CNN IN THE MONEY
Has Bush Committed Too Much Money to Africa?; Is Viacom Stock a Good Buy?; Interview With Senator John McCain
Aired July 12, 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: I'm Jack Cafferty. Welcome to IN THE MONEY. Coming up on today's program, permanent vacation. Long-term unemployment no day at the beach, and it is affecting hundreds of thousands of U. S. workers. We'll look at the hidden crises behind the jobless numbers.
Plus inhuman wrongs and human rights. President Bush's trip to Africa this week. Raising the pressure for slavery reparation payments. We'll look at the debate and whether or not the demands are likely to be met.
And blue movies and greenbacks. From the back streets to Main Street, the porn industry is booming like never before. We'll find out how some major mainstream banks are profiting as the customers pay up.
Joining me today as always, a couple of our IN THE MONEY regulars, Susan Lisovicz, financial correspondent for CNN and CNNFN, and Shawn Tully, who is a senior writer at "Fortune" magazine.
It occurs, reading the news this week, that the president may begin to feel the heat on Iraq pretty soon. We had General Tommy Franks saying that the military may have to be there as long as four years. The cost of maintaining forces in Iraq and Afghanistan are running $153 million a day. Our military people are getting shot and killed and/or wounded almost on a daily basis. We are getting no help from the allies, and we are getting close to a re-election campaign. I wonder how long the public will tolerate this.
SUSAN LISOVICZ, CNN FINANCIAL NEWS CORRESPONDENT: Well, not only that, I mean we have a federal deficit. We have 40 states that are in the red with their governments. We have a rising unemployment rate. We have a lot of problems economically, never mind the tragedy of our American soldiers dying almost on a daily basis. It's a huge issue and one, it seems, the government was unprepared for.
SHAWN TULLY, SENIOR WRITER, "FORTUNE" MAGAZINE: Yes. I think the numbers are sort of theoretical to most people, whether it is 70 million a day or 150 million a day, but the drum beat, the steady drum beat of the publicity over the deaths and the kind of feeling of helplessness and the inability to tame that country can definitely be very politically damaging.
I think here that Bush is going to need the capture of Osama bin Laden or Saddam Hussein, progress in the Middle East, something to offset this negative publicity that keeps on coming in every day.
CAFFERTY: Plus this week they turned up that little gem that was in the State of the Union address about Saddam Hussein allegedly looking for uranium in Africa to reconstitute Iraq's nuclear weapons program, and earlier today, the White -- or this week, the White House said, well, we shouldn't have said that because it wasn't true.
LISOVICZ: Well, do you think it's the State of the Union address? This is not some off the cuff remark. This is one of the most vetted addresses that the President ever gives, and oops, it slipped through.
TULLY: We are checking the State of the Union better than "Fortune" magazine. We are more accurate than they are.
CAFFERTY: I figured we see a White House speech writer hanging by his thumbs from a tree limb out on the White House lawn.
TULLY: That's what they do to journalists.
CAFFERTY: There you go. All right. Whether they like it or not, hundreds of thousands of Americans are getting the summer off without pay. Last month's unemployment numbers, the worst in nine years. And the Labor Department says the job market is now in its longest slump since World War II. The picture is so bleak that a lot of people gave up looking for a new job months ago.
CNN's Greg Clarkin joins us now with the details on the numbers that are behind the numbers. How are you doing, Greg?
GREG CLARKIN, CNN CORRESPONDENT: I'm well. Thanks, Jack. This is a scenario that millions -- really, thousands of Americans are facing these days. They lose their job, and the start their job search, and after a while, they really get no where, and as the weeks turn into months, a lot of these folks are drained and discouraged, and they simply give up. They throw in the towel.
And it's really at that point that they become no longer part of the labor force in the government's eyes, they are somewhere between employed and unemployed. The government doesn't recognize them, and in the Labor Department's parlance, they are called "discouraged workers."
Now, by the Labor Department's own estimates, there are 482,000 such workers, and really, the big fear is here that when the economy picks up, they will come back to the labor market in big numbers, and what that is going to serve to do really is inflate the already poor employment picture. The fear is that when they re-enter the workforce, that is going to inflate the unemployment rate, and there is a big fear out there, Jack, that this will probably prolong this already incredibly lengthy slump in the labor market.
So again, it's folks basically throwing the towel, discouraged, and they are no longer considered really part of the labor force. They come back in a big way when the economy does begin to pick up, and it is going to be a bigger problem. It will probably stretch things out even further.
CAFFERTY: That's why they talk about these jobless numbers being a big time lagging indicator. The recession in the early 1990s -- there was a jobless recovery there. And long after the recovery got underway, the employment rate kept rising and rising and rising month after month until it got, I think, to 7 percent.
The question is, and I'm sure there's no way to answer this, but it seems like a logical question to pose. Why doesn't the government report the real numbers?
CLARKIN: Well, I think to some degree, it's hard to get a handle on, you know, just where a lot of these folks stand. A lot of folks maybe don't see any prospects out there. They have drained their network of contacts. So, they simply basically, you know, just step to the side and look for things to get a little bit better.
So, there might be a big gray area, where it's tough to get a handle on just, you know, who is unemployed, who is unemployed and, you know, how actively they are looking for a job. It probably shifts, I'm sure, by the day for a lot of folks.
CAFFERTY: All right, Greg, thank you. CNN's Greg Clarkin taking a broader look at the employment picture.
We are joined by John Challenger out of Chicago. He's the CEO of the executive search firm, Challenger, Gray & Christmas. John, nice to have you with us. Thanks for joining us.
JOHN CHALLENGER, CEO, CHALLENGER, GRAY & CHRISTMAS: Nice to be here, Jack.
CAFFERTY: What about that idea. The government seems to know these people are out there, and they have some rough idea of how many there are. Why aren't the numbers reported in such a way as to reflect a truer picture of who is out of work in this country?
CHALLENGER: It depends whether or not you have been looking in the last months. When they do those stats, those are people for the last four weeks. And a very interesting number, since March, we have had 1.3 million new people who have come into the workforce, 400,000 more people now are working than March, but 900,000 plus people can't find a job. That's one of the key causes for unemployment taking the big jump in this latest report in June from 6.1 percent up to 6.4.
LISOVICZ: So, John, can you just put it in perspective for us? Six point nine percent, that's a nine-year high, but, historically speaking, that's not so bad for the U.S. We have seen a lot higher, and in other industrialized countries, we have certainly seen a lot higher. What is the truer picture of the unemployment rate in the United States right now?
CHALLENGER: There was one report this week saying that, in fact, was about the average over the last 30 years, 6.4 percent. Back in the mid 1990s, there was a point where we thought six percent, then maybe five percent was full employment. The problem is today we have seen unemployment just steadily drain higher and higher month by month. The weekly claims numbers right now are above 400,000 for three months running. The labor market is not in good shape. So, even if you look at it historically, it doesn't accurately picture what's really happening.
TULLY: And, John, when you add in the people who are discouraged who have essentially left the labor force, you get up to something like 12 percent, right?
CHALLENGER: That's right. If you take the people who are discouraged workers that have just stopped looking in the last four weeks -- sometime in the last year they have been looking -- then you add in the number of people also who are underemployed. There's almost 5 million people who are in part-time jobs, wish they could have full-time but don't think they can find them or don't have the time to find them. If you add those numbers in, unemployment jumps to over 12 percent.
CAFFERTY: How much of this, John, do you lay at the feet of the recently concluded recession, and how much of it may have to do with the tremendous amount of outsourcing that is going on, particularly in the service sector? If I call one of the computer 24-hour service lines, I am going to be talking to somebody in New Delhi, India, instead of a worker here in the United States. How big a factor is that?
CHALLENGER: This issue of permanent job loss is going to be with us for years to come. We are moving into a global economy. Right now, we are seeing the down side of that. Workers are shifting to overseas, and it's not just manufacturing workers to China and to India. It's also skilled jobs. That's going to come. Architects, engineers. Of course, we are going to see that.
We haven't yet seen the demand side, though, come back. And as the world economy picks up, that could fuel the growth for years to come in this economy, so it might be bigger than the tech boom, but it's certainly a tough issue right now.
LISOVICZ: So, John, we have seen so much outsourcing in the tech industry. Where is the first sector that would benefit from a recovery? Because so many analysts and economists are saying it will come in the second half of the year.
CHALLENGER: Certainly, you would like to see tech, finance -- as businesses start to grow, they start to borrow more money again to go out and invest. That's going to be a key industry to be watching. We have seen the airlines and the travel sector experience significant problems. Manufacturing has bled jobs right on through this recession. Those are some of the areas that have to start coming back.
TULLY: What kind of advice would you give to white collar people who are all of jobs now? And a lot have been looking for many, many months, and the numbers are not as high for those people as they are for the overall numbers. They're not quite as bad. But people who are out of work, computer engineers, and many, many white collar workers are staying out for very, very long periods of time. What can they do to improve their job prospects?
CHALLENGER: Many people do take on part-time jobs, contingent jobs. They go in an do a project, especially in the tech world. There's a lot of that going on. Those can turn into full-time jobs if the company in that kind of extended interview likes what you do. So, don't be afraid to take on work and then meet everybody in the company and build into a longer-term job.
CAFFERTY: Thank you for joining us on IN THE MONEY. I appreciate it.
CHALLENGER: Thank you.
CAFFERTY: John Challenger, CEO of Challenger, Gray & Christmas, joining us from Chicago.
Coming up on IN THE MONEY as we continue, putting a price on misery. As President Bush tours Africa, activists back home are pushing for slavery reparations. We will look at the debate over compensation.
Plus skin is in. The line between porn and everyday entertainment is blurring. And for some banks, that means big money.
Also ahead, doing lunch with a legend. The chance to sit down and dine with the oracle of Omaha, Warren Buffett causing quite a stir on the web. We will tell you how much that lunch is going for. Stay with us.
CAFFERTY: Welcome back to IN THE MONEY. A number of you wrote to us this week about President Bush's trip to Africa. Here is one e- mail we received from Judy in South Carolina. She wrote, "What in the world is our president doing in Africa promising all that money? He should take good look at the USA. Thousands are out of work. What is he thinking?"
LISOVICZ: That was the question we wanted to try to answer ourselves, and we are getting some help from senior political correspondent Candy Crowley. She's been looking at the political reasons for the President's trip. Hi, Candy.
CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: Hi. Look, let me address the money question first from your e-mailer. And that is, the President's promise is about $15 billion in medicine for AIDS patients in Africa over a five-year period, so approximately $3 billion a year, although it won't work out evenly. The budget this year is $2 trillion, 225 billion about. So, it's a lot of money, but then you put it up against the budget, it's not as much money.
Politically, there are a couple of reasons. Internationally, as you know, the President has this sort of cowboy, Texas image, quick on the trigger. He has a package, particularly for the sub-Saharan Africa, that would help countries move towards democracy, sort of enticing them and rewarding them with funds if they crack down on corruption. This is another way to go about spreading democracy, and it's a good sort of international image.
Domestically, here's the compassionate conservative. He's over there promising money for AIDS. By the way, the money isn't there yet. And over there trying to talk about democracy and preach its values and sort of cut some of the rough edges off the cowboy image. So, that's part of the reason why.
And also, look, let's face it, Africa needs the help. AIDS there is rampant. And also, this is post 9/11 world, and this president who as a candidate didn't think that Africa was very strategic, is now looking, particularly in the sub-Saharan, at a country that is teeming with AIDS, and is very, very poor, and is politically unstable. It's basically very fertile ground for terrorism. If you start to promote democracy in there, you might prevent some things like 9/11.
By the way, Saddam Hussein -- Osama bin Laden was first in the Sudan before he went to Afghanistan. So, those are a couple of the reasons. The short answer is he went there for a lot of reasons.
CAFFERTY: Candy, I was going to ask you, though, about the timing, and you alluded to that it might have something to do with the war on terrorism. He is the first Republican president ever to go to Africa while in office. And I was just curious why now? It's not like he doesn't have a fairly good-sized list of issues and things to deal with, is it?
CROWLEY: No. Absolutely not. And, you know, nothing that any president does, or anybody does, even if it doesn't have a political motivation, and we can never know what's in their head, it always has a political implication.
Again, obviously aides are hoping that the compassionate conservative Bush that campaigned comes to the forefront now that we are into the presidential election season, and that is certainly something they hope is a benefit of this trip, and that's why now.
Now again, as I said, the president, when he was a candidate, really didn't think Africa was that strategic, but he does have Colin Powell, the secretary of state, Condi Rice, who is his national security adviser. Both of them have been working very hard on the President saying, you have to got to pay attention to this continent.
But there is absolutely no doubt that there is, particularly among suburban voters who make or break presidential candidates, that there is a good reason to go over there, remind people of the compassionate conservative, help out with this AIDS problem, help out with democracy, and just remind voters of who it was that campaigned.
LISOVICZ: Senior political correspondent, Candy Crowley. Thank you, Candy.
During a stop in Senegal earlier this week, President Bush denounced slavery as, in his words, "one of the greatest crimes in history." Our next guest welcomes those words and hopes Washington will go on to formally apologize for slavery in America's past. Deadria Farmer Paellmann is the lead plaintiff in a suit calling for major U.S. firms to disclose past profits from slavery and pay compensation, and she joins us now. Welcome. It's nice to meet you.
DEADRIA PAELLMANN, LEAD PLAINTIFF: Thank you.
LISOVICZ: When we look at this class action lawsuit and the companies involved, some well-known companies, like Aetna. Aetna in insurance, Lehman Brothers in financial, JP Morgan Chase, Fleet Boston -- these crimes go back in some cases 200 years. What possible point do you see in dredging up some of the darkest chapters in America's history.
PAELLMANN: Well, first of all, let me say that the information about the roles that these companies played in slavery is only new. Much of the information is hidden in corporate archives. The reason for bringing the action now is because we are in a climate internationally where nations are apologizing for the crimes, the harm that they caused other people, and the United States needs to face up to the crime that it committed. These corporations need to face up to the crimes that they committed against African-Americans.
And I applaud the president for acknowledging that slavery was a crime. I think he -- it's unprecedented that a president of this country would acknowledge that slavery was a crime, and of course, we know in international law, crimes against humanity had no statute of limitations. It doesn't matter when we raise the issue, we are protected by international law.
TULLY: But slavery is universally denounced by mainstream in this country. It is denounced by these companies who have very, very enlightened hiring policies. They are responsible corporate citizens. These lawsuits are not going to create one new job. What's the justification of going back 150 years and suing these companies? We have a litigation crazy society as it is now, and the people that are going to have to pay are going to have to be the people consuming their products anyway. I mean, what's the real point here?
PAELLMANN: Well, the point is that these corporations sold people, the stole labor, they are responsible for raping women to force them to breed more enslaved Africans. They committed torture against Africans to keep them enslaved, and they still have that wealth, and the reason for bringing the action now is because African- Americans cannot afford to allow multibillion dollar corporations to keep money we should have inherited.
It's -- the United States Constitution protects us. It requires that we be able to inherit the fruit of our ancestors' labors. We have a statute, the Civil Rights Act of 1866, that says that African- Americans should inherit the wealth of their ancestors, and that's why we are pursuing there case.
CAFFERTY: How significant is it that the president stopped short of making a formal apology? What would that have meant in the scheme of this?
PAELLMANN: Well, certainly an apology is significant. It makes a difference in terms of this nation acknowledging that it committed a wrong. And in addition to that, I have to say that the president could make that apology, and we are hopeful that before he leaves Africa he will do that.
But there are other things that the president can do. There was a world conference against racism that took place in 2001. A declaration was issued by the Human Rights Commission saying that slavery and the transatlantic slave trade were crimes against humanity. The President can move Congress and the Senate to endorse that declaration. He can also appoint a mediator to bring the corporations and the plaintiffs in the lawsuit to reconciliation. That was done in the holocaust cases, and there is no reason why this nation can't do it in our case.
LISOVICZ: I'm just curious. As a lawyer, how difficult is it to prove your case? Documents have been lost. I mean, we are talking literally about going back 200 years. Obviously, there are many deceased people. It's difficult to track down descendants. What do you need to prove?
PAELLMANN: Right, well it's not so difficult to track down descendants. We know that 35 million Africa-Americans live in this nation. Some people who are alive today were enslaved themselves. In fact, we have about eight people in our litigation that were enslaved.
As far as the corporations are concerned, documents do exist. They have archives, the records date back far, we know this, the information is available on databases about the records that they keep. One of the things we are trying to do with this lawsuit is get access to those records.
And actually, there have been lawsuits -- litigation -- I'm sorry, back up -- there has been legislation passed around the country requiring that these corporations disclose this information. And already about eight corporations, insurance companies, have disclosed their connections to slavery and have made those documents available.
CAFFERTY: I've got 20 seconds left. What happens to the money if you are successful?
PAELLMANN: We are requesting that a humanitarian trust fund be created. We want to use the assets to address the vestiges of slavery. We want affordable housing, increased health care, educational opportunities, economic development. These are the things that we aim to do.
CAFFERTY: Deadria, it's nice to have you with us. Thank you very much. Deadria Farmer Paellmann, who is the lead plaintiff in the slave reparation case.
Coming up next on IN THE MONEY as we continue, getting wired. Viacom angling for a piece of the cable industry. We will look at what that could mean for the programs you watch -- besides this one, we know you watch this one -- and for Viacom's financial future.
Plus lewd, rude, and shrewd. Pornography. Busting out from behind closed doors. We will tell you about the billions of dollars at stake and some of the banks that handle all these transactions. And tuned out and turned off. There's less business for the sports business this summer. We will find out what's keeping fans away from the ballparks and in front of the TV screens and what it might take to bring back their enthusiasm. Stick around.
LISOVICZ: Here's a look at the top stories of the past week in our "Money Minute." Microsoft is speaking about issuing its first ever stock dividend. It is a move that would be worth $10 million to shareholders. Microsoft is also ending its stock options program and will now give its employees shares of restricted stock instead. But they will have to hold onto those shares for some years before they can sell.
The nation's number two and three tobacco companies may be joining forces. RJR is in merger talks with Brown & Williamson. The combined companies would have a market value of about $6.5 billion in a cigarette industry facing big challenges from lawsuits and discount brands.
And the nation's credit card users are still spending with a vengeance. The government says U.S. consumer credit card debt jumped by more than $3 billion in May, and overall consumer debt rose by more than $7 billion. That puts the total consumer debt in the country at $1.75 trillion, that's "tr."
Media giant and stock of the week, Viacom, was also in the news this week. CEO Sumner Redstone spoke out on a couple of big issues. First, he said Viacom is interested in buying Vivendi Universal's cable TV networks, but not any of its other divisions. Secondly, Redstone said Viacom would love to buy CNN if AOL Time Warner ever put it up for sale. That's a story we are particularly interested in.
CAFFERTY: Would we get a raise if they did that?
LISOVICZ: That's one of the questions we are asking. Viacom already owns CBS and several cable powerhouse networks like MTV and Comedy Central. And as this chart shows, its stock price hasn't been beaten up like some other media companies we know and love. So, I guess the question to put to our colleagues is is Viacom a good stock buy?
CAFFERTY: I don't know. My guess is if they were taking a look at AOL Time Warner, it is probably because, you know, the price might be sort of right given what the current stock is selling for, but that's not an area that I know a lot about, along with a whole long list of other subjects on this practice program.
Viacom's efforts to expand its cable come as Arizona Senator John McCain is blasting the cable providers, the cable industry overall, for gouging the public. The senator's war. McCain cited a new FCC report that shows that cable rates jumped 8.2 percent in the last year, while inflation was running at something less than 2.
Joining us now from Washington to talk about that and a few other topics, we are happy to welcome Senator John McCain to IN THE MONEY. Senator, nice to have you with us.
SEN. JOHN MCCAIN (R), ARIZONA: Thank you.
CAFFERTY: I hate my cable company. I pay $65 a month, they keep switching my channels around, I get religion where there used to be sports, the sports goes to a scrambled place that I can't get the reception, and the bill goes up and up and up. Is "gouging" too strong a word? What do you mean by "gouging?" And what ought to be done about it?
MCCAIN: Well, you've also noticed that the cable companies profits are at an all time high, and, of course, they are all blaming circumstances beyond their control. A lot of the blame is placed on ESPN. You and I watch the sports networks, Fox Sports network and ESPN, and they are blaming the rising costs there, which they say they can't do anything about. Just so has happens that ABC owns ESPN, and it goes on and on.
We have a GAO study that has been going on for many months now. That's due out in September. And the General Accounting Office, as you well know, is highly respected and highly regarded. We are going to have hearings after that to try to sort all this out because everybody is blaming everybody else. But the person who is really getting gouged, if I may use that word, is the cable subscriber.
And so it's also --by the way, I worry about media consolidation, which then would decrease competition as far as cable rates are concerned rather than increase them.
TULLY: Senator McCain, you are a Reagan Republican. You believe in the markets, that the markets can bring down prices, control prices, solve these problems. We have a booming satellite TV industry that is competing in a lot of markets with the cable industry. Is that enough, or do we need price controls to rein in this what is still in some ways a monopoly?
MCCAIN: I am a deregulator. I believe in deregulation, but the results is of these constant increases in cable rates over the past several years indicates that there is not competition. I am willing to examine all options. I prefer competition. I prefer that satellite be more competitive with cable. But so far, we have not seen any tangible results as far as competition is concerned, and we have seen more and more huge consolidation within the cable industry itself. As you know, 10-15 years ago, there were literally tens, if not hundreds of local little cable companies. They have been bought up, and now there's, what, three or four mega cable companies in America.
LISOVICZ: And Senator, that's the question I want to ask because it's directly tied in. Just a few weeks ago, it seemed that there was this discussion, the FCC settled it and eased the ownership rules that would enable these mega companies to buy even more companies. But, yet, now it's stalled, and Congress has a backlash. Can you quickly just tell us what the status is? Will that not go through? Is Congress really putting up a fight against this? MCCAIN: Congress is reflecting the deep concern that Americans have about further media consolidation, most especially in the radio industry, but overall, including cross ownership of newspapers, television stations, cable, radio, et cetera. A little straight talk, it will be blocked in the house because the chairman of the House Commerce Committee and others have said that a roll back of the FCC rules will not be allowed the House of Representatives. I accept their word.
But you haven't heard the last of this at all, 750,000 people contacted the FCC in an unprecedented move. We never had that many people involved. So, there's deep concern out there at all ends of the political spectrum. Bill sapphire in "The New York Times" to some of will more liberal media people have highlighted this issue. I don't know the answer, we need more hearings, but I do believe as the five commissioners of the FCC testified, there's too much media concentration in radio. And there's real concern when you have a situation as could exist in Los Angeles, where "The L. A. Times" owns three major television stations, several radio stations, and a cable network.
CAFFERTY: Unbelievable. Senator, let me ask you about the situation in Iraq while we have you on the program. This week there were several developments on that front. General Tommy Franks, who prosecuted the war, saying that American Military might be over there for as long as four years. It was thought that once the major combat ended, we could do the job of policing what was left of about 50,000 troops. We have three times that many there. The costs are breathtaking, much higher than anyone anticipated, $150 plus million per day to maintain the forces in Iraq and Afghanistan.
We had that situation develop over the questionable piece of information in the State of the Union address about efforts on behalf of Saddam Hussein to obtain uranium in Africa to reconstitute a nuclear weapons program. What's your take on all this, and what sense do you have on whether or not the public is going to get worn out with this long before, perhaps, president bush gets everything done that he'd like to?
MCCAIN: You covered a lot of topics. I will try to be very brief. One, I believe that the American people will believe and do believe the war was justified and will support the president of the United States because -- if, and because the president needs to talk straight to the American people, which I'm sure he will do, telling them that this is a long, difficult, arduous mission, but it has had enormous benefits in Iraq, in the Middle East process and the democratization in the Middle East. It's been a very good thing. The day they saw the 8- and 9-year-old boys leave that prison, most Americans felt it was justified.
Having said that, though, the American people need to be told how much it is going to cost, how long we are going to be there, and given the complete story, which they haven't been so far but are starting to get, then they will support the president.
On the issue of the statement that was made by the president in the State of the Union message, we need to find out who was responsible for that. The president doesn't want to do that, he doesn't want to say anything that's untrue. But that would not change the justification for the war. The critics of the war and the President are trying to say, well, that would have changed the whole argument for war. That's not true. The American people still support it. But we need to find out who was responsible for it and take appropriate action, even if it means removing someone, because, obviously, you don't want that to happen.
CAFFERTY: Of course. Senator, we will have to leave it there.
CAFFERTY: I appreciate you joining us very much. Thanks for being on the program. Senator John McCain, Republican of Arizona.
Still ahead on IN THE MONEY as we continue, naked ambition. The pornography business -- who writes this stuff? The pornography business hustling for a crossover from lurid to legit, as Americans spend more on X-rated material. So, find out who is taking home some of the cash.
Plus love none. Sports fans turning down tickets for top events. With prices rising and demand falling, we will look at what it will take to put the sports business back on top. Stay with us.
CAFFERTY: In a matter of a decade or two, pornography in America has gone from out of sight to in your face. Porn stars are showing up on mainstream television shows and in magazines that you wouldn't necessarily hide from your mother.
But the sexiest thing about the business of pornography might be the balance sheets. "Newsweek" magazine puts the total revenues for porn at between $5-10 billion. And a lot of that money changes hands online through credit cards with banks handling those transactions. For more about that, we are joined from Los Angeles by Seth Lubove, who is the West Coast bureau chief for "Forbes" magazine. Seth, good to have you with us.
SETH LUBOVE, WEST COAST BUREAU CHIEF, "FORBES" MAGAZINE: Good morning.
CAFFERTY: The last time I checked the Internet pornography, it's all legal and above board. Where does the controversy come here?
LUBOVE: Well, start with the fact that it is controversial, no matter which way you slice it. And, certainly, in certain parts of the country, it's even illegal.
LISOVICZ: Can you break it down, Seth, the porn industry for us and how online fits into that picture? I mean, there's the traditional XXX theaters, and then there's the magazines that have the covers on in 7-Eleven stores, and then there's your pay-per-view. How big is online?
CAFFERTY: You know a lot about these, don't you?
LISOVICZ: As a journalist, I do, Jack.
CAFFERTY: (UNINTELLIGIBLE) on the waterfront.
LISOVICZ: Seth, save me on this!
LUBOVE: You know more about it than I do. We are talking multiples of billions of dollars that, as far as the Internet portion of pornography is concerned. There's other ways that pornography is delivered, from your pay-per-view to the magazines to CDs to videos. But the Internet has come from nowhere to suddenly become one of the most significant portions of the pornography market. And the only way you can buy porn on the Internet is using your credit card.
TULLY: Seth, there's a big interaction now between the pornography industry and the mainstream financial industry. Can you describe the process through which people are billed on their credit cards and how banks fit into this process?
LUBOVE: Sure, there's no pornography on the Internet unless there's credit cards, and there's no credit cards unless there's banks, and when you go and -- present company excepted, of course -- but if you go and you pornography on the Internet and you give them your credit card, the merchant, or the pornographer, or guy in his basement, or whatever -- he takes that credit card, and he passes along your credit number to his bank. That bank then passes it along to the bank that issued the credit card to you, Chase or whatever. And within an instant, the credit card transaction is cleared.
It's the bank that works with the pornographer or the merchants in this case. These are the ones we are talking about. There's really only a handful of banks that process this business because the bank that issues your credit card -- they can't tell you what to buy with or without their card.
CAFFERTY: I was going to say, how is it different than I use my credit card to buy a case of whiskey or a carton of cigarettes gamble in Atlantic City or do something else that certain members of society might take issue with? It's really no different. It is legal.
LUBOVE: It is legal, but, again, the bank that processes the credit card, they have a choice. They don't have to necessarily enable this business, as does Visa or MasterCard itself. American express got out of this business a couple years ago because they were tired of the fraud. They were tired of all the instances where somebody says, hey, I didn't buy the porn because my wife found out about it or something like that. And so, they got out of the business.
And so, Visa and MasterCard and the handful of banks that process this stuff, they have a choice about whether or not they will handle it. And if they get out of the business, there's no porn on the Internet tomorrow. LISOVICZ: But, of course, what's so sexy to those handful of banks, Seth, is the rate that they can charge because they charge a lot more for the merchants who pedal porn.
LUBOVE: Exactly, they know that they can charge what the market will bear, and in this instance, there's so few banks that handle this work, that they can charge twice, three times as much as what they might charge from a normal transaction from when you go and use your credit card at a grocery store or a retailer or anybody else who isn't a pornographer.
TULLY: Right. But Seth, aren't so many people reversing the charges on these pornography sites that the processing costs are getting a lot higher, and hasn't this unleashed some lawsuits that are kind of shining a light into this area?
LUBOVE: Yes, that's exactly what's going on. That's why we know more about the business now than ever. Because there are lawsuits involving what the industry calls "charge backs." A charge back happens when you call up the credit card company, and you say, "I didn't pay for this," or "This guy ripped me off," or whatever. Under normal circumstances, retailers deal with this all the time because, you know, somebody stole their credit card, or they didn't like what they bought.
The pornography industry -- for them it is absolutely a nightmare because people -- typically what happens is a guy might by some porn, and his wife finds out about it, and he says, "I'm shocked that somebody stole my credit card. I never bought this stuff." And he calls up the credit card company, and he says, "Take that off. I didn't pay for it. Take it off my credit card."
What happens, though, is the Visa or MasterCard, they say to the bank, we are going to charge you for that because you messed up, and the bank, in turn, charges the pornographer or the merchant who is selling this stuff, and it's a huge fine, and there's a limit on these things. As of now, one percent of your revenues. If you go over that in charge backs, you are out of business, no more credit cards.
CAFFERTY: One quick question. We're out of time. Is it realistic to think that the banks somehow are going to back away from this on the high moral ground that it's just wrong to do? I mean, we were just talking about they can charge people two or three times the normal rate, and if Bank A says, I am not doing this any more, and Bank B down the street says, well, you can make three times the normal rate on the transaction, maybe I will do it. I mean, it's always going to be around in that somebody is always willing to take the money.
LUBOVE: There might be; there might not be. A lot of banks have gotten out of the business. We are down to three at this point in this country and them some foreign banks handling it. But if those three decide that their reputations are at risk and that it's just not worth the headache, they will get out of the business, and that's the end of porn.
CAFFERTY: Well, let's trash the banks' reputations. What are they, those three?
LUBOVE: The three are -- one is a subsidiary of First Data, the big giant credit card processor that owns Western Union and a bunch of other financial subsidiaries, and the other are two are small-town Northern California banks. One got out of it recently, actually. Humboldt Bank sold their credit card processing business to a private bank. And the third one is called National Bank of the Redwoods, as small town as it gets, and they are processing a lot of this.
CAFFERTY: And those three -- those three operations handle all the Internet pornography credit card business in the country?
LUBOVE: Within this country, yes. For the most part, they are the big three. And if you talk to any pornographer, as I do from time to time, researching, you understand.
CAFFERTY: Of course.
LUBOVE: These three banks are, like, you know, Chase Manhattan or JP Morgan to the porn guys.
LISOVICZ: The big three takes on new meaning.
CAFFERTY: Thank you, Seth. We have to leave it there. Seth Lubove, who is the West Coast bureau chief, "Forbes" magazine. Thanks for being with us.
LUBOVE: Thank you.
CAFFERTY: Appreciate it. Coming up next on IN THE MONEY, we will clean this up a little. The sports business strikes out. We will look at why a lot of fans have got from rah rah to blah blah. They just don't care. They are not showing up at the ballparks or in front of the TV sets.
And what would you talk about with the most successful investor of all time. Someone just shelled out a quarter of a million dollars to sit down to lunch with world renowned investor Warren Buffett. We will have that story coming up.
You are watching IN THE MONEY. We will be back.
CAFFERTY: Attendance at major sporting events way down this year, and people aren't watching too much television either. Joining us now to talk about some of the reason behind the falloff in interest in sporting events, "Wall Street Journal" reporter Sam Walker. Sam, nice to see you.
SAM WALKER, REPORTER, "THE WALL STREET JOURNAL": Good to see you, Jack.
CAFFERTY: I was reading the other day about the Wimbledon, the tennis tournament. TV ratings the worst they have had in a lot of years. Some of the baseball parks are not drawing like they used to. What's going on?
WALKER: Well, you know, it's almost like a foggy highway. One car has crashed, and another one keeps crashing behind it. It is amazing. Wimbledon, as you said, is latest casualty, down about 13 percent, both the men's and women's side. By my count, there are about 20 sporting events so far this year that have seen some kind of a decline. It's pretty substantial. I mean, as much as 36 percent for the NBA finals, 39 percent for the French Open women's finals.
You are also seeing just less buzz for events. The heavyweight champion fight with Lennox Lewis didn't even sell out.
CAFFERTY: Yes, but who was he fighting?
WALKER: Well, yes, that's true. It was Klitschko. But still, it was the heavyweight championship of the world.
LISOVICZ: But I mean, that's the point, isn't it? It's all about marquee players. I mean, I watched Wimbledon, and I turned it off because the Williams sisters don't play well against each other. Agassi was out. Who won? I forget. I mean, I'm not familiar with them. Funny Cide didn't win the Triple Crown. The New Jersey Nets, as much as I love them, don't appeal to a lot of other basketball fans who just, you know, considered a new franchise. Isn't it that's what it's all about? That people draw to their stars, and there just aren't any stars that are doing well right now?
WALKER: I think that's true. You know, the best argument I have heard is that in a way, we have been spoiled over the last few years. We've had so many signature performers, like Tiger Woods, Lance Armstrong, Mike Tyson, the Williams sisters. I mean, we have forgotten sort of how phenomenal they all are individually. And so, what we are getting now -- also networks now are very -- have a lot more invested in sports and sports rights, and it's more important for them to drive ratings.
So what we are seeing is a combination of these two factors and that networks are really -- they are not hyping the event, they are hyping individual performer. And this year, as you said, there have been so many instances where either these performers have not been in contention, or as you mentioned, Annika Sorenstam, she didn't make the cut at the Colonial. It was quite a disappointment. Funny Side didn't make the Triple Crown.
So, it's a series of flops and disappointments, and it's the thing with Klitschko. If you are thinking about a boxing fight...
LISOVICZ: Oh, yes, Klitschko.
WALKER: Right. Klitschko. That guy. But I mean, if you are thinking about a heavyweight championship fight, and you look at the marquee, and there's no Tyson, and it's some guy named Klitschko, I mean...
TULLY: But there are so many more choices now because I scroll through on my satellite TV system, and you can just get all these local games that you couldn't access before. So is there kind of overcapacity? Or are we drowning in options now? And is that taking away from some of the more -- the events that used to have bigger viewership?
WALKER: Absolutely. I think that's a big part of it. And anyone will tell you that fragmentation is really one of the problems with sports and with television right now. But beyond that, there's also this element of -- that I think -- and this is a crazy theory of mine, but I think television itself has change in terms of what's on the tube. It used to be that sports was the only reality television you had.
CAFFERTY: That's a good point.
WALKER. And you have every show is reality based, and I think a lot of fans can get their competition from "American Idol." They don't need to watch a lousy basketball game to get their fix.
LISOVICZ: But Sam, aren't people disappointed with their heroes, too? I mean, Sammy Sosa was hitting with a cork in the bat. I love Sammy Sosa, but -- and yet, you hear like for the farm teams, attendance is way up. People are disappointed with these prima donnas who are making a lot of money and not nice to their fans and let us down all too often.
WALKER: That's true. I agree 100 percent, and I think that's been -- there's been a sort of a cumulative effect there, and there have also been some scandals and disappointments as well this year. Sammy Sosa is a great example, But we also had the controversy over the Masters, It took some fun out of that. You know, we have these college coaches gone wild.
CAFFERTY: What about LeBron James? How much pressure is on this kid to do for the NBA what Michael Jordan was able to do? Or Kobe Bryant or, you know, somebody like that?
WALKER: I think the pressure is incredibly fantastic, unbelievable on him. The funny thing is -- I was thinking about this this morning. The NBA, in a way -- I think the worst thing that ever happened to it is the popularity of shoes and the fact that young kids and teenage kids really buy a lot of tennis shoes because if you look at LeBron James and his compensation, I mean, if he is filling out a tax return, he's a Nike employee. He's not -- he's making so much more money.
CAFFERTY: He doesn't work for the NBA. That's right.
WALKER: So, I don't know where his priorities are.
CAFFERTY: Sam, it's good to have you with us. Thank you. Drop it again. We'll kick this around some more. Sam Walker is a very distinguished sports columnist for "The Wall Street Journal." We appreciate having you on.
Just ahead as we continue, how much would you pay to sit down for lunch with the greatest investor in all the world? That man, the Oracle of Omaha. A quarter of a million dollars to have a burger and fries with Warren Buffett. Stick around. That's coming up.
LISOVICZ: Andy is off this week, but he filed yet another educational and entertaining edition of "Fortune Fundamentals." Here he is.
ANDY SERWER, EDITOR-IN-CHIEF, "FORTUNE" MAGAZINE: A lot of times people will come up to me and say, hey, I'm buying a $5 stock, it's really cheap. And I say, cheap relative to what?
It's not just a low stock price that matters. You have to compare that number to something. What are you getting for $5. Well, the measure people most often use is called the price earnings ratio or PE ratio, which is the stock price relative to a company's earnings.
To give you an example, let's say the stock of the fictitious Banana Company trades for $30. Now, Banana is expected to earn $3 a share this year. You divide the $3 by the $3 to give you a PE ratio of 10. Let's say the Cherry Company is also selling for $30, but Cherry is only going to earn $2 a share. It has PE ratio of 15, the 30 divided by 2. Now, both stock prices are the same, but Cherry, the one with the PE ratio of 15, is a more expensive stock because you are paying more for less earnings than with Banana. It doesn't mean Cherry is a better company than Banana. It just means that it's stock is more expensive, and should understand that.
CAFFERTY: A bidder on eBay is apparently very anxious to get some tips from the man known as the world's best investment expert. The still unknown bidder is paying $250,000 to sit down and have lunch with Warren Buffett. The Oracle of Omaha auctioned off lunch with him in New York City. It is for a charity called "Glide," which serves the poor, hungry, and homeless in San Francisco. So, if you have a quarter of a million dollars to pay for just one lunch, you probably don't need to get too much investment advice anyway. You are probably doing all right.
You have a Warren Buffett story, don't you, Shawn?
TULLY: Well, first of all, he likes burgers, hot dogs, meat and potatoes, steakhouses in Omaha.
LISOVICZ: That's part of his secret. TULLY: That's part of his mystique, yes. And he hates companies that issue lots of stock options, so he's probably going to be telling this group if they are options abusers, to stay away.
CAFFERTY: All right. Time to check your responses to our e-mail question of the week. We asked what does it mean to be a patriot American? Vicki from North Carolina wrote this, "It means to take the responsibility for fixing things and stop assuming the government or someone else will do it."
Pearl wrote to us, "A patriot is someone not afraid to stand up and speak out against corruption by a government, despite threats of retaliation. I think the true patriots today are those Americans who demonstrated against the war in Iraq."
But another viewer named Darren may have put it best when he simply said, "Being a patriot today means you must sue somebody." That weird guy.
It's time now for our e-mail question of the week, which you can weigh in over the course of the next week, and then, of course, we will pick two or three of your responses to read next weekend. Do you think U. S. corporations should be reparations to the descendants of slaves? You can send your answers or any other comments you have on the program to firstname.lastname@example.org.
That's it for this edition of IN THE MONEY. Thank you. I want to thank our panel, my colleague Susan Lisovicz over at CNN Financial News, Shawn Tully of "Fortune" magazine for joining us. We will be back tomorrow at 3:00 Eastern time in the afternoon when one of our topics will be those big jackpot lotteries, of which I have never hit one. Tomorrow we will tell you what the states do with all that money. Tomorrow's show begins at 3:00 Eastern time. We expect you will be on time. Thanks for watching. Enjoy the weekend.
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