investment, if you will, of last resort. Given the fact that there's no place else really to go out and make a buck these days, why shouldn't people keep putting money here?
TALBOTT: I think you hit on one of the reasons why we're experiencing this increase in housing prices. You know, the market softened, the stock market's soft, the economy is soft. Commercial construction is soft. The vacancy rates are very high in the commercial sector, and yet housing is up dramatically in the last three years.
So, you know, I think what people are saying is they're pulling their money out of maybe some of the high-tech stocks where they've suffered in this century, and now putting it into what they think are bricks and mortar, and bricks and mortar, while they can't evaporate like some of the high-tech companies did, you have to ask that question, what price are you paying for that bricks and mortar?
CAFFERTY: Fair enough.
TALBOTT: Leon Cooperman, back in 1987, when I was on Wall Street with Goldman Sachs, they asked him, where should you put your money, given that the stock market was trading off, and he said, I would put half my money in cashed and half in canned goods.
CAFFERTY: Well, cash doesn't -- go ahead.
TALBOTT: There is some logic to that, and that's a funny answer. The logic is that very smart, wealthy people, when markets are peaking, take their money off the table, and when people with leverage get in trouble, they come in and buy assets very cheap. So...
CAFFERTY: Investors makes profits, pigs get slaughtered, as they say. There's a time to get out.
If you're concerned about the crash in the housing market, that's the name of John's book, "The Coming Crash in the Housing Market". John Talbott is the author. John, appreciate you having the time to spend with us here today.
TALBOTT: Oh, thank you very much.
CAFFERTY: I'm a homeowner, I hope you're wrong. We're not catching bouquets here on IN THE MONEY, but you can toss us an e-mail. Tell us what's on your mind at email@example.com. Back in a minute.
CAFFERTY: If you feel the need to communicate, you've got something you want to speak about, get up off the couch and get over to the keyboard and get about the task at hand. The e-mail address for this program is firstname.lastname@example.org, and that funny looking dude has nothing to do with answering the mail, but another funny looking dude, Dave Novak, does. Back after this.
CAFFERTY: Funky music. Time to check the e-mails for the week. A lot of you weighed in on our story about corporations that have subsidiaries in Iran. Thomas in Arizona wrote to us and said, "I can't help but think U.S. oil companies like Halliburton are running American policy. Clearly, we are not out of the woods with such corporate ethics."
Our segment on suicide bombers and what motivates them also produced a lot of reactions. David from California writes, "It is time for us to use a weapon we invented in the first place, public relations. We have got to convince the general Muslim population that we are decent and kind people. There used to be a saying that running the world is not a popularity contest. With one terrorist capable of carrying as much force as an army, it is now a popularity contest."
And our debate on how the new federal tax cuts will or won't help American workers produced this comment from Mary in Missouri, "I think if the government wants to really get job growth, it needs to quit sending jobs overseas. Here in Missouri, when we call the state capitol, you get somebody in India." Mary, you may be surprised to hear that some U.S. companies aren't just exporting job to places like India, they are importing people from places like India to do jobs right here in the United States for a lot less money, and that costs American workers jobs.
We'll tell you more about the controversial L-1 visa on tomorrow's edition of IN THE MONEY, which begins at 3:00 Eastern time here on CNN. And you can tell us what you think anytime of the day or night. email@example.com is the e-mail address. We'll pick a few and read them every week. We pick a lot more and totally ignore them. That's it for this edition of IN THE MONEY. My thanks to Susan Lisovicz of CNN "FINANCIAL NEWS" and Justin Fox, editor-at-large, "Fortune" magazine sitting in for Andy Serwer who is on donut assignment. We'll see you tomorrow, 3:00.
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