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Archived material from the June 28 broadcast: » Stock Picks » Robert E. Rubin interview » Roundtable guests » Rubin biography

Program Summary

Co-hosts Karen Gibbs noted that the past week has been one of Wall Street's most dramatic weeks in months, with three instances of new criminal charges being brought against companies or executives, another discovery of improper accounting on a massive scale, a major cable bankruptcy, and the suspension of Martha's Stewart's broker by his employer. All in just five days.

Colvin and Gibbs don't agree on everything. He thinks there's a complete system failure. She believes that, although may be a "more than a few bad apples" in Corporate America, U.S. managers overall are honest and ethical.

Despite the mistrust surrounding the markets, long-term value can be found, Colvin said. But knowing when to sell is just as important as knowing when to buy, Gibbs said.

Investors apparently found value Thursday and most of Friday, judging by the slightly positive performances of the Nasdaq and S&P 500, Gibbs said during her market summary.

Rubin: Fix the system, but do it with care

The co-hosts interviewed Robert Rubin who was Secretary of the Treasury until 1999, when he left to become a director at Citigroup. Corporate governance and accounting issues must be addressed, but not recklessly, Rubin said.

"We have a system that has served our country extremely well for a long time, and while it's very important that we act and act thoughtfully and sensibly, I also believe it's very important that we act with balance and don't overreact," he told Colvin and Gibbs. "Because I think if we do that, we can unbalance and damage our long-term economic prospects."

A bill sponsored by Sen. Paul Sarbanes, D-Maryland, stands out as useful legislation, said Rubin, who was Secretary of the Treasury under President Bill Clinton. Political leaders such as the U.S. president should discuss economic issues, Rubin said.

Rubin declined to answer Colvin's question about why people should trust analysts from Citigroup's Salomon Smith Barney investment bank, in light of recent concerns about the relationship between analysts and underwriters at investment banks in general, and Salomon in particular. "Let's leave Citigroup and Salomon out of it," said Rubin, who pointed to accountants as the biggest problem on Wall Street.

"A far more central problem with respect to how our system is functioning is the role of accountants, because I think they're in an extremely difficult position," Rubin said.

Pressure in recent years to produce stellar results every quarter has driven companies to use more aggressive accounting, Rubin said. "I was astonished at how greatly the intensity of focus on quarterly earnings had increased in the time that I was in government," Rubin said. "It's irrational in terms of maximizing over the long term, both for investors and businesses."

There probably isn't anything that can be done to reduce investors' focus on quarterly results, Rubin said. But corporate America is healing itself, he said.

Worldcom hurts many

After the Rubin interview, Colvin took a look at who is hurt by the collapse of communications provider Worldcom which earlier this week admitted to massive accounting fraud. Almost anyone could have been hurt, Colvin said, because many large, popular mutual funds, including Vanguard, Oppenheimer, Scudder and Putnam Investments, owned large blocks of Worldcom at the end of the first quarter.

Since Worldcom hit its peak valuation of $160 billion in 1999, pension funds for state employees have lost hundreds of millions of dollars, including the NY State Common Retirement Fund, down $300 million; the California Public Employees Retirement System, down $565 million; and the New York City Pension Fund, down $100 million.

Roundtable

James Chanos and James Barrow joined Colvin and Gibbs in a roundtable discussion. (Click here to see what Chanos and Barrow are picking these days).

Chanos, a short-seller, said all investors need to investigate on their own, and pay more attention to the actions of corporate managers. And the accounting profession definitely needs a closer look, said Chanos, who couldn't think of a single major fraud in the past 10 years originally unearthed by auditing firms.

His favorite shorts include the whole cable television sector, which as an industry has never had free cash flow or earnings, Chanos said.

Despite the stock market slump, finding names in which to invest hasn't been very hard, said Barrow, a value manager. Although the market isn't cheap, there are companies that are cheap to buy and own, he said. Focusing on companies with a price-earnings ratio of 15 or less and a current yield of 2 1/2 to 3 1/2 percent will get investors through this difficult time, Barrow said. Sectors he currently likes include tobacco, oil companies and utilities.

Rich don't trust the Street either

A Money magazine survey indicated that wealthy folks also have a high level of pessimism about Wall Street, Gibbs said. About 48 percent of money managers believe the Nasdaq won't regain the 5,000 mark for 11 to 20 years, and 11 percent don't believe it will happen in our lifetime.

Another survey from the magazine showed that 76 percent of people worth more than $1 million don't believe corporate financial statements. And 73 percent of them don't trust stock recommendations from equity analysts.

Next week: a look at FORTUNE's All-Star analysts.