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QUEST MEANS BUSINESS
Ceiling on Debt Talks?; Italy's Senate OK's Budget Cuts
Aired July 14, 2011 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JOHN DEFTERIOS, HOST, QUEST MEANS BUSINESS: Any deal will do. Obama looks set to put a ceiling on the debt talks.
European Union of austerity, Italy's senate votes yes to budget cuts.
And keep it out of the family? Why the Murdoch name is not so golden with some News Corp. shareholders.
I'm John Defterios in for Richard Quest. And this, of course, is QUEST MEANS BUSINESS.
A debt ceiling about to be shattered and a deficit that could trigger default, the White House and congressional Republicans are fighting a battle on two fronts. And the country's triple A rating could become the first casualty. Talks have been getting testy. The top House Republican, Eric Cantor, says he was taken aback by President Obama's behavior, in another fruitless round of negotiations on Wednesday night.
While Washington stalls, the rating agencies say they won't hesitate to do the unthinkable and downgrade the United States. S&P says even if it keeps up with interest payments the U.S. could get downgraded if it fails to keep up with its obligations. Moody's has also put the U.S. on official review. Democrats in Congress pointed the finger at their Republican rivals for supposedly playing a dangerous political game.
(BEGIN VIDEO CLIP)
SEN. CHUCK SCHUMER, (D) NEW YORK: It has only been about protecting the wealthiest few while middle-class Americans and our nation's seniors pay the price. If they really cared so much about debt reduction and the deficit, Senator McConnell wouldn't have offered his plan.
REP. NANCY PELOSI, (D) CALIFORNIA: 191 days, no jobs bill in sight, that is worth its salt (ph), and yet dealing recklessly, dealing recklessly, with our economy. Recklessly, by even the thought that the debt ceiling would not be lifted.
(END VIDEO CLIP)
DEFTERIOS: Polarization, there is a distance of 1.2 miles, or nearly 2 kilometers, between Capitol Hill and the White House, but the two sides seem to be on opposite coasts, right now. Let's take a look at the two bargaining positions so we can put this into perspective.
Start with the Democrats, of course, by President Obama. His plan called the "grand bargain" adds up to $4 trillion overall. Part of that would come from cuts in Medicare and Social Security. Shall I say, a risky move for Democrat. On the revenue side, he wants to phase out the Bush tax cuts for people making more than $250,000 a year.
For Republicans, that is not going to fly. Let's take a look at this. This is Mitch McConnell's. He is the Senate minority leader, in fact, more than 250 congressmen, all of whom, mostly are Republicans, have signed a pledge not to allow any tax increases at all. They want to tackle both the debt ceiling, and the spending cuts at the same time.
Mitch McConnell, the Senate minority leaders, says he would let the president raise the ceiling up to $2.5 trillion, but only if it comes with $2.5 trillion in spending cuts at the same time. McConnell says that offer is what prompted Obama to walk out of Wednesday night's meetings.
In about an hour President Obama will meet with the Treasury Secretary Tim Geithner before another round of negotiations. We don't know exactly where it is going to go next, but we are going to go check in with Washington and bring in Wolf Blitzer to analyze how polarized the situation is.
Wolf, is it conceivable that their bickering so much about the cuts and the mix of tax increases that the debt ceiling itself could be stalled even longer?
WOLF BLITZER, CNN ANCHOR, THE SITUATION ROOM: It is conceivable, but very unlikely. I suspect that by August 2nd they'll reach some sort of deal. It is not going to be a pretty process by any means. I think that the leadership, certainly, the Democratic leadership and the Republican leadership, who are in those meetings with President Obama, on the Republican side, the Senate Republican leader Mitch McConnell, and the House Speaker John Boehner, and the Democratic side, Harry Reid and Nancy Pelosi. They know what the consequences of failure would be. It would be a disaster for the U.S. economy, dare I say, for the global economy, the ripple effect if the U.S. were unable for the first time to meet its international and its domestic responsibilities. So I suspect they will, although if you as me if it is possible, they won't? Yes, it is possible, but unlikely.
DEFTERIOS: Now, let's get to the spending cuts. One would think-and I had a chance to cover like five or six budget rounds in Washington, it got very tiring-that you would have the same old entrenched positions on Social Security, Medicaid and Medicare. But in fact, they found about $1 trillion, up to $1.5 trillion of discretionary spending. But that is not enough to close the gap. That is the challenge?
BLITZER: And that would be over the next 10 years. All of these numbers that we're throwing around, would be over the next decade. So, yes, $1 trillion, that would be about $100 billion a year, in the scheme of things, that is not huge. If you get to $3 or $4 trillion then you are obviously talking real money, as they say here in Washington. But it is definitely doable. They can definitely come up with $1 trillion, $1.5, even $2 trillion. I think there is a bipartisan readiness to do so, the question is will there be any-what they called tax revenue increase. Is more money coming into the U.S. Treasury? From an elimination of loopholes, deductions, subsidies, every one agrees that they are not going to raise the tax rates in the federal income tax situation right now, because they know that is a non-starter for the Republicans.
But they are looking for some creative ways to finesse, elimination of some of these sensitive loopholes. For example, General Electric, which made about $14 billion worldwide last year, $5 billion here in the United States. They wound up paying zero in federal income tax because of various loopholes that are out there. And they are looking for some ways to deal with that.
The Republicans say they are ready to deal with that, provided there are some other cuts in taxes to balance off any increases along those lines.
DEFTERIOS: Final thing, Wolf, I think it would add value to your viewers internationally, go say-because John Boehner, the speaker of the House, have all of his Republicans behind him, as a troop? Are they going to go together, or are they that divided right now, where he doesn't have their support to bring it to the bargaining table?
BLITZER: I think if it were just John Boehner and President Obama, they would have had a deal by now. But John Boehner certainly does not have all of the Tea Party activists within the Republican caucus behind him. He may not even have his number two Republican, Eric Cantor, the House majority leaders, behind him. He has taken a very, very tough stance, much tougher than John Boehner has taken in these negotiations.
The Republican Party, in the House of Representatives, specifically, not so much in the Senate. The Senate is much more in line with Mitch McConnell, if you will. But in the House of Representatives it is very, very divided right now and some of those divisions-among the Republicans- are really spilling over. And as I say, it could be ugly.
DEFTERIOS: Nice to see you. Thank you for the analysis. Wolf Blitzer joining us from Capitol Hill, himself.
Well, China is telling the U.S. to sort itself out for investors' sake. With more than a $1 trillion of U.S. debt on its books, it has to be a reason to be concerned about the default right now. As the Fed chief, Ben Bernanke, admitted failing to solve this crisis could knock America's reputation, right across the world.
(BEGIN VIDEO CLIP)
BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE BOARD: I think it would be a calamitous outcome, It would create a very severe financial shock, that would have effects, not only on the U.S. economy but on the global economy.
Treasury securities are critical to the entire financial system. The are used in many different ways, for example, as collateral or as margin. Default on those securities would throw the financial system into-into- potentially into chaos. And in any case, what would certainly be the case is that we would destroy the trust and confidence that global investors have in U.S. Treasury securities, as being the safest and most liquid assets in the world.
(END VIDEO CLIP)
DEFTERIOS: And some would argue that is the biggest threat to the U.S. economy, right now, Ben Bernanke. Let's go to Peter Morici, a professor of international business at the University of Maryland.
Peter, it is quite interesting. We have a lot of potential cuts over a decade, as Wolf Blitzer was talking about. But still a huge gap as they see it? The president still wants to raise some taxes, eliminate that top tax about $250,000, or more. What is going to bring them to close that gap, in your view?
PETER MORICI, PROFESSOR, UNIV. OF MARYLAND: Well, I think there has to be some realization on the Democratic side that very substantial spending cuts are in order. Spending has increased by 25 percent over the last four years, over and above what was necessary for inflation; about $1 trillion a year. That comes out to $10 trillion over 10 years, talking about the numbers we're dealing with. So it should be possible to come up with, not just a $3 trillion deal, but something more like $5 trillion to cut that increase in spending in half.
On the other hand, let's face it, the Democrats are politicians and they have to have something to take to their base. If we are going to get really big, significant, substantial spending cuts that will stave off downgrading, not just now, but next January, because next January we have to have a credible plan or we will be downgraded.
You know then the Republicans are going to have to acknowledge that they will have to be able to take back to their base some significant tax increases that are not paid for by tax cuts in other places. They have to contribute. If they are not willing to do that, and as Wolf Blitzer spoke to you earlier, and I spoke to him here, in the studio in Washington, you know I think if it was up to Boehner and Mr. Obama, they can reach a deal. But on both sides you have personalities like Pelosi and Cantor, which make it very, very difficult.
DEFTERIOS: Did the president put his neck on the line by offering to make some cuts to Medicare, Medicaid and Social Security? Where, in fact, his real base within Washington, and throughout the United States, the voting base for the Democrats is going to be eroded as a result?
MORICI: Well, if you read press that is sympathetic towards him, they would say yes. If you listen to the Republicans they would say no, because he has been very vague. He has been very specific about the tax increases that he wants. But he is not very specific at all about the spending cuts he is willing to make. He talks in vague generalities. And so they are afraid they are going to pay for the spending cuts with increased taxes and not get them.
You know at yesterday's meeting what caused the, quote, "walk out" or end, "abrupt termination", was when Cantor asked the president, you know, where is your plan? And the president said, well, you know, who am I negotiating with, you or Boehner? Well, that wasn't quite fair because they were all in the room. And he said, Speaker Boehner has the plan. Turns out nothing has been given to Speaker Boehner, by the White House, in terms of a tangible plan.
The president, if he wants to lead, has to get substantive. So, you know, there are issue here.
DEFTERIOS: Yes, well also within the Republican Party, though, Peter, to be fair.
DEFTERIOS: There is deep divisions amongst the House Republicans right now. If you look at the candidates who are running for office, from the Republican Party, it covers the waterfront.
Very quickly, in 10 seconds, does the Tea Party position weigh in, in the bargaining table right now?
MORICI: Absolutely. Cantor represents the Tea Party. That is the bottom line. And that is what is keeping Boehner from being more flexible and perhaps Mr. Obama from being more forthcoming. Because he afraid of getting stuck, too. And you know the analogue to the Tea Party is Nancy Pelosi's position. Many Democrats are as severe on the other side as the Tea Party is.
DEFTERIOS: OK, we'll leave it there. Peter Morici joining us from our Washington studios. Good to see him again.
Now why is the market not reacting that much to what is really taking place down in Washington? Let's go to the New York Stock Exchange, check in with Alison Kosik.
And I'm referring to, Alison, the bond market. You would think in the crisis like this, the interest rates would be shooting up, and they are not just yet.
ALISON KOSIK, CNN FINANCIAL CORRESPONDENT: Yes, I mean, you mention that, there was a 30-year option earlier today, at a low interest rate, and it was a sell out. You know it had a seller turn out. It shows that there is, at least in the bond market, there is not much worry about the U.S. defaulting on its debt. And then you look at the equity market, we are seeing something similar here. Markets are mixed, pretty much flat.
You know, I think the reality is, John, that traders think that lawmakers aren't going to miss that August 2nd deadline. The consequences, they are just too dire. Even if both sides have to make concessions. Wall Street truly believes that an agreement will be reached in time. There are experts, including Fed Chief Ben Bernanke, they have made it very clear that the global recovery would be at risk of completely unraveling if they the U.S. can't pay its debt. And you know it is hard to imagine that those in power would allow that to happen. So the widespread believe is that they won't. So, sure, these traders here on Wall Street not worried, and apparently, as you said, the same thing in the bond market, John.
DEFTERIOS: OK. Alison Kosik at the New York Stock Exchange for us this evening.
Well, here in Europe lawmakers are also debating debt. Italy's finance minister says he feels like a passenger on a the Titanic. Find out what he is doing to stop Italy from sinking right now, when QUEST MEANS BUSINESS continues.
DEFTERIOS: Ireland's austerity program is back on track and it has a green light for growth. That is the verdict of a team from the International Monetary Fund, the European Central Bank, and the European Commission. The so-called troika says the Irish authorities have been steadfast in their efforts and the team sees, quote/unquote, "positive growth" this year, which will strengthen in 2012. The European Commission says it is important for Ireland to keep up with the program.
(BEGIN VIDEO CLIP)
ISTVAN SZEKELY, EUROPEAN COMMISSION: The program is on track and is well financed. Ownership of the program on the part of the government is strong. And implementation is steadfast. And these are defining characteristics of the EU, ECB, IMF program, for Ireland. Continued strong implementation, policy implementation will be important to limit potential contagion from other parts of the world.
(END VIDEO CLIP)
DEFTERIOS: That is the view in Ireland. Lawmakers in Italy approved an austerity package worth at least $56 billion. It includes cuts and tax rises designed to eliminate the deficit altogether in three year's time. The finance minister Giulio Tremonti told lawmakers Europe has an appointment with destiny and salvation can only come through politics.
(BEGIN VIDEO CLIP)
GIULIO TREMONTI, ITALIAN FINANCE MINISTER (through translator): We have reached the dilemma and drama facing the euro and Europe. Either we go ahead, or we sink. The solution is either a political one or there is no solution. It needs to be in common with Europe. There is no safety net for anybody. Just like when the Titanic sank, not even the first-class passengers are safe.
(END VIDEO CLIP)
DEFTERIOS: A little drama for us in the Italian senate, from Giulio Tremonti, there. The markets gave lawmakers a sharp nudge toward those austerity measures earlier. Italy just raised $7 billion in bond sales. And for some of that debt the price was the highest it has been in three years. Let's get a read of the budget deficit situation and the debt situation and turn it over to Nina Dos Santos who joins us from Rome, again tonight.
It is quite interesting what Tremonti had to say. He is basically saying an austere times are coming we need to jump onto this boat, stay on the boat, and so does the European Union.
NINA DOS SANTOS, CNN INTERNATIONAL CORRESPONDENT: Yes, indeed, before it sinks, from the sounds of what he had to say in the Italian parliament earlier today, John.
Now one of the ways that Italy is planning to cut its budget deficit, as you were saying earlier, to zero by 2014, is by cracking down on tax evasion. Earlier today I took to the streets of Rome to find out just how bad the problem is.
DOS SANTOS (On camera): This is Rome's Tivoli Station, it is the beating heart of this ancient capital, where trains, every single day, take thousands of commuters to and from their jobs. Yes, just behind this very building lies the nerve center of this city's underground economy, which is populated by people who pay no tax. And some of them aren't even supposed to be in the country.
(voice over): Think tank Urestas (ph) estimates that Italy is home to 800,000 illegal migrants, who work for cash in hand, but have no access to state services like health care and housing benefits. One such worker, who has been in the country for eight years, agree to talk to us anonymously. He earns 900 euros a month, about $15,000 a year, cleaning rich Roman's houses. He doesn't pay tax, but still it is not enough to keep a wife and two sons.
UNIDENTIFIED MALE: When I go to work then I see the police. They always say, documents, so when I see the police I go the other way. Yes, it is better for me if I am illegal living in Italy, because I just want to-for me, I just want to find another job, just like my profession in my the Philippines. I just want a job (ph) like here.
DOS SANTOS: Tax evasion and organized crime cost Italy lost revenues equal to 27 percent of its GDP each year, according to the INS. Rome is at the front line of the battle to stem those losses. And just as the official economy is shrinking, business off the balance sheet is booming.
DAVIDE CARDIA, ITALIAN TAX & FINANCE POLICE: The problem of tax evasion here in Rome is very significant, even because of the financial crisis. It is growing even in the last six months we have discovered the same evasion all of 2010, of the last year.
DOS SANTOS: Cardia says some who don't pay their dues are professionals like lawyers and doctors, the self-employed status makes earnings difficult to track. Economists say tax evasion on such a grand scale cannot continue in a country struggling to avoid getting caught up in the European debt crisis.
GIUSEPPE RAGUSA, LUISS UNIVERSITY: There is a huge shadow economy. People don't pay taxes. You know there is a sensation among people that the tax evasion is an issue that needs to be fixed.
DOS SANTOS: So, there you have it, John. Economists say enough is enough. The Italians must crackdown more on tax evasion. But the austerity measures that Giulio Tremonti has presented to the senate-the Upper House of Parliament, here in Rome, earlier today-also include huge privatization plans, cutting back on pensions, health care reform. And they also include trying to crackdown on people putting money in their bank accounts and putting money in securities and bond to try and stimulate the Italian economy, and once again hopefully get it growing.
DEFTERIOS: Yes, as you know, Nina, the unions have a very big voice, still, in Italian politics. Are the cuts going to reach in to that membership, or that voting block in Italy? Or is everybody, literally, going to be touched by austerity?
DOS SANTOS: It seems as though almost everybody eventually will be touched by austerity, John. But one thing we should strictly stress is that the government here is trying to go for the richer people in the population first. It is going to tapping gilded pensions, very generous pensions, particularly above a certain high level. It is also going to be trying to target people, who, as I was just saying before, have plenty of money invested in stocks and shares and bonds, a well. It is going to be imposing strict stamp duties on purchases of future securities to try and get that money out of people's bank accounts, get that money out from underneath the mattress, and also back into the working economy.
I've also got some other interesting statistics for you, John. When it comes to how Italy stacks up against Greece, in light of what Giulio Tremonti said, when he was saying, even perhaps the first class passengers aren't safe, just like on the Titanic.
Now, when it comes to tax evasion, Italy is second only to Greece, according to the IMF, among the world's 30 richest nations, when it comes to a high rate of tax evasion, Italy has 27 percent of its GDP lost every single year by tax evasion. Only Greece has more at 30 percent. And as you figured, John, I'm sure you'd like this statistic: The places in the world that have the fewest taxes, seem to do best when it comes to tax evasions. Switzerland has the world's lowest among the world's richest nations, standing at just 9 percent. Go figure.
DEFTERIOS: OK, thanks very much, Nina Dos Santos. This is one night I think I will not claim my Greek heritage after Nina's report there.
The anxiety is back in charge of traders in Europe. Stocks ended the day lower because of the uncertainty about debt right around the world. The sell off was broad, indeed, with banks among the hardest hit. Shares in the major markets, you see, London down 1 percent, the Xetra DAX down 0.73 of 1 percent, Paris down just over 1 percent. And the Zurich SMI down 0.73 of 1 percent. The euro is also loosing ground tonight against the U.S. dollar. The dollar is drawing strength from last night's comments by Ben Bernanke when he squashed suggestions of more monetary easing. We are at $1.4175.
When we come back on QUEST MEANS BUSINESS, the casualties of the U.S. debt crisis, the boss of America's GE says, without a deal small business could stop hiring.
DEFTERIOS: The crisis over the U.S. debt ceiling comes at a very bleak time for job seekers in the United States. Poppy Harlow sat down with the chief executive office of GE, Jeffrey Immelt. She asked him what it is going to take to get companies to start hiring again?
JEFFREY IMMELT, CEO, GE: I actually think companies like GE don't really have any excuses not to-you know, we are going to plot our own strategy. And a lot of-you know, we're a lot outside the United States today, with aircraft engines, and gas turbines. So we're going to keep investing. And we have announced about 15,000 jobs in the U.S. this year. We're going to do it.
I would ask people, don't think about GE so much. Think about a small business person, who really do create a lot of jobs in this country. They are petrified right now.
POPPY HARLOW, CNN FINANCIAL CORRESPONDENT (on camera): What are they scared of?
IMMELT: Well, look, I mean, you know, what happens if the government doesn't rollover its debt, you know? Why would you invest into that? And you know, if the budget deficit means super high tax rates for them and things like that. Again, that to me is the piece that is missing. There has been bad new business generation, small businesses have gotten hurt coming out of this recession. Guys like us, that have a global footprint, global demand, we are going to power through this. And I see that today. We have good demand for our products on a global basis. There is no excuse for us not to keep investing.
HARLOW: So Bernanke just came out today and said, that if we don't see a deal on the debt ceiling by the August 2nd deadline, it is going to be catastrophic. Now, you don't hear words like that from the Fed chairman very often. He is guarded in the language he uses. You said, recently, we are at each other's throats more than is necessary. What is the right solution here, when it comes to the debt ceiling? And if we don't see a deal by the deadline what is the result on job creation?
IMMELT: Look, I don't even want to spell-I'm going to let Chairman Bernanke speak for the voice of the government on the debt ceiling. I would make a couple of points.
I think the Simpson-Bowles Commission study was outstanding. You know, Dave Cody (ph) who is chairman of Honeywell, he did a great job. He was on it.
HARLOW: We were so close.
IMMELT: You know, I kind of say that is the tapestry on which I think a lot of people can agree.
IMMELT: Beyond that, you know, legislators legislate. This is what- they need to come together. And this is what they are supposed to do, is to legislate. And I just think we need that kind of leadership right now.
HARLOW: What we pay them to do. And we are in a jobs crisis, so if we don't see a deal by August 2nd, what happens to jobs?
IMMELT: I, again, I just think-I'm going to stay focused on GE. We are going to keep powering through. But I do think at the end of the day, these people have to get a deal done. That is what they are supposed to do.
DEFTERIOS: From one of the biggest CEOs in the United States, Jeffery Immelt on the debt talks.
Like father, like son? Rupert and James Murdoch will both be facing questions from Britain's parliament, next week. We'll take you inside the most famous family in media, when we come back.
DEFTERIOS: Welcome back. I'm John Defterios. And here are the day's headlines stories at the bottom of the hour.
DEFTERIOS: Well, as international outrage grows over the News Corp. hacking scandal, Rupert Murdoch, himself, is set to face the music. Let's get you caught up on what the activities are today, in the U.K. Murdoch, his son, James, and former "News Of The World" editor, Rebekah Brooks will testify before lawmakers in London next week. The Culture, Media, and Sport Committee says it wants them to account for the behavior of News International and for previous statements made to the committee, in parliament, now acknowledged to be false.
Well, the outrage is spreading beyond the U.K. right now, let's go to Australia. Australian Prime Minister Julia Gillard says she is shocked and disgusted over the extent of News International intrusion of grieving families. Ms. Gillard says she is open to a review of Australia's media regulation in light of this global scandal.
(BEGIN VIDEO CLIP)
JULIA GILLARD, AUSTRALIAN PRIME MINISTER: I anticipate we'll have a discussion amongst parliamentarians about this, about the best review and way of dealing with all of this. I'll be interested in people's ideas. And I think whatever parliament does or doesn't do, there is going to be a national conversation about the media's role in media ethics in the weeks and months ahead.
(END VIDEO CLIP)
DEFTERIOS: And let's go to the United States to round out our coverage tonight. Pressure on Murdoch's News Corp is mounting, in Washington. Today, Bruce Braley, a key member of the House Oversight Committee asked Congress to investigate allegations that it broke bribery and other laws. He also says News Corp. newspapers may have engaged in political or personal espionage.
(BEGIN VIDEO CLIP)
REP. BRUCE BRALEY, (D-IA), OVERSIGHT & REFORM CMTE.: Everything we are hearing about this growing problem is that it involves reprehensible conduct by people who are trained to follow a journalistic code of ethics that I learned in journalism school, right after Watergate.
Accuracy, objectivity, fairness, and integrity, and we have seen this blurring line with many of the News Corp. flagship papers and other things, where you blur the line between fact, news, opinion, and political propaganda. But no one thought they were engaging in any type of spying into the private lives of U.S., or British citizens.
(END VIDEO CLIP)
DEFTERIOS: You remember the story in "The Wall Street Journal", that big takeover battle with the Bancroft family, he had to convince some of the members, who were splintering off. That was for $5 billion. Well, some members of the Bancroft family now say they would not have sold "The Wall Street Journal" to Murdoch if they had known of the scandal. News Corp. paid $5 billion for the newspaper's publishers, all the way back in 2007.
Rupert Murdoch's career has now spanned, believe it or not, six decades. CNN's Allan Chernoff looks at what, really, he has built over time.
ALLAN CHERNOFF, CNN SR. CORRESPONDENT (voice over): Rupert Murdoch's great love has always been the newspaper business, say those who know him. He demands dramatic stories, telling reporters we will never be boring, and frequently checks in with his top editors. One of whom used to be Lou Colasuonno.
LOU COLASUONNO, SR. MANAGING DIR., FINANCIAL DYNAMICS: He's passionate about his newspapers, and along with that passion comes an involvement in the day-to-day operations of his papers, particularly his biggest ones.
CHERNOFF: Murdoch's ambitions began in his native Australia, inheriting his father's newspaper business. Murdoch added media properties across the country. He even started the Australian, a nationwide paper. And aggressively used them to support politicians he favored.
Overseas Murdoch's first purchase was a British tabloid, "News Of The World", followed by "The Sun". Both of which he pushed to a new level of sensationalism.
MARTIN DUNN, FMR. EDITOR, "THE SUN", "THE NEWS OF THE WORLD": Topless girls on page three of "The Sun" was a Rupert innovation.
CHERNOFF: Murdoch became the central figure in Britain's competitive newspaper market known as Fleet Street. Former Deputy Editor Martin Dunn says he was as tough as his headlines.
DUNN: He was the man who tamed the print unions, so that newspapers became incredibly profitable.
CHERNOFF: Checkbook journalism, paying for stories, was a regular practice that paid dividends with higher newspaper sales. Some detractors referred to Murdoch as "The Dirty Digger".
COLASUONNO: He ran close to what might be considered journalistic ethics. I'm not saying he broke the law. I'm not saying he did anything illegal. But I will say that he is aggressive in getting stories.
CHERNOFF: Murdoch also used his papers as a power base, with his editorial support, Margaret Thatcher, John Major, Tony Blair, and David Cameron, all rose to prime minister.
ALEX BEN BLOCK, AUTHOR, "OUTFOXED": He, more than anybody I've ever seen in my lifetime in the media, understood how you could use the power of the media to shape the political views in the country, and in doing so to affect elections.
CHERNOFF: And to assist his business ambitions. Murdoch did the same in the U.S.
RUPERT MURDOCH, CHAIRMAN, NEWS CORPORATION: Now we are moving very fast, at News Corporation, to have a worldwide platform.
CHERNOFF: Newspapers, Internet, television, film, all together have expanded his political influence. His decades of brilliant business and political success make this week's collapse all the more shocking.
Murdoch has achieved the impossible, said one observer. Britain's normally divisive political parties are all united against him.
DUNN: I think it is terribly devastating. He doesn't understand the word "defeat".
CHERNOFF (on camera): Rupert Murdoch is used to winning. He once told "Vanity Fair", "I love competition, and I want to win." This is a stunning defeat for a man, who only last week you could have called the most powerful media baron on the planet. Allan Chernoff, CNN, New York.
DEFTERIOS: Well, a U.S. legal filing this week accused Rupert Murdoch of using his business as a quote, unquote, "family candy jar". So let's take a look at the Murdoch family tree to give you some indication of what we are really talking about.
Not surprisingly, at the top of the tree you have the 80-year-old Mr. Murdoch, who is of course in charge as the chairman of New Corporation. Let's move him out, and move over to James, now we are not going to go with the oldest, but the youngest of the team here. He is the current deputy, COO, and chairman and CEO of International News Corporation. His appointment of as CEO of BSkyB was seen as allowing James leapfrog his older brother as the most likely successor to the father.
I'm not sure if you remember, this side of the saga. But Lachlan had a very powerful position. He is now a the Network 10 Board, in Australia. He is the former deputy COO, of News Corp. and had some success turning around the perpetually trouble tabloid in New York, of course, "The New York Post". But Lachlan had so many strains with his father, you probably remember, that he just said, look, I've had enough, New York, London is not quite my thing. And he moved in with a very high profile marriage in Australia and stayed there to kind of distance himself from the family.
The eldest of the three children is Elisabeth. The 42-year-old is a News Corp. board member, as well as the chairman and CEO of Shine Group, a media production company based in the U.K. Rupert Murdoch's News Corp. bought her company for over $600 million to keep it all in the family. And this has been one of the key criticisms of the Murdoch family. You have him at the top, Elisabeth, Lachlan, and James. Lachlan, really not a player right now. Spending $615 million to buy out her company, is something that some of the institutional investors have suggested, we should think differently of News Corp. in the future.
Well, on Wednesday, News Corp. backed off from a $12.5 billion takeover, as you all know, of BSkyB. The cash cow that News Corp. itself helped to create. Well, James Murdoch is the chairman of BSkyB. Earlier I spoke to Alan McDougall, the managing director of a shareholder group that invests in the company. He told me it is time for him to think about stepping down.
ALAN MACDOUGAL, MANAGING DIRECTOR, PIRC: Well, the company is an exciting company, it is at the cutting edge of media. We think it has a good business model. I think the challenge is the risk inherent in the governance framework of the company. And I think in order to sustain the business model, shareholders need to see and independent share and some more independent directors brought onto the board.
DEFTERIOS: You are suggesting then that James should go. This is the time to get the Murdoch off the seat?
MACDOUGAL: The key decision for shareholders is to push forward for an independent chair. Whether James stays on the board is a separate decision. He doesn't have to resign from the board. The key thing is the minority shareholders, effectively, they need an independent chair.
DEFTERIOS: I want to look at the bigger picture, as well. Say you have a deal that slips out of their hands, $12 billion of BSkyB was going to generate a lot of cash for News Corp. in 2012, probably 1.6 billion. If that happened to anyone else, the pressure on the chairman would be severe. Should the board of directors, in News Corp., now put pressure on Rupert Murdoch to step aside?
MACDOUGAL: I think there are questions about governance risk at News Corp. and I think those have got to be addressed by primarily U.S. shareholders, although it has a global shareholder base. With BSkyB I think the key issue is they have to look long term. I mean, a lot of commentators in the market have said it is a shame that the deal didn't go ahead. I think for longer term investors, which I represent, they are interested in sustainable (UNINTELLIGIBLE) in the long term. And I think that doesn't necessarily mean that the BSkyB deal for News Corp. would have the best option for them.
DEFTERIOS: But if you look at the track record in News Corp, like MySpace, it was sold at 10 percent of the purchase. "The Wall Street Journal", that is something that Rupert Murdoch wanted to have for $5 billion. He bought his daughter's production company for $615 million. That doesn't seem to fly in the 21st century. Are some of your shareholders saying the same?
MACDOUGAL: Yes, there are challenges now in the U.S. market over the valuations of those deals. I think from a long-term perspective you have to more separate the issues between the family control, and their interests, and the long-term business strategy interests of the company as a whole. I think it is-everybody has been kind frightened to raise the issues of why shouldn't the company have an independent future without the family? Now it is no, there is no question, the family has done great things.
I think the key to the situation now is that with the risk factor of reputation at stake, we are not sure how that is going to play out in the U.S. market but it could be very severe, depending upon some of the accusations that are currently being made. That means that minority shareholders need to look to the long term. And the family structure, controlling these two publicly listed companies, is not the appropriate vehicle to go forward.
DEFTERIOS: The final thing I wanted to talk to you about, here, then is what happens to the structure itself; 12 percent of the voting stock, but they really control 40 percent, and you add in like a Prince Al-Waleed bin Talal of Saudi Arabia, and he has a lock on this board. Doesn't that really need to change?
MACDOUGAL: I think it does, but that is a subtle process. You can't act like a bull in a china shop here. I think you have to negotiate the way forward. I think Murdoch probably, today, is more open to those kinds of discussions than he has ever been in the past. I think the institutional investor community needs to seize the opportunity-
DEFTERIOS: If they break silence, though, Al, they are afraid to talk.
MACDOUGAL: It is very disappointing. I think they have suffered from the same pressures as parliamentarians have suffered, as other journalists have suffered. They have been frightened to say boo to the goose. Now, I think, the climate is right to begin to raise these questions without fear or favor.
DEFTERIOS: OK, Alan MacDougal, once again, an advisor to institutional investors who have been remaining silent until just recently.
Well, after yesterday's modest recovery, shares of News Corp. have been trading pretty flat on the Nasdaq today. They are currently up by just a few cents or around a third of 1 percent. They are still down by 18 percent over the past week. As for BSkyB, its shares fell 1.35 percent today, at 696 British pence. It is now trading below the initial offer price made for the company by News Corp, before it was force to withdraw the bid just yesterday.
Europe's favorite music streaming service has hit the United States. Next Spotify's chief content officer will tell us why free music is a model for success, even in America.
DEFTERIOS: Spotify has crossed the Atlantic. Today a select group of U.S. members got their first access to the music streaming service, which is already a major hit in Europe. Let's take a look at what it has to offer. The big difference between Spotify and online music stores is that you are not buying the music. You listen to tracks for up to 20 hours a month for a fee, or pay a small fee for unlimited streaming. Since most record companies profits come from the sale of music tracks labels obviously want to make sure they keep getting paid under this business model of Spotify. Getting the labels on board is what has held up the U.S. launch until today.
Ken Parks is the chief content officer for Spotify. Earlier he told me he is confident that the business model that has made the service a hit in Europe will transfer over across the Atlantic.
KEN PARKS, CHIEF CONTENT OFFICER, SPOTIFY: Well, we think this is a model that resonates for everybody who loves music. Of course, this is the biggest music market in the world. We wanted to be careful in the way we approached it. We think that core to what Spotify is all about is having an amazing free experience, that lets users invest in it. So, I'm sure that the rights holders and our-the other stake holders in the equation want to be careful as well.
You know, of course, anything worth doing is going to take a little bit of time. And we are happy to have the support now of the industry for the essence of what Spotify is all about, which is this amazing free experience, coupled with an amazing pay experience.
DEFTERIOS: Do you have a challenge in the sense where the music, the music executives of the world say, we don't like your business model, and a la Netflix, we'll charge you quite a bit as time goes on, for streaming. Is that going to penetrate the music space as well?
PARKS: I think what you have seen with Spotify is the model proving itself, for the last three years. You mentioned that we do have this experience in Europe. We probably wouldn't be having this conversation if we hadn't been so successful in generating pay users. And what we have done that other subscription offerings haven't been able to do is, is to get a lot of people to see the value form a subscription experience. Key to that, is this free experience that allows users to invest a lot of time, build collections.
So getting into the experience, if you ask the, you know, would you pay, you know, the equivalent of two or three fancy coffees a month, to have all the music, take it with you on your mobile. So the answer might be no. But as users invest in it, they'll play with it, spend 1,000 hours on it. Have all their friends using it, sharing music.
The answer to your question is much different. Then it becomes sort of a-no brainer, for the cost of a couple of pints, you can have access to that stuff on your mobile device.
PARKS: So, you know, the key to it is having a model that allows you to see the value of it, that they might not otherwise see.
DEFTERIOS: You had some sizable partners to launch, like Coca-Cola, Motorola, Chevron. Are they advertisers that will give you some breathing room and a very large and expensive market, from a marketing stand point?
PARKS: Well, we are first of all very happy that we got such a blue chip launch sponsors with us. We do have an advertising business. Maybe that is sometimes forgotten that in addition to having a lot of paid user we have this very large ad network that we have built up in Europe. We are anxious to scale that up in the U.S. And these are partners that, you know, have seen what a lot of what our advertising partners have seen in Europe, which is just a great place to be in terms of connecting their brands with people who want music.
DEFTERIOS: Once again, Ken Parks of Spotify, joining me via Skype a little bit earlier, from New York.
Well, Google is hoping its earnings will be music to its investors' ears right now. With the launch of Google Plus, and more recently the addition of movie rentals to its Android app market, it has been a busy few weeks for the search engine. We'll hear its results after the bell, but let's get an update on what Google is up to, itself, by checking in with Felicia Taylor, who is standing by in New York.
It is almost like the long tentacles of Google are going out there, into every application. They are not sitting idle, that is for sure.
FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT: No, they definitely not sitting idle and that is, you know, part of this story, which is so interesting. And the reason, look, Google is expected to outperform what the expectations are and give pretty good results after the bell, today, in New York.
But it is kind of a darned if you do, darned if you don't story here. And what Wall Street doesn't like is the fact that Google does spend money. And you mentioned some of the names that they have been involved with, new social networking site that they launched, Google Plus. They own YouTube. They have the Android operating system, which gives it 35 percent of the smart phone market. It is also saying that it is going to be very aggressively looking for talent in January. It said that they were going to hire 6,000 people.
So that is the part that Wall Street doesn't like, because it spends the money that it has. And, frankly, those rising expenses did eat into profits. And that is what hit the stock, and it was down about 8 percent after that.
But on the plus side, here is what people love about this stock. It has a number of paid clicks. That is, of course, when you click on something, when you are searching for it and it goes straight to an advertisement. That is money for Google naturally. People are obviously going to continue to use the Internet as one of the fastest growing areas that we know of. And let's say that this is the only company that has actually been able to monetize the Internet to perfection. And the paid search market, believe it or not, is going to expand by 14 percent this year, to be worth about $35 billion. So, people are going to continue to use Google as their Internet search on mobile devices, which is a plus for them, so more searches, more ads, that means more money for Google. And that is exactly why this analyst is so bullish on Google.
(BEGIN VIDEO CLIP)
SCOTT KESSLER, ANALYST, STANDARD & POOR'S: Our target price is $700. We see a lot of upside from here. We think that the risks that people have been focusing on for, I would argue, for the last couple of quarters, while they are still in place. They are really not as worrisome as perhaps they were. And we see a lot of possibility in terms of both growth, as the company invests and as it pursues a lot of these new kind of blue water opportunities. In addition, we really see the valuation as pretty compelling right here.
(END VIDEO CLIP)
TAYLOR: Well, it certainly is. And to add to that plus-side column, they have increased revenues coming from China and Latin America, making up about 53 percent of their revenues coming from outside the United States. They have $35 billion in cash, and zero debt. They have a big pot of cash to spend. And quoting yet another analyst, there is no better tech company thank Google, and there are a few stocks priced as cheaply as Google is right now. I should mention, there is an overall tech pull back today in the marketplace, But right now Google shares are trading at about $531. That is down about 1.30, in today's trade. That analyst was looking for a $700-dollar target. So that is quite an increase from today's pace.
DEFTERIOS: It makes me laugh. It is almost like Berkshire Hathaway, with $531 dollars to $700.
TAYLOR: I know, you have to be kidding.
DEFTERIOS: Don't go anywhere I need you to sit tight because we have some breaking news coming out on News Corp. We are getting reports in the past few minutes that he FBI is launching an investigation into News Corp, right now, over allegations that it hacked the phones of its 9/11 victims. That is according to various news reports, including "The Wall Street Journal" and the Associated Press. Shares of News Corp. have fallen sharply on that news.
10 minutes ago, we said that the stock was trading flat. It is down more than 3 percent, after that announcement. We talked about the long arm of the law, Felicia, and whether this goes into congressional hearings, we heard from Australia, and the prime minister there, that they are going to do some investigations. We know that the Murdochs are going to go before the U.K. Houses of Parliament, next week. But this seems to be quite serious with the FBI on their trail.
TAYLOR: This is the first step in what we have been expecting to hear about these lawsuits. And you know, the use the idea of tentacles with Google. These are the tentacles of the arm of the law that are reaching into the Murdoch empire. The big question everybody's mind is, you know, were there illegal practices in any of his American holdings, such as "The New York Post" or "The Wall Street Journal", any of those newspapers.
And there is something called the Foreign Corrupt Practices . And that is when the FCC, the securities and exchange commission, or the Department of Justice, would look into any of those practices. Because it is illegal in this country, and in the United States, for anyone to pay money to get a story, to advance the sales of new papers. So this FBI investigation would be the beginning of what potentially could be many different investigation and clearly that could to on for years, frankly it cost Murdoch millions, if not 10s of millions of dollars, John.
DEFTERIOS: OK, thanks for the analysis. Felicia Taylor in New York. Of course, it would be interesting to see what the analysts say tomorrow about that.
We are going to take a short break. We'll be right back after this.
DEFTERIOS: Time now for a look at some of the "Tweets from the Top". Let's keep it political, shall we, today? Let's start with Eric Cantor, the U.S. House Majority Leader has this partisan warning, via Twitter. "The reality is that tax increases cannot pass the House. The constant demand for the makes coalescing around a final bill, less likely. That was very controversial yesterday because, his words apparently, prompted President Obama to walk out of the room during the negotiations.
Now to a man we interviewed last night, Najib Tome Razak, the prime minister of Malaysia, he Tweets: Fruitful London trip so far. Five memorandum of understanding signed between Malaysia and the U.K., public and private sector, including cooperation for urban rail developments." Surprised he didn't mention any news of his appearance on QUEST MEANS BUSINESS.
And Carl Bildt, the foreign minister of Sweden, Tweets: "Big and important investment by Elextrolux," in Egypt, Shows confidence in the future of the country and its economy. A you probably well, know that the economy tracked and brought in $50 billion over the last five years, into that country, before that uprisings. And for the Tweets at the top of this program, you can follow Richard@ Twitter.com/RichardQuest. Who is Tweeting while he is away on assignment.
Shares in News Corp have fallen sharply on the news that we talked about today, after the investigation by the FBI on phone hacking of 9/11 victims, the stock is now down 4 percent. Coming from Reuters, "The Wall Street Journal" and AP.
And that is QUEST MEANS BUSINESS. I'm John Defterios in London. PIERS MORGAN TONIGHT, is just ahead, following a look at today's headlines.