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ADAM SMITH'S MONEY GAME Missed the show? Get a phone call half way through? Fail to catch the name of a stock in "Personal Best"? In case you did, we are happy to provide you with a transcript. If you would like a transcript from a previous season, please visit 800-All-News at www.800-all-news.com or call them at (800) All-News. ANNOUNCER: [voice over] This program is made possible by a grant from MetLife, helping peoplebecome financially secure for 130 years. Funding has also been provided by the Roy R. andMarie S. Neuberger Foundation. ADAM SMITH: [voice over] Why is this woman the nightmare of corporate board rooms? Why isthis multi-billionaire selling golf clubs? Who is this man out to stamp out big tobacco? Find out next.
Face to Face Back to Top ADAM SMITH: Hello, I'm Adam Smith and welcome to The Money Game. Money is a source of contention in many marriages and 50 percent of marriages end in divorce. The case of Wendt vs. Wendt last year made headlines not just because it involved tens of millions of dollars, but because it asked "What is a wife worth?" It continues to reverberate in the board rooms of America because it held to the spotlight executive compensation which has become handsome if not humongus. So, Wendt vs. Wendt may change divorce hereafter. Meet Lorna Wendt, face-to-face. LORNA WENDT, Corporate Ex-Wife: I decided to fight my husband in the courts on the principlethat when we married we were partners. Everything was equal, and now, in my case, he decidedto offer me about 10 percent of what was our estate. And to me that was just a put down of myvalue as a person and what I had been with him and for him through 32 years of marriage. ADAM SMITH : [voice over] Like many a corporate wife, Lorna Wendt lived in the shadow of herhigh-powered husband's career. But when she took her case to court in their home state ofConnecticut to fight for half of the marital estate, she found herself an overnight celebrity. LORNA WENDT: I think society has picked up on this. As I said, marriage is a partnershipbetween equals and I'm finding out from what I'm hearing in thousands of letters and email andtelephone calls that that's the way they feel, also. ADAM SMITH: Lorna, I'm sure you agree not all marriages work out. They must be dissolved. Isthere a right way to do that? LORNA WENDT: I think the right way in my case would have been for Gary to have said, "Lorna, after 32 years of marriage I do want different things in my life. And this is going tobe tough. And I respect you and I respect you as the mother of our children; what you'vebrought to our marriage; what you've meant to me. I have all of this money now, or I have nomoney. It doesn't matter what kind of money, but I would like then to go on with my life and Iwill give you 50 percent." ADAM SMITH: Your case has brought the question to mind, what's the value of a wife? What awife does. And some people have said, Well, yes she does the car pool and she does a lot ofchauffeuring. One could get a taxi to take the children around. And yes, she does thelaundry. You could get somebody to do that. And you could get a cook to cook the dinners.And there is a value to that. But it doesn't come to tens of millions of dollars. What's yourreaction to that? LORNA WENDT: You can't put a dollar sign, an amount on what a mother, in my case, theintangible things that I brought to our marriage -- being there for the children, car pooling,yes, or maybe, not car pooling or staying home. Being support for your husband, doing allthose things that you cannot put a price tag on. ADAM SMITH: [voice over]When they started out, it was Lorna's salary from teaching high schoolthat helped Gary get his Harvard MBA. At the end, however, it was Gary who was the Wendtfamily breadwinner and the bread he brought home as the CEO of GE Capital was worth millions --100 million, according to Lorna; less according to Gary. Late last year the Connecticut Superior Court judge hearing the case ruled Lorna couldget $20 million, less than the 50 she asked for, but more than the $8 million plus alimony Garyhad offered. The judge's formula was simple. Divide all the hard marital assets 50:50. Shegot the house in Connecticut. He agreed to pay off the mortgage. She got their home in KeyLargo, Florida, half of all the cash in stocks and alimony of $21,000 month. She even got himto pay her dues at a resort club in Florida and a country club they both belong to. Dividingmarital assets was easy. Splitting up Gary's executive compensation package was anothermatter. In previous decades, employees didn't make $100 million, even when they did well. Butcorporate boards have been generous in the '90s and the bull market has magnified the awards.Here the judge produced a complicated equation awarding Lorna less than half the value. [Graphic: 5,000 units granted 6/24/94, vesting on 9/24/98; 6/24/94 to 12/1/95 = 17.233 = 44.19%; 6/24/94 to 9/24/98 = 39] Gary has options to buy GE Common Stock at favorable prices in the future. He also has restricted GE shares which he can't sell for several years and he has a so-called Top Hatpension retirement pay for the boss after he steps down from GE Capital. Lorna Wendt and her attorney Sara Oldham are waiting to hear the judge's fullexplanation. It's expected to run the length of a hefty novel. Then, they will decide what todo next. SARAH OLDHAM, Lorna Wendt's Attorney: I think part of the problem is that the compensationpackages for highly compensated executives has gotten more and more complex and they nowinclude things like stock options, restricted stock, top-hat pensions. These are all thingsthat the executives in this country are earning as part of their packages. But they're notpaid right now and for tax reasons they are not actually considered part of their taxableassets at the present time. But they are earned as a result of the labor that's occurringduring a marriage. And all over the country courts are being asked to determine whether theseassets are part of the marriage and can be distributed in a divorce or are they not. And thisis the first case that has really focused the attention on that issue in Connecticut. ADAM SMITH: Tell me about the reactions in corporate boards of directors where thecompensation committees give out these plans. What's their reaction to this case? SARA OLDHAM: Clearly there is some concern that if the intent of the compensation boards, themembers of the compensation board is to try to keep these things away from spouses, this trendin the law toward finding that these are assets of the marriage, is having an effect on that. I personally don't believe that there is a conspiracy out there of corporatecompensation managers thinking How can we keep this away from the spouses? I think the ideais to benefit the employee the maximum amount by deferring as much tax as possible. I thinkthat's the real motivation. ADAM SMITH: Has someone suggested keeping money away from spouses? SARAH OLDHAM: We hear rumblings about that. ADAM SMITH: [voice over] Few boards of directors in today's America would actually identifythemselves with one or the other of the warring parties in a divorce. But Attorney RaoulFelder, sometimes known as `` Captain Divorce,'' normally represents the aggrieved party,usually the wife. And Felder believes that corporations do take care of their own. RAOUL FELDER, Divorce Attorney: I believe there's an "Old Boy" network in all thesecorporations and I believe a corporate executive today has the ability to say to his partners,because they're really his partners, in a discretionary setting of options and incomes, andmost of it is discretionary, to say, "Hey, listen. Take less this year but you understand,fellas, next year after my divorce, I want to make up for it some way." And, they may add,"And I'll do the same thing for you." Can we prove that? No. But does it happen? Of course it happens. One friend wantsto help another. It's very simple. ADAM SMITH: Do you think this will change the form of corporate compensation, or do you thinkcorporations will simply declare themselves neutral and leave all this other stuff to thedivorce lawyers? RAOUL FELDER: Reality is that it will affect because human nature is such. It's moreimportant, stronger than any of these other impulses -- self preservation. They're going to behaving conversations with each other and it's going to affect compensation. Will it be in anycorporate ledger? Will it be in corporate minutes? Absolutely not. If you were a bug on themen's room floor, you would hear conversations about this. ADAM SMITH: Isn't it just the fact that it's earned money -- money earned while they weretogether? The Vanderbilts, the Rockefellers, the Astors got divorced and it didn't create thisparticular kind of brouhaha. RAOUL FELDER: In most states when you have equitable distribution, excluded from that pile, iseverything you've come up with you had before marriage, anything you got by gift of rightbecause of inheritance or other people give you and its natural increase into the marriage.Here it was a sweetheart perfect case. Nothing before marriage. So, not like the Vanderbiltsand all these Rockefeller cases where you might have great wealth. Everything was earnedduring the marriage. A textbook case to test the proposition of 50:50. ADAM SMITH: In the end, the case of Wendt vs. Wendt boils down to the meaning to just twowords: "equitable" which means whatever split the judge decides is fair; and "equal,"which means what it says, 50:50. Since embarking on her case, Lorna has started a foundationfor equality in marriage to help others and to start a dialogue about the state of matrimonytoday. LORNA SMITH: I decided that I am a steward of God's gifts which are all my moneys that I willreceive from this marriage and I wanted to do something to help society. ADAM SMITH: Your father was a Lutheran minister. What do you think his reaction would be toyour foundation and its intentions? LORNA SMITH: Sure, he would have been sad that there is a need for it. But I think thatfairness and principle, that as a Lutheran, or as a Christian that we expound to, he would bevery much in support of. ADAM SMITH: You lived with Gary Wendt for a long time and you certainly know him well. Whatdo you think his reaction is to everything that's come out of this? LORNA SMITH: Well, he's been quoted a number of times as saying he's absolutely astounded asto the venom that's being spewed at him by women and men in society. I don't think heunderstands that this is the principle. I think he's still is dollar and cents-ing it. Andhe's very much surprised, I think. [Graphic: U.S. map highlighting California, New Mexico, and Louisiana; States Where "Community Property" Law would Automatically Award Lorna Wendt 50 percent of Gary's Assets in a Divorce]
On the Spot Back to Top ADAM SMITH: Advertising permeates American culture. It's part of all of us. Just asNineteenth Century Englishmen could quote Kipling "Go to your god like a soldier." We canquote, "Reach out and touch someone." "Or, I can't believe I ate the whole thing." Advertising is also very big business. Bob Garfield is the columnist of the trademagazine Advertising Age and author of Waking Up Screaming from the American Dream. He is withme to put some new high-profile ads on the spot. ADAM SMITH: Well, we're all used to commercials in which a sports figure endorses something hemight use, a sneaker or something. But here is a businessman, Bill Gates endorsing a golfclub. Why? BOB GARFIELD, Columnist, AD AGE: And it is unusual. This is a commercial from Daily andAssociates for Callaway Golf for the Big Bertha driving club and they don't hire Tiger Woods orJack Nicholas or Ernie Els or any professional golfer. Instead, they have gone out and broughtin the world's foremost techno geek. ADAM SMITH: Let's take a look at the commercial. BOB GARFIELD: Okay. [excerpt from Callaway commercial] ADAM SMITH: Why are they doing this? BOB GARFIELD: Well, because I think people sense that Bill Gates is not in it for the $100,000that he, you know, he stands to earn if this things stays on the air for awhile. They knowthat he's there for reasons other than money. ADAM SMITH: What? BOB GARFIELD: Well, I think to rehabilitate his own and his company's reputation in the eyesof the public. ADAM SMITH: You mean by being just an ordinary guy? BOB GARFIELD: Just an ordinary guy. ADAM SMITH: He's frustrated. He's humiliated. He's just a hacker. You know, John D.Rockefeller, a predecessor to Bill Gates in some ways, hired a public relations man called IvyLee. And Ivy Lee had John D. Rockefeller pass out shiny new dimes to children. Is this in thesame strain? BOB GARFIELD: It absolutely is. It's the very same phenomenon. The advertising that he'sappeared in -- he's done a spot for Coca-Cola as well -- is Bill Gates "shiny dime." Youknow, Bill could afford to do it with shiny 100 dollar bills if he wanted to, but he's taking adifferent tact here. And he's trying to -- He's trying to humanize himself. Remember in 1984what may be the greatest commercial ever filmed. It was for Apple Computer to introduce theMacintosh. And the premise was this 1984 scenario where there's a Big Brother type on thistele--? ADAM SMITH: Where he walks down the aisle and smashed the screen. BOB GARFIELD: Precisely. And there's all these automatons were in the audience with slackjaws and this nice looking babe comes and swings the hammer and smashes Big Brother. And themessage of the commercial is that we are Macintosh. We are Apple. We are the antidote, theantithesis of this big, looming, sinister, monolithic IBM -- the Big Brother that can and willenslave. ADAM SMITH: So, this is big-- Bill Gates is not really Big Brother. Bill Gates is a weekendhacker. BOB GARFIELD: Well, that's the problem. Bill Gates really is Big Brother and they're tryingto persuade us otherwise and that's why they're letting him do this. ADAM SMITH: Will it sell golf clubs? BOB GARFIELD: Who knows. I mean that's a very good question. Golf equipment is in and ofitself an irrational purchase because, you know, the truth of this is the one thing Bill Gatescannot buy -- maybe the only thing he cannot buy -- is a golf swing. And golf marketing is all about making people believe that there's a solution, that all you have to do is shell out another $300 for a Big Bertha or something else.
In Focus Back to Top ADAM SMITH: Coming up later on the Money Game some tips that might help you make money in ourPersonal Best segment. But first, outside countless office buildings there are the signs of a remarkablesocial revolution. Clustered around the doors, no matter how hot or how cold the weather, aresmokers pulling on a last-minute cigarette before returning to their smoke-free environments.The smokers have been driven out by a great crusade and in the forefront of the crusaders isone whose background is anything but what you would expect. My correspondent Adele Malpass hasthat story, In Focus. ADELE MALPASS, Correspondent: [voice over] This man is out to bring big tobacco down. He'san unlikely anti-smoking crusader. His name is Patrick Reynolds, the grandson of R. J.Reynolds -- the man who made cigarette smoking a big business. PATRICK REYNOLDS, Anti-Smoking Activist: [excerpt from speech] We have had tremendousvictories in the anti-smoking movement, enormous victories. ADELE MALPASS: Patrick Reynolds story is striking because this is exactly the kinds of thingshe's fighting against and he's been willing to do it at a cost of his fortune and his family.[voice over] Reynolds could have lived in luxury on his tobacco money, but he has rejected histobacco roots after watching most of his family die from smoking. PATRICK REYNOLDS: This is a personal mission for me. My father died from smoking when I was15. My grandfather probably died from chewing tobacco. My oldest brother R. J. Reynolds, III,died from smoking. My Aunt Nancy died from smoking. Aunt Mary smoked and died from cancer.My mother smoked and got an aneurysm. Smoking has decimated my family. ADELE MALPASS: [voice over] The Reynolds Tobacco Company and most of Patrick's family thinkhis conversion is insincere. They call him a failed actor, a playboy type who lived in thefast lane and was never successful at anything until he found the anti-smoking cause. PATRICK REYNOLDS: It probably goes back to the 60s when I was kind of rebellious, and youknow, had long hair and they didn't-- They took a dim view of that and maybe never got overthat impression of me and before that, even before that, my mother was a penniless Irishshowgirl who was gorgeous. And I think the Reynolds family resented my father divorcing therich Southern wife and marrying this poor Irish showgirl. And when he showed her off downaround Winston-Salem everybody looked down their noses at her. So, in a way I was ostracizedfrom the Reynolds family from the time before I was even born. ADELE MALPASS: [voice over] Reynolds claims the turning point was the pain of watching bothhis parents die. He says it was especially hard at age 15 to watch his father die from smokingafter having an active life. In 1979 Patrick Reynolds took the big step. He sold all histobacco stock worth millions. PATRICK REYNOLDS: There I am an addictive smoke and I've got a cigarette in one hand and thetelephone in the other hand and saying, "Look, I don't want to own the Reynolds stock. Sellit!" And the broker said, "Mr. Reynolds, there'll be capital gains to pay on that."And then I said, "I don't care. [acting as if smoking a cigarette] Sell the tobacco stock. Idon't like being a cigarette addict. I just want to get rid of it." ADELE MALPASS: [voice over] Today the stock Reynolds sold would be worth far more butReynolds says he has no regrets. He gets satisfaction from progress in the anti-smoking wars.In many places smoking has been banned leaving people to puff away only in designated smokingareas. Tobacco companies are on the defensive. For the first time in history during the 90s,tobacco company profits have actually fallen. PATRICK REYNOLDS: I have channeled my energy into this fight and devoting my life to thisfight. And I believe that we're going to have a smoke-free society in the 21st Century. [Graphic: Killer Tobacco; Annual Deaths from Tobacco-Related Disease: 430,000(U.S. Gov. Figures]
Personal Best Back to Top ADAM SMITH: In our Personal Best segment each week, I'll be talking to experts who can giveyou information that could help you get richer. This week the ins and outs of successful mutual fund investing. It can be tricky tomaster and it's different from buying and selling individual stocks. For example, what'smutual fund bloat? Very ominous sounding. And joining me now to discuss how serious thismalady can be is Bob Casey of Bloomberg Personal Magazine. Welcome, Bob. BOB CASEY, Bloomberg Personal: Thank you. ADAM SMITH: What is mutual fund bloat? BOB CASEY: America is on an investing binge. There's roughly $3 trillion dollars in mutualfunds now. A lot of it from 401K plans, boomers saving for retirement. The funds are gettingbigger. The performance of the best funds attracts the most money. So, on the one hand youhave good performance, but eventually that performance, when its too much money, theperformance begins to sag. ADAM SMITH: So much money comes pouring into a fund that advertises its past couple of yearsas being hot that the manager can't manage that amount of money? BOB CASEY: It makes it difficult. You have to buy instead of 50 or 75 stocks, you have to buy300 or 400 stocks. ADAM SMITH: Tell me some stock-- some funds that got too big. BOB CASEY: Well, Magellan is one fund, a Fidelity fund that got too big and they closed itlast year. Fidelity has closed-- ADAM SMITH: It didn't make it any smaller, though? BOB CASEY: No, but it's not going to grow as fast as it was growing. Fidelity has just closedthree other funds, all large funds. And this will be a benefit to their shareholders. ADAM SMITH: How do you tell when a fund that you might have is getting too big, it's gottentoo big for its britches and is going to slow down? BOB CASEY: One thing that you need to do is not only monitor the performance of your fund, buttheir size and if you got into a fund that was one billion and it's now 10 billing, you start--you ought to ask questions. Is it becoming too big? You'll see as the funds grow larger, thatrelative performance versus their peer group will decline. ADAM SMITH: Should you switch out of that fund? BOB CASEY: Yes, I think you should definitely consider it. There may be other factorsinvolved. You may have taxable gains. You may not have the ability to make the switch soeasily if it's in a 401K plan, but it's something that you definitely should consider. ADAM SMITH: What about mutual fund expenses? There's a debate about whether high expenses areworth the money that you pay. BOB CASEY: Our magazine recently did a study and it showed that on average they're not. A lotof funds are sold on the basis of if you pay more money, you'll get better performance becausehigher performing managers charge higher fees. That's generally not true. On the average, thehigher charged higher-fee funds have worse performance. ADAM SMITH: Where do you look to see what the expenses are? BOB CASEY: Each fund will quote an expense ratio. Often it's printed in the paper. It alsoappears in the prospectus and in their semi-annual reports. ADAM SMITH: Doesn't Vanguard always have the lowest expenses? BOB CASEY: I think that's probably true. It's-- it's rare to find a fund that's offered tothe public, retail investors that's cheaper than Vanguard. ADAM SMITH: Does that mean you're pointing people in that direction? BOB CASEY: Vanguard has some good funds. There are other people that have good funds that arecompetitive, you know, net of-- net of fees. But, it's hard to quarrel with Vanguard. A lotof the fund-- ADAM SMITH: Okay, over the long run this tiny little expense can really make a difference. BOB CASEY: It makes a big difference. If you expect a 10 percent return and say you have$100,000 in your retirement account, if you're paying a high fee, say two percent, versus a lowfee, one percent, after 20 years you're going to have $460,000 with the high fee and about$560,000 with the low fee if you start out with $100,000. ADAM SMITH: Makes a difference. BOB CASEY: It sure does. [Graphic: Bob Casey's Tips;] Small Company Funds that Probably Should be Closed Fund Families with Low Expenses Back to Top ADAM SMITH: What do you want to know about pocketbook issues or anything else in the moneygame? We'd like to hear from you. Get in touch with us at our email address [on screen -letters@adamsmith.net] letters at adamsmith.net or write to us the old fashioned way at: AdamSmith's Money Game, 885 Third Avenue, Suite 2800, New York, NY, 10022. We look forward tohearing from you and we're planning to answer your questions on the air. The roaring stock market has produced the usual excesses of consumption. One New Yorkrestaurant now charges $1000 for a glass of cognac. Good stuff, but still, $1000. We werewondering if anyone who had made a heap of money on Wall Street has devoted as much energy andtime doing some good for society with their winnings as they did raking it in the first place.Not just writing a tax-deductible check, but something with initiative that really makes adifference. If you know of anyone, tell me. It would make a good story. I'm Adam Smith. Seeyou next week as the Money Game continues. ANNOUNCER: For more of the Money Game, visit us in cyberspace at www.adamsmith.net. ANNOUNCER: This program is made possible by a grant from MetLife with over $330 billion inassets under management. Funding has also been provided by the Roy R. and Marie S. NeubergerFoundation. CREDITS Produced by ADAM SMITH EDUCATIONAL PRODUCTION LTD. AND ALLIANCE INTERNATIONAL LLC. Special Thanks to: Bloomberg News and Information Services Worldwide Thanks to: 3-D Models Provided in Part by 3-D CAFE For a VHS cassette send $19.95 or $5.00 for a printed transcript to: Copyright _ 1998 Adam Smith Educational Productions Ltd.
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