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SAC Capital Charged; Steven Cohen: Man Behind SAC; Implications of SAC Case; British Growth Boost; Spanish Unemployment Falls; Global Economic Outlook; European Markets Slip; Church of England Takes on Payday Lenders; Dollar Down

Aired July 25, 2013 - 14:00   ET


NINA DOS SANTOS, HOST: Tonight, criminal charges for SAC Capital. Wall Street's biggest hedge fund is accused of systematic insider trading.

On the mends. The UK chancellor says that Britain's economy is now healing.

And it's a case of Welby versus Wonga. The Church of England takes on the world of payday lending.

Hello, I'm Nina Dos Santos, and this is QUEST MEANS BUSINESS.

Good evening. Well, first off, federal prosecution -- prosecutors, I should say -- have now filed charges against SAC Capital. This is, of course, one of the world's biggest and most profitable hedge funds.

It's accused here of insider trading which, as you can see from the quote here, was "substantial, pervasive, and on a scale without known precedent in the hedge fund industry," according to the deposition that was filed earlier today. The wrongdoing is said to have generated hundreds of millions of dollars in revenues and illegal profits for this firm.

Now, the boss, the billionaire investor Steve Cohen, is not facing criminal charges himself, we should stress. But he is still the subject of action by the SEC, the Securities and Exchange Commission. Let's bring in Felicia Taylor, now, to break it all down for us. Felicia, first of all, I suppose, why is he not be charged himself?


FELICIA TAYLOR, CNN INTERNATIONAL CORRESPONDENT: Boy, you've asked that multimillion-dollar question. The reason that he's not being charged himself, one has to presume, is that the authorities do not have enough information or evidence to prove that he is -- or to even bring a charge against him -- that he is guilty of insider trading.

What they do have is a number of employees, some of them were traders, a couple of them were portfolio managers, and that's very significant, because those two portfolio managers have pled not guilty to charges of insider trading.

But those portfolio managers are the people responsible for bringing him what they call their best ideas, and that is where he has been able to get his information up until now that has provided these double-digit returns.

That kind of information, it is alleged, was obtained through insider trading. In other words, if this was non-public, material information that these people used, these individuals used to make trades and make these illegal profits.

But the thing is, there are a thousand employees at this company, 125 of these portfolio managers. They generated hundreds of millions of dollars in terms of fees and commissions for those on Wall Street. This is a major firm, and that's why it is such a big deal, it is such a high- profile firm.

I've spoke to a number of traders that had said that there was this kill or be killed kind of culture on the trading floor at SAC, the idea that it was very demanding, very aggressive, you had to meet your numbers, and that's the kind of culture that existed. So, a lot of traders there were under the gun to perform.

But the man himself that is sitting at the top of SAC is not being criminally accused. Let's take a look at who this person is and how he developed SAC.


TAYLOR (voice-over): He is one of the most successful and controversial hedge fund managers in Wall Street history. By every estimation, the story of Steve Cohen and SAC Capital Advisors, is an extraordinary one. But the death knell may soon be coming.

JACOB FRENKEL, FORMER FEDERAL PROSECUTOR: The criminal case against the company could result in the dissolution, the vaporization of his firm, so there will be no entity in which he would then be able to manage money.

TAYLOR: Steven A. Cohen founded SAC Capital in 1992 and quickly made a name for himself by delivering double-digit returns for clients, who he charged some of the highest fees in the business.

ED BUTOWSKY, CHAPWOOD INVESTMENTS: The record for SAC has been nothing short of spectacular, and since 1994, they've returned about 3,800 percent net to their clients. And those are phenomenal numbers. You compare those to a Warren Buffet or just about any portfolio manager and no one even comes close

TAYLOR: Cohen's investment prowess earned him a net worth estimated at over $9 billion, and Cohen isn't afraid to spend it. He lives large on a sprawling, 14-acre Greenwich, Connecticut estate with a 35,000 square- foot home and a pricey mansion in the Hamptons.

His art collection, which includes Picasso's La Reve and one of Damien Hirst's famous floating sharks, is valued at $1 billion.



TAYLOR: Cohen is also politically active. He was a big supporter of Republican presidential candidate Mitt Romney. And even though he is notoriously camera shy and shuns publicity, Cohen is passionate about his philanthropic causes. He is co-chair of the anti-poverty Robin Hood Foundation.

Over the years, as Cohen's stature has risen, he became a person of interest for the Fed. The big question: did SAC use inside information to beat the market? The government first filed insider trading charges against former SAC figured in 2011.

Their biggest catch, former SAC portfolio manager Matthew Martoma, who goes on trial in November for what is being called the most profitable insider trading case in history. But so far, Cohen has escaped the worst.

FRENKEL: The way that Steve Cohen has been able to avoid being the focus of these cases is the fact that his fingerprints are not on any of the illegal activity.


TAYLOR: Nina, the company has been charged with four counts of securities fraud, one count of wire fraud, and as Jacob Frenkel just said, his fingerprints aren't on any of that illegal activity. It is now the burden of the authorities to prove that there is criminal intent.

DOS SANTOS: Felicia Taylor in New York for us this hour. Thanks so much for that.

Well, as we were saying before, this is the culmination of a decade- long investigation into the notoriously opaque world of hedge funds, as Felicia was just saying. Let's have a look at how the drama actually unfolded, starting out with, of course, the words SAC. They represent his own initials, Steven A. Cohen, as Felicia was saying before.

As Felicia also mentioned, this is a man whose wealth is literally gargantuan. He's ranked 114th richest man in the world, according to "Forbes." He's got a fortune of $9.3 million -- billion, I should say.

And here's the man who's leading the charges against him, Preet Bharara, Manhattan's chief federal prosecutor, 44 years old. So far, he has an unblemished record, and his catch phrase is "No one is too big to jail." Remember that, of course, that is different from what we heard a few years ago, "too big to fail" on Wall Street when, of course, Lehman Brothers went under.

Well, any more than half of -- half a dozen current and former SAC employees, as Felicia said, have already been implicated with at least three of them admitting wrongdoing, but we've also seen criminal charges for two portfolio managers, who are the ones she was talking about before, Matthew Martoma, there, and also Michael Steinberg. Both have pleaded not guilty.

And there have already been some pretty successful prosecutions in the world of hedge funds by Preet Bharara. As you can see here, Raj Rajaratnam, who is the founder of Galleon Group. He was sentenced to 11 years for trading on tips that were provided this man, Rajat Gupta, former Goldman Sachs board member. Gupta himself is serving two years in jail as a result.

Let's discuss the implications of this particular case, now, with Richard Farley, he's a partner of the Leverage Finance Group of New York law firm, Paul Hastings. Great to have you on the show. First of all, do you think these kind of charges are going to stick?

RICHARD E. FARLEY, LEGAL EXPERT, PAUL HASTINGS: Well, these charges are notoriously difficult to prove because you have to show that the compliance program and the monitoring of the traders was either -- remember, this is a criminal case, not a civil case -- was either designed to not unveil the fraud, or those in charge knew.

And who was in charge here was obviously Mr. Cohen, knew that the illegal trading was going on, encouraged it, or turned a blind eye and effectively encouraged it. And that's going to be very difficult to prove.

And if you read the complaint carefully, you can see that what the -- government is alleging as the basis of that theory is clearly open to alternative interpretations. So, this could very well go all the way to a trial.

DOS SANTOS: That's an interesting point you should make, but also, the other point is that the SEC has filed charges as well, just last week. And either way, that could thwart Steven A. Cohen's financial reputation going forward in terms of being able to take on other people's money and manage it for them.

FARLEY: I think that's absolutely right, but keep in mind that the overwhelming majority of money in his fund now is his own. I think it's close to over -- I think of the $6 million he's said to have under management, over $5 million is his own money. So, at least for the time being, he can certainly keep the operation running, keep the employees in house, and keep the lights on.

Now, the question is, how much time would have to elapse, assuming that he prevails in these proceedings, to be able to attract more money from outside investors, and does he even care at this point?

DOS SANTOS: Richard, what does this mean for the hedge fund industry if each time we see these very profitable hedge funds seem to come down on these kind of allegations. Is it the death knell?

FARLEY: It could be, because remember, most hedge funds are not like Mr. Cohen's where the money is his own. Most hedge funds have their money from outside investors, and outside investors will not hang in there as someone who's an insider.

So, if any other fund of significant size that we can think of that did not have the principal, owning the vast majority of the assets in the fund, I think they would almost have to shut down if the were indicted by the federal government or had this sort of pressure on them from the SEC.

And we've seen examples of that going back a long way, including larger institutions, investment banks like Drexel Burnham, and of course, Arthur Andersen, the accounting firm. Very hard to operate in this space with the specter of a federal indictment on you.

DOS SANTOS: That's an interesting point. Richard Farley, there, partner of the Leverage Finance Group of the law firm, Paul Hastings. Thanks so much for joining us in New York this hour --

FARLEY: Thank you again.

DOS SANTOS: -- to put that into context. Well, after the break, Europe, it seems, is feeling better, it's looking stronger, and it's also getting back to work. Economic data right across this continent has been showing signs of recovery. We're going to look at the numbers and the full story straight ahead.


DOS SANTOS: Welcome back. Britain's economy, it seems, is growing at twice the speed it was at the start of the year. Gross domestic product expanded by 0.6 percent in the second quarter of the year. And while there were some encouraging signs in servicing and manufacturing sectors, the British finance minister, George Osborne, still says that he's under no illusions about the task ahead.


GEORGE OSBORNE, BRITISH CHANCELLOR OF THE EXCHEQUER: Britain has held its nerve, we're sticking to our plan, and the economy is on the mend, but we still have a long way to go, and I'm very conscious that things are still difficult for families out there.


DOS SANTOS: George Osborne's right-hand man at the treasury is Danny Alexander. He still says that it's quite a long road ahead that Britain faces. He's the chief secretary to the treasurer, and early today, Charles Hodson asked him if the kind of growth we see today is sustainable.


DANNY ALEXANDER, CHIEF SECRETARY TO THE UK TREASURY: There is absolutely no grounds for complacency about this. The UK and the world economy is still recovering from the deepest financial crisis for very many decades.

We have to continue in this country with the job of repairing our public finances, dealing with our deficit. We have to continue to make Britain a better place to do business.

We've already created over a million jobs in the UK in the private sector over the past three years, our deficit is down by a third. But there's a lot more to be done in all those areas, and so, it is a long and hard road that the UK is on back to being a country where prosperity is sustainable.

We are on the right track, and as a government, we're going to stick tot he plan that has got us this far and continue down that road.

CHARLES HODSON, CNN INTERNATIONAL CORRESPONDENT: Do you think that there is, therefore, an argument for thinking more in terms of growth than in fixing the debt and deficit problems, that the time now has come to try and get growth onto a kind of sustainable path, and that they way to do that is not to squeeze the economy any further at the fiscal level?

ALEXANDER: I really believe that the two things go hand in hand, that if we hadn't taken the tough decisions when we came into office to get some confidence that the UK was a country that could deal with the problems in its public finances, and to that felt secure at the low interest rates which have helped this country through these difficult times, then you don't have a firm platform for growth.

I think that the measured, balanced plan that we have and that we're implementing to reduce public spending, to deal with the problems of our public finances, they're the essential precondition, if you like, for sustainable growth in this country.

But there's a lot more on top of that that we're doing. Changing the regime for business taxation, making the UK now recognized as one of the best places in the world to invest in business, one of the best places in the word to invest in infrastructure projects, reducing the burden of taxation on people who are working in this country on low incomes, dealing with issues like regulation and red tape and the planning system, all things that have held this country back for very many years.

So we're trying to -- we're working hard to make the UK more competitive at the same time as seeing through the plans that are absolutely necessary to stabilize our nation's finances.


DOS SANTOS: That's Danny Alexander, there, the chief secretary to the UK treasury.

Well, we've heard more encouraging signs on the European economy, including the first drop in Spanish unemployment for about two years. The jobless rate in Spain now stands at 26.3 percent here, but that is down from 27.2 percent, which is what we saw in the first quarter of the year.

In the meantime, in Germany, business confidence has also managed to improve. That came in improving for a third month in a row. Obviously, this is a sign of confidence, some say, that the numbers on July for the Ifo survey of business confidence coming in stronger than analysts had expected. The big question now is whether it is sustainable.




PARKER: -- good. The source of growth is very diversified. But the process of healing the economy is very long-term.

DOS SANTOS: The UK seems to be gradually decoupling itself from the rest of the eurozone, but we've even got positive figures coming out of Spain. Who'd have thought? A country with some of the highest rates of unemployment, finally that's coming down . PARKER: Well, Nina, actually, you make a very good comment, which is that whereas last year, the performance of the UK economy was highly correlated with the problems in the eurozone, that correlation between the UK and the eurozone has now clearly decreased.

Now, having said that, as you mention, the data over the last month is starting to look better in the eurozone. Let's not forget, the eurozone has been recession for seven quarters.

I think there's a high probability that the eurozone will actually come out of recession probably early the fourth quarter, so around October. Germany, I think you're going to see an acceleration in growth over the next three to six months.

So, this very difficult, deep recession that we've had, most notably in the southern countries like Spain and Italy, we are, I think, in the end game. But it's going to be a gradual recovery.

DOS SANTOS: Of course, a lot of this hinges on the direction of interest rates. The ECB, it seems, is poised to sort of potentially cut yet again, but if we do see a recovery on the cards there, Bob, is that completely off the cards?

PARKER: I think the ECB is going to run a very easy monetary policy for a long period of time, and by a long period of time, I mean at least the next 18 months to two years. Yes, they might cut their reference rate, currently at 0.5 percent.

One thing that they are looking at, and I'm not sure whether they'll introduce it or not, but they are looking at actually charging a negative interest rate when banks deposit money with them, and that would obviously push money back into the system and actually solve one of the big issues in the eurozone, which is the lack of bank lending, particularly in those stressed countries like Italy and Spain.

DOS SANTOS: Bob Parker, advisor to Credit Suisse, thank you so much for joining us there in our London studios --

PARKER: Thank you.

DOS SANTOS: -- to put some meat on the bones of those economic figures.

Now, for investors, the encouraging economic news coming out of Europe was overshadowed, though, by corporate concerns. Stock markets did fall across Europe.

As you can see there, red arrows right across the board, with a number of them, including the DAX, down around about 1 percent despite the fact that, as we were just saying, three months in a row we've had this Ifo Institute of investor sentiment rising.

Shares in Siemens fell by more than 5 percent, that was after that company issued a profit warning for next year. The company says that lower expectations for its main markets are to blame for that. As you can see, the CAC 40 in the eurozone didn't do quite as badly as the Xetra DAX, but the FTSE also falling, despite the better-than-expected GDP numbers for the UK.

Now, when we come back, this man opens the door to money lenders in the temple. The head of the Church of England, no less, reaches out to credit unions, giving payday lenders a run for their money.


DOS SANTOS: Welcome back. The Church of England wants to allow credit unions to open on its property so that they can take on short-term payday lenders like, for instance, Wonga. Well, all of this pitches the new Archbishop of Canterbury, Justin Welby, against the CEO and founder of Wonga, as you can see there, Errol Damelin, on the left.

They have actually met, and the archbishop told him in no uncertain terms that he intends to compete Wonga, quote, "out of existence." Here's what the church had to say about what it's up against.


UNIDENTIFIFED MALE: Online to us, with a loan from, you can borrow up to 1,000 ponds for up to 31 days. It's the perfect way to help manage your short-term cash flow.

UNIDENTIFIED MALE: I think Earl likes your granddaughter's music. Earl?


UNIDENTIFIED MALE:, straight-talking money.


DOS SANTOS: Well, apologies. As you can see there, that was actually what the church is actually up against. That was an advert coming from Wonga's campaign in the UK. Let's compare the costs, though, about exactly what you'd have to pay if you borrowed from each of these two unions.

So, if you started out borrowing from a credit union $600, say, and paid it back the following month, as you can see, that would cost you around about $10 on top of your loan, plus of course the joining fee to actually accede to the union.

The maximum annual percentage rate, so APR we're talking about here, this is the extra amount that you'd owed over the course of the year is, as you can see there, 26.8 percent.

Now, here's the big figure. Borrow the same amount with Wonga over the course of a month and you'd instead repay $794 on your original $600. When it comes to the APR, well, take a look at that. It has interest piled on top of interest, plus repayments, it's nearly 6,000 percent APR in total, and it can go higher than that with Wonga.

Now, Errol Damelin says, quote, "The archbishop," as you can see here, "is an exceptional individual. Wonga welcomes the competition from any quarter," he goes on to say, "and that gives the consumer greater choice in effectively managing their own financial affairs." Well, the church says that the sector badly needs more competition.


MALCOLM BROWN, DIRECTOR OF MISSION AND PUBLIC AFFAIRS, CHURCH OF ENGLAND: I think the archbishop's work on the banking standards commission has shown him just how inflexible and uncompetitive some corners of our financial services sector are.

And in particular, if you want, for instance, a short-term relatively small loan, the mainstream financial institutions aren't interested in you, and that pushes you into the hands of people like Wonga, who are all about instant credit and, as a result, they charge phenomenal interest rates.

People who are actually quite good credit bets, who don't need the money immediately but can't be -- aren't being served by the mainstream banks, have very little choice, and they get caught up by the payday lenders who, once you're in, flood you with adverts and other things, as well as charging phenomenal interest rates with lots of rollover and so on.

And so, what we're hoping to do is to strengthen the community finance sector, the credit unions, which would offer a genuine choice for people, which offset the repetitive -- the speed with which you can get a loan through Wonga against much more reasonable interest rates.

DOS SANTOS: Why do the church think payday loans are such a bad thing?

BROWN: Well, the problem is, as I said, that people get caught up in a spiral if they're not careful. A lot of people need a little bit of help, a bit of money in advance to get through things, especially in a recession, especially when you've got problems with things like the delivery of benefits. It's not so much the policy, it's the delivery that can slip up and leave people in poverty.

Now, if you haven't got choice and the only choice -- the only option is a firm who charge thousands of percent APR, then you're in a pretty tricky position. That's the difficulty. If we can have a market that's more flexible, has more options for people, and that's potentially there already in the credit union sector, then we can do something about it, if we can build up that sector.


DOS SANTOS: Time for a Currency Conundrum for you out there. Senator John McCain is making a renewed attempt to try and scrap the dollar note to save the treasury money. So, dollar coins aren't all that popular in the United States or, indeed, elsewhere.

So, what I want to know this evening is what percentage of coins actually end up being returned to the treasury? Is it A, 30 percent? B, 40 percent? Or C, 60 percent? I'll have the answer for you later on in the program.

Speaking of the dollar, it's currently down against the British pound, the euro, and also the yen. We'll be back with more QUEST MEANS BUSINESS after the break.





DOS SANTOS: Hello and welcome back. I'm Nina dos Santos. These are the top stories we're following for you here on CNN this hour.


DOS SANTOS (voice-over): Eighty people are known to have died in a high-speed train crash in northwestern Spain. Ninety-five people remain in hospital and four children are currently in critical condition. The driver's being questioned by police and is under formal investigation, suggestions that the train was traveling too fast appear now to be gaining weight.

The King and Queen of Spain have visited the scene in honor of the victims today.

The death of an opposition leader in Tunisia has now set off a new wave of protests there. Mohammed al-Brahimi was killed outside his home, becoming the second Tunisian opposition leader to have been killed in six months.

A U.S. grand jury has indicted FAC Capital, one of the country's largest hedge funds, for running what it calls an unprecedented insider trading scheme. According to the indictment, the insider trading went back to 1999 and involved some 20 companies. Its founder, Steven Cohen, was not charged himself. The chief prosecutor says his firm became a magnet for market cheaters.


PREET BHARARA, U.S. ATTORNEY, SOUTHERN DISTRICT, N.Y.: The SEC companies are being held accountable for the criminal acts of so many of their employees because the misconduct was pervasive, because those employees were acting for the direct financial benefit of the firm and because the company did not effectively police its (inaudible).



DOS SANTOS: More people, it seems, than ever are using Facebook on their mobile phones and tablets. Shares in the social networking site rallied more than 25 percent after it posted a whole set of earnings that exceeded many an analyst's expectations. All of this puts it on track for its best ever one-day gain. Maggie Lake is at CNN New York and has been following these numbers.

Twenty-five percent, Maggie? That is huge.

MAGGIE LAKE, CNN CORRESPONDENT: It is huge, Nina. Not only that, it is 10 percent of overall market activity today. This is a very, very heavily traded stock. And you know, Facebook didn't just beat estimates; they really changed the hearts and minds of investors.

I really can't remember the last time we've seen something like this. Listen to some of the glowing research notes coming out from analysts all across Wall Street today. JMP Securities suggests Facebook is increasingly becoming a must-by for advertisers. Goldman says Facebook is at the center of a mobile revolution. And JPMorgan say the results are (inaudible) changing for many investors.

Remember, Facebook was the dog of Wall Street after the IPO debacle and all of the concerns. This is why everyone's so excited. A year ago, revenue from advertising for Facebook, from mobile, was zero. This year, a year later, one year later, 41 percent of their overall revenue.

And as for that Facebook fatigue, the idea that it was a great idea that time had passed doesn't look like anybody's getting tired of it. Monthly active users up 21 percent year-over-year. The people using, the number of people using Facebook on mobile devices, like tablets and phone, up 50 percent you.

Advertisers seem willing to pay for it. And, Nina, very important that they had these kinds of results in a quarter where Google disappointed. So a banner day for Facebook.

DOS SANTOS: Yes, really interesting. I've got to say, Maggie, obviously you know, Wall Street is perhaps slightly more fickle than we thought if it changes its opinion so quickly. But investors are also pleased by what they've seen on the emerging markets front, too.

LAKE: Yes, that's right. Facebook -- this was another sort of concern; if all the growth and all the young people in these emerging markets are where the future is, Facebook, not a lot of penetration. But they came out with an app, Facebook for Everyone, their app for non- smartphones, which is the type of phone that most people use, especially young people in emerging markets.

And that's been a real hit, 100 million users. So they're penetrating there. Again, advertisers love that.

And I think the other thing that's important about that, Nina, not only that aspect but the entire report is this really, I think, shows people have a lot of confidence in Zuckerberg. You know, the guy with the hoodie who was a little bit snarky on the IPO roadshow; everyone just thought this guy is going to lead a company? Does he really get it? Can he do this?

And he's showed that he made acquisitions; he brought in talent. He said they were going to focus on mobile, and he did it. He said they were going to figure out a way to attract those people who didn't have smartphones and he's delivering on that.

So I think this is also a real game-changer for how people perceive Mark Zuckerberg and his grasp on this sort of new landscape of mobile. So not only good day for Facebook, but I think a day we're going to look back on as a sea change for sentiment when it comes to Mark Zuckerberg.

DOS SANTOS: Yes, and also the fact that a stock like that with an important fan base like that, over a billion people around the world using Facebook, can rise 25 percent in one day. That in itself is just amazing.

Maggie Lake joining us there live from New York.

Well, if you take a look at the markets as a whole, despite Facebook's growing strengths and its stock price and, as we were saying, user base, investors saw mixed results today and some pretty tepid economic reports as well, as you can see. That's got the Dow Jones industrial average down around about 20 points or 0.1 of 1 percent at the moment.

While some of the companies reporting those mixed bags of results included the likes of General Motors. It's improved its bottom line in the United States, managed to cut back on the losses it suffered in Europe, but China remained a weak spot, which is completely in contrast to what Ford Motor Co. said yesterday.

Alison Kosik is live, as you can see there, for us at the New York Stock Exchange at the earnings season gets into full swing.


ALISON KOSIK, CNN BUSINESS CORRESPONDENT: And as we get that General Motors report, Nina, it shows that the American car industry continues to recover. GM reporting improved second quarter earnings in North America this morning. Also it managed to cut its losses in Europe.

However, lower earnings in China results in a drop in overall profit, which came in at $1.2 billion. That's actually still better than expected.

GM has aimed to launch 19 new vehicles next year. About two-thirds of them are supposed to be coming in this half of the year. The company CEO says it's seen very solid demand in the U.S. economy, but that Europe remains a challenging environment. Things are better there than they were, though; we mentioned those narrowing losses in the region.

They went from $110 million in this year's second quarter compared to the $394 million last year.

As for the stock, after initial pop, GM slightly lower, about 1 percent lower. These results are not unlike those that we've seen reported by Ford yesterday, which saw similar -- a similar situation in Europe and North American businesses, Nina.

DOS SANTOS: OK, Alison Kosik there live at the New York Stock Exchange with the latest on General Motors business.

Well, after the break, we're going to moving away from economic bellwethers to bring you the latest from the CNN World Weather Center.





DOS SANTOS (voice-over): Time now for the answer to tonight's "Currency Conundrum" for you out there. You may remember earlier in the show I asked you how many unwanted dollar coins are returned to the U.S. government?

And the answer, if you're a betting person, is B, 40 percent of circulated coins eventually make their way back to the Treasury. They're particularly unpopular because people think that vending machines won't take them. And of course, Americans still feel rather (inaudible) of the iconic $1 note.


DOS SANTOS: Let's go over to Jenny Harrison who's standing by to tell you about the "Business Traveller" forecast and plenty more.


JENNY HARRISON, CNN METEOROLOGIST: Hey, Nina, yes, we had some pretty ferocious storms come through the north and the west of Europe in the last few hours. Clearing out across areas of France in the last few hours, but the area of low pressure responsible is just sort of sitting out there in the Atlantic.

It's anchored and it's continuing to produce these showers and these thunderstorms the last few hours. You can see things have been a bit clearer. But we have had some very heavy rain and some thunderstorms across parts of Ireland in fact.

(Inaudible) seem like a lot, but 16 mm of rain in Dublin, but enough to cause some flooding, to cause some problems to the Dart (ph) system, the railway system there and also the big iconic store in the middle of the city has (inaudible) close its doors for several days because the damage that was done by that storm.

Some pretty strong winds as well, always coming through with these scattered thunderstorms and this is the set up, as you continue through the week and through the first part of the weekend. So it is cooler across much of the northwest, those temperatures have come down. But look at this, the heat really is going to build now across these central areas.

We will still have the chance for some pretty strong thunderstorms, particularly this area throughout France. So we could see some more severe winds, that large, damaging hail and, of course, some pretty strong winds.

So do be prepared, maybe on Friday, for some delays at some of the airports, Amsterdam and also Paris where we've got that clash the air masses we could have some thunderstorms which could delay your travels. Temperatures this Thursday, still pretty high in Berlin at 29, Amsterdam 28, but cooling down there in Prague and London.

But as I say, the heat getting on in central Europe. So look at this Berlin, 37 by Sunday. The last time you were that warm in Berlin it was July three years ago. Meanwhile in Vienna, by Sunday, 38 Celsius. But guess what? Last year you did actually get to 41. So we will see how you fare in the next few days.


DOS SANTOS: OK, Jenny Harrison at the CNN World Weather Center there. As you just heard, things are cooling off a little bit in London, but still the world's attention has been family focused on the British capital this week.

About 15 minutes from now, Christiane Amanpour takes a deeper look at what's happening in London and how hosting the Olympics played a big role in its future. Her guest tonight, (inaudible) London mayor Boris Johnson. So do stay with us for that.

Thanks for watching QUEST MEANS BUSINESS. "MARKETPLACE EUROPE" continues after this.




DOS SANTOS: On the River Thames in London, welcome to MARKETPLACE EUROPE. I'm Nina dos Santos.

Europe is home to around about 3.5 thousands breweries, which produce a quarter of the world's beer. In this week's program, we examine the opportunities and challenges for an industry which employs over 2 million people across the region.


DOS SANTOS (voice-over): Coming up, how thirst for sales growth overseas is helping one London brewery to limit the impact (inaudible) at home.

UNIDENTIFIED MALE: Let it flow, and then --

DOS SANTOS: And Heineken's president of central and eastern Europe on the prospects for one of the biggest beer regions in the world.

JAN DERCK VAN KARNEBEEK, PRESIDENT, CENTRAL AND EASTERN EUROPE, HEINEKEN: It's very fertile hunting ground for companies which have international sparring (ph) brands like we do.


DOS SANTOS: Having a pint in a pub is about as British as it gets. Almost 20 million pints of beer are drunk here every single day.

Fuller, Smith & Turner has been making beer along the banks of the River Thames in London for 160 years. Isa Soares has been to find out how this traditional family brewer is satisfying an increasing thirst for its beers abroad.



ISA SOARES, CNN CORRESPONDENT (voice-over): Rolling in from overseas, keg after keg returns home to be cleaned and refilled. This is the new workflow for Fuller, Smith & Turner, a family partnership that's been brewing at this site since 1845.

MICHAEL TURNER, CHAIRMAN, FULLER, SMITH & TURNER: Up until three years ago, the offices of president, chairman and chief executive were occupied by one of each of the original founding families. And we think it's almost unique. We're not sure. But we think it may be unique that three families can trade together for that length of time, for over 160 years.

SOARES (voice-over): Together, they've weathered several economic downturns. And now they're facing yet another one, as U.K. beer duty saps demand for their product at home.

TURNER: We pay, in this country, 40 percent of all the duty, the beer duty, for the whole of the E.U. So our consumers are very hard-pressed. We pay something like 12 times the amount of tax that the Germans do, for instance. So that has really had a very detrimental effect on beer volumes. So that's where exports fit in.

So we're now exporting to 68 different countries. And our exports have gone up by three times in the last five years.

SOARES (voice-over): To overcome the high taxes, Fuller has been lining up its beers and shipping them overseas, exporting the equivalent of 12 million pints per year, demand that has seen export volumes increase by 200 percent in the last five years.

SOARES: There's more to exporting than just filling up a bottle and shipping it to make a profit. You need to know your market. In the United States, they sell them in these cardboard baskets.

Or when selling to Scandinavia, the product tends to have a high alcohol content, in this case, 8.5 percent. In the European Union, the buyers prefer the 30-liter keg to this 50-liter keg because of health and safety. After all, they're lighter and easier to carry.

TURNER: Some of these markets abroad, the tax is based on per bottle; whereas in this country, the tax is based on the amount of alcohol. So in America, for instance, they're happy to drink a range of different alcoholic levels, and they would tend to be stronger than the U.K.

If you go to Italy, they're incredibly brave. They drink Golden Pride on draft, and that's 8.5 percent alcohol. So there will be lots of different markets. And they will have different affinities. To go to Russia, London Black Cab, which is our stout, is very popular out there. But, again, the idea of having a Black Cab on the label from London, clearly, is very important to people.

SOARES (voice-over): To keep up with international demand for its beers, Fuller's have had to increase efficiency, investing around $7 million, extending its already cramped facility, from robots that can maximize space by loading and unloading kegs and beer pallets to fully integrated operation lines that clean, sterilize, fill them with beer and then pallet them for dispatch.

JEFF HACK-DAVIES, PACKAGING OPERATIONS MANAGER, FULLER, SMITH & TURNER: We're actually investing in the line that you can see behind me, which basically gave us the capacity to grow to where we have. We still have duty (ph) capacity (inaudible) plan years in advance. And we basically produce on average 6,000 to 7,000 kegs a week. So eight years ago, this would have only been 3,000.

SOARES (voice-over): As long as demand is being met, being squashed doesn't rattle this chairman.

TURNER: If we were to up stakes and move elsewhere, I'm sure we could get ourselves a new workforce. But they wouldn't necessarily have the same passion and devotion. And we feel really beholden to the local community that we are one of the largest employers. And when you think that that's a responsibility that we should take seriously.

SOARES (voice-over): For him, growth is as much about staying loyal to your roots as it is about having pride in your product.


DOS SANTOS: Isa Soares there, getting a taste of some traditional London pride.

Well, coming up after the break, the Dutch brewing giant Heineken looks to central and eastern Europe to add future profit to its beer sales.




DOS SANTOS: Welcome back to MARKETPLACE EUROPE from the River Thames.

The brewing industry is an important part of the European economy, not least by the amount of money that it generates for government funds through taxes, some 50 billion euros a year.


DOS SANTOS (voice-over): Heineken is a global beer brand operating in 71 countries. It's the largest brewer in central and eastern Europe. The region accounted for a quarter of the group's beer volumes and 11 percent of its operating profits in 2012. Heineken sells around 55 million hectoliters of beer in central and eastern Europe; Russia and Poland are its largest markets in the area.


JAN DERCK VAN KARNEBEEK, PRESIDENT, CENTRAL AND EASTERN EUROPE, HEINEKEN: Beer has been a story of growth the last 10 years. In the east of Central Europe, you had Russia, which was a vodka culture. And you had in the south of the Balkans, you had a wine culture. And against those cultures, beer has made huge progress the last 10 years.

Now actually a mainstay at Romanian barbeques, Russian restaurants, Polish bars. So beer's been on a growth path and actually (inaudible) had a big impact on that.

DOS SANTOS: Aside from the immediate crisis situation a lot of these economies find themselves in, what are the dynamics like for the central Eastern European market?

KARNEBEEK: Well, you've seen the last 10 years because of intense competition and lots of brands becoming available, quality improving. Beer's made itself right into the core of social life for central and eastern Europe. We see growing middle classes. These people want to trade up. They want to go from our premium brands. So to continue it to invest in that makes a lot of sense.

DOS SANTOS: Beer like this in the central and eastern European region makes up around about 25 percent of total beer volume sales for a company like Heineken. But it's very difficult to translate that into profit. So I think it only accounts for about 11 percent of your operating profit.

How much of that has to do with costs, regulation, taxation in these places?

KARNEBEEK: Well, first of all, we'd have to see it against the backdrop of what historically are low incomes in the region. And as incomes rise, it will be easier and easier to translate that into beer prices. You have to, of course, base that already offering something of quality. So you have to come with your international brands. You have to come with innovations.

You do stuff, for example, in a region like Grava (ph), which is beer with natural lemon juice. And it's these sort of innovations. And the premium brands which allow us to now trade up and trading up is what will turn the volume into value and profit.

DOS SANTOS: Is this a region that a company like Heineken just has to be present in, even if it's not as lucrative as other markets?

KARNEBEEK: Just by sheer size, central and eastern Europe has become one of the biggest beer regions in the world. Perhaps a surprise to some, but it's grown so massively that it now major, major beer region.

So, yes, you have to participate in central and eastern Europe. But also because it's an area of promise because young consumers in this part of the world are so tuned into brands and are so much aware of what's going on around the world, that it's very fertile hunting ground for companies which have international aspiring brands like we do.

DOS SANTOS: Are you going to be adding more brands to that portfolio, especially in eastern Europe?

KARNEBEEK: What you see in central and eastern Europe in the -- we compete in 13 markets. And in each of these markets, we have a portfolio of brands. So this portfolio of brands usually starts with what we call a mainstream brand, affordably priced, then national premium brand, which is still a local brand, a bit of a higher price.

And on top of that, you get our shining star, Heineken and Desperados. So with these portfolios in place, we offer something for consumers with every level of spend. And we gradually trade them up to higher priced beers as income develops.

DOS SANTOS: So we'll see the central and eastern European region is a place where finally the authorities really are trying to up their game when it comes to regulation and also regulation of the alcohol industry in light of high levels of alcoholism. How is that affecting companies like Heineken?

KARNEBEEK: I think the important thing -- and this is -- we as an industry take our own responsibility. So we strongly believe in moderate consumption. And we walk a talk. So we have our own campaigns in place in order to promote moderate alcohol consumption. This is where it all starts. I think we do that well.

We are in discussion with the authorities in various countries to ensure that the industry does its bit and that the government on its side does its bit. And if I look at that, this is not unique. This happens all over the world.

And brewing's answer to this is to make sure that being a moderate level alcohol beverage anyway at only 5 percent alcohol by volume, that we actually manage to work with these developments and keep our industry healthy.

DOS SANTOS: What are the challenges of doing business in Russia? Because it's a notoriously trying business environment, that one.

KARNEBEEK: It is, but it is s worthwhile business environment, because we had to realize that especially in Russia, the middle class is growing extremely rapidly. So that is a huge opportunity. Now the challenge is that we need to make sure that we stay abreast of the regulatory framework. I think we're able to do so.

And by that, I mean that the excise duty increases, we have been facing the last few years. We've managed to be able to compensate in our pricing. So going forward, I'm very positive of Russia.


DOS SANTOS: Heineken's president of central and eastern Europe, calling time on this week's MARKETPLACE EUROPE. Well, join us again next week if you can. But in the meantime, thanks for watching and goodbye.