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YOUR MONEY

General Motors' Recalls Not Hurting Profitability; U.S. Stocks Assessed; New Desalinization Plant Being Built in California; App that Hails Taxis Expanding

Aired June 14, 2014 - 14:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


CHRISTINE ROMANS, CNN ANCHOR: The president's economic agenda at risk. I'm Christine romans. This is "CNN Money." A week ago a senior administration official told me President Obama can still get a whole lot done in the next two years. What a difference a week makes. Immigration reform by many accounts may be dead. That follows the shocking primary defeat of House Majority Leader Eric Cantor, whose opponent painted him as pro-amnesty for illegal immigrants.

On student loans, the president expanding an income-based repayment prom that only helps the poorest borrowers living on the edge. Senator Elizabeth's Warren's bill that woo have helped millions more refinance their student loan debt, that was defeated. And now, Iraq, violence flaring, oil prices climbing, America has spent $15 billion on training, weapons and equipment in Iraq. But a terror group now controls huge swaths of that country.

(BEGIN VIDEO CLIP)

REP. JOHN BOEHNER, (R) HOUSE SPEAKER: They're 100 miles from Baghdad. And what's the president doing? Taking a nap.

(END VIDEO CLIP)

ROMANS: The president's economic agenda is in jeopardy but the administration is not backing down. Here's what Education Secretary Arne Duncan told me when I pressed him on immigration reform.

(BEGIN VIDEOTAPE)

ARNE DUNCAN, EDUCATION SECRETARY: We absolutely have to get this done. Again, this should be a bipartisan issue. This is about strengthening the country, strengthening the economy, moving people from the shadows of society into the mainstream and helping them become productive citizens.

ROMANS: As an educator, when you see pictures of these children who are in government detention centers in Nogales, Arizona, being shipped from Texas, these are kids who should be in school. Their parents doing everything to try to get them into the American school system. What do you think?

DUNCAN: It's absolutely -- it's brute's. It's inhumane. And I'm hugely focused on making sure that dreamers have a chance to get a college education. And we have far too many young people across the country who came here at three months old or six months old, they played by all the rules, and then we say they can't go to college? We're cutting off our nose to spite our face. It makes no sense whatsoever.

(END VIDEOTAPE)

ROMANS: Ironically it is that dream, many say, that is attracting people to this country and may be the root of this crisis. Duncan says we've got to educate our way to a better economy, and that means improving America's schools. This week a landmark decision in California's superior court, a judge ruling that the state's teacher tenure law is unconstitutional. I asked Secretary Duncan whether he agrees. It shouldn't take years to get a bad teacher out of the classroom.

(BEGIN VIDEOTAPE)

DUNCAN: I absolutely believe in tenure and due process. We have to have those supports in there. But having said that, having teachers get tenure as it were there in 18 months or two years is not a meaningful bar. That doesn't make sense to me. And an inability to remove grossly ineffective teachers, teachers by any measure are simply not working, and we know where those teachers typically end up, unfortunately. That's in the most needy communities.

Finally, the big thing for me, Christine, is whether it's in L.A. or California, or across the country, the lack of incentives to find the hardest working, the most committed teachers, the most successful principals and place them in the neighborhoods where the children need the most help.

ROMANS: Do you think teachers should be paid based on merit and shouldn't have lifelong jobs because they've been in the job as long as they have?

DUNCAN: These are complex issues, but I think a piece of teacher compensation, we should be rewarding excellence. We should be encouraging teachers to go work in the most undeserved communities. Let me be clear -- no teacher ever goes into education to make $1 million. I've been very public. I think starting teacher salaries should be much higher. I think a great teacher should be able to make, pick a number. $120,00, $130,000, $150,000.

ROMANS: Let's talk a little bit about student loans. This week talking about making available some income-based repayments, some pay as you earn plans for people who are really struggling with big student loans and low salaries. They're grumbling middle class families say wait a minute. We're driving a beater of the car and we're not going on vacation. We're saving money like crazy. Somebody who borrows too much, they're going to get loan relief after 10 years. Is that fair?

DUNCAN: We just want to relieve some of the onerous nature of that huge amount of debt, and rather than just pay the debt back, if those people are starting jobs, starting businesses, buying homes, buying cars, that's good for the economy. So we think this is absolutely the right thing to do.

And Christine, this is part of a larger national conversation. The amount of debt out there is over $1 trillion. It's huge. The amount of angst this is causing, the stress this is causing on young people, their families, their parents, it's huge. As a nation going to college is the most important thing folks can do to enter the middle class. Going to college has never been more important, but sadly, it's never more expensive. We have to address the massive cost of going to college.

(END VIDEOTAPE)

ROMANS: Yes, the real core of this problem is the cost of problem up 544 percent since the 1980s.

Coming up, GM's recall nightmare will likely cost the automaker billions, but it's hardly the first company to commit a deadly mistake. The price tag for corporate negligence, next.

(COMMERCIAL BREAK)

ROMANS: GM grilling part two, CEO Mary Barra is scheduled to appear Wednesday before a house committee to answer questions about the company's recall nightmare. Last time she was there Barra had few answers.

(BEGIN VIDEO CLIP)

MARY BARRA, GENERAL MOTORS CEO: We're doing a full and complete investigation.

That's why we're going this investigation.

That is part of the investigation we're doing.

The investigation will tell us that.

(END VIDEO CLIP)

ROMANS: That investigation released more than a week ago found a pattern of incompetence and neglect. Barra will be joined next week by Anton Valucas, the former federal prosecutor who conducted what is a really scathing report about what happened and didn't happen inside GM. At this week's GM shareholder meeting Barra insisted the company is strong despite the recalls. Four more recalls, by the way, announced Friday, bringing GM's totaled recalled vehicles this year to 16.5 million worldwide.

Barra is deep in damage control mode, building up the new GM even as questions swirl over the incompetence and mistakes of the old one.

(BEGIN VIDEOTAPE)

ROMANS: Testifying before Congress is bad enough.

BARRA: General Motors today finds anytime there's an incident -- SEN. BARBARA BOXER, (D) CALIFORNIA: You know, today or today.

Yesterday I did some things I'm accountable for.

ROMANS: But when that testimony is spoofed on "Saturday Night Live."

UNIDENTIFIED FEMALE: I am looking into knowing when I first knew about it, but I won't know the results of that knowing until I know for sure.

(LAUGHTER)

ROMANS: It's a bona fide brand crisis. General Motors barely shaking off its bailout baby government motors image, thrust into a product safety crisis of its own making.

BARRA: The pattern of incompetence and neglect.

ROMANS: And those words attract plaintiffs lawyers like bears to honey. GM now finds itself among the greatest hits of deadly corporate mistakes that resulted in massive settlements. Toyota doled out $1.1 billion for its runaway accelerator problem. Merck paid $4.85 billion for its deadly drug Vioxx. The dangerous diet pill Fhen-Phen cost American Home Products $3.75 billion. BP paid $7.8 billion for poisoning the Gulf of Mexico. But nothing compares to the tobacco industry coughing up $206 billion.

The costs for GM will likely run into the billions, no question, cost of the recalls, payouts to victims' family, lost value of used cars, fines from the government, to say nothing of the reputation hit as angry families grieve.

UNIDENTIFIED FEMALE: It's not about the money. We want --

UNIDENTIFIED MALE: Not about the money.

Phen/fen Still, GM has deep pockets. In the years since taxpayers bailed it out in 2009, at a cost of $10.6 billion, GM sales are up, in fact, surging since the ignition defect recall was announced in February. It seems consumers think GM really messed up, but they don't associate GM with the car brand they want to buy.

WILLIAM HOLSTEIN, AUTHOR, "WHY GM MATTERS": The vast majority of people don't know that Buick and Cadillac and GMC are GM products. So there's a very interesting bifurcation between the image that General Motors has and the image that its brands have.

ROMANS: And it's making money. GM revenue last year was $155 billion, and its stock is up since the recall.

(END VIDEOTAPE)

ROMANS: In fact, GM shares up about $1 since the recall, not really helping to drive the rally on Wall Street, but there are plenty of other companies making some big moves this week. And for that we bring Paul La Monica is. He's the assistant managing editor of "CNN MONEY." You can read and watch him on "The Buzz" every weekday. Paul, the Dow backed away from 17,000, but there were some individual movers, some big individual movers this week. I want to start with Facebook, because this is a really interesting story. After some pessimism here and then here, look, we're coming back.

PAUL R. LA MONICA, ASSISTING MANAGING EDITOR, CNN MONEY: Yes. What happened I think earlier this year, you had some skepticism about earnings growth and user growth. You also had questions about, did they really need to spend as much as they did on Oculus. But the stock has had a nice rebound latest with a lot of other momentum stocks. But for Facebook specifically, they just lured away the head of eBay's PayPal. That has a lot of people talking what Facebook might do with payments. And the company also accidentally released its slingshot app that a

lot of people think could be a potential Snap Chat killer. So that's some of the reasons by people are excited about Facebook now.

ROMANS: The acquisition for talent is something that so interesting around these Silicon Valley firms. Who they buy is sometimes more important than hardware.

Let's talk about Apple. The past five years, back above 90 only because of a split. This was, last week, $600 and some. Does the split bring in new buyers, do you think?

LA MONICA: I think the split might have brought in some new buyers. We had a great story on "CNN MONEY" about how some average investors did feel buying a couple shares in the $90s range was a nor reasonable thing than try and buy one at $650 or so. So the stock has had a steady march back, 700, now 100 is the new 700 in terms of looking at that September 2012 all-time high, optimism about the dividend, the buyback and, heck, new products, too, with iPhone 6 later this summer.

ROMANS: So many people are saying to me, should I buy Apple? If you didn't when it was almost 700, what makes it a different story at 100? Is it just the timing of a split that suddenly makes it attractive again?

LA MONICA: There is that psychological impact. You are 100 percent right that there is no difference right now in Apple trading where it in the $90s than at $650 on a valuation basis, price to earnings ratio, but it seems cheaper, and historically companies have tended to do well after stock split. So there is some argument.

ROMANS: A nice run there for Apple, Apple shareholders recently, but not for Radio Shack. We were joking earlier, any kind of company, tech company with the word "radio" in its name tells you it's 20th century.

LA MONICA: Yes. And Radio Shack made fun of themselves with a Super Bowl ad, their late '80s image. People thought that was great. But I think the reason people thought it was great is because it was true. You look at this company, shares are plunging obviously because their earnings, they don't have any. They're losing more money. Sales going down, they're running through cash. There's an analyst who just downgraded his price target to zero, and the "b" word is out there. People are talking about whether or not this company may have to file for bankruptcy. It really is sad, but in a world where Amazon and WalMart sell almost anything you can get at Radio Shack, and even Best Buy, which isn't healthy, but it's healthier, it's looking very bleak for Radio Shack.

ROMANS: What's the joke, if you want "shack" in the name, you should buy --

LA MONICA: You either need to have Shake Shack or "Love Shack" if you're B52 fans. Radio Shack not so much.

ROMANS: Let's talk about Lulu Lemon. This is since January, last year. Ouch. This is a trend. This is what we call charting a trend.

LA MONICA: Lulu Lemon has really been kind of a nightmare of a stock. I won't make the yoga joke that everyone makes because downward dog is the only pose I know. But when you at why this company has fallen, it has a lot to do with management turmoil. Christine Day, the well- respected CEO< she's gone in the wake of the black pants, the translucent see-through pants fiasco. The company's founder, who is no longer chairman of the board, voted against two board members this week. So he's feuding with the company. And then you have with this backdrop, lowered earnings outlook for the year. This was a cult stock. The bulls thought it would be the next Nike. It's not. It's just plain old lemon.

ROMANS: Internal turmoil is never a good think when you're trying to get things back on track. Paul La Monica, thanks so much.

It's a new day here at "CNN Money." Want to check out the closing bell on Tuesday. You can see us all there, our boss, CNN Worldwide President Jeff Zucker, CNN International's Richard Quest, Alison Kosik, Zain Asher, Brian Stelter, Laurie Segall, a lot of other editors and bosses up there on the podium. These are teh people who put "CNN Money" online and on the air. We want to thank the New York Exchange for helping us celebrate the rollout of "CNN Money."

Coming up, this is not a weather map. It doesn't show the hottest housing markets and the areas in red are not creating the most jobs. What it does show can cost you serious cash. I'll explain it when we come back.

(COMMERCIAL BREAK)

ROMANS: Welcome back. Consumer prices are up every month this year. We're going to get a fresh reading next week, but you're probably feeling it at the grocery store. One reason is the serious drought in the western U.S. Take a look at this map from the National Drought Mitigation Center. The largest problem area right now, you can see it there, California. That state accounts for 11 percent of domestic crop production, producing staples like grapes, almonds, lettuce. So a drought there has the potential to cost you at the checkout. CNN's Rachel Crane takes us to San Diego where engineers are in the middle of building a high-tech answer to a growing problem.

(BEGIN VIDEOTAPE) RACHEL CRANE, CNN CORRESPONDENT: With California experiencing one of the worst droughts in the state's history, access to fresh water has never been more important, or more difficult. Here in southern California, the largest desalination plant in the western hemisphere is being constructed. It will soon take water from the ocean and create 50 million gallons of fresh water a day.

BOB YAMADA: California is in a serious drought right now, and any new water supplies are important to the region.

PETER MAOLAGGAN: We have a $190 billion economy in this region that's dependent on water. The question you need to consider is what's the cost of not having enough water?

YAMADA: Unlike, let's say, water that comes from rainfall or water that comes from snow pack, we're utilizing what essentially is the world's largest reservoir, the Pacific Ccean.

CRANE: The Carlsbad desalination plant will cost approximately $1 billion. The freshwater will be pumped 10 miles underground to a regional delivery system, providing water to an additional 300,000 San Diego County residents.

Customers won't know whether they're drinking desalinated water or not?

YAMADA: That's right. It will become part of the overall supply.

CRANE: Through a process called reverse osmosis, the plant will convert every two gallons of seawater into one gallon of fresh water, filters out 99.9 percent of the salt. The salt, or brine, that's removed, is discharged back into the ocean. The desalination process traditionally takes a lot of energy. A plant this size would normally use as much energy in a single day as 70 homes in a year. Officials at the Carlsbad plant say theirs will use 46 percent less energy.

The project is not without criticism. Environmentalists point out desalination requires a lot of energy and that brine discharge can negatively impact marine life.

MAOLAGGAN: We're creating more marine wetlands in the south San Diego Bay to create new habitats so fish can reproduce there. With respect to the brine discharge we dilute the brine with sea water before it leaves the site.

CRANE: The plant is expected to be completed in 2016.

YAMADA: Everybody is extremely excited to see this project coming online and providing us with a new water supply.

(END VIDEOTAPE)

ROMANS: That's something. Solve a lot of problems that way. For more on tech innovation check out the redesigned "CNN Money." You'll also find our new media and luxury sections, and our special section, "Big Money, Million Dollar Backyards" in a neighborhood near you, and a $21,000 apartment in the sky located in the first class cabin of a luxury jumbo jet. For all of that and much more, check out the new CNN Money.

Coming up, this used to be the only way to hail a cab in America's big cities. Now the app disrupting the taxi industry. Get this, it's worth $18 billion. It's only been around four short years. The Uber revolution, next.

(COMMERCIAL BREAK)

(BEGIN VIDEO CLIP)

ROMANS: It's not easy being green and neither is hailing a cab in the big city. Just ask Kermit the frog.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Taxi! Taxi? I don't know why the cabs won't stop.

(END VIDEO CLIP)

(LAUGHTER)

ROMANS: I think Kermit needs to give Uber a try. It's an app that was launched five years ago in San Francisco, precisely because it was hard to get a taxi. Now it's in 130 cities around the world, and this week Uber was valued at, get this, $18.2 billion. "CNN Money" tech correspondent Laurie Segall is here. Laurie, you sat down with Uber's CEO this week. First, explain how this app works.

LAURIE SEGALL, CNN MONEY CORRESPONDENT: Sure. Think about it like this. We used to go out and try to hail a cab, put our arm up. Now the idea is let's just make an app for that, right? So you go to the app. You look around. You can see all the different cars who are there, and literally press a button, and a car will come to you. As opposed to the traditional way, now a tech way to can do. And obviously it's taken off. Tons of competitors now trying to do the exact same thing, Christine.

ROMANS: So $18.2 billion, a valuation makes Uber more than some of the household names, Hertz, Campbell Soup, Mattel. How does the CEO justify the Valuation of Uber?

SEGALL: It's unbelievable. We all sat back and said how on earth is an app worth $18.3 billion? I asked him. He said I don't need to justify this. He said it's all about growth. Obviously, there has been some controversy. We looked at the protests that happened in Europe. I asked about the growth and also some of the controversy. Listen to this.

(BEGIN VIDEOTAPE)

TRAVIS KALANICK, CEO UBER: To give you a sense of the size of what we're talking about, Uber is basically responsible for adding 20,000 jobs to the economy every month. And so when you look at that, you look at the fact we're doubling every six months and really doing billions of dollars in transactions a year, the numbers get big quick.

SEGALL: How much of a risk factor would you say some of the regulatory issues are?

KALANICK: It's really common when we go into a city that the incumbents, the taxi industry, are often trying to protect a monopoly that has been granted them by local officials.

SEGALL: Is Uber competing kind of with the taxis and this kind of thing, or are you guys completely creating a new market?

KALANICK: We feel like we're creating a new market, where people who previously were driving are now sort of getting rid of their second car and in many cases even getting rid of their first car, and sort of depending on this utility, or this service as a utility to get around cities around the world.

(END VIDEOTAPE)

SEGALL: And you know, what he said is obviously there are challenges. I met Travis years ago. He was wearing a cowboy hat and snakeskin boots, just a renegade ready to do something. Now they're teaming up with big brands. They just teamed up with American Express for loyalty rewards program. You get the idea that they're not going anywhere and they are going to fight the fight.

ROMANS: Interesting, some of the protests in Europe this week actually attracted more people to Uber. That is what was so interesting about that.

SEGALL: I know.

ROMANS: All right, Laurie Segall, great interview. Thanks, Laurie.

All right, thanks for watching "CNN Money." You can find us right here every Saturday at 2:00 p.m. eastern and online 24/7 at CNNMoney.com. Follow us on Twitter at CNN Money. My handle is @ChristineRomans. Let me know what you like on the site and you might see it here on the show. Have a great weekend.

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