USA > History > 2010 > Economy (II)

BP Loses Trading-Floor Swagger

in Energy Markets

June 27, 2010
The New Yoprk Times
By NELSON D. SCHWARTZ

It seems like Wall Street at its worst: a cowboy on the trading floor plots to corner a market, and gets caught.

Only in this case, the brash trader did not work for a high-flying investment house — he worked for BP, whose reputation for taking risks in the oil fields is matched only by its daring in the energy markets, traders and industry experts say.

The trader’s attempt to corner the propane market resulted in the largest fine for market manipulation in the history of the Commodity Futures Trading Commission, a federal regulator, in 2007.

BP, however, remained committed to the aggressive trading that brought in billions annually — as much as a fifth of the company’s total profits — according to interviews with experts, government officials and other traders.

Now, with BP facing billions in liability claims from the Deepwater Horizon disaster, the trading unit’s prospects are uncertain, and the resources the unit once took for granted are threatened.

There are already signs that trading partners are becoming wary of BP’s financial outlook; one market participant, Bank of America Merrill Lynch, is halting long-term contracts with BP. The company’s deteriorating credit rating — on June 15, it was downgraded by Fitch to one notch above junk bonds — makes it harder for traders to cheaply deploy vast amounts of cash. And with its stock down by more than half since the blowout in the gulf, BP can only watch as rival firms try to poach its best traders.

“A lot of the swagger comes from the amount of money they have to trade with,” said Craig Pirrong, a director at the University of Houston’s Global Energy Management Institute. “And traders realize they don’t have the capital they had just a couple of weeks ago.”

It is a humbling moment for a secretive unit that earns the company $2 billion to $3 billion annually and has long inspired fear and envy among rival traders.

BP declined to comment for this article.

For all its influence, BP’s trading unit is something of an anomaly in the staid world of drillers and refiners.

While other oil giants like Exxon Mobil and Chevron shy away from big market wagers, BP employs a diverse array of bets as part of its strategy. Its market wagers on crude oil, gasoline or natural gas can use both physical supplies as well as paper petroleum — in the form of futures contracts and other derivatives.

Even in the outsize world of Wall Street, this is a huge market. More than 137 billion barrels of oil changed hands on the Nymex exchange last year, making it a multitrillion-dollar market, while energy derivatives on the more lightly regulated over-the-counter markets account for a trillion dollars more, according to the Bank for International Settlements.

BP and Shell, another major trader, declined to disclose the size or profitability of their trading units, but experts say BP’s operation is twice Shell’s size and much more active in the American market. In a 2005 Securities and Exchange Commission filing, BP disclosed that it earned $2.97 billion from overall trading in 2005, with $1.55 billion coming from the oil market and $1.31 billion from bets on natural gas.

Analysts estimate that BP’s trading profits have remained in the $2 billion to $3 billion range since then, which would be slightly less than 20 percent of the company’s $16.7 billion in earnings in 2009.

“They are the 800-pound gorilla in their market and the perception is they don’t let you forget it,” said Stephen Schork, president of the Schork Group, an industry trading and research firm.

But that swagger has faded since the April 20 accident in the gulf.

With their bonuses likely to be decimated by the company’s financial problems, many BP traders are eyeing opportunities at Wall Street firms or with companies overseas. They are among the most sought-after professionals in the sharp-elbowed world of energy trading desks.

At least a dozen have quit since the disaster, with BP losing crucial traders in Singapore, London and Chicago, according to other traders. Several have joined Brightoil, a Chinese oil trading and logistics company, in Singapore.

“Everyone is hovering over that company right now,” said George Stein, managing director of Commodity Talent, an executive search firm in New York.

BP’s size and ability to make huge bets was at the heart of the 2007 case, which resulted in $303 million in fines.

According to the government complaint, traders in Houston amassed short-dated futures contracts on 5.1 million barrels of propane stored in Texas pipelines in February 2004 — 800,000 barrels more than existed in the system. As prices steadily rose, BP refused to sell, driving prices steadily higher until they could force buyers to accept the asking price.

“How does it feel taking on the whole market, man?” one BP trader asked another, according to tapes of conversations cited as evidence in the case. “Whew! It’s pretty big, man,” was the answer.

Although one trader did plead guilty, four others had their indictments dismissed last September after a judge said the trades were exempt under federal law because they took place on the lightly regulated over-the-counter-market, not on an open exchange.

The government is appealing to have the indictments reinstated, but the Houston judge’s ruling underscores how difficult it is to prove commodity fraud cases — as well as how what might be manipulation to one observer is smart trading to another.

According to people familiar with the 2007 case, investigators also found evidence that BP traders had previously engaged in a more sophisticated effort to manipulate the much-larger crude oil market, by moving oil in and out of its gigantic storage facility in Cushing, Okla. Prosecutors did not pursue the case because the statute of limitations had nearly expired.

Experts point out that BP’s huge physical empire of wells, pipelines, refineries and storage facilities gives it an edge that is perfectly legal. For example, if traders see oil piling up in storage facilities or aboard supertankers in the BP fleet, it is a signal to bet oil prices will fall. Similarly, if BP refineries are low on gasoline, traders can scoop up gas futures.

“If you are actually dealing in the physical market, you have an informational advantage over purely financial traders,” said Neill Morton, an analyst with MF Global in London, who covers BP.

In addition, until the Deepwater Horizon spill in the gulf, BP’s solid financial position and physical infrastructure meant it could safely take on huge positions and hold on until they paid off. The physical assets are still there, of course, but the long-term financial picture is not so secure.

“Everyone says nothing has changed, but I’m sure they have their running shoes on,” Mr. Pirrong said. “People think if it starts to go, I want to be able to get away as fast I can.”

BP Loses Trading-Floor Swagger in Energy Markets, NYT, 27.6.2010, http://www.nytimes.com/2010/06/28/business/global/28bptrade.html

The Third Depression

June 27, 2010
The New York Times
By PAUL KRUGMAN

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

In 2008 and 2009, it seemed as if we might have learned from history. Unlike their predecessors, who raised interest rates in the face of financial crisis, the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.

But future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

As far as rhetoric is concerned, the revival of the old-time religion is most evident in Europe, where officials seem to be getting their talking points from the collected speeches of Herbert Hoover, up to and including the claim that raising taxes and cutting spending will actually expand the economy, by improving business confidence. As a practical matter, however, America isn’t doing much better. The Fed seems aware of the deflationary risks — but what it proposes to do about these risks is, well, nothing. The Obama administration understands the dangers of premature fiscal austerity — but because Republicans and conservative Democrats in Congress won’t authorize additional aid to state governments, that austerity is coming anyway, in the form of budget cuts at the state and local levels.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits. But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors. On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

It’s almost as if the financial markets understand what policy makers seemingly don’t: that while long-term fiscal responsibility is important, slashing spending in the midst of a depression, which deepens that depression and paves the way for deflation, is actually self-defeating.

So I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.

And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

    The Third Depression, NYT, 27.6.2010, http://www.nytimes.com/2010/06/28/opinion/28krugman.html

At Summit, Banks Avoid New Global Regulations

June 27, 2010
The New York Times
By SEWELL CHAN and JACKIE CALMES

TORONTO — Giant banks, while bracing for a wave of tougher regulation in Washington, will not have to face a new set of global rules on capital and liquidity anytime soon.

The world’s biggest economies have been developing rules that would require banks to hold more capital and be better equipped to absorb losses when financial conditions sour. But it became clear on Sunday at the meeting of the Group of 20 countries that it could be years before they take effect.

The rules are to be finished at the next G-20 leaders’ summit talks, in Seoul, South Korea, in November.

While the participants here said they aimed to adopt the rules by the end of 2012, they cautioned that the standards would be “phased in over a time frame that is consistent with sustained recovery and limits market disruption.”

The United States Treasury secretary, Timothy F. Geithner, said that progress was being made on new capital standards, although disagreements remained.

“We’re narrowing those differences, but we’re still some ways apart,” he said during a news conference here on Saturday. He added that negotiators were trying to ensure that limiting the risks taken by banks would not endanger the recovery by choking off financing.

“And the best way to strike that balance is to make sure you set ambitious standards, but give people a transition period so they can adapt over time to those standards,” he said.

Trillions of dollars are at stake in the negotiations over what is being called Basel III, named for the Basel Committee on Banking Supervision, a body of regulators that meets regularly in Switzerland.

In some ways the Basel negotiations will be as significant for future financial stability as the Congressional debates over the American regulatory system. “We want to have a level playing field,” Mr. Geithner said.

“In these markets today, risk can move very quickly to evade the strongest standards, and we think the system will be stronger as a whole if these measures in the U.S. we’re about to enact are complemented by strong actions by other countries.”

But banks across the world have been pressing for a delay or even a rewrite of the proposed rules, in part by arguing that the new standards could hamper the global recovery.

The Institute of International Finance, the world’s leading banking industry group, warned earlier this month that economic growth in the United States, Japan and the countries that use the euro would be reduced by three percentage points between now and 2015 if the current Basel proposals were put in place.

The Basel Committee, which sets standards that are then carried out by national regulators, wants to tighten the definition of what can be counted as Tier One capital, which is the basic measure of what banks hold against the risk of future losses.

The committee also wants banks to have enough liquid assets to survive a short-term market plunge, by reducing their dependence on short-term wholesale financing.

Mario Draghi, the chairman of the Financial Stability Board, a global coordination body that works closely with the Basel Committee, said on Sunday that it would be better to delay putting the standards in effect, rather than weakening them.

“The quality and amount of capital in the banking system must be significantly higher to improve loss absorbency and resiliency,” Mr. Draghi, the governor of the Bank of Italy, wrote in a letter to the G-20 leaders. He added that governments “should provide transition arrangements that enable movement to robust new standards without putting the recovery at risk, rather than allow concerns over the transition to weaken the standards.”

Karen Shaw Petrou, managing partner at Federal Financial Analytics, who follows bank capital standards, said the G-20 committed itself to “implementation by 2012 unless that proves inconvenient.”

She added: “Clearly, new tough rules are coming, but what they are and how they will affect each nation is up to each nation. In the U.S., the rules will be very stringent, but that’s because of the bill Congress passed on Friday.”

The Financial Stability Board is also working on rules that would tighten scrutiny of hedge funds and debt rating agencies; set restrictions on executive pay to discourage excessive risk-taking; and push trading of derivatives onto open markets. The Congressional legislation, which is expected to go to President Obama’s desk within the next week, includes similar provisions in those areas.

An amendment to that legislation, sponsored by Senator Susan Collins, a Maine Republican whose support was vital to the measure’s passage in the Senate, requires that only equity — and not instruments like trust-preferred securities, which are a hybrid of equity and debt — count as Tier 1 capital.

Banks opposed that amendment, and the Obama administration had concerns about putting the provision in law as opposed to regulation.

In a compromise, Congressional negotiators agreed to give big bank holding companies five years to follow the new rule, and to allow companies with assets of $15 billion or less to count their current holdings of trust-preferred securities as part of Tier 1, though not new investments.

But the banks appear to have won an important victory in blocking an effort that would have effectively made them hold more government securities as a way of raising liquidity, or the ability to handle short-term financial shocks.

    At Summit, Banks Avoid New Global Regulations, NYT, 27.6.2010, http://www.nytimes.com/2010/06/28/business/global/28bank.html

On Finance Reform Bill, Lobbying Shifts to Regulations

June 26, 2010
The New York Times
By BINYAMIN APPELBAUM

WASHINGTON — Well before Congress reached agreement on the details of its financial overhaul legislation, industry lobbyists and consumer advocates started preparing for the next battle: influencing the creation of several hundred new rules and regulations.

The bill, completed early Friday and expected to come up for a final vote this week, is basically a 2,000-page missive to federal agencies, instructing regulators to address subjects ranging from derivatives trading to document retention. But it is notably short on specifics, giving regulators significant power to determine its impact — and giving partisans on both sides a second chance to influence the outcome.

The much-debated prohibition on banks investing their own money, for example, leaves it up to regulators to set the exact boundaries. Lobbyists for Goldman Sachs, Citigroup and other large banks already are pressing to exclude some kinds of lucrative trading from that definition.

Regulators are charged with deciding how much money banks have to set aside against unexpected losses, so the Financial Services Roundtable, which represents large financial companies, and other banking groups have been making a case to the regulators that squeezing too hard would hurt the economy.

Consumer groups, meanwhile, are mobilizing to make sure that regulators deliver on promised protections for borrowers and investors. They worry that the shift from Capitol Hill to the offices of regulators could put the groups at a disadvantage.

“It’s out of the public eye, so a natural advantage that we benefit from — public outrage — we lose that a little,” said Cristina Martin Firvida, a lobbyist for AARP, which advocates for older Americans. “We know there’s still a lot here left to do.”

The legislation is intended to expand federal oversight of the financial industry to police risks to the broader economy and to protect consumers of financial products. It would also impose federal regulations for the first time on the trading of derivatives, the complex financial instruments that can be used to make large bets. But Brett P. Barragate, a partner in the financial institutions practice at the law firm Jones Day, estimated that Congress had fixed in place no more than 25 percent of the details of that vast expansion.

“Congress is doing this in broad strokes,” said Scott Talbott, a lobbyist for the Financial Services Roundtable. “Where the rubber meets the road is the regulatory process.”

President Obama hopes to sign the bill into law by the Fourth of July. In his weekly address on Saturday, Mr. Obama said, “I urge Congress to take us over the finish line, and send me a reform bill I can sign into law, so we can empower our people with consumer protections, and help prevent a financial crisis like this from ever happening again.”

His signature will start the clock on dozens of deadlines embedded in the legislation for regulators from a host of agencies, including the Federal Reserve, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation, to make those decisions.

Interest groups have been preparing for months. When the Consumer Bankers Association convened its annual meeting in early June, there was still plenty of time to lobby Congress. But the group’s president, Richard Hunt, told his board that the group should shift its focus to the rule-making process. The board voted to increase the group’s budget and staff.

“Now we hope to have a good give and take with the regulators on the best interests of the consumer and the industry,” said Mr. Hunt.

Shaping regulations is a different game than shaping legislation. Political considerations carry less weight. Instead, regulators crave data that can be used to justify decisions.

Consider the new restrictions on the fees that merchants must pay to banks when customers swipe debit cards. The Nilson Report, a trade publication, estimated that last year, those fees averaged 1.63 percent of the transaction amount.

The legislation directs the Federal Reserve to cap those fees at a level that is “reasonable and proportional” to the cost of processing transactions. It gives the Fed nine months to gather data and decide.

Trade groups for retailers, which want a lower cap, and banks, which want a higher one, are standing by to weigh in.

“We have the data ready and we have the right people ready to go to the Fed, and we’ve had an ongoing dialogue with the Fed,” said John Emling, a lobbyist for the Retail Industry Leaders Association.

The debit card regulations are unusual, however, in pitting the interests of two industries against each other. Many more of the new regulations pit the interests of consumer groups against financial companies.

Historically, industry groups have dominated these information wars, plying regulators with exhaustive studies and detailed analyses of the options at hand. Trade groups have more money and more people, and they often produce and control the relevant information about their business and customers.

Seeking an equalizer, the AARP decided several months ago to begin preparing research that could be presented to regulators on several parts of the bill that it favored. The group was gambling that the provisions — like a requirement that investment brokers act in the interest of their clients — would end up in the final bill.

“We took a risk,” said Ms. Firvida, the group’s government affairs director for financial issues. “Success will depend on how much quality information is in front of the rule makers.”

The legislation would hand consumer groups a series of important victories, most notably the creation of a consumer protection bureau inside the Federal Reserve. But Ms. Firvida and others said there could be a sharp distinction between the authorities granted by the legislation and the results.

Affected companies are nervous as well and are banding together. In the immediate aftermath of the financial crisis, trade groups lost members as banks cut back on spending. That trend has now reversed. The Consumer Bankers Association has added seven members in recent months, bringing its total to 60.

Mr. Hunt, the group’s president, said its role was expanding in direct response to the plan to create the consumer protection bureau, which would focus on regulating his membership.

“The entire financial services industry understands that what happens in Washington affects them,” he said. “It’s something other industries found out many years ago, and we’re finding it out now.”

In a recent letter to the Treasury secretary, Timothy F. Geithner, the American Bankers Association estimated that banks had been hit with 50 new or expanded federal regulations in the last two years. A single example, the credit card bill that passed Congress last year, landed on the desks of bankers as 252 pages of new regulations.

And that count does not include the impact of the new legislation. “It’s a massive compliance burden,” said Edward L. Yingling, the group’s president. “And there is going to be massive uncertainty in the financial industry about how all of this will play out.”

One clear consequence is a surge in the demand for lawyers with expertise in financial regulation, particularly those who have worked for regulatory agencies. Most of the major trade groups are hiring lawyers. The major banks say they are employing more, too.

“I don’t know that there has been a bill that has touched as many different substantive areas as this one,” said A. Patrick Doyle, a partner at Arnold & Porter who has worked on financial issues for three decades. “Clearly there’s going to be a lot of work.”

The surge in hiring has sent a joke bouncing around Washington: Congress finally passed a jobs bill — full employment for lawyers.

    On Finance Reform Bill, Lobbying Shifts to Regulations, NYT, 26.6.2010, http://www.nytimes.com/2010/06/27/business/27regulate.html

Financial Regulation

June 25, 2010
The New York Times
 

There is much to applaud in the financial regulatory reform bill announced last Friday by House and Senate negotiators. It would limit some of the riskiest activities of banks and regulate the multitrillion-dollar market in over-the-counter derivatives. It would give federal regulators the tools, if they need them, to shut failing large banks and financial firms instead of bailing them out.

In significant ways, the bill would also protect Americans directly. Consumers would be shielded from many forms of abusive and predatory lending, and investors could be empowered to influence corporate boards that have long been impervious to shareholder concerns.

The bill is a considerable accomplishment. It is the final version. Congress should pass it quickly.

At the same time — and in the months and years ahead — lawmakers must acknowledge the bill’s shortcomings and be prepared to take corrective action. Many of the bill’s provisions come with exceptions or exemptions that could, in practice, swallow the new rules.

The reforms are also vulnerable to being weakened in the painstaking process of translating new law into actual regulations and procedures. Special interests — think Wall Street — have the resources and time to monitor and influence that process. The public does not. Lawmakers have to ensure the carrying out of the rules does not veer widely from what Congress has promised.

Take for example, the so-called Volcker rule, intended to reduce risk and speculation in the financial system. The Obama administration proposed banning banks from using their capital to invest in hedge funds and private equity funds. The final bill would let banks invest up to 3 percent of their high-quality capital in such funds, a big exception. Congress has to be prepared to reduce the percentage to control risks in the system.

Derivatives regulation also bears watching. The bill would require most transactions to occur on regulated exchanges, rather than as private contracts. Regulators and lawmakers must strictly monitor derivatives that trade off-exchange and stop that market from growing ever larger.

For all of the specific reforms, the legislation leaves intact a handful of behemoth, multitasking banks whose size and scope would make them difficult to dismantle in a crisis, even under a new law.

Congress is gambling that the reforms, taken together, will sufficiently reduce the banks’ riskiness. That could happen, but if it does, the banks will make considerably less money and will want relief from what they are sure to call overly burdensome regulation. When that happens — and if the reforms work, it will — lawmakers will have to stand firm, even though it means imposing pain on the banks. Equally important, if the big banks grow larger and riskier despite the new rules, will lawmakers impose stronger restraints? If they do not, it is only a matter of time before the next calamity.

Americans have paid for the financial crisis with their jobs, incomes, savings, investments and home equity, and with their faith in markets and in the government to protect them from harm. The new bill is a step toward redressing those losses and restoring that faith. Congress should pass it, and then do what must be done to ensure that it performs as advertised.

    Financial Regulation, NYT, 25.6.2010, http://www.nytimes.com/2010/06/27/opinion/27sun1.html

In Deal, New Authority Over Wall Street

June 25, 2010
The New York Times
By EDWARD WYATT and DAVID M. HERSZENHORN

WASHINGTON — An overhaul of the nation’s financial regulatory system, reached after an all-night Congressional horse-trading session, will vastly expand the authority of the federal government over Wall Street in a bid to curb the free-wheeling culture that led to the near collapse of the world economy in 2008.

The deal between House and Senate negotiators, sealed just before sunrise on Friday, imposes new rules on some of the riskiest business practices and exotic investment instruments. It also levies hefty fees on the financial services industry, essentially forcing big banks and hedge funds to pay the projected $20 billion, five-year cost of the new oversight that they will face. And it empowers regulators to liquidate failing financial companies, fundamentally altering the balance between government and industry.

But after weeks of intense lobbying and months of debate, Congress in the end stopped short of prohibiting some of the practices that led to the crisis two years ago, betting instead that a newly empowered regulatory regime can rein in the big financial players without shackling the markets and drying up the flow of credit to businesses.

“We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression,” President Obama said on the South Lawn of the White House, before leaving for the Group of 20 meeting in Toronto, where he was expected to press other nations to tighten their financial rules.

Democrats predicted that the full Congress would approve the legislation next week and that they would meet their goal of sending the bill to Mr. Obama for his signature by the Fourth of July.

The financial industry won some important victories, even if they face significantly heightened regulation. They fought off some of the toughest restrictions on their ability to invest their own funds. Most significantly, they thwarted an attempt to make them give up their highly profitable derivatives trading desks. And big lobbying fights remain in the future, when regulators begin the nitty-gritty task of turning complex, sometimes vague laws into real-world rules for these businesses to follow.

Industry analysts predicted that banks would most likely adapt easily to the new regulatory framework and thrive. As a result, bank stocks were mostly higher Friday, prompting some skeptics to question if the legislation, in fact, would be tough enough to rein in the industry and prevent future shocks to the economy as a result of bad gambling.

Even architects of the bill acknowledged that it might take the next financial crisis to truly determine the effectiveness of the changes.

On Friday morning, after a 20-hour final negotiating session, lawmakers, Congressional aides, lobbyists and the banking industry were still sorting through the legislative rubble of a frantic night of deal-making, edits and adjustments that left even some of those who worked most closely on the bill confused about exactly how some of the final details turned out. At points in the debates, lawmakers seemed to have trouble following their own deliberations.

“Can somebody explain to me what’s in Tier 1 capital?” Representative Melvin L. Watt, Democrat of North Carolina, pleaded, referring to the core measure of a bank’s financial strength. “I just don’t have enough knowledge in this area.”

The White House’s desire to get a bill before the Fourth of July break drove the day. At 11 p.m. Thursday, Representative Barney Frank, Democrat of Massachusetts and chairman of the Financial Services Committee who presided over the conference proceedings, began to show signs of impatience. When the senior Republican on the committee, Representative Spencer Bachus of Alabama, asked for another minute to finish a statement, Mr. Frank cut him off. “I would object to that,” he snapped. “Not at 11 o’clock at night.”

As midnight turned to early morning, lawmakers cast rapid-fire votes on amendments hastily scrawled in the margins of rejected proposals. With C-Span carrying the proceedings live, the last half-hour of the session featured sometimes confused lawmakers repeatedly asking about what happened to various proposed amendments.

While the televised proceedings at times provided a remarkable window into the minutiae of legislating, many of the deals to complete the bill were cut outside the conference room, in private discussions between Democratic lawmakers and the Obama administration, with some of Washington’s most influential lobbyists trying to weigh in as best they could.

One major bank on Friday scrambled to figure out what happened to six words that to its surprise and dismay were apparently cut from an amendment on proprietary trading, potentially posing a threat to its business.

The final bill vastly expands the regulatory powers of the Federal Reserve and establishes a systemic risk council of high-ranking officials, led by the Treasury secretary, to detect potential threats to the overall financial system. It creates a new consumer financial protection bureau, and widens the purview of the Securities and Exchange Commission to broaden regulation of hedge funds and credit rating agencies.

The measure restricts the ability of banks to invest and trade for their own accounts — a provision known as the Volcker Rule, for its chief proponent, Paul A. Volcker, the former Federal Reserve chairman — and creates a tight new regulatory framework for derivatives, the complex financial instruments that were at the heart of the 2008 crisis.

But in a late-hour compromise, the bill does not include the tough restrictions on derivatives trading championed by Senator Blanche L. Lincoln, Democrat of Arkansas, which would have forced banks to jettison their most lucrative dealings in this area.

Instead, in a deal negotiated between Mrs. Lincoln and a bloc of House members called the New Democrat Coalition, banks will be required to segregate their dealings only in the riskiest categories of derivatives, including the highly structured products like credit-default swaps based on bundles of mortgage loans, and in certain types of derivatives that are based on commodities that banks are already prohibited from investing in, like precious metals, agricultural products and energy.

But derivatives that have clear business purposes like helping manufacturing companies to hedge against the cost of raw materials or swings in foreign exchange rates would continue to be allowed. And nonfinancial corporations would be allowed to set up their own financial affiliates to create and trade derivatives related to their businesses.

The derivatives deal also headed off a last-minute rebellion by some New York lawmakers concerned about the effect of Mrs. Lincoln’s proposal on Wall Street businesses.

“We wanted to make sure we didn’t drive all the derivative business out of New York,” said Representative Gregory W. Meeks, a Democrat from Queens, who served on the conference committee.

The bill also does not include some of the more draconian proposals debated in recent months, including re-establishing a firewall between commercial and investment banking. And the nation’s auto dealers won exemption from oversight by the new consumer protection bureau, which will regulate most consumer lending.

Some business groups angrily denounced the final product, saying it was ill-conceived and would have unintended consequences harmful to the economy.

“Far from effective reform, this legislation includes provisions totally unrelated to the financial crisis which may disrupt America’s fragile economic recovery and increase instability and risk,” said John J. Castellani, president of the Business Roundtable, which represents chief executives of top American companies.

The conference report approved Friday is subject to approval by both chambers of Congress, a process that is expected to begin on Tuesday with action by the House and then by the Senate — where 60 votes will be required to end debate.

The vote in the conference committee was on party lines, with Democrats in favor and Republicans opposed. House conferees voted 20 to 11 to approve the bill and Senate conferees voted 7 to 5.

Republicans repeatedly complained that the bill would do nothing to tighten regulation of the government-sponsored mortgage companies, Fannie Mae and Freddie Mac, which were at the heart of much of the housing crisis.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee who with Mr. Frank led the negotiations, said the bill would prevent the corporate bailouts required in 2008 and allow the United States to become a global leader in financial regulation, potentially providing decades of stability.

“Never again will we face the kind of bailout situation as we did in the fall of 2008 where a $700 billion check will have to be written,” Mr. Dodd said in an interview. But he acknowledged that the effectiveness of the legislation would be learned only over time.

“I don’t have the kind of ego that would tell you we have absolutely solved these problems,” he said. “We won’t know until we face the next economic crisis.”

Republicans, however, warned that the bill would extend the reach of government too far.

At one point during debate over whether banks should be allowed to trade for their own profit, Representative Jeb Hensarling, Republican of Texas, asked what the issue had to do with the financial crisis. “How much riskier is proprietary trading than investment in certain forms of residential real estate?” Mr. Hensarling asked.

“If we’re not going to bail them out with taxpayer money, what they do with their money is their business.”

He said, adding: “This is one more occasion where we see something in the bill that did not have a causal role in the crisis.”

While regulatory bills often get watered down as they grind through the legislative process and interest groups and industry press for changes, the financial bill mostly gained strength as the debate lengthened and lawmakers seized on public frustration that rich financial institutions, recently bailed out by taxpayers, showed no signs of curtailing their risky practices or their outsize pay packages.


Raymond Hernandez and Binyamin Appelbaum contributed reporting.

    In Deal, New Authority Over Wall Street, NYT, 25.6.2010, http://www.nytimes.com/2010/06/26/us/politics/26regulate.html

The Next Crisis: Public Pension Funds

June 21, 2010
The New York Times
By ROGER LOWENSTEIN

Ever since the Wall Street crash, there has been a bull market in Google hits for “public pensions” and “crisis.” Horror stories abound, like the one in Yonkers, where policemen in their 40s are retiring on $100,000 pensions (more than their top salaries), or in California, where payments to Calpers, the biggest state pension fund, have soared while financing for higher education has been cut. Then there is New York City, where annual pension contributions (up sixfold in a decade) would be enough to finance entire new police and fire departments.

Chicken Little pension stories have always been a staple of the political right, but in California, David Crane, the special adviser to Gov. Arnold Schwarzenegger, says it is time for liberals to rally to the cause.

“I have a special word for my fellow Democrats,” Crane told a public hearing. “One cannot both be a progressive and be opposed to pension reform.” The budgetary math is irrefutable: generous pensions end up draining money from schools, social services and other programs that progressives naturally applaud.

In California, which is in a $19 billion budget hole, Calpers is forcing hard-pressed localities to cough up an extra $700 million in contributions. New York State, more creatively, has suggested that municipalities simply borrow from the state pension fund the money they owe to that very fund.

Such transparent maneuvers will not conceal the obvious: for years, localities and states have been skimping on what they owe. Public pension funds are now massively short of the money to pay future claims — depending on how their liabilities are valued, the deficit ranges from $1 trillion to $3 trillion.

Pension funds subsist on three revenue streams: contributions from employees; contributions from the employer; and investment earnings. But public employers have often contributed less than the actuarially determined share, in effect borrowing against retirement plans to avoid having to cut budgets or raise taxes.

They also assumed, conveniently enough, that they could count on high annual returns, typically 8 percent, on their investments. In the past, many funds did earn that much, but not lately. Thanks to high assumed returns, governments projected that they could afford to both ratchet up benefits and minimize contributions. What a lovely political algorithm: payoffs to powerful, unionized constituents at minimal cost.

Except, of course, returns were not guaranteed. Optimistic benchmarks actually heightened the risk, because they forced fund managers to overreach. At the Massachusetts pension board, the target was 8.25 percent. “That was the starting point for all of our investment decisions,” Michael Travaglini, until recently its executive director, says. “There is no way a conservative strategy is going to meet that.”

Travaglini put a third of the state’s money into hedge funds, private equity, real estate and timber. In 2008, assets fell 29 percent. New York State’s fund, which is run by the comptroller, Thomas DiNapoli, a former state assemblyman with no previous investment experience, lost $40 billion in 2008. Most funds rebounded when the market turned, but they remain deep in the hole. The Teachers’ Retirement System of Illinois lost 22 percent inthe 2009 fiscal year. Alexandra Harris, a graduate journalism student at Northwestern University who investigated the pension fund, reported that it invested in credit-default swaps on A.I.G., the State of California, Germany, Brazil and “a ton” of subprime-mortgage securities.

The financial crash provoked a few states to lower their assumed returns. This will better reflect reality, but it will not repair the present crisis. Before the crash, retirement systems were underfinanced (they did not have sufficient funds to pay promised benefits), but the day of reckoning was distant. Moreover, the pain was indirect. Taxpayers were not aware that pension debts caused teachers to be laid off — only that schools had fewer teachers.

Postcrash, the horizon has condensed. According to Joshua Rauh of the Kellogg School of Management at Northwestern, assuming states make contributions at recent rates and assuming they do earn 8 percent, 20 state funds will run out of cash by 2025; Illinois, the first, will run dry in 2018.

What might budgets look like then? Pension obligations are a form of off-balance-sheet debt. As funds approach exhaustion, states will be forced to borrow to replenish them. Some have already done so. Thus, pension obligations will be converted into explicit liabilities (think of a family’s obligation to pay for grandma’s retirement being added to its mortgage). According to Rauh, if the unfinanced portion of all public pension obligations were converted to debt, total state indebtedness would soar from $1 trillion to $4.3 trillion.

Such an explosion of debt would threaten desperate governments with bankruptcy. Alternately, states could try to defray pension costs from their operating budgets. Illinois, once its funds were depleted, would be forced to devote a third of its budget to retirees; Ohio, fully half. This would impoverish every social (and other) program; it would invert the basic mission of government, which is, after all, to serve constituents’ needs.

States really have no choice but to further cut spending and raise taxes. They also need to cut pension benefits. About half have made modest trims, but only for future workers. Reforming pensions is painfully slow, because pensions of existing workers are legally protected. There is, of course, no argument for canceling a pension already earned. But public employees benefit from a unique notion that, once they have worked a single day, their pension arrangement going forward can never be altered. No other Americans enjoy such protections. Private companies often negotiate (or force upon their workers) pension adjustments. But in the world of public employment, even discussion of cuts is taboo.

Recently, states have begun to test the legal boundary. Minnesota and Colorado cut cost-of-living adjustments for existing workers’ pensions; each faces a lawsuit. But legislatures need to push the boundaries of reform. That will mean challenging the unions and their political might.

The market forced private employers like General Motors to restructure retirement plans or suffer bankruptcy. Government’s greater ability to borrow enables it to defer hard choices but, as Greece discovered, not even governments can borrow forever. The days when state officials may shield their workers while subjecting all other constituents to hardship are fast at an end.


Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer and author of “While America Aged,” among other books.

    The Next Crisis: Public Pension Funds, NYT, 21.6.2010, http://www.nytimes.com/2010/06/27/magazine/27fob-wwln-t.html

On Wall Street, So Much Cash, So Little Time

June 23, 2010
The New York Times
By JULIE CRESWELL

Only on Wall Street, in the rarefied realm of buyout moguls, could you actually have too much money.

Private equity firms, where corporate takeovers are planned and plotted, today sit atop an estimated $500 billion. But the deal makers are desperate to find deals worth doing, and the clock is ticking.

The stores of money inside the private equity industry have ramifications far beyond the bid-’em-up crowd on Wall Street. Millions of Americans — investors, employees, retirees — have a stake in the game too.

Corporate buyout specialists generally raise money from big investors and then buy undervalued or underappreciated companies. To maximize investment returns, they typically leverage their cash with loans from banks or bond investors.

In recent years, private investment firms have amassed business empires rivaling the mightiest public corporations, buying up household names like Hilton Hotels, Dunkin’ Donuts and Neiman Marcus.

Critics contend that leveraged buyouts can saddle takeover targets with dangerous levels of debt. But unlike indebted homeowners, highly leveraged companies under the care of private equity have so far dodged the big bust many have predicted. After an unprecedented burst of buyouts during the boom leading up to 2008, a vast majority of these companies are hanging on. Whether they will avoid a reckoning is uncertain.

So for now buyout artists are searching for their next act. Public pension funds, university endowments, insurance companies and other institutions have pledged to invest many billions with them — provided the deal makers can find companies to buy. If they fail, investors can walk away, taking lucrative business with them.

Private equity funds generally tie up investors’ money for 10 years. But they typically must invest all the money within the first three to five years of the funds’ life. For giant buyout funds raised in 2006 and 2007, at the height of the bubble, time is short. They must invest their money soon or return it to clients — presumably along with some of the management fees the firms have already collected. Some of the industry’s biggest players, like David M. Rubenstein of the Carlyle Group, Henry Kravis of Kohlberg Kravis Roberts and David Bonderman of TPG, have more than $10 billion apiece in uncommitted capital — what is known as “dry powder” — according to Preqin, an industry research firm.

Some buyout firms are asking their clients for more time to search for companies to buy. Many more are rushing to invest their cash as quickly as possible, whatever the price.

Many in the industry are getting caught in bidding wars. Firms are assigning surprisingly high valuations to companies they are acquiring, even though the lofty prices will in all likelihood reduce profits for their investors. A big drop in returns would be particularly vexing for pension funds, which are counting on private equity, hedge funds and other so-called alternative investments to help them meet their mounting liabilities.

Given the prices being paid for companies, investors’ returns over the life of the fund are likely to drop into the low to mid-teens, said Hugh H. MacArthur, head of global private equity at the consulting firm Bain & Company, which used to be affiliated with Bain Capital, the private equity firm. Returns will be even lower once fees are factored in. Private equity firms typically charge an annual fee of 2 percent and take a 20 percent cut of any profits.

While investing in private equity will probably be more lucrative than investing in public markets, “those are far from the gross returns of the mid- to high teens that we saw a few years ago,” Mr. MacArthur said.

One factor in the modest forecast is rising prices for buyouts. Kelly DePonte, a partner at Probitas Partners in San Francisco, which helps private equity firms raise money, said “tough competition for deals” had driven up valuations recently.

One of the biggest and costliest deals so far this year was the acquisition of a stake in the Interactive Data Corporation, a financial market data company, by two private equity firms, Silver Lake and Warburg Pincus, according to Capital IQ, which tracks the industry. A third, unidentified private equity partner dropped out because the price was too high.

The two buyout shops paid $3.4 billion, or $33.86 in cash for each share of I.D.C. — a premium of nearly 33 percent to the going price in the stock market. Technology companies often command high valuations. Silver Lake and Warburg Pincus declined to comment for this article.

Last year, when banks balked at financing deals and private equity firms worried the economic crisis would drag on, the number of deals — and prices paid — fell sharply.

In July 2009, for instance, Apax Partners paid $28.50 a share, or $571 million, for Bankrate, which owned a number of consumer finance Web sites. The price represented a 15.8 percent premium. Apax had to pay the entire bill itself, with no money from banks.

But these days, even small and midsize companies are in a bidding frenzy. More than a dozen buyout firms made initial bids for the Virtual Radiologic Corporation, a company that interprets medical images remotely. Providence Equity Partners eventually paid a 41 percent premium for the company. When a small online education company called Plato Learning hung up a “for sale” sign, several suitors showed interest. When Plato last tried to sell itself, in the fall of 2007, it found no takers.

Private equity players concede that competition has heated up and prices are rising. But they argue that prices, from a historical standpoint, remain attractive. Prices are well below the stratospheric levels of 2007 and 2008, according to Capital IQ. Buyout executives also say it is too soon to determine what profits will come from these deals. And, they say, losers in bidding wars always claim the winners overpaid.

Still, those with dry powder are bidding aggressively, in the United States, Europe and Asia.

TPG — which, according to Preqin, has one of the largest stockpiles at more than $18 billion — has bid aggressively at several auctions, according to several investment bankers.

In fact, TPG has spent $9.2 billion so far this year, investing in 11 companies, including ones in India and Brazil. That makes TPG the industry’s top deal maker, according to Dealogic, a research firm. A spokesman for TPG declined to comment.

Noting that buyout firms are “feeling a lot of pressure to put the money to work,” William R. Atwood, head of the Illinois State Board of Investment, said he hoped the firms would not stretch too far for deals.

“There is a big counterpressure — a requirement for prudence and returns from their investments,” he said.

    On Wall Street, So Much Cash, So Little Time, NYT, 23.6.2010, http://www.nytimes.com/2010/06/24/business/24private.html

S.E.C. Accuses Firm of Fraud in Mortgage Deals

June 21, 2010
The New York Times
By LOUISE STORY

The Securities and Exchange Commission on Monday accused a New York firm that helped manage complex mortgage securities of defrauding investors as the housing market collapsed.

The firm, ICP Asset Management, used four mortgage deals called Triaxx like a piggy bank to enrich itself by diverting money from investors, the commission said in a complaint filed in the Southern District of New York.

The case involves a new type of target for the S.E.C., which has been following the mortgage pipeline in an effort to uncover wrongdoing. The commission has filed cases against mortgage companies that originated loans, like Countrywide Financial, and this spring it filed a case against Goldman Sachs over a mortgage bond the bank created. The case against ICP examines the last party in that chain, a firm that managed complex deals known as collateralized debt obligations, or C.D.O.’s.

When banks first created C.D.O.’s, they worked with outside managers like ICP to reassure investors that there was a third party watching out for their interests and designing the deals to succeed.

But the S.E.C. paints a picture of a firm that was anything but neutral. ICP, the complaint said, set up trades with the Triaxx vehicles that favored the firm’s other funds, in some cases using the C.D.O.’s to pump up the market prices they could claim as reasonable for their hedge funds. In addition, two of the Triaxx deals were partially insured by American International Group. The S.E.C. said that ICP broke its agreement to obtain the insurer’s permission for certain investments.

For instance, the complaint said, in the summer of 2007, when two Bear Stearns hedge funds were in trouble, ICP agreed to purchase $1.3 billion in bonds from the Bear funds. ICP did not have the money to accept the bonds immediately, so it entered a forward agreement to accept them later on behalf of Triaxx C.D.O.’s. But ICP was supposed to obtain A.I.G.’s permission for such forward agreements, and the firm failed to do so, the complaint said.

Shortly thereafter, ICP resold some of those Bear Stearns bonds to one of its other funds at a $14 million profit. But, the S.E.C. said, ICP canceled the trades with the Triaxx C.D.O.’s in such a way as to divert that profit to ICP’s owners, rather than giving it to the investors in the C.D.O.’s.

The firm denied any wrongdoing. “We at all times acted in the best interest of our clients and intend to vigorously defend these allegations,” Thomas Priore, one of ICP’s principals, said in an e-mail message.

Mr. Priore was also charged by the S.E.C., which said he had breached his duties to Triaxx’s investors in favor of investors in his other vehicles.

For instance, the commission said that in the middle of 2008, one of ICP’s vehicles faced margin calls from its lenders. To raise cash for those calls, ICP sold hundreds of millions of dollars of bonds from that vehicle to the Triaxx C.D.O.’s at inflated prices. The C.D.O.’s overpaid by about $40 million, the complaint said.

“Priore knew that the prices of sales from Triaxx Funding were substantially above prevailing market levels, yet instructed ICP employees to proceed with the sales,” the complaint said. “After several sales were executed, ICP’s portfolio manager, who felt uncomfortable following Priore’s instructions, directed ICP employees to name Priore as the trader in ICP’s books and records.”

ICP marketed the Triaxx deals when they were created in 2006 and 2007 by using A.I.G.’s name. The firm said in marketing materials that A.I.G. would serve as a “collateral manager,” approving trading by the Triaxx vehicles. But ICP repeatedly misled A.I.G. about its actions, the complaint said, even during 2008 as A.I.G. neared the brink and was rescued by a taxpayer bailout.

    S.E.C. Accuses Firm of Fraud in Mortgage Deals, NYT, 21.6.2010, http://www.nytimes.com/2010/06/22/business/22sec.html

Stores’ Treatment of Shoplifters Tests Legal Rights

June 21, 2010
The New York Times
By COREY KILGANNON and JEFFREY E. SINGER

The A & N Food Market on Main Street in Flushing, Queens, has an almost entirely Chinese clientele. The inventory ranges from live eels, turtles and frogs, to frozen duck tongue and canned congee. These goods, like products sold in every store in every neighborhood of the city, attract their share of shoplifters. But A & N Food Market has its own way of dealing with the problem.

First, suspected shoplifters caught by the store’s security guards or staff members have their identification seized. Then, they are photographed holding up the items they are accused of trying to steal. Finally, workers at the store threaten to display the photographs to embarrass them and call the police — unless the accused thieves hand over money.

“We usually fine them $400,” said Tem Shieh, 60, the manager, who keeps track of customers on 30 video monitors in the store’s surveillance system. “If they don’t have the money, then we usually hold their identification and give them a chance to go get it.”

The practice of catching suspected shoplifters and demanding payment is an import from China, several experts in retail loss prevention said, where there is a traditional slogan that some storekeeper’s post: “Steal one, fine 10.” Whether this practice is legal in the United States is open to interpretation.

New York State law allows “shopkeepers’ privileges” that fall somewhere between the police and a citizen’s arrest. The law also details “civil recovery statutes,” by which retailers may use the threat of a civil lawsuit to legally recover substantial settlements for even minor thievery. But threatening to report that someone has committed a crime can be considered a form of extortion.

Neither the Police Department nor the Queens district attorney’s office said it had received any complaints about the practice. But critics believe that the accused shoplifters are deprived of basic civil rights and the usual assurances in public law proceedings, like a right to a lawyer and freedom from coercion, as well as being held by adequately trained security officials without proper oversight.

“If a store owner says he’ll call the police unless you pay up, that’s extortion, that’s illegal,” said Steven Wong, a community advocate in Chinatown, sitting in his office above a restaurant on Chatham Square. “And putting up pictures in public, calling someone a thief who has never even been formally charged, that’s a violation of their civil rights.”

It is unclear exactly how rampant this practice is, and whether threats of arrest are always used, but it exists in certain predominately Chinese neighborhoods around the city.

Many accused shoplifters will often plead poverty. But they usually manage to come up with money to pay their way out of being publicly shamed and arrested, Mr. Shieh said, often after calling upon friends and relatives for the cash. Unfounded fears of being deported often color their panicked responses.

“Two weeks ago, a woman tried to take two bags of grapes worth maybe $10,” he said, speaking in Chinese.

The woman first said she had no money, but somehow found it. “She came back with eight new 50-dollar bills,” he said.

At the Chang Jiang Supermarket on Kissena Boulevard in Flushing, where hawkers of fresh produce in sidewalk bins continuously yell out specials in Chinese, credit cards are accepted from accused shoplifters for payment to avoid arrest, said the manager, Wu Jian Si.

“They just say, ‘Run the credit card,’ ” said Mr. Wu, 30, speaking in Chinese. “They have money.”

Fliers posted in the store display images of accused shoplifters and of a man being escorted by police, along with warnings in Chinese and English that say, “If we catch, we will take your photo for records and your fine will be $400 or you go to prison.”

The fines are necessary, Mr. Wu said, because the police do not always arrest the accused shoplifters. And even if they do, Mr. Wu said, “The most they’ll get is 24 hours.”

Many of the accused shoplifters are immigrants who have a heightened fear of authority, of those in uniform, and they often lack proper immigration status, said Jason Sanchez, 24, who has worked as a security guard at several Chinese markets in Flushing.

“They figure they’ll be deported, so they’ll do anything to get the money,” Mr. Sanchez said. “Some stores ask for $400, or some ask for $200 — it becomes a negotiation.”

In an example of the wall-of-shame style that certain stores use, in Manhattan’s Chinatown, a grocery on East Broadway called NY Tak Shing Hong posts photographs near the cash registers, some bearing names, addresses and Social Security numbers of the persons depicted. Some also include simple descriptions in Chinese, like “Stole Medicine” and “Thief.”

Some store owners share their photographs with other stores, and post them in other store branches they own. For example, an image in the Chang Jiang market of a man holding up a large stash of live fish in a plastic bag, with the words “Big Thief,” can also be seen in several stores in the area.

The Chung Fat Supermarket, on Main Street in Flushing, posts photographs of accused shoplifters on the front doors and up above the cashiers.

“All we can do is put up their pictures and let them know we do something about it,” a manager, Sam Lim, 42, said in Chinese , referring to the many photographs of suspected shoplifters posted near the cashiers.

Chung Fat has 100 surveillance cameras. According to a sign in a storage area, first-time shoplifters face a $500 fine, and repeat offenders must pay $2,000. In reality, though, store officials admit they are rarely able to collect much money from offenders.

Some of these enforcement policies have recently come under fire. Last month, two Chinese immigrants spoke out publicly after being wrongly accused of shoplifting at the New York Supermarket, a store under the Manhattan Bridge in Chinatown that posts photographs of accused shoplifters next to the cashier, behind the live crabs and eels.

One woman, Li Yuxin, said that after being falsely accused of thievery, she began weeping in front of a crowd of shoppers. Another woman, Liang Huanqiong, a 60-year-old home attendant, also claimed that false accusations of theft damaged her reputation and caused mental anguish.

The episodes made headlines in Chinese-language newspapers, and store officials apologized to the women and said they would train employees to better recognize thievery and use more sensitivity in approaching suspected shoplifters, the articles reported.

Both women are being advocated for by Mr. Wong, who is critical of the practices despite the apparent vagueness of the law. The police, for example, would not even discuss the legality of the practice without specific examples.

In New York State, a retailer may sue a thief (who has stolen any type of item, costly or not) for the item’s retail price up to $1,500 if the item is not resalable, along with a penalty from $75 to $500 depending on the item’s price. Usually, the retailer threatens legal action and settles for several hundred dollars, experts in loss prevention said. This process is separate from criminal prosecution and can take place even without arrest or conviction, even if the case is criminally tried and thrown out.

Richard Hollinger, a sociologist and criminologist at the University of Florida, said that a shopkeeper demanding money on the spot is a version of the legal process of civil recovery outside the law. He said it can veer into extortion, which is defined by laws in New York State as demanding payment using the fear of accusing “some person of a crime or cause criminal charges to be instituted against him.”

Mr. Sanchez, the security guard, said that some stores parade the suspected shoplifter up and down the aisles, announcing the attempted theft to customers.

“It is truly the walk of shame,” he said.

    Stores’ Treatment of Shoplifters Tests Legal Rights, NYT, 21.6.2010, http://www.nytimes.com/2010/06/22/nyregion/22shoplift.html

The Town That Loved Its Bank

June 18, 2010
The New York Times
By ANDREW MARTIN

MAYWOOD, Ill.

LIKE many working-class towns in the Midwest, this Chicago suburb has been on the cusp of better times for decades.

Separated by a river and woods from its wealthier neighbors, Oak Park and River Forest, it shares some of their charms: imposing, century-old homes and stately elms and maples draping the streets. But Maywood is decidedly more blue-collar than its neighbors, and its residents are predominantly African-American. Most of its homes are modest bungalows and frame houses that were built for factory workers whose jobs disappeared long ago. Many storefronts are vacant, and there appear to be more churches than viable businesses.

For more than a decade, a silver-haired banker from River Forest named Michael E. Kelly — owner of Park National Bank in the Chicago area and eight others around the country — took an unusual interest in Maywood. He did things most bankers don’t do.

In 2003, he opened a branch in Maywood, just west of the city, despite the modest incomes of most of its residents. His bank bought an entire redevelopment bond issue from the village and refinanced it at a lower rate to save Maywood money. And in an effort to prop up property values, he came up with the idea of buying homes out of foreclosure, renovating them and selling them at cost.

“He’s from River Forest, O.K.?” says Lennel Grace, a fourth-generation Maywood resident. “If you talk to people in River Forest or Oak Park, they say, ‘Oh, poor Maywood.’ They kind of look down their nose. He’s not that kind of a person.”

“He has a true connection and compassion for the community,” adds Mr. Grace, who is 60. “He understood that all these communities are linked in one way or another.”

Last fall, Mr. Kelly’s private banking empire collapsed, and his profitable, time-tested playbook as a banker and philanthropist failed amid his own misjudgments and the brutal headwinds of the financial crisis. At the direction of federal regulators, his nine banks were acquired by U.S. Bank, the nation’s fifth-largest bank, based in Minneapolis.

His banks are among more than 200 that federal regulators have seized in the last three years, many of them small, community institutions. Other banks have acquired most of their assets and deposits, and quietly reopened branches with new signs and little fuss.

Across the country, many have bemoaned the loss of locally owned banks, worrying that a faceless national bank will have little interest in a community — aside from making profits. Perhaps nowhere has that issue played out more publicly than in the Chicago area, where Mr. Kelly’s Park National Bank was as well known for its philanthropy as for its financial products.

Eight months after Park National’s closing, anger continues to boil, in part because of the unusual circumstances surrounding its demise. And residents rankle because the federal government decided to bail out megabanks like Citigroup, deemed “too big to fail,” while letting a beloved community bank go under. In that context, outrage — and hyperbole — reign.

“Basically, it amounts to the largest bank robbery in the history of the United States,” says David Pope, the Oak Park Village president. As the new owner of Mr. Kelly’s banks, U.S. Bank has become the unwitting lightning rod for local politicians and activists. They demand that the bank, whose parent, U.S. Bancorp, had profits of $2.2 billion on revenue of $16.7 billion last year, curb foreclosures and replicate Mr. Kelly’s philanthropy (which involved giving nearly 20 percent of annual profit to causes like education and affordable housing).

Indignation erupted on a recent evening at a community meeting on Chicago’s West Side, organized by the Coalition to Save Community Banking, a group of activists and ministers.

It was clear from the start that the meeting, at Hope Community Advent Christian Church, wouldn’t go well for the two attending U.S. Bank executives, Robert V. McGhee and William Fanter, who sat squirming in dark suits at a table set above the crowd on the dais.

One speaker, the Rev. Randall Harris, led the audience in a rowdy chant. “U.S. Bank!” he shouted. “Step up!” Others vowed more vigorous protests unless U.S. Bank complied with community demands, which include establishing a $25 million fund to help stave off foreclosures. “We are ready to sit down inside your bank until you take action,” said the Rev. Michael Stinson. “It’s going to get real ugly before it gets pretty.”

When Mr. McGhee, a vice president of U.S. Bank, stood to address the crowd, he was interrupted with angry questions and chants. “We are very much aware of the impact Park had on this community,” he said. “That is not lost on us. We’ve taken copious notes.”

U.S. Bank officials, clearly vexed by a groundswell, say they intend to honor all of Park National’s outstanding commitments. But they also say the level of charitable giving will probably decline to match donations in other areas where U.S. Bank has branches. Because of the complexities of the modern mortgage business, the bank also says it has little legal ability to modify local mortgage loans that it did not originate but for which it acts as trustee.

“This has involved more public-relations issues than we ever had before,” says Richard C. Hartnack, the bank’s vice chairman for consumer banking. “We bought 400 branches in California, and it’s a much bigger place. That’s gone absolutely smoothly.”

But as he notes, there’s a big difference between California and Maywood. In California, he says, “we didn’t have the ghost of Mike Kelly to deal with.”

DESCRIBING Mr. Kelly as a ghost isn’t entirely inaccurate. This 65-year-old banker, who is alive and presumably well, is as intensely private as he is generous. In keeping with his past aversion to the news media, he declined to be interviewed for this article.

According to Congressional testimony and former colleagues, Mr. Kelly took over the First Bank of Oak Park in 1981, and built it into an enterprise with about $19 billion in assets, largely by buying failed or underperforming banks.

He ended up owning nine banks in Texas, California, Arizona and Illinois, all under the umbrella of his bank holding company, the FBOP Corporation. It was the largest privately held bank-holding company in the United States and, before 2008, recorded 25 consecutive years of profits, according to Mr. Kelly’s testimony before Congress in January, in a hearing prompted by the closing of his banks.

Mr. Kelly’s banks were also known for generous charitable donations and a commitment to low-income areas, particularly in the Chicago area. For instance, Park National pledged a $27 million, interest-free construction loan to build a Jesuit preparatory school in Austin, a predominantly African-American neighborhood that abuts Oak Park.

Park National also helped to create a community savings center on the West Side of Chicago that provided low-cost banking services and financial counseling to people who normally don’t use banks. And it set aside $20 million to help homeowners facing foreclosure.

In total, Mr. Kelly’s banks donated a total of $36.7 million to charitable causes in 2007 and 2008. FBOP, the holding company, chipped in a further $17 million in those two years, according to his Congressional testimony.

FBOP banks also provided $583 million in that two-year span for community development loans, including such things as affordable housing and inner-city redevelopment, he told Congress.

“This was the finest community bank in America,” says the Rev. Marshall Hatch, a leader in the community banking coalition. “The loss of the bank is incalculable for our side of town.”

But, of course, Park National is now out of business. So are Mr. Kelly’s other eight banks, which were also acquired by U.S. Bank last October. The Federal Deposit Insurance Corporation said the cost of the failures to its insurance fund was $2.5 billion.

LEFT in the rubble of that takeover are questions about the viability of Mr. Kelly’s altruistic business model and the fairness of the federal government’s system for closing down — or saving — ailing banks.

Whereas some of the nation’s biggest banks nearly collapsed under the weight of risky loans and dubious underwriting, FBOP’s big problem, according to Mr. Kelly and his regulators, was that it invested nearly $900 million in what appeared to be sure-thing, blue-chip investments — preferred stock in Fannie Mae and Freddie Mac, the government-sponsored mortgage giants. Those investments were considered so safe, in fact, that government regulators encouraged banks to invest in them.

But as the mortgage industry melted down, so did Fannie and Freddie; the government took them over two years ago. Holders of Fannie’s and Freddie’s preferred securities were out of luck, and the loss left gaping holes in the capital cushion at some of Mr. Kelly’s banks.

He had other problems, too. For years, he had prospered by scooping up other banks in times of trouble or lending when others pulled back. He followed the same instincts as the mortgage crisis began to go into overdrive, allowing FBOP’s banks to expand their loan portfolio by 35 percent between 2007 and 2008.

When the credit and real estate markets subsequently fell apart, the deterioration of FBOP’s loan portfolio, particularly in commercial real estate, accelerated, federal regulators testified at the January hearing.

At the hearing, Mr. Kelly testified that he believed his problems with securing new funding during the mortgage crisis were solved when the government announced the Troubled Asset Relief Program, or TARP, in October 2008.

Mr. Kelly said regulators urged him to apply immediately for TARP funds and gave him verbal assurances that his application would be approved. But the first round of TARP money was directed at publicly traded banks, not private entities like FBOP, and Mr. Kelly didn’t receive any aid. He testified that a second application for TARP funds stalled as regulators kept changing the criteria.

In a story that has gained much notoriety in Chicago, the Treasury secretary, Timothy F. Geithner, awarded a Park National subsidiary $50 million in tax credits on the morning of Oct. 30, 2008, to help the bank finance schools, retail development and a community center on the city’s South Side.

Later that day, federal regulators closed Mr. Kelly’s banks.

F.D.I.C. officials said they simply pursued the least costly option for resolving the failed banks, as required by law.

“FBOP’s business strategy — which had previously been successful — left the bank vulnerable to the perfect storm of events that the FBOP banks could not survive, including unforeseen and devastating G.S.E. losses,” testified Jennifer C. Kelly, senior deputy comptroller for the Office of the Comptroller of the Currency, the primary regulator for many of Mr. Kelly’s banks. Fannie and Freddie are known as G.S.E.’s, or government-sponsored enterprises.

“The determinations to place the FBOP banks into receivership were consistent with, or required by, the statutory scheme Congress put in place,” she said.

MR. HARTNACK, the U.S. Bank executive, says that his bank has won over customers in the many markets it has entered over the years, and that it eventually will do so here. But he said big banks will never be mistaken for the old corner bank.

“It is virtually impossible for a very large company to attain that same level of affection that a community bank has,” he says, suggesting that the local banking model has become somewhat antiquated as more consumers bank online. “It’s a charming part of our financial history.”

Mr. Hartnack also points out that FBOP concentrated its donations in the Chicago area. U.S. Bank, he said, tries to spread donations fairly among its more than 3,000 bank offices across the country. As a big publicly traded institution, U.S. Bank also has to consider shareholders who would undoubtedly frown if 20 percent of its profits went to charity.

“It’s probably reasonable to expect some diminishment in total giving but not reneging on commitments,” Mr. Hartnack says of his bank’s takeover of FBOP. “We’ll gradually not make as many new ones until we get the numbers in balance.”

U.S. Bank’s evolving policy in the Chicago area has created a fair amount of angst, in part because the bank donates 1 to 2 percent of its profits. Besides its donations, the bank provides billions in community lending and investments.

Jackie Leavy, a founder of the Coalition to Save Community Banking, said the bank hadn’t been transparent in its intentions. For instance, she says, U.S. Bank has taken over and renamed Park National’s nonprofit arm, which rehabbed homes and redeveloped blighted areas, but has declined to say how much money it is putting into it.

“It’s the bob-and-dodge act,” Ms. Leavy says.

U.S. Bank officials say they are still working out the numbers and don’t feel compelled to share news of every donation with community activists.

Members of the coalition have also criticized U.S. Bank for what they say is its hands-off policy on housing foreclosures. But the bank is in a difficult situation in that regard, given the structure of the mortgage market. Individual mortgage loans were long ago pooled into bonds and then sold to investors as a means of — in theory — reducing investors’ exposure to mortgage losses and therefore allowing banks to underwrite many more mortgages.

Neither U.S. Bank nor Park National was a major originator of mortgages in Maywood or the Chicago area. But U.S. Bank is a custodian of bonds containing those mortgages.

Bank officials say that as trustee, they have no authority to try to restructure mortgages. But that reasoning has done little to appease critics, who say banks are just passing the buck.

Protesters recently rallied against U.S. Bank at a vacant apartment building in Austin, the neighborhood near Oak Park; the bank is trustee for the bonds backed by the property. The back door was ajar, and a pipe in the basement spewed water. The apartments were littered with dog feces and the detritus of past lives: birthday streamers over a doorway, a girl’s pink coat on a hook, computer monitors and dishes.

“The door is open; sometimes I can hear dogs barking,” says Delia Ewing, 84, who lives next door. “I walk in the backyard and see grass taller than I am.”

Given the circumstances, U.S. Bank officials said they contacted the originator of the mortgage, Wells Fargo, and urged it to board up the building.

But U.S. Bank officials say they are dumbfounded that they are being singled out. “We agree that foreclosures are a huge problem,” says Steve SaLoutos, executive vice president of U.S. Bank’s Midwest division. “It’s not a Park National problem, or a U.S. Bank problem, but a national problem.”

He says it’s a frustrating situation for the bank to manage, because it is essentially in the position of cleaning up other people’s mistakes. “Do you isolate the bank that is the last one to put a sign on the building?” he asks.

U.S. Bank, though, has made some friends in Chicago.

At Christ the King Jesuit College Preparatory, the school to which Park National pledged a no-interest loan, the bank is seen as a hero. The school caters to motivated low-income students who agree to work one day a week to cover most of their tuition costs.

As the first new Catholic high school on the West Side in 85 years, it owes its existence to Michael Kelly, but when Park National folded last fall, Christ the King’s future suddenly looked bleak.

“There was so much uncertainty,” says the Rev. Christopher J. Devron, the school’s president, adding that he “prayed a lot, lost a lot of sleep.”

He said he eventually approached U.S. Bank to see if it would take over Park National’s commitments. U.S. Bank sent a team to the school to meet students, and it eventually decided to substantially match Park National’s commitments — not only money but also jobs for students. “You couldn’t argue with the value of what the school was doing,” says Mr. Hartnack.

ON a tour of Maywood, Lennel Grace works through a list of foreclosed homes for which U.S. Bank is either originator, trustee or servicer. At some of the stops, members of the Coalition to Save Community Banking have put signs on the door that read, “Another U.S. Bank foreclosure.”

Mr. Grace, economic development director at Rock of Ages Baptist Church, says foreclosures have devastated the village, creating dangerous eyesores that have decimated property values. Of the town’s roughly 6,800 households, there were 449 new foreclosure filings in Maywood from the beginning of 2009 through the first quarter of 2010, according to the Woodstock Institute, a community development think tank.

“This is not a bad neighborhood,” he says, pulling onto South 17th Street. “But they are buying these houses for nothing.”

Mr. Grace and others say they are well aware that U.S. Bank isn’t responsible for all the foreclosures. But they also said that by acquiring Park National Bank, U.S. Bank accepted the community’s expectations set by Mr. Kelly.

At the meeting at Hope church, Mr. Hatch applauded U.S. Bank for making some steps, like investing in schools. But like many others that night, he dispatched with niceties, and threatened to send busloads of protesters to U.S. Bank’s headquarters in Minnesota unless it started acting more like Park National.

“We have made tremendous progress,” he said, turning to the audience. “Because on the West Side we fight back.”

    The Town That Loved Its Bank, NYT, 18.6.2010, http://www.nytimes.com/2010/06/20/business/20maywood.html

Cost of Seizing Fannie and Freddie Surges for Taxpayers

June 19, 2010
The New York Times
By BINYAMIN APPELBAUM

CASA GRANDE, Ariz. — Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords.

Bill Bridwell, a real estate agent in the desert south of Phoenix, is among the thousands of agents hired nationwide by the companies to sell those foreclosures, recouping some of the money that borrowers failed to repay. In a good week, he sells 20 homes and Fannie sends another 20 listings his way.

“We’re all working for the government now,” said Mr. Bridwell on a recent sun-baked morning, steering a Hummer through subdivisions laid out like circuit boards on the desert floor.

For all the focus on the historic federal rescue of the banking industry, it is the government’s decision to seize Fannie Mae and Freddie Mac in September 2008 that is likely to cost taxpayers the most money. So far the tab stands at $145.9 billion, and it grows with every foreclosure of a three-bedroom home with a two-car garage one hour from Phoenix. The Congressional Budget Office predicts that the final bill could reach $389 billion.

Fannie and Freddie increased American home ownership over the last half-century by persuading investors to provide money for mortgage loans. The sales pitch amounted to a money-back guarantee: If borrowers defaulted, the companies promised to repay the investors.

Rather than actually making loans, the two companies — Fannie older and larger, Freddie created to provide competition — bought loans from banks and other originators, providing money for more lending and helping to hold down interest rates.

“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement, and in 2001 the company set a target of helping to create six million new homeowners by 2014. Here in Arizona, during a housing boom fueled by cheap land, cheap money and population growth, Fannie Mae executives trumpeted that the company would invest $15 billion to help families buy homes.

As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.

The huge and continually rising cost of that decision has spurred national debate about federal subsidies for mortgage lending. Republicans want to sever ties with Fannie and Freddie once the crisis abates. The Obama administration and Congressional Democrats have insisted on postponing the argument until after the midterm elections.

In the meantime, Fannie and Freddie are, at public expense, removing owners who cannot afford their homes, reselling the houses at much lower prices and financing mortgage loans for the new owners.

The two companies together accounted for 17 percent of real estate sales in Arizona during the first four months of the year, almost three times their share of the market during the same period last year, according to an analysis by MDA DataQuick.

Valarie Ross, who lives in the Phoenix suburb of Avondale, has watched six of the nine homes visible from her lawn chair emptied by moving trucks during the last year. Four have been resold by the government. “One by one,” she said. “Just amazing.”

The population of Pinal County, where Mr. Bridwell lives and works, roughly doubled to 340,000 over the last decade. Developers built an entirely new city called Maricopa on land assembled from farmers. Buyers camped outside new developments, waiting to purchase homes. One builder laid out a 300-lot subdivision at the end of a three-mile dirt road and still managed to sell 30 of the homes.

Mr. Bridwell sold plenty of those houses during the boom, then cut workers as prices crashed. Now his firm, Golden Touch Realty, again employs as many people as at the height of the boom, all working exclusively for Fannie Mae. The payroll now includes a locksmith to secure foreclosed homes and two clerks devoted to federal paperwork.

Golden Touch gets more listings from Fannie Mae than any other firm in Pinal County. Mr. Bridwell said he was ready to jump because he remembered the last time the government ended up owning thousands of Arizona houses, after the late-1980s collapse of the savings and loan industry.

“The way I see it,” said Mr. Bridwell, whose glass-top desk displays membership cards from the Republican National Committee, “is that we’re getting these homes back into private hands.”

Selling a house generally costs the government about $10,000. The outsides are weeded and the insides are scrubbed. Stolen appliances are replaced, brackish pools are refilled. And until the properties are sold, they must be maintained. Fannie asks contractors to mow lawns twice a month during the summer, and pays them $80 each time. That’s a monthly grass bill of more than $10 million.

All told, the companies spent more than $1 billion on upkeep last year.

“We may be behind many loans on the same street, so we believe that it’s in everyone’s best interest to aggressively do property maintenance,” said Chris Bowden, the Freddie Mac executive in charge of foreclosure sales.

Prices have plunged. So by the time a home is resold, Fannie and Freddie on average recoup less than 60 percent of the money the borrower failed to repay, according to the companies’ financial filings. In Phoenix and other areas where prices have fallen sharply, the losses often are larger.

Foreclosures punch holes in neighborhoods, so residents, community groups and public officials are eager to see properties reoccupied. But there also is concern that investors are buying many foreclosures as rental properties, making it harder for neighborhoods to recover.

Real estate agents tend to favor investors because the sales close surely and quickly and there is the prospect of repeat business. But community advocates say that Fannie and Freddie have an obligation to sell houses to homeowners.

David Adame worked for Fannie Mae’s local office during the boom, on programs to make ownership more affordable. Now with prices down sharply, Mr. Adame sees a second chance to put people into homes they can afford.

“Yes, move inventory,” said Mr. Adame, now an executive focused on housing issues at Chicanos por la Causa, a Phoenix nonprofit group, “but if we just move inventory to investors, then what are we doing?”

Executives at both Fannie and Freddie say they have an overriding obligation to limit losses, but that they are taking steps to sell more homes to families.

Fannie Mae last summer announced that it would give people seeking homes a “first look” by not accepting offers from investors in the first 15 days that a property is on the market. It also offers to help buyers with closing costs, and prohibits buyers from reselling properties at a profit for 90 days, to discourage speculation. Fannie Mae said that 68.4 percent of buyers this year had certified that they would use the house as a primary residence.

Freddie Mac has adopted fewer programs, but it said it had sold about the same share of foreclosures to owner-occupants.

The companies also have agreed to sell foreclosed homes to nonprofits using grants from the federal Neighborhood Stabilization Program. Chicanos por la Causa, which won $137 million under the program in partnership with nonprofits in eight other states, plans to buy more than 200 homes in Phoenix in the next two years. It plans to renovate them to sell to local families.

The scale of such efforts is small. The home ownership rate in Phoenix continues to fall as foreclosures pile up and renters replace owners.

But John R. Smith, chief of Housing Our Communities, another Phoenix-area group using federal money to buy foreclosures, says he tries to focus on salvaging one property at a time.

“I tell them, ‘O.K., you want to unload 10 houses to that guy, fine,’ ” he said. “ ‘Now give me this one. And this one. And one over here.’ ”

    Cost of Seizing Fannie and Freddie Surges for Taxpayers, NYT, 19.6.2010, http://www.nytimes.com/2010/06/20/business/20foreclose.html

Peddling Relief, Industry Puts Debtors in a Deeper Hole

June 18, 2010
The New York Times
By PETER S. GOODMAN

PALM BEACH, Fla. — For the companies that promise relief to Americans confronting swelling credit card balances, these are days of lucrative opportunity.

So lucrative, that an industry trade association, the United States Organizations for Bankruptcy Alternatives, recently convened here, in the oceanfront confines of the Four Seasons Resort, to forge deals and plot strategy.

At a well-lubricated evening reception, a steel drum band played Bob Marley songs as hostesses in skimpy dresses draped leis around the necks of arriving entrepreneurs, some with deep tans.

The debt settlement industry can afford some extravagance. The long recession has delivered an abundance of customers — debt-saturated Americans, suffering lost jobs and income, sliding toward bankruptcy. The settlement companies typically harvest fees reaching 15 to 20 percent of the credit card balances carried by their customers, and they tend to collect upfront, regardless of whether a customer’s debt is actually reduced.

State attorneys general from New York to California and consumer watchdogs like the Better Business Bureau say the industry’s proceeds come at the direct expense of financially troubled Americans who are being fleeced of their last dollars with dubious promises.

Consumers rarely emerge from debt settlement programs with their credit card balances eliminated, these critics say, and many wind up worse off, with severely damaged credit, ceaseless threats from collection agents and lawsuits from creditors.

In the Kansas City area, Linda Robertson, 58, rues the day she bought the pitch from a debt settlement company advertising on the radio, promising to spare her from bankruptcy and eliminate her debts. She wound up sending nearly $4,000 into a special account established under the company’s guidance before a credit card company sued her, prompting her to drop out of the program.

By then, her account had only $1,470 remaining: The debt settlement company had collected the rest in fees. She is now filing for bankruptcy.

“They take advantage of vulnerable people,” she said. “When you’re desperate and you’re trying to get out of debt, they take advantage of you.” Debt settlement has swollen to some 2,000 firms, from a niche of perhaps a dozen companies a decade ago, according to trade associations and the Federal Trade Commission, which is completing new rules aimed at curbing abuses within the industry.

Last year, within the industry’s two leading trade associations — the United States Organizations for Bankruptcy Alternatives and the Association of Settlement Companies — some 250 companies collectively had more than 425,000 customers, who had enrolled roughly $11.7 billion in credit card balances in their programs.

As the industry has grown, so have allegations of unfair practices. Since 2004, at least 21 states have brought at least 128 enforcement actions against debt relief companies, according to the National Association of Attorneys General. Consumer complaints received by states more than doubled between 2007 and 2009, according to comments filed with the Federal Trade Commission.

“The industry’s not legitimate,” said Norman Googel, assistant attorney general in West Virginia, which has prosecuted debt settlement companies. “They’re targeting a group of people who are already drowning in debt. We’re talking about middle-class and lower middle-class people who had incomes, but they were using credit cards to survive.”

The industry counters that a few rogue operators have unfairly tarnished the reputations of well-intentioned debt settlement companies that provide a crucial service: liberating Americans from impossible credit card burdens.

With the unemployment rate near double digits and 6.7 million people out of work for six months or longer, many have relied on credit cards. By the middle of last year, 6.5 percent of all accounts were at least 30 days past due, up from less than 4 percent in 2005, according to Moody’s Economy.com.

Yet a 2005 alteration spurred by the financial industry made it harder for Americans to discharge credit card debts through bankruptcy, generating demand for alternatives like debt settlement.

The Arrangement

The industry casts itself as a victim of a smear campaign orchestrated by the giant banks that dominate the credit card trade and aim to hang on to the spoils: interest rates of 20 percent or more and exorbitant late fees.

“We’re the little guys in this,” said John Ansbach, the chief lobbyist for the United States Organizations for Bankruptcy Alternatives, better known as Usoba (pronounced you-SO-buh). “We exist to advocate for consumers. Two and a half billion dollars of unsecured debt has been settled by this industry, so how can you take the position that it has no value?”

But consumer watchdogs and state authorities argue that debt settlement companies generally fail to deliver.

In the typical arrangement, the companies direct consumers to set up special accounts and stock them with monthly deposits while skipping their credit card payments. Once balances reach sufficient size, negotiators strike lump-sum settlements with credit card companies that can cut debts in half. The programs generally last two to three years.

“What they don’t tell their customers is when you stop sending the money, creditors get angry,” said Andrew G. Pizor, a staff lawyer at the National Consumer Law Center. “Collection agents call. Sometimes they sue. People think they’re settling their problems and getting some relief, and lo and behold they get slammed with a lawsuit.”

In the case of two debt settlement companies sued last year by New York State, the attorney general alleged that no more than 1 percent of customers gained the services promised by marketers. A Colorado investigation came to a similar conclusion.

The industry’s own figures show that clients typically fail to secure relief. In a survey of its members, the Association of Settlement Companies found that three years after enrolling, only 34 percent of customers had either completed programs or were still saving for settlements.

“The industry is designed almost as a Ponzi scheme,” said Scott Johnson, chief executive of US Debt Resolve, a debt settlement company based in Dallas, which he portrays as a rare island of integrity in a sea of shady competitors. “Consumers come into these programs and pay thousands of dollars and then nothing happens. What they constantly have to have is more consumers coming into the program to come up with the money for more marketing.”

The Pitch

Linda Robertson knew nothing about the industry she was about to encounter when she picked up the phone at her Missouri home in February 2009 in response to a radio ad.

What she knew was that she could no longer manage even the monthly payments on her roughly $23,000 in credit card debt.

So much had come apart so quickly.

Before the recession, Ms. Robertson had been living in Phoenix, earning as much as $8,000 a month as a real estate appraiser. In 2005, she paid $185,000 for a three-bedroom house with a swimming pool and a yard dotted with hibiscus.

When the real estate business collapsed, she gave up her house to foreclosure and moved in with her son. She got a job as a waitress, earning enough to hang on to her car. She tapped credit cards to pay for gasoline and groceries.

By late 2007, she and her son could no longer afford his apartment. She moved home to Kansas City, where an aunt offered a room. She took a job on the night shift at a factory that makes plastic lids for packaged potato chips, earning $11.15 an hour.

Still, her credit card balances swelled.

The radio ad offered the services of a company based in Dallas with a soothing name: Financial Freedom of America. It cast itself as an antidote to the breakdown of middle-class life.

“We negotiate the past while you navigate the future,” read a caption on its Web site, next to a photo of a young woman nose-kissing an adorable boy. “The American Dream. It was never about bailouts or foreclosures. It was always about American values like hard work, ingenuity and looking out for your neighbor.”

When Ms. Robertson called, a customer service representative laid out a plan. Every month, Ms. Robertson would send $427.93 into a new account. Three years later, she would be debt-free. The representative told her the company would take $100 a month as an administrative fee, she recalled. His tone was take-charge.

“You talk about a rush-through,” Ms. Robertson said. “I didn’t even get to read the contract. It was all done. I had to sign it on the computer while he was on the phone. Then he called me back in 10 minutes to say it was done. He made me feel like this was the answer to my problems and I wasn’t going to have to face bankruptcy.”

Ms. Robertson made nine payments, according to Financial Freedom. Late last year, a sheriff’s deputy arrived at her door with court papers: One of her creditors, Capital One, had filed suit to collect roughly $5,000.

Panicked, she called Financial Freedom to seek guidance. “They said, ‘Oh, we don’t have any control over that, and you don’t have enough money in your account for us to settle with them,’ ” she recalled.

Her account held only $1,470, the representative explained, though she had by then deposited more than $3,700. Financial Freedom had taken the rest for its administrative fees, the company confirmed.

Financial Freedom later negotiated for her to make $100 monthly payments toward satisfying her debt to the creditor, but Ms. Robertson rejected that arrangement, no longer trusting the company. She demanded her money back.

She also filed a report with the Better Business Bureau in Dallas, adding to a stack of more than 100 consumer complaints lodged against the company. The bureau gives the company a failing grade of F.

Ms. Robertson received $1,470 back through the closure of her account, and then $1,120 — half the fees that Financial Freedom collected. Her pending bankruptcy has cost her $1,500 in legal fees.

“I trusted them,” she said. “They sounded like they were going to help me out. It’s a rip-off.”

Financial Freedom’s chief executive, Corey Butcher, rejected that characterization.

“We talked to her multiple times and verified the full details,” he said, adding that his company puts every client through a verification process to validate that they understand the risks — from lawsuits to garnished wages.

Intense and brooding, Mr. Butcher speaks of a personal mission to extricate consumers from credit card debt. But roughly half his customers fail to complete the program, he complained, with most of the cancellations coming within the first six months. He pinned the low completion rate on the same lack of discipline that has fostered many American ailments, from obesity to the foreclosure crisis.

“It comes from a lack of commitment,” Mr. Butcher said. “It’s like going and hiring a personal trainer at a health club. Some people act like they have lost the weight already, when actually they have to go to the gym three days a week, use the treadmill, cut back on their eating. They have to stick with it. At some point, the client has to take responsibility for their circumstance.”

Consumer watchdogs point to another reason customers wind up confused and upset: bogus marketing promises.

In April, the United States Government Accountability Office released a report drawing on undercover agents who posed as prospective customers at 20 debt settlement companies. According to the report, 17 of the 20 firms advised clients to stop paying their credit card bills. Some companies marketed their programs as if they had the imprimatur of the federal government, with one advertising itself as a “national debt relief stimulus plan.” Several claimed that 85 to 100 percent of their customers completed their programs.

“The vast majority of companies provided fraudulent and deceptive information,” said Gregory D. Kutz, managing director of forensic audits and special investigations at the G.A.O. in testimony before the Senate Commerce Committee during an April hearing.

At the same hearing, Senator Claire McCaskill, a Missouri Democrat, pressed Mr. Ansbach, the Usoba lobbyist, to explain why his organization refused to disclose its membership.

“The leadership in our trade group candidly was concerned that publishing a list of members ended up being a subpoena list,” Mr. Ansbach said.

“Probably a genuine concern,” Senator McCaskill replied.

The Coming Crackdown

On multiple fronts, state and federal authorities are now taking aim at the industry.

The Federal Trade Commission has proposed banning upfront fees, bringing vociferous lobbying from industry groups. The commission is expected to issue new rules this summer. Senator McCaskill has joined with fellow Democrat Charles E. Schumer of New York to sponsor a bill that would cap fees charged by debt settlement companies at 5 percent of the savings recouped by their customers. Legislation in several states, including New York, California and Illinois, would also cap fees. A new consumer protection agency created as part of the financial regulatory reform bill in Congress could further constrain the industry.

The prospect of regulation hung palpably over the trade show at this Atlantic-side resort, tempering the orchid-adorned buffet tables and poolside cocktails with a note of foreboding.

“The current debt settlement business model is going to die,” declared Jeffrey S. Tenenbaum, a lawyer in the Washington firm Venable, addressing a packed ballroom. “The only question is who the executioner is going to be.”

That warning did not dislodge the spirit of expansion. Exhibitors paid as much as $4,500 for display space to showcase their wares — software to manage accounts, marketing expertise, call centers — to attendees who came for two days of strategy sessions and networking.

Cody Krebs, a senior account executive from Southern California, manned a booth for LowerMyBills.com, whose Internet ads link customers to debt settlement companies. Like many who have entered the industry, he previously sold subprime mortgages. When that business collapsed, he found refuge selling new products to the same set of customers — people with poor credit.

“It’s been tremendous,” he said. “Business has tripled in the last year and a half.”

The threat of regulations makes securing new customers imperative now, before new rules can take effect, said Matthew G. Hearn, whose firm, Mstars of Minneapolis, trains debt settlement sales staffs. “Do what you have to do to get the deals on the board,” he said, pacing excitedly in front of a podium.

And if some debt settlement companies have gained an unsavory reputation, he added, make that a marketing opportunity.

“We aren’t like them,” Mr. Hearn said. “You need to constantly pitch that. ‘We aren’t bad actors. It’s the ones out there that are.’ ”

    Peddling Relief, Industry Puts Debtors in a Deeper Hole, NYT, 18.6.2010, http://www.nytimes.com/2010/06/19/business/economy/19debt.html

Supreme Court Rebuffs Homeowners in Beach Case

June 17, 2010
Filed at 11:04 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- The Supreme Court ruled on Thursday that Florida can undertake beach-widening projects without paying beachfront property owners who lose exclusive access to the water.

The court, by an 8-0 vote, rejected a challenge by six homeowners in Florida's Panhandle who argued that a beach-widening project changed their oceanfront property into oceanview. Justice John Paul Stevens took no part in the case in which the court affirmed an earlier ruling.

Private property advocates had hoped the court would rule for the first time that a court decision can amount to a taking of property.

The court's four conservatives -- Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas -- were prepared to rule that way, even though the homeowners still would have lost in this case, Scalia said in his opinion for the court. But they lacked a fifth vote.

The Constitution requires governments to pay ''just compensation'' when they take private property for public use.

The homeowners said a Florida Supreme Court ruling in favor of the erosion-control project ''suddenly and dramatically changed'' state law on beach property and caused their property values to decline. The homeowners wanted the state to pay them undetermined compensation for ''taking'' their property, which Florida law had long recognized as extending to the water line at high tide.

The Florida decision ratified the designation of the new sand along nearly seven miles of storm-battered beach that stretches through the city of Destin and neighboring Walton County as public property, depriving the homeowners of the exclusive beach access they previously enjoyed.

Stevens sat out the case, presumably because he owns an apartment in an oceanfront building in Ft. Lauderdale, Fla. The area has been slated for an erosion-control project similar to the one in the high court case.

    Supreme Court Rebuffs Homeowners in Beach Case, NYT, 17.6.2010, http://www.nytimes.com/aponline/2010/06/17/us/politics/AP-US-Supreme-Court-Beach-Erosion.html

U.S. Consumer Prices Fall on Lower Energy Costs

June 17, 2010
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — Consumer prices fell for the second consecutive month in May, extending a break for Americans’ pocketbooks. Less expensive energy was the main factor pulling down prices.

But a weekly unemployment report found that the number of people filing new claims for jobless benefits jumped last week after three weeks of declines, a sign that hiring remains weak.

The Labor Department said the Consumer Price Index, the government’s most closely watched inflation barometer, dropped 0.2 percent in May, after a 0.1 percent dip in April.

It marked the biggest decline since consumer prices plunged 0.7 percent in December 2008. That was a period when the worst recession since the 1930s stoked fears of deflation. The country did not get stuck in a deflationary spiral then, and probably will not now, economists say.

Meanwhile, “core” consumer prices, which strip out volatile energy and food, edged up 0.1 percent in May, after being flat in April. That meant core prices are up only 0.9 percent over the past year — below the Fed’s inflation target.

For the year, overall consumer prices rose 2 percent — within the Fed’s inflation comfort zone.

Falling energy prices pulled overall prices down last month.

Energy prices dropped 2.9 percent, the most in more than a year. Gasoline prices posted the biggest decline — down 5.2 percent in May, the sharpest decline since December 2008.

Prices at the pump have dropped about 8 percent since hitting $2.93 a gallon on May 6. Global oil prices have been falling amid fears that the European debt crisis will hurt growth on the continent and possibly slow the global recovery.

Food prices were flat in May, down from a 0.2 percent rise in April. Falling prices for fruits and vegetables swamped rising prices for meat, cereals and dairy products.

Even though inflation is tame, workers’ paychecks are not benefiting. Average hourly earnings adjusted for inflation were flat for the 12 months ended May. That followed a 0.5 percent drop in April.

In the report on jobless filings, the Labor Department said initial claims for jobless benefits rose by 12,000 to a seasonally adjusted 472,000, the highest level in a month. Economists had expected claims would fall to a seasonally adjusted 450,000, according to Thomson Reuters.

First-time jobless claims have hovered near 450,000 since the beginning of the year after falling steadily in the second half of 2009. That has raised concerns that hiring is lackluster and could slow the recovery.

Still, the four-week average for unemployment claims, which smoothes volatility, dipped slightly to 463,500. That was down by 3,750 from the start of January.

The number of people continuing to claim benefits rose by 88,000 to 4.57 million. That does not include about 5.2 million people who receive extended benefits paid for by the federal government.

Congress has added 73 weeks of extra benefits on top of the 26 weeks typically provided by states. All told, about 9.7 million people received unemployment insurance in the week ending May 29, the most recent data available.

The extended benefit program expired this month. Congress is debating whether to continue it through the end of November.

Adding to worries about the job market, the Labor Department said earlier this month that the economy generated only 41,000 private-sector jobs in May. That was down from 218,000 in April.

In a third report, the Commerce Department said that the deficit in the broadest measure of trade rose in the first quarter to the highest point in more than a year as rising global oil prices and a rebounding economy pushed up imports sharply.

The deficit in the current account increased to $109 billion in the period, compared to a revised $100.9 billion in the fourth quarter of last year.

The current-account deficit narrowed to $378.4 billion in 2009, down a sharp 43.4 percent from the 2008 deficit of $668.9 billion. The big drop reflected a deep recession in the United States, which cut demand for imported goods. But with the United States economy recovering, analysts believe the trade deficit will increase this year.

The 8 percent increase in the first quarter deficit marked the third straight quarterly increase in the deficit, which now stands at the highest point since the final three months of 2008.

    U.S. Consumer Prices Fall on Lower Energy Costs, NYT, 17.6.2010, http://www.nytimes.com/2010/06/18/business/economy/18econ.html

Housing Market Slows as Buyers Get Picky

June 16, 2010
The New York Times
By DAVID STREITFELD

Before the recession, people simply looked for a house to buy. Later they got squeamish just thinking about buying. Now they are on a quest for perfection at the perfect price.

Exacting buyers are upending the battered real estate market, agents and other experts say, leading to last-minute demands for multiple concessions, bruised feelings on all sides and many more collapsed deals than usual.

It is a reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners. These days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.

“We see buyers who must have learned their moves from the World Wrestling Federation,” said Glenn Kelman, chief executive of the online broker Redfin. “They think the final smack-down occurs at the inspection, where the seller will be reluctant to refuse any demand because the alternative is putting the house back on the market as damaged goods.”

Everyone expected the housing market to suffer at least a temporary hangover after the government’s $8,000 tax credit expired, but not necessarily this much. Preliminary data from around the country indicates that the housing market began swooning last month immediately after the credit was no longer available. In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided.

Builders have been affected too. Construction of new homes in May dropped 17.2 percent from April, the Commerce Department said Wednesday, significantly lower than forecast. Permits for future construction dropped 10 percent, suggesting a cruel summer.

Even the lowest home mortgage rates in decades are not doing much to invite deals. The Mortgage Bankers Association said Wednesday that applications for loans to buy houses were down by a third compared with last year. Applications are back to the level of the mid-1990s, when the country’s housing market was smaller.

Against such a backdrop of misery, buyers are empowered — and are taking full advantage.

John Porter Simons, a Seattle software engineer, thought he had a couple willing to pay $340,000 for his house. But they asked for $24,000 worth of work, most of which involved waterproofing the basement. “It was totally irrational,” said Mr. Simons. “My basement has never flooded. I live on a hill.”

He made a counteroffer to their offer, and the buyers walked. The house is now under contract to a new set of buyers, who got a cut in price and $2,500 in electrical work thrown in.

Buyers, of course, say they are merely being smart.

Chris Dunn, an economic consultant in Chicago, saw a house he liked last month for $539,000. He offered $500,000, but then his inspector told him that he would eventually have to replace the windows. The sellers were persuaded to kick in $10,000 more to pay for the work.

“We didn’t feel we were being that aggressive,” said Mr. Dunn. “We had the position, ‘If the seller is willing to come down enough, we will buy this home.’ If they weren’t willing, we would have just moved on. In this market, you have a lot of options.”

In some cases, agents say, sellers literally cannot afford to make concessions. Another $10,000 will push them underwater, which means they will have to arrange the sale through the bank.

“People cashed in on their houses to get money to go on vacation, for a new roof, to send the kids to college,” said Roberta Baldwin, an agent in Montclair, N.J. “They thought it was always going to be worth more.”

Even when a sale can be worked out, it is not uncommon for everyone to walk away feeling more aggrieved than celebratory.

“Buyers feel they’re not appreciated for simply making an offer,” Ms. Baldwin said. “And sellers feel humiliated and even angry. They expected to do better.”

Information about scuttled deals tends to be anecdotal, but Mike Lyon of Lyon Real Estate in Sacramento estimates that 15 to 17 percent of sales in his area are falling apart at the last minute as sellers prove unable or unwilling to give buyers what they want. In a normal market, he said, the figure is about 5 percent.

“This is the fallout from all the foreclosures: Buyers think that anyone who is selling must be desperate,” said Mr. Lyon, who employs about a thousand agents. “They walk in with the bravado of, ‘The world’s coming to an end, and I want a perfect place.’ ”

The tax credit, for all its flaws, may have helped avert financial Armageddon, but the final effect is still being tallied. In Indianapolis, the number of contracts signed in May was down 32 percent compared with May 2009. They dropped nearly 25 percent in Minneapolis/St. Paul, 20 percent in Seattle, 10 percent in Sacramento and 42 percent in Hartford. (A few areas, including Miami, showed improvements instead of declines.)

Pending contracts, if they are not canceled at the last minute, become official in six to eight weeks. Many deals done in April, when the credit was in effect, are still being completed and will be counted in May or June sales reports. So the severity and extent of the current slump will not become clear until fall.

The optimists, and real estate remains full of them, say the trough is temporary. The stimulus might have stolen sales from May but by July, they argue, people will need to buy again.

Indeed, the Mortgage Bankers Association’s purchase application index ticked up slightly this week after five weeks of decline, although the association declined to say the index had bottomed out.

John P. Johnson of Des Moines will continue to hope, as he has for more than two years now, for a market that is healthy enough to supply him with a buyer. His house, built in 1981, is too recent to be charming and too old to be new.

“When we upgraded the kitchen, we put in Corian countertops, which were fashionable at the time, but now they all want granite,” he said.

He had one offer in the fall, which fell apart when the buyer made too many demands (a shaved sales price plus paying the closing costs and all their other fees). Despite another price cut to $204,000, only one couple showed up at the last open house. His agent tells him the market is dead. The number of contracts signed in Des Moines in May was down 47 percent from last year.

“Keeping this house ready to sell is a full-time job,” said Mr. Johnson. “I never thought I’d be spending my retirement doing this.”

    Housing Market Slows as Buyers Get Picky, NYT, 16.6.2010, http://www.nytimes.com/2010/06/17/business/economy/17slump.html

The Unemployed Held Hostage

June 14, 2010
The New York Times

Since June 1, when federal unemployment benefits began to expire, an estimated 325,000 jobless workers have been cut off. That number will swell to 1.25 million by the end of the month unless Congress extends the benefits. The Senate, so far, has failed to act.

Some senators, including Democrats, have balked at an unrelated provision that would begin to close a tax loophole enjoyed by some of the richest Americans. You heard right. Desperately needed unemployment benefits have been held hostage to a tax break for the rich, and the Senate’s Democratic leadership has had to delay and finagle to get its own caucus in line.

State-provided unemployment benefits generally last for 26 weeks, and the federal government picks up the tab after that, provided Congress approves the extensions. There is no disagreement over the need: 46 percent of the nation’s 15 million jobless workers have been unemployed for more than six months — a higher level than at any time since the government began keeping track in 1948.

There is not even any genuine debate about how to pay for extended benefits. An extension through November would cost about $40 billion. But unemployment benefits are correctly considered emergency spending — they are a vital safety net, and the money is crucial to supporting consumer demand in a weak economy — and exempt from pay-as-you-go budget rules.

Nonemergency provisions in the bill do need to be paid for, including renewal of several generally useful business tax breaks, like the research-and-development tax credit, totaling $32 billion over 10 years. To help cover those costs, Democratic lawmakers in the House and Senate started out with the sound idea to close an egregious tax loophole that allows wealthy fund managers at private equity firms and other investment partnerships to pay a top tax rate of just 15 percent on much of their earnings — versus a top rate of 35 percent for all other higher-income Americans.

Closing the loophole would raise an estimated $25 billion over 10 years. Many private equity mavens, venture capitalists and other partnerships have lobbied to keep as much of the loophole as they can. Most Republicans and some Democratic senators — including John Kerry of Massachusetts, Mark Warner of Virginia and Maria Cantwell of Washington — are doing their bidding.

In its version of the bill, the House closed part of the loophole: fund managers would retain the special low rate on 25 percent of their privileged earnings. The loophole measure was watered down even more in the Senate. And investment partnerships are still lobbying.

Senators aren’t likely to vote on the bill until the end of this week. Then it would need to be reconciled with the House-passed version. In the meantime, hundreds of thousands more jobless Americans will lose benefits.

The Senate bill is also urgently needed because it includes a provision to provide $24 billion in emergency fiscal aid to states, which is vital to preventing further mass layoffs and damaging budget cuts on the state and local levels.

The right thing to do is obvious. The House and Senate should immediately extend unemployment benefits and aid to states and close the fund-managers’ tax loophole — completely.

That so many senators have balked is a bad sign for the economy and for the most vulnerable Americans. The fact that lawmakers are not willing to ask the nation’s wealthiest to pay their fair share of taxes also makes a mockery of all their talk about deficit reduction.

    The Unemployed Held Hostage, NYT, 14.6.2010, http://www.nytimes.com/2010/06/15/opinion/15tue1.html

Uncertainty Restores Glitter to an Old Refuge, Gold

June 12, 2010
The New York Times
By NELSON D. SCHWARTZ

It is the resurgent passion of the doomsday crowd, a bet that everything will go wrong. No matter what has you worried, they say, the answer is gold.

Inflation, deflation, government borrowing or the plunging euro — you name it — the specter of these concerns has set off a dash to gold, driving the precious metal to new highs and illustrating how fears of economic turmoil have moved from the fringe to the mainstream.

And gold bugs, often dismissed as crackpots who hoard gold bars in the basement, are finally having their day.

“I just think you’re in a world where a lot of chickens are coming home to roost,” said John Hathaway, manager of the Tocqueville Gold fund. “Gold is an escape hatch.”

The most visible new gold enthusiasts range from the Fox News commentator Glenn Beck on the right to the financier George Soros on the left, with even some sober-minded Wall Street types developing a case of gold fever. While their language may differ, they share a fundamental view that the age-old refuge of gold is relevant again, especially as other assets like stocks and national currencies show signs of weakness.

Now, individual investors are following their example around the world. The United States Mint is running short of gold coins, and the South African mint increased Krugerrand production by 50 percent late last month, to its highest level in 25 years, on brisk European demand.

The debt crisis in Europe and the ensuing drop in the value of the euro are the most recent catalysts for gold’s spike last week to $1,254 an ounce, a record before adjusting for inflation, but the deeper concern is that even in the United States, government borrowing is unsustainable and the day of reckoning is at hand. Sales of American Eagle one-ounce gold coins tripled in May from the month before.

If governments print more money to pay off their debts, the logic goes, inflation will destroy the value of the dollar, the euro and other paper currencies — thus enhancing the value of gold. What is more, with tax increases unlikely and with Europe on the brink, the unthinkable — a sovereign debt default or the collapse of the credit system — has suddenly become thinkable.

To be sure, gold buyers have always been motivated by fear. What has changed is that some of the most respected investors on Wall Street are now among the fearful.

“In recent years, we have gone from one bubble and bailout to the next,” David Einhorn, a New York money manager who was among the first to foretell the failure of Lehman Brothers, said in a speech last month. “Our gold position reflects our concern that our fiscal and monetary policies are not sufficiently geared toward heading off a possible crisis.”

Since ancient times, gold has been deemed intrinsically valuable, holding its worth even as governments fell and currencies collapsed, while seemingly casting a spell on its owners.

Still, gold can go down — sometimes sharply. After peaking in 1980 at more than $800 an ounce, gold sank over the next two decades, bottoming out at just over $250 an ounce in 1999. But unlike paper assets that can become worthless, gold always retains at least some value.

These days, gold is also something of a political Rorschach test. On conservative talk radio, opposition to the Obama administration’s economic policies and warnings that huge budget deficits will set off runaway inflation have made gold a hot topic of on-air discussion — and lured gold companies as advertisers.

Tongue only half in cheek, Glenn Beck advised his audience to consider “Gold, God and Guns,” while laying out three possible scenarios for the economy: recession, depression or collapse.

One major advertiser on Mr. Beck’s show is Goldline, a huge California marketer of gold coins and bars that is also a sponsor of programs hosted by other prominent conservative commentators like Laura Ingraham and Mike Huckabee. Mr. Beck has said he “was a client of Goldline long before they were a client of mine,” adding: “I personally don’t buy gold as an investment. I buy it for protection.”

Of course, the right hardly has a monopoly on gold. Mr. Soros, a prominent donor to liberal causes and candidates, holds more than $600 million in bullion and gold mining shares.

Even as worries about the global economy have intensified, gold has become easier to buy.

Although some people still regard bars of gold in a vault as the ultimate insurance policy, exchange-traded funds, or E.T.F.’s, that hold gold have exploded in popularity in recent years. Gold E.T.F.’s, which trade like stocks but track the price of physical gold, account for 1,856 tons of gold, up from less than 500 tons in 2005, according to Credit Suisse.

Besides luring individual investors, these funds have also made gold more appealing to hedge funds and other institutions, allowing them to own vast amounts of gold without the burden of having to store it.

John A. Paulson, a top New York hedge fund manager who earned billions betting against subprime mortgages, holds $3 billion worth of gold E.T.F.’s, making gold the largest single position in his $35 billion portfolio.

Daniel J. Arbess, who manages more than $2 billion in Perella Weinberg’s Xerion fund, is another new gold lover. A few years ago, he said, he would not have taken a second look at gold as an investment. But now Mr. Arbess, a Harvard Law graduate and a generally conservative investor, is very serious about gold.

Spiraling deficits in the United States, Japan and Britain are unsustainable, he said, and could eventually hurt confidence in what are called “fiat currencies” — paper money not backed by gold, including the United States dollar.

“Indebted countries may soon be forced to choose among three politically difficult alternatives: sharp cuts in expenditures, debt default or printing money to pay off debt,” he said, with the last option the most likely outcome. Gold, he said, is a logical hedge against this risk, because firing up the printing presses ignites inflation.

True believers note that gold has risen in each of the last nine years, and that while the Standard & Poor’s 500-stock index is down 13 percent since 2001, gold is now worth nearly five times what it was then.

For all its newfound respectability, gold still manages to bring out the inner survivalist in its adherents. Gold bugs like Peter Schiff of the investment firm Euro Pacific Capital in Westport, Conn., envision a black market arising in the United States, with merchants refusing paper money and insisting on gold instead, while Mr. Hathaway, the gold fund manager, says the credit system has entered “the end game.”

“People probably still think I’m nuts,” Mr. Hathaway said. “But I’m not talking to myself in an isolation chamber anymore. We’ve got company now.”

    Uncertainty Restores Glitter to an Old Refuge, Gold, NYT, 12.6.2010, http://www.nytimes.com/2010/06/13/business/13gold.html

Prune and Grow

June 10, 2010
The New York Times
By DAVID BROOKS

Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided then about whether this spending was worth it, and they are just as divided now.

The president’s economists ran the numbers through their model and predicted that the stimulus package would create or save at least three million jobs. John F. Cogan and John B. Taylor of Stanford and Tobias Cwik and Volker Wieland of the Goethe-University of Frankfurt argue that the White House methodology is archaic. Their model suggests the stimulus will create about a half-million jobs.

Edward L. Glaeser of Harvard compared the change in employment in each state to the amount of stimulus money it has received. He found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas.

Over all, most economists seem to think the stimulus was a good idea, but there’s a general acknowledgment that we know relatively little about the relationship between fiscal policy and job creation. We are left, as Glaeser put it on The Times’s Economix blog, “wading in ignorance.”

If the economists are divided about what just happened, the rest of the world is not divided about what should come next. Voters, business leaders and political leaders do not seem to think that the stimulus was such a smashing success that we should do it again, even with today’s high unemployment.

They seem to see the fiscal floodgates wide open and that the private sector still only created a measly 41,000 jobs last month. That doesn’t inspire confidence. Furthermore, they understand something that is hard to quantify: Deficit spending in the middle of a debt crisis has different psychological effects than deficit spending at other times.

In times like these, deficit spending to pump up the economy doesn’t make consumers feel more confident; it makes them feel more insecure because they see a political system out of control. Deficit spending doesn’t induce small businesspeople to hire and expand. It scares them because they conclude the growth isn’t real and they know big tax increases are on the horizon. It doesn’t make political leaders feel better either. Lacking faith that they can wisely cut the debt in some magically virtuous future, they see their nations careening to fiscal ruin.

So we are exiting a period of fiscal stimulus and entering a period of fiscal consolidation. Last year, the finance ministers of the G-20 were all for pumping up economic activity. This year, they called on their members to reduce debt. In this country, deficits are now the top concern.

Some theorists will tell you that if governments shift their emphasis to deficit cutting, they risk sending the world back into recession. There are some reasons to think this is so, but events tell a more complicated story.

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, “in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions.”

This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.

So the challenge for the U.S. in the years ahead is to consolidate intelligently. That means reducing deficits while at the same time making the welfare state more efficient, boosting innovation in areas like energy, and spending more money on growth-enhancing sectors like infrastructure.

That’s a tough balancing act.

The biggest task will be to reduce middle-class entitlement spending. Alesina found that spending cuts are a more effective way to stabilize debt than tax increases, though we’ll need both.

The second biggest task is to consolidate while addressing another problem: labor market polarization. According to a Hamilton Project/Center for American Progress study by David Autor, high-skill sectors saw no net loss of jobs during the recession. Middle-skill sectors like sales saw an 8 percent employment decline. Blue-collar jobs fell by 16 percent.

In other words, the recession exacerbated the inequalities we’ve been seeing for decades. Somehow government has to cut total spending while directing more money to address the trends that threaten to hollow out the middle class.

During the period of consolidation, in other words, the government will have to spend less, but target better. That will require enormous dexterity and intelligence from a political system that has recently shown neither.

    Prune and Grow, NYT, 10.6.2010, http://www.nytimes.com/2010/06/11/opinion/11brooks.html

As Pressure Rises, BP Tries to Reassure Investors

June 10, 2010
The New York Times
By JULIA WERDIGIER

LONDON — British investors in BP are growing increasingly frustrated with the White House’s involvement and comments about the company’s efforts to clean up the oil spill in the Gulf of Mexico and partly blame politicians for the sharp share price drop.

BP’s shares, which are widely held by pension funds here, dropped 7 percent in London on Thursday because of concerns about the costs for the oil cleanup. The shares fell more than 40 percent since a fatal explosion at an oil rig in April and the start of the leak, wiping more than £50 billion, or $73 billion, from the company’s market value.

Shares, however, were 11.9 percent higher Thursday in New York trading after falling 15.8 percent on Wednesday. The drop came after lawmakers in Washington have called on BP to suspend its dividend and advertising to pay for the cleanup and a senior official said the Justice Department was “planning to take action.”

Investors were particularly furious about the suggestions that BP should not pay a dividend until it cleaned up the oil spill. Most shareholders rejected concerns that the costs of a cleanup and possible damages could force BP into Chapter 11 and said the drop in the share price is not justified by the value of BP’s assets.

“BP has many problems in the U.S.,” Justin Urquhart Stewart, co-founder of Seven Investment Management in London, said. “One of them is that it has the word British in its title.”

In a statement on Thursday, the company reiterated that stopping the oil leak, cleaning up the spill and dealing with any potential damage claims remained its top priority and that it had a “significant capacity and flexibility in dealing with the cost of responding to the incident, the environmental remediation and the payment of legitimate claims.”

Iain Armstrong, an analyst at investment manager Brewin Dolphin in London agreed with BP that the company has enough money to pay for the cleanup efforts and also rejected any potential concern that the company might not be able to pay for its debt.

“It’s gotten completely out of hand,” Mr. Armstrong said. “It’s a totally over-politicized situation. There is a disconnect between reality and BP being totally lambasted.”

“Ironically, by being extremely strong financially, BP has become a target here,” he said.

BP, which earned more than $16 billion last year and about $6 billion in the first quarter, said Thursday the cost of the clean-up and containment efforts was now $1.43 billion. Last year, the company paid about $10.5 billion in dividends.

Mr. Armstrong said that President Obama should not forget that 40 percent of BP shares are held by U.S. shareholders. “So he’s not doing them any favors either,” he said.

BP said in a statement Thursday that it noted the most recent share price drop but that it “is not aware of any reason which justifies this share price movement.”

Peter Hitchens, a research analyst at Panmure Gordon in London, said most analysts and investors in Britain are “more relaxed” about the future of BP than their U.S. counterparts partly because of the geographic distance. “We don’t have all the press coverage that’s over there and we’re further away from U.S. politics,” he said. “We have a more rational view.”

Indeed some investors said they see the recent decline in BP’s share price as a buying opportunity. But as oil continues to spew into the Gulf of Mexico they also acknowledge that while BP would probably be able to pay for the cleanup costs, the real question is whether it would be able to weather the political storm.

In a report Thursday, the International Energy Agency said the ongoing oil spill could prove to be a “game changer” because it could restrict future undersea oil development and limit supply.

“Emotion is understandably running high, and the way deepwater hydrocarbon developments are approved, operated and regulated will of course be thoroughly examined and potentially amended,” the agency said in its monthly oil market report.

Mr. Hitchens said the situations has now “gone beyond what’s rational” and some investors might start to fear that BP could be kicked out of the United States.

London’s Mayor Boris Johnson said Thursday that the drop in BP’s shares was slowly becoming a political issue in Britain.

“When you consider the huge exposure of British pension funds to BP and the BP share price and the vital importance of BP then I do think it starts to become a matter of national concern if a great British company is being continually beaten up on international airwaves,” he told BBC radio Thursday.

“What people forget is that if anyone breaks a pipeline, you’d thank god that it was a company that can actually pay for it,” Mr. Urquhart Stewart said.

Some business leaders on Thursday urged the British government to come BP’s defense.

But Reuters quoted Prime Minister David Cameron as saying, “This is an environmental catastrophe. BP needs to do everything it can to deal with the situation, and the U.K. government stands ready to help. I completely understand the U.S. government’s frustration.”

Earlier, a spokesman for Mr. Cameron said the prime minister would be discussing the issue with President Obama in a weekend telephone call.


David Jolly contributed reporting from Paris.

    As Pressure Rises, BP Tries to Reassure Investors, NYT, 10.6.2010, http://www.nytimes.com/2010/06/11/business/11bp.html

The Wrong Message on Deficits

June 9, 2010
The New York Times

The whip-deficits-now fever is running hot on both sides of the Atlantic. In Europe, politicians are understandably spooked by investors dumping government bonds in the wake of the Greek meltdown. But the sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse.

The United States is running the same very high risk. Democrats have soured on job creation and economic stimulus in favor of antideficit rhetoric, which Republicans have long seen as the easy road to discontented voters in a confusing election year.

At a hearing on Wednesday, the Federal Reserve chairman, Ben Bernanke, said job creation and financial-stabilization programs were essential to stop recession from becoming depression, but he also called for “a strong commitment to fiscal responsibility in the longer run.” The emphasis in that statement should be on that “longer run,” but we fear many politicians weren’t listening for nuance.

The economic crisis isn’t over. Nearly 1 in 10 workers is still unemployed in the United States and in the European Union. Germany, Europe’s most robust economy, suffers 7 percent unemployment. In Spain, it is nearly 20 percent. Still, the German government plans to cut its budget deficit from 5 percent to 3 percent of gross domestic product by 2013. The Spanish government promised to cut to 6 percent from 11.2 percent. The new British government promised to take an ax to spending when it proposes its budget on June 22.

The enthusiasm for budget cutting has spread beyond the United States and Europe. A meeting last week in South Korea of finance ministers from the Group of 20 large economies applauded deficit-reduction talk.

The Obama administration has warned that the new austerity drive could undercut economic recovery and has pressed the case that stronger countries, such as Germany, should not slam on the brakes. In a letter to G-20 colleagues, Treasury Secretary Timothy Geithner warned that budget cutting won’t work “unless we are able to strengthen confidence in the global recovery.”

Weak European governments cannot ignore investors dumping their bonds, and they will eventually have to curb their gaping budget deficits. But for everybody to slash public spending when growth is faltering and unemployment remains stubbornly high risks undercutting the goal of fiscal probity by slowing economic growth and reducing tax revenues.

The global recovery is already faltering. China’s economy is losing momentum. The United States’ is slowing. If budget cutting depressed economic growth, the reaction from investors would be no less brutal than their current attack on European bonds.

The problem calls for a varied response. Some countries, such as Spain or Portugal, may have to drastically cut their budgets if they don’t want to lose their access to capital markets. But countries such as Germany, Britain and the United States have space to spend.

Interest rates on German and U.S. bonds remain low. Rates on British debt also are very low, reflecting better growth prospects than those of the countries that use the euro. For them, the best policy should be to take advantage of the cheap money to spend more, not less.

Deficits will have to be reduced once the recovery gains more traction and unemployment recedes. Right now, for the most robust economies — the United States, Germany, Britain, Japan — slashing budgets is the wrong thing to do.

    The Wrong Message on Deficits, NYT, 9.6.2010, http://www.nytimes.com/2010/06/10/opinion/10thu1.html

Exports Declined as U.S. Trade Gap Widened in April

June 10, 2010
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — The United States trade deficit rose to the highest level in 16 months as exports fell for the second time in three months, but a report on jobless data provided a hint that long-term unemployed workers are beginning to find work.

The Commerce Department said Thursday that the trade deficit widened to $40.3 billion in April, up by 0.6 percent from March. American exports dropped 0.6 percent while imports declined by 0.4 percent. The data is a potentially worrisome sign that Europe’s debt troubles are beginning to crimp American manufacturers.

Manufacturing has been a standout performer as the United States recovers from the worst recession in decades. But the concern is that Europe’s debt crisis will slow growth in that part of the world and dampen demand in a key American export market.

Still, the latest economic reports offered some encouraging news. The tally of laid-off workers continuing to claim jobless benefits fell by the largest amount in almost a year. At the same time, new claims for unemployment insurance dipped slightly for a third consecutive week.

The Labor Department said Thursday that the total unemployment benefit rolls fell by 255,000 to a seasonally adjusted 4.5 million. It was the lowest total since December 2008. Analysts polled by Thomson Financial had expected a much smaller drop.

Some of those recipients may have exhausted the 26 weeks of benefits customarily provided by most states. A Labor Department analyst said state agencies didn’t provide any explanation for the big drop.

The number of first-time claims fell by 3,000 to a seasonally adjusted 456,000. The four-week average of new claims, which smoothes volatility, rose for the fourth straight week to 463,000.

First-time claims have hovered near 450,000 since the beginning of the year after falling steadily in the second half of 2009. That has raised concerns among economists that hiring remains weak and could slow the recovery.

Economists look closely at the total number of people claiming benefits. They monitor those who are initially receiving 26 weeks of state benefits, on average. But they are also concerned about the number of people who are receiving federal unemployment benefits, which can last up to 73 additional weeks.

Nearly 5.4 million Americans are receiving extended benefits. All told, about 9.8 million people drew unemployment in the week ending May 22, the latest data available.

    Exports Declined as U.S. Trade Gap Widened in April, NYT, 10.6.2010, http://www.nytimes.com/2010/06/11/business/economy/11econ.html

Markets Up Sharply on Jobs Report

June 10, 2010
The New York Times
By THE ASSOCIATED PRESS

Stocks surged Thursday on Wall Street after positive reports on the United States jobs market and Chinese exports provided some relief to two issues that have had investors on edge for more than a month.

By midmorning, the Dow Jones industrial average was up 210.85 points, or 2.1 percent, to 10,110.10. The Standard & Poor’s 500-stock index rose 21.44, or 2 percent, while the Nasdaq composite index rose 38.64 points, or 1.8 percent.

Investors have sent stocks sharply lower for more than a month because of concerns that Europe’s sovereign debt crisis would slow economic growth worldwide and high unemployment would stall a United States recovery.

Asian and European markets rose after China said exports rose 48.5 percent in May, while imports jumped 48.3 percent. The jump in tradeprovides some relief that mounting debt problems in Europe might not halt a global economic recovery. The 27-nation European Union is China’s largest trading partner.

Economic recovery in China and other developing nations has outpaced a rebound in more developed economies, so a pullback there would deal a blow to global growth.

The euro, which is used by 16 countries in Europe, rose to $1.2129 Thursday. The currency has become an indicator of investor confidence in Europe’s economy. It has also heavily influenced global stock markets in recent weeks because of concerns that rising debt in countries like Greece, Spain and Portugal would upend a global economic recovery.

While investors worry about how Europe’s debt problems could affect the rest of the world, there are also concerns about continued high unemployment in the United States. High unemployment remains one of the biggest obstacles to a strong domestic rebound.

A Labor Department report Thursday said new claims for unemployment fell by a less-than-forecast 3,000 to a seasonally adjusted 456,000. While that figure fell short of economists’ forecast for a drop to 448,000, investors were heartened by data showing total claims last week dropped by the largest amount in almost a year. Total unemployment benefit rolls fell by 255,000 to 4.5 million.

The drop in total claims provides some hope that laid-off workers are starting to find new jobs. It was welcome relief after the Labor Department said last week that private employers slowed their hiring in May to the lowest levels since January.

Job creation is considered vital to a sustained recovery in the United States and consistently positive jobs data could provide confidence to investors after worries about Europe’s troubles have overwhelmed global markets for more than a month.


Julia Werdigier contributed reporting.

    Markets Up Sharply on Jobs Report, NYT, 10.6.2010, http://www.nytimes.com/2010/06/11/business/11markets.html

After Suicides, Scrutiny of China’s Grim Factories

June 6, 2010
The New York Times
By DAVID BARBOZA

SHENZHEN, China — The factory’s first death this year came on Jan. 23.

The body of a 19-year-old worker named Ma Xiangqian was found in front of his high-rise dormitory at 4:30 a.m. Police investigators concluded that he had leapt from a high floor, and they ruled it a suicide.

His family, including his 22-year-old sister who worked at the same company, Foxconn Technology, said he hated the job he had held only since November — an 11-hour overnight shift, seven nights a week, forging plastic and metal into electronics parts amid fumes and dust. Or at least that was Mr. Ma’s job until, after a run-in with his supervisor, he was demoted in December to cleaning toilets.

Mr. Ma’s pay stub shows that he worked 286 hours in the month before he died, including 112 hours of overtime, about three times the legal limit. For all of that, even with extra pay for overtime, he earned the equivalent of $1 an hour.

“The factory was always abusing my brother,” the sister, Ma Liqun, said tearfully last week.

Since Mr. Ma’s death, there have been 12 other suicides or suicide attempts — eight men and four women — on two Foxconn campuses in Shenzhen, where employees live and work. The factories here, with about 400,000 employees, make products for global companies like Apple, Dell and Hewlett-Packard.

Most of the other suicide cases fit a similar profile: ages 18 to 24, relatively new to the factory, and falling from a campus building.

The rash of suicides has intensified scrutiny of the working and living conditions at Foxconn, the world’s biggest contract electronics supplier. Responding to the clamor, Foxconn has raised salaries steeply twice in the last five days. The company announced the latest increase on Sunday, saying that after a three-month trial period, the basic salaries of many of its workers in China could reach nearly $300 a month, more than double what they were a few weeks ago.

Sociologists and other academics see the deaths as extreme signals of a more pervasive trend: a generation of workers rejecting the regimented hardships their predecessors endured as the cheap labor army behind China’s economic miracle.

Rather than take their own lives, many more workers at Foxconn — tens of thousands more — have simply quit. In recent interviews here, employees said the typical Foxconn hire lasted just a few months at the factory before leaving, demoralized.

They complain about military-style drills, verbal abuse by superiors and “self-criticisms” they are forced to read aloud, as well as occasionally being pressured to work as many 13 consecutive days to complete a big customer order — even when it means sleeping on the factory floor.

Although the legal limit in China is 36 hours of overtime a month, several workers interviewed here said they regularly exceeded that by wide margins.

“They leave so soon because they can’t adjust to factory life,” said Wang Xueliu, a production team leader who has worked at Foxconn for six years. He, too, plans to leave soon, to join a new business with his brother making candles for export.

Many other manufacturers in China also struggle with high turnover.

Throughout southern China, the country’s industrial heartland, there is an acute labor shortage, as the legions of rural migrants who formerly journeyed thousands of miles from the interior provinces are now choosing other options. Many seek positions in the service sector, or jobs closer to home.

“There’s no doubt about it: they don’t want to work on the assembly line,” Jing Jun, a sociologist at Tsinghua University in Beijing, says of the young migrant workers moving into southern China. “They have a different expectation. And once people’s attitudes about being in a factory change, other things will change.”

Foxconn said it was trying to improve its employees’ working and living conditions. Still, Louis Woo, a high-ranking Foxconn executive, acknowledged that much needed to be done to improve the workplace and the management culture.

“Maybe this spate of suicides will also serve us as a wake-up call,” he said in an interview last week. “We realize we must do a better job.”

Sociologists say China’s new generation of migrant workers — many of them born in the 1990s — are better educated and more conscious of their rights. And their ambivalence about factory life coincides with a demographic shift that has resulted in a decline in the number of young people entering the work force.

Economists say the changes are already eroding some of China’s competitive advantages in the global economy by raising wages, the cost of production and, soon, the prices of a wide range of consumer goods that China exports.

“The factory model has run into some serious limitations,” says Huang Yasheng, a professor of management at M.I.T. and the author of “Capitalism With Chinese Characteristics.”

“Now, they have to find a new model and move to a more innovative economy,” Professor Huang said. “The problem, though, is that those kinds of companies don’t create a lot of opportunities for young, migrant workers.”

Ma Xiangqian, who killed himself on Jan. 23, may have been an extreme case with his own emotional frailties. But he may also stand as a symbol of what his generation of workers are rebelling against.

Described by his father as quiet and determined to help alleviate his family’s poverty, Mr. Ma followed a path similar to the one that millions of other migrant workers, including his three older sisters, had taken before him, traveling more than 800 miles from a poor farming village in Henan Province — a village now nearly devoid of young working-age people — to seek employment in Shenzhen, China’s electronics manufacturing capital.

Foxconn, founded by the Taiwanese industrialist Terry Gou, is a $60 billion manufacturer with a reputation for military-style efficiency that includes mapping out assembly line workers’ movements in great detail and monitoring tasks with a stopwatch.

The company is also known for the scale of its operations.

Last week, its site here, covering about a square mile, was teeming with uniformed migrant workers, filing into work at gray, low-slung factory complexes, or entering utilitarian high-rise dormitories.

At Foxconn, Mr. Ma shared a dormitory room with nine other workers, ate in the campus cafeteria and worked night shifts, 7 p.m. to 8 a.m. His sister said he did little but work and sleep, had no friends on campus and did not even know the names of most of his roommates.

For Mr. Ma, though, the problem was apparently not just the pace and length of work.

“At the end of December, my brother called my parents and said he had a bad relationship with his production team manager,” said his sister, adding her brother said the manager often cursed at him.

His family said the demotion to scrubbing toilets in December further demoralized him about life at the factory complex — where a shortage of warm water in the dorm often meant cold showers, and where even simple pleasures like snacks were forbidden.

Apple, Dell and Hewlett-Packard have already said they are looking into conditions at Foxconn — although Apple’s chief executive, Steven P. Jobs, said last week that he was troubled by the suicides but that Foxconn was “not a sweatshop.”

Foxconn has also defended its operation, saying it treats workers with respect. But it also says that it intends to address management weakness and the ills of some of its workers, by adding counselors, hot lines and consulting monks.

But labor rights groups, including China Labor Watch, a human rights group based in New York, say they have documented what they call the dehumanizing treatment of workers at Foxconn. Mr. Ma’s sister quit shortly after her brother’s death.

She is staying with her parents, who have temporarily moved from their province to a dilapidated, one-room apartment here in Shenzhen to try to resolve the issues surrounding their son’s death.

Some of the families of the other suicide victims have reportedly received settlements of as much as $15,000 — a factor that some sociologists say may have led to copycat suicides in some cases by workers hoping to help their families.

Ma Xiangqian’s family had negotiated with the company over compensation, but Foxconn declined to discuss the specifics of the case.

“He was my only son,” said Ma Xiangqian’s father, Ma Zishan, a struggling farmer of landscape plants and trees grown for use in the bustling cities. “Only sons are very important in the countryside. What am I going to do?”


Bao Beibei contributed research.

    After Suicides, Scrutiny of China’s Grim Factories, NYT, 6.6.2010, http://www.nytimes.com/2010/06/07/business/global/07suicide.html

Imagining Life Without Oil, and Being Ready

June 5, 2010
The New York Times
By JOHN LELAND

As oil continued to pour into the Gulf of Mexico on a recent Saturday, Jennifer Wilkerson spent three hours on the phone talking about life after petroleum.

For Mrs. Wilkerson, 33, a moderate Democrat from Oakton, Va., who designs computer interfaces, the spill reinforced what she had been obsessing over for more than a year — that oil use was outstripping the world’s supply. She worried about what would come after: maybe food shortages, a collapse of the economy, a breakdown of civil order. Her call was part of a telephone course about how to live through it all.

In bleak times, there is a boom in doom.

Americans have long been fascinated by disaster scenarios, from the population explosion to the cold war to global warming. These days the doomers, as Mrs. Wilkerson jokingly calls herself and likeminded others, have a new focus: peak oil. They argue that oil supplies peaked as early as 2008 and will decline rapidly, taking the economy with them.

Located somewhere between the environmental movement and the bunkered survivalists, the peak oil crowd is small but growing, reaching from health food stores to Congress, where a Democrat and a Republican formed a Congressional Peak Oil Caucus.

And they have been resourceful, sharing the concerns of other “collapsitarians,” including global debt and climate change — both caused by overuse of diminishing oil supplies, they maintain.

Many people dispute the peak oil hypothesis, including Daniel Yergin, the Pulitzer Prize-winning author of “The Prize: The Epic Quest for Oil, Money and Power” and chairman of IHS Cambridge Energy Research Associates, a company that advises governments and industry. Mr. Yergin has argued that new technology continues to bring more oil.

Andre Angelantoni is not taking that chance. In his home in San Rafael, Calif., he has stocked food reserves in case an oil squeeze prevents food from reaching market and has converted his investments into gold and silver.

The effects of peak oil, including high energy prices, will not be gentle, said Mr. Angelantoni, a Web designer whose company, Post Peak Living, offers the telephone class and a handful of online courses for life after a collapse.

“Our whole economy depends on greater and greater energy supplies, and that just isn’t possible,” he said. “I wish I could say we’ll quietly accept having many millions of people unemployed, their homes foreclosed. But it’s hard to see the whole country transitioning to a low-energy future without people becoming angry. There’s going to be quite a bit of social turmoil on the way down.”

Transition US, a British transplant that seeks to help towns brace for life after oil, including a “population die-off” from shortages of oil, food and medicine, now has 68 official chapters around the country, since starting with just two in 2008. Group projects range from community vegetable gardens to creating local currency in case the national one crashes.

Bleak books like James Howard Kunstler’s “The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century” and Richard Heinberg’s “The Party’s Over: Oil, War and the Fate of Industrial Societies” have sold 100,000 and 50,000 copies, respectively, according to their publishers.

In Congress in 2005, Representative Roscoe G. Bartlett, Republican of Maryland, and Senator Tom Udall, a New Mexico Democrat who was a representative at the time, created the Congressional Peak Oil Caucus. Web sites, online videos and numerous social networks connect adherents in ways that would once have been impossible.

Mr. Angelantoni, 40, came to his concern about peak oil from an interest in climate change, because he felt its impact would be more precipitous. “The peak oil conversation is where the climate change conversation was 20 years ago,” he said. He distinguished the peak oil crowd from the environmental movement. “The Sierra Club tells people that if we use less energy, the underlying model is sound,” he said. “I don’t think that’s the case.”

Like several people in the telephone class, he said his concern with peak oil had strained his relationship with his spouse, creating an “unbridgeable” distance between them.

“It’s very difficult for people to hear that this form of the economy is breaking down,” he said. “They think that because it hasn’t happened yet that it won’t ever happen.”

Mrs. Wilkerson has now read two dozen books about peak oil and related topics. For a while, she became depressed at work and had trouble discussing her feelings with her husband because the conversations were so dire, she said. At work, her colleagues told her directly “that they were tired of hearing about it,” she said. “They felt I was going to an extreme, thinking collapse was going to happen.”

She added, “I was ready to move out to the country and be an organic farmer, but I learned that’s not the way to do it. You need a community.”

Despite the rapid growth of Transition US, the movement was much easier to sell in England, said Raven Gray, who came to this country to found a branch here. While Americans embrace doomsday scenarios, they are less likely to work together on how to live afterward, she said.

“There’s lot of apocalyptic people in environmental circles,” she said. “A lot of those people were outraged that we presented an optimistic view of the future. There’s a dark vision driving us, but we’re about moving toward a positive picture of what can be done.”

For Mrs. Wilkerson, who is now growing vegetables in her kitchen, the course, which cost $175, gave her encouragement to move in that direction.

“Whether or not collapse happens, being able to teach other people to grow food so they can weather any adversity is a good investment of my time,” she said.

    Imagining Life Without Oil, and Being Ready, NYT, 5.6.2010, http://www.nytimes.com/2010/06/06/us/06peak.html

Job Data Casts Pall Over Economic Recovery

June 4, 2010
The New York Times
By MICHAEL POWELL

A shadow fell across America’s economic recovery on Friday, as the Labor Department’s monthly report showed that job growth was weak in the private sector, provoking a precipitous sell-off in the stock market.

The headline numbers for May suggested reason for optimism — employers added 431,000 jobs and the jobless rate fell to 9.7 percent, from 9.9 percent in April. But the underlying numbers showed that almost all of the growth came from the 411,000 workers hired by the federal government to help with the Census. Most of those jobs will end in a few months.

By contrast, the private sector created 41,000 positions, far short of expectations for 150,000 to 180,000 jobs. And the number of long-term unemployed, those Americans out of work for 27 or more weeks, remained at its highest level since the Labor Department began collecting such data in the 1940s.

The ailing American labor market and continued threatening economic news out of Europe — this time from Hungary, where a government spokesman raised the prospect of default — set the stock market on edge, as the Dow Jones industrial average plunged 323.31 points, or 3.2 percent. The Standard & Poor’s 500-stock index tumbled 3.4 percent, and the Nasdaq composite slid 3.6 percent.

Currency and commodity prices fell in tandem. The euro spiraled downward, dropping below $1.20 for the first time since early 2006. And the price of oil dropped to $71.51 a barrel.

The financial world has cast a wary eye at Europe for months, with attention fixed on the southern tier stretching from Greece to Spain and Portugal. But Friday offered a reminder that Eastern Europe was a frail reed, as a spokesman for the Hungarian prime minister said that the previous government had manipulated economic figures and that Hungary was in “a very grave situation.”

President Obama tried to put a gloss on the jobs report, telling workers at a trucking company in Hyattsville, Md., that the numbers showed an economy that was “getting stronger by the day.” Mr. Obama mentioned that Census Bureau hiring accounted for most of the new jobs, but he added that the nation had added jobs for each of the last five months. “These numbers do mean that we are moving in the right direction,” he said. “There are going to be ups and downs.”

In fact, the May figures suggested a job market wheezing after months of more vigorous growth. The economy must add more than 100,000 jobs a month just to absorb new workers entering the market. Those entrants — including a large batch of high school and college graduates — will join a labor pool swollen with 15 million Americans looking for work. As well, the report showed that hard-pressed city and state governments had begun to cut budgets and shed employees, a process that could accelerate sharply in coming months.

“It’s a very, very grudging labor market,” said Joshua Shapiro, chief economist for MFR Inc. “A growing amount of evidence now points to this recovery taking a long time.”

Several economists expressed concern about the shape of a future constrained by a weakening Europe and slow consumer spending. Robert Reich, who served as labor secretary for President Bill Clinton, placed the chance of the United States slipping back into recession at 50 percent; while his is a minority view, Mr. Reich gave voice to the more bearish take.

“The consumers are tapped out, we’ve got a fiscal drag from cities and states which are just beginning to lay off people in great numbers, and most of the buying has been consumers replacing household items — I just don’t see the oomph,” he said, in a view that drew some private assents from within the Obama administration Friday.

A sliver or three of hope could be found in the report. Manufacturers hired 29,000 workers last month, and both hours worked — 40.5 hours a week — and wages rose. Factory employment has risen steadily, by 126,000 jobs over the last five months, with fabricated metals and machinery particularly strong.

“Nothing in this report suggests that the recovery is in trouble — the markets need to get a grip,” said Bernard Baumohl, chief global economist at the Economic Outlook Group in New Jersey.

Growing numbers of Americans who had worked part time have found full-time work. And the Census jobs will put money into the pockets of the nation’s hard-pressed working and lower-middle class. As these workers have little margin for error, they will spend these dollars quickly.

But that, other economists said, described the limit of good news Friday. The number of long-term unemployed remained at about 6.7 million, accounting for 46 percent of the jobless rolls. And the number of “discouraged workers,” which is to say people not looking for work because they see no prospect of employment, rose by 291,000 from a year earlier.

William Dunkelberg, chief economist for the National Federation of Independent Business, had forecast private-sector job growth would be nearly flat in May. He said that, unlike stock bubbles, which pop quickly and often reinflate quickly, housing bubbles offer lingering downturns and slow recoveries. He says he does not believe the economy is so weak that it will fall into the ditch of a second recession.

But that is not to suggest he is particularly optimistic.

“We won’t have a second down, but it’s going to be grimly slow,” he said.

And, save for the hiring of Census workers and the rise in work hours, Heather Boushey, senior economist at the liberal Center for American Progress, saw little cause for cheer. Consumers account for 70 percent of American economic activity, she said, and people cannot spend what they cannot earn.

“At this point, it looks like the labor market is stabilizing into an L-shaped pattern, without sufficient job creation to bring unemployment down,” she said. “This would not only be devastating for workers and their families, but also threaten the path of the economic recovery over all.”

For now, the nation has more workers like Robert Mucha than at any time since the Depression. A Chicago-based engineer, the 43-year-old Mr. Mucha has been looking for work since losing his job in 2008. After putting in résumé after résumé, Mr. Mucha finally took a job as a Census worker.

He has no illusions about his future.

“I keep hearing about how there’s a job waiting around the corner, but I never seemed to get it,” he said. “And when I’m finished with the Census, I’ll be looking again.”


Helene Cooper and Christine Hauser contributed reporting.

    Job Data Casts Pall Over Economic Recovery, NYT, 4.6.2010, http://www.nytimes.com/2010/06/05/business/economy/05jobs.html

A Jobless Rate Still Unaffected by New Hiring

June 3, 2010
The New York Times
By MOTOKO RICH

SCHAUMBURG, Ill. — After hemorrhaging jobs for months, the economy is finally starting to add them. Yet the unemployment rate is not really budging because of people like Regina Myles.

Ms. Myles, 51, has been out of work for three years. After a grueling job search yielded 150 interviews but no offers, she simply stopped looking last fall. Then this spring, with a $3,000 government-funded grant to help pay for a training course at a local beauty school in this Chicago suburb, she began applying for jobs online and in stores again.

“I just know if I am given this chance to finish this course I can make it,” Ms. Myles said after practicing a facial on a classmate at the International Skin Beauty Academy. “I feel like it is my time now.”

Millions of people became so discouraged during the brutal recession that they gave up the job search altogether. Some entered training programs to redirect careers; others focused on caring for family members. Some college graduates, despairing of their prospects, enrolled in graduate school, rather than hunt for jobs.

Now many of them are beginning to look for work again, encouraged by four consecutive months of job growth and reports of a strengthening economy. But the initial return to the labor force may prove dispiriting, since so many people are already chasing too few jobs.

Because the government does not count people as unemployed unless they say they are actively searching for work, many discouraged people have been hiding in the shadows.

Heidi Shierholz, an economist at the Economic Policy Institute in Washington, estimates about 2.4 million “missing workers” either left the labor force or did not enter it in the last 28 months. That is on top of the 15.3 million people who are officially counted as unemployed.

Although economists expect the jobs report scheduled for release on Friday to show that employers added perhaps half a million jobs in May, that kind of growth would have to be sustained for some time to absorb the backlog.

“The problem is if they come back into the labor force because they perceive that jobs are being offered again, but they come in at a faster rate than those jobs are really being offered,” said Ian Shepherdson, chief United States economist at High Frequency Economics.

In other words, just because it has rained for a few days does not mean the drought is over.

In April, those people who started looking again helped push the unemployment rate to 9.9 percent, from 9.7 percent in March and close to this recession’s peak of 10.1 percent last October.

If, as some economists predict, the unemployment rate edges up or remains stubbornly high, that could prove a political problem for the Obama administration heading into the fall midterm elections.

To a certain extent, the bad news is also the good news. The fact that people are looking for work again “is a vote of confidence in the overall economy,” said Ken Goldstein, an economist at the Conference Board.

Ms. Myles, who speaks in a low timbre and is quick to smile, is trying to remain optimistic during her renewed job hunt.

After a bitter divorce in 2007, she lost her job managing a tax preparation office that she ran with her ex-husband for eight years. To supplement $900-a-month alimony payments, she applied for everything from secretarial positions to fry cook at a McDonald’s. She tried for so many jobs online, she said, “I think my résumé is on YouTube at this point.”

Last fall, she thought she was finally close to getting hired when she was called back for a third interview for a clerical job at a pharmaceutical company.

When it did not work out, she hit bottom. For weeks, she sat at home, crying and wondering how she would pay her rapidly accumulating bills.

Around the holidays, a neighbor told her J. C. Penney was hiring, and Ms. Myles decided to dip her toe back into the job market. She still did not have any luck, but early this spring, she pulled together the application for a government grant to help pay for beauty school.

When she graduates in October, Ms. Myles expects her new skills will help her find a job. “People have a tendency to figure out a way to do our beauty products,” she said.

In the Chicago area, which lost 360,000 jobs — or about 8 percent of its jobs base from the beginning of 2008 through 2009, according to an analysis by Moody’s Analytics — those re-entering the market confront a sobering landscape.

At a job fair last week in Palatine, another Chicago suburb, Matt Landmeier, a recruiter for Just Energy, a local natural gas and electricity supplier, collected 110 résumés from a line of half-haggard, half-hopeful candidates. A majority told him they had been out of work a year or longer.

Recruiters and economists worry that those who quit the labor force for a while will have difficulty competing with younger workers or people who have been out of work for only a short period.

Even with a robust recovery that creates three or four million jobs in the next year, said Lawrence F. Katz, professor of economics at Harvard, “most of those jobs will go to new entrants and short-term unemployed people.”

That concern is not lost on Roman Landa, a former mortgage broker in Glenview, another Chicago suburb, who suspended his job search in frustration early this winter after applying for nearly 700 positions in three years.

Because he has been out of finance for so long, he fears it is getting harder to go up against younger workers. “It’s like a boxer who is closer to retirement thinking he is as good as he was when he was 20 years old,” he said.

Mr. Landa, 36, who stayed home with his six-year-old son for two months without looking for work, started searching again in April. He has a promising lead, but if he does not receive an offer soon, he plans to enlist in the Army. “I need to take care of my family,” he said.

In some industries, the outlook is improving enough for re-entrants to find jobs. In April, manufacturers added 44,000 jobs, the largest increase since 1998. In Rockford, a manufacturing outpost west of Chicago, Donald Ritter, who was laid off 14 months ago, recently found a temporary job operating a machine for a hydraulics company.

Mr. Ritter, a boyish 52, had stopped submitting applications in the fall, when the want ads dried up. “I was not applying for work because there was no work,” he said.

Last month, he noticed an advertisement for eight immediate openings at the hydraulics firm, and pounced. He started there a few weeks ago at $13 an hour, a significant cut from the nearly $20 he was making a year ago. “Essentially, I am just going to get caught up by the time I am supposed to retire,” he said.

Ms. Myles, too, is discouraged by job prospects that will barely cover her expenses. But on a recent afternoon, she was determined not to lose hope again.

After finishing classes at the beauty academy, she drove to a nearby strip mall and dropped into an outlet of Tuesday Morning, a retailer that sells closeout housewares. A manager directed her to a computer kiosk in the corner.

In response to the question “What are your hourly rate expectations?” Ms. Myles quipped, “$4,000 an hour?” but typed in $12.

Once she finishes beauty school, Ms. Myles figures that at the least, she can administer facials and wax treatments from home.

For now, she is on the hunt. After finishing at Tuesday Morning, she spotted a Barnes & Noble across the parking lot. “I think I’ll go apply there,” she said, and sped off.

    A Jobless Rate Still Unaffected by New Hiring, NYT, 3.6.2010, http://www.nytimes.com/2010/06/04/business/economy/04workers.html

Currently in Vogue: Ringing the Deficit Alarm

May 28, 2010
The New York Times
By CARL HULSE

WASHINGTON — Deficits finally matter.

After years of citing national security, social necessity and economic crisis as sufficient justification to pass costly legislation without paying for it, members of Congress are getting cold feet about continually adding to the national vat of red ink.

In the House, the leadership was forced this week to jettison popular health insurance subsidies and cut a major tax-and-spending measure in half in a desperate effort to round up votes from moderate and conservative Democrats. In the Senate, 26 Republican senators balked at an emergency war funding bill — an almost unthinkable position for them in the past — complaining that it was bloated and irresponsible.

Both measures ultimately passed as Congress made a messy pre-Memorial Day exit. But lawmakers say they appear to have reached a turning point when it comes to routine deficit spending. The new attitude could reshape the way Congress does its fiscal business the rest of this year and into the future, and potentially constrain President Obama and Democrats as they pursue their agenda.

Democrats are already ducking demands that they produce a budget for 2011, well aware that it would be very difficult to balance the conflicting interests of liberal lawmakers pushing for more spending and the centrists and fiscal conservatives who want cuts.

It is likely that Democrats will also punt on most of the major spending bills for the year, preferring to hold federal agencies at their current levels rather than get into a pre-election fiscal fight. There is mounting resistance to reflexively extending jobless pay for the long-term unemployed, and other initiatives, like a $23 billion plan to prevent public school teacher layoffs, face serious challenges.

The reasons for the new deficit sensibilities are both substantive and politically driven. A growing number of House and Senate members see both the annual deficits and the accumulated federal debt — hovering now at the $13 trillion threshold — as time bombs for future generations, the unexploded remnants of a lavish spending spree engaged in by both parties over the past decade.

At the same time, Republicans have stirred up their core voters and made inroads with independents by accusing Democrats of profligacy since they took charge. The success of the attacks has not been lost on Democrats, who are hearing it regularly from their constituents back home. Republicans, who share blame for the deficits the government ran when they were in power and in particular for the increase in the national debt from the tax cuts and spending increases they passed under former President George W. Bush, are also under pressure to show they have changed their ways as well if they hope to win over the Tea Party set.

It adds up to serious new reluctance to be free with federal dollars.

The House fight over the package of safety-net spending, tax breaks for businesses and individuals and tax increases on corporations and wealthy investors was illustrative. A major Democratic priority, it began the week as a nearly $200 billion catchall measure that would have added about $134 billion to the deficit.

Facing a rank-and-file revolt, Democratic leaders began trimming the measure, first by limiting the length of coverage for some of the more costly programs and saving more than $40 billion. It was not enough. Lacking the necessary votes entering Thursday evening, Democrats sliced the bill again, eliminating health insurance subsidies for the unemployed and health care aid to states — saving $30 billion or so and getting the deficit impact down to $54 billion.

The measure then passed 215 to 204, with 34 mainly moderate and conservative Democrats joining 170 Republicans in opposing the bill.

“We have to stop spending money we don’t have,” said Representative Jim Cooper, a Tennessee Democrat who voted against the bill. “I hope deficit reduction fever is catching.”

While the struggle in rounding up the votes resulted in a cut in the bill’s price tag, the House delay was costly in another sense. With the bill stalled in the House, the Senate packed up and left for recess without considering it. As a result, the extension of unemployment benefits will have to wait at least a week, and some Americans relying on jobless pay could see their checks delayed.

The Senate found itself in a deficit fight of its own, though the outcome was never in doubt. The $60 billion war funding measure the Senate passed late Thursday was certain to be approved given its importance to the Pentagon and military operations in Afghanistan and Iraq.

But Senator Tom Coburn, Republican of Oklahoma, criticized his colleagues for pushing it through without finding spending cuts elsewhere to pay for it, and he was joined by 25 colleagues in opposing it.

“Are we in denial in this body?” asked Senator Jeff Sessions, Republican of Alabama and another opponent. “Do we think it’s just business as usual, that we can just continue to spend, spend, spend and borrow, borrow, borrow?”

Republicans are eager to blame Democrats. But Democrats note that it was Republicans who initially chose not to pay for wars in Iraq and Afghanistan, initiated a series of major tax cuts and started a new Medicare drug benefit that ran up the deficit before Democrats ever took the wheel.

“The people who set the fire are now the ones calling the fire department,” said Representative Richard E. Neal, Democrat of Massachusetts.

In any event, the deficit alarm has been sounded and lawmakers are responding. Whether it is too late for them remains to be seen.

This article has been revised to reflect the following correction:

Correction: May 28, 2010

Due to an editing error, an earlier version of this article misstated vote totals in the House. A measure to extend unemployment benefits passed by a vote of 215 to 204, not 245 to 171. A measure to prevent a cut in Medicare payments passed with a vote of 245 to 171, not 245 to 177.

        Currently in Vogue: Ringing the Deficit Alarm, NYT, 28.5.2010, http://www.nytimes.com/2010/05/29/us/politics/29deficit.html

Apple Passes Microsoft as No. 1 in Tech

May 26, 2010
The New York Times
By MIGUEL HELFT and ASHLEE VANCE

SAN FRANCISCO — Wall Street has called the end of an era and the beginning of the next one: The most important technology product no longer sits on your desk but rather fits in your hand.

The moment came Wednesday when Apple, the maker of iPods, iPhones and iPads, shot past Microsoft, the computer software giant, to become the world’s most valuable technology company.

This changing of the guard caps one of the most stunning turnarounds in business history for Apple, which had been given up for dead only a decade earlier, and its co-founder and visionary chief executive, Steven P. Jobs. The rapidly rising value attached to Apple by investors also heralds an important cultural shift: Consumer tastes have overtaken the needs of business as the leading force shaping technology.

Microsoft, with its Windows and Office software franchises, has dominated the relationship most people had with their computers for almost two decades, and that was reflected in its stock market capitalization. But the click-clack of the keyboard has ceded ground to the swipe of a finger across a smartphone’s touch screen.

And Apple is in the right place at the right time. Although it still sells computers, twice as much revenue is coming from hand-held devices and music. Over all, the technology industry sold about 172 million smartphones last year, compared with 306 million PCs, but smartphone sales grew at a pace five times faster.

Microsoft depends more on maintaining the status quo, while Apple is in a constant battle to one-up itself and create something new, said Peter A. Thiel, the co-founder of PayPal and an early investor in Facebook. “Apple is a bet on technology,” he said. “And Apple beating Microsoft is a very significant thing.”

As of Wednesday, Wall Street valued Apple at $222.12 billion and Microsoft at $219.18 billion. The only American company valued higher is Exxon Mobil, with a market capitalization of $278.64 billion.

The companies have comparable revenue, with Microsoft at $58.4 billion and Apple at $42.9 billion. But in their most recent fiscal years, Apple had net income of $5.7 billion, while Microsoft earned $14.6 billion.

Microsoft has more cash and short-term investments, $39.7 billion, to Apple’s $23.1 billion, which makes the value assigned by the market to Apple, essentially a bet on its future prospects, all the more remarkable.

Microsoft and Apple declined to comment.

Apple’s climb to the top of the heap cements the reputation of Mr. Jobs, who once operated in the shadow of Microsoft’s co-founder, Bill Gates.

“It is the single most important turnaround that I have seen in Silicon Valley,” said Jim Breyer, a venture capitalist who has invested in some of the most successful technology companies.

While Apple is at the top of its game, it faces a new and powerful rival in Google, which is battling Apple in mobile devices with its Android operating system, and mobile advertising.

Google, with a market cap of $151.43 billion, also appeared to leap ahead of Apple in a new potentially important area, Internet-connected televisions. And Google is steering consumers toward yet a new model of computing in which Internet applications, rather than iPhone or desktop applications, rule.

“The battle has shifted from Microsoft against Apple to Apple against Google,” said Tim Bajarin, a technology analyst who has been following Apple since 1981. “Apple has a significant lead. But Google is going to be a powerful competitor.”

Apple and Microsoft initiated the personal computing revolution in the late 1970s, but Microsoft quickly outflanked Apple and grew to be one of the most profitable businesses ever created.

A little more than a decade ago, Apple, which had pushed out Mr. Jobs in 1985, was widely believed to be on the path to extinction.

Michael S. Dell, the founder and chief executive of Dell computer, went so far as to suggest that Apple should shut down and return any money to shareholders. (The computer maker is now worth about a tenth of Apple.) Around the same time, Microsoft’s chief technology officer called Apple “already dead.”

But with the return of Mr. Jobs to Apple in 1996 — and an investment by Microsoft of $150 million — the company began a slow path to recovery. Apple’s rebirth began in earnest with the introduction of the iPod music players, and Mr. Jobs began to gain a reputation for anticipating what consumers want. The company elbowed aside Sony and came to dominate the music distribution business with the iTunes online music store.

It later upstaged Nokia, the dominant brand in mobile phones, by introducing the iPhone in 2007. And this year, Mr. Jobs shook things up again, with the introduction of the iPad, a tablet computer that has the potential to create a new category of computers and once again reshape the way people interact with their devices.

Mr. Jobs helped create “the best desktop computer, the best portable music device, the best smartphone and also now the best tablet,” said Steve Perlman, a serial entrepreneur who was an executive at both Apple and Microsoft and is now the chief executive of OnLive, an online gaming company.

As Apple grew increasingly nimble and innovative, Microsoft has struggled to build desirable updates to its main products and to create large new businesses in areas like game consoles, music players, phones and Internet search. Microsoft, which is a component stock of the Dow Jones industrial average, has lost half its value since 2000.

Still, Microsoft is a hugely powerful and profitable company in the tech world. Its Windows software runs 9 out of every 10 computers, while more than 500 million people use its Office software to perform their daily tasks, like writing letters or sending e-mail messages. These two franchises account for the bulk of Microsoft’s annual revenue.

But Apple has the momentum. “Steve saw way early on, and way before Microsoft, that hardware and software needed to be married into something that did not require effort from the user,” said Scott G. McNealy, the co-founder and longtime chief executive of Sun Microsystems.

“Apple’s products are shrink-wrapped and ready to go.”

    Apple Passes Microsoft as No. 1 in Tech, NYT, 26.5.2010, http://www.nytimes.com/2010/05/27/technology/27apple.html

Electronics Maker Promises Review After Suicides

May 26, 2010
The New York Times
By DAVID BARBOZA

SHENZHEN, China — Struggling to cope with a rash of suicides at his company’s electronics factories here, the chairman of an electronics maker that supplies Apple, Dell and Hewlett-Packard said Wednesday that he was doing everything possible to find a solution.

“We are reviewing everything,” Terry Gou, the chairman of the Hon Hai Precision Industry Group of Taiwan and one of Asia’s richest men, said after traveling here from the company’s headquarters in Taiwan. He said the company was reviewing labor practices, hiring psychiatrists and putting up safety nets on the buildings.

“We will leave no stone unturned,” Mr. Gou said, “and we will make sure to find a way to reduce these suicide tendencies.”

Mr. Gou spoke at a hastily organized news conference and media tour on the campus of Foxconn Technology, the Hon Hai subsidiary that operates some of the world’s biggest factories and produces a wide range of electronics for global brands, including American computer makers.

Foxconn, which has about 420,000 employees on two campuses in Shenzhen, is known for its military-style efficiency, the awesome scale of its production operations and for manufacturing popular products like the Apple iPhone. But this year the company has come under intense scrutiny because of a string of suicides by distressed workers between the ages of 18 and 24.

The most recent took place early Tuesday, when a 19-year-old employee fell to his death here. The police have already ruled the death a suicide.

It was the ninth suicide this year by an employee at one of Foxconn’s two Shenzhen campuses, police said. Two additional workers survived suicide attempts with serious injuries.

Apple, Dell and Hewlett-Packard say they were now investigating conditions at Foxconn amid growing concern about the suicides. The companies say that all their manufacturers are required to comply with international labor standards.

But several labor rights groups have called for an independent investigation into the suicides and labor conditions at Foxconn, saying some deaths appear to be suspicious. Some advocates have also accused the company of running huge sweatshops that regularly violate Chinese labor laws and treat workers harshly.

Those assertions have been bolstered in recent weeks by China’s state-run newspapers, which have published a series of sensational reports about the suicides alongside exposés detailing the harsh conditions inside Foxconn factories.

Some articles describe the heavy burdens workers face in trying to meet Foxconn’s production quotas, cramped dormitories that sometimes house 10 to a room and meager salaries of about $150 a month before overtime.

Foxconn executives, though, strongly defend the company’s labor practices and the conditions on its huge campuses, which they say have modern dormitories, swimming pools and shopping and recreational facilities.

While company executives acknowledge a sharp rise in the rate of suicides on the Shenzhen campuses this year, they say the causes are largely because of China’s social ills and personal problems that arise when migrant workers travel long distances to find jobs.

Foxconn is still investigating the circumstances surrounding the suicides, but company executives say they have no evidence they were caused by poor labor conditions.

“There is a fine line between productivity and regimentation and inhumane treatment,” said Louis Woo, an aide to Mr. Gou at Hon Hai. “I hope we treat our workers with dignity and respect.”

To help ease the crisis, Foxconn says, it has invited university scholars and mental health experts to its campuses in recent weeks. At the news conference at one campuses Wednesday, some of those experts said the rising number of suicides may be the result of complex social factors, including the nation’s rising income gap and even something known as suicide contagion — a tendency for copycat suicides to occur after reports of other suicides.

Health experts say the suicide figures from Foxconn are troubling but far below the national rate of about 14 per 100,000 in China, according to the World Health Organization.

Still, Mr. Gou, who rarely grants interviews and almost never allows journalists to visit the campuses of Foxconn, made an unusual show of concern and openness in Shenzhen on Wednesday, bowing several times at the news conference, apologizing for the tragedies and asking mental health experts to help find a solution. He even led dozens of journalists on a tour of Foxconn’s campus, visiting dormitories, a campus hospital, a production line and an employee care center.

And he appealed to the media to stop sensationalizing the suicides at Foxconn, which he said could fuel even more suicide attempts.

“I’m appealing to the press to take social responsibility,” he said. “Do not sensationalize this. But later, he said Foxconn was re-examining the way it operated. “We can be a better company,” he said.


Bao Beibei contributed research.

    Electronics Maker Promises Review After Suicides, NYT, 26.5.2010, http://www.nytimes.com/2010/05/27/technology/27suicide.html

Financial Reform

May 21, 2010
The New York Times

After all the revelations about predatory lenders, bankers who bet against their clients and speculative booms and busts, it should be clear that weak regulation is a recipe for disaster. And open and transparent markets, with clear roles for regulators, are essential to the nation’s financial health.

So it was good news that, despite all the bank lobbying and all the Republican posturing, the Senate finally passed a financial reform bill on Thursday.

Whether it will fix the system is still not known. In many ways, the bill has moved closer to what is needed. But when House and Senate leaders meet in coming days to negotiate a final bill, they need to correct several deficiencies and omissions.

The political battle also is far from over. When the stock market sank on Thursday, hours before the final vote, opponents rushed to declare that that was because even the possibility of reform was destabilizing. The market rose again on Friday. The rhetoric didn’t stop.

Here is what needs to be addressed:

RISKY BUSINESS It was never going to be easy to rein in the multitrillion-dollar market in unregulated derivatives. The Senate bill went further than the House version in requiring most derivatives to be traded on exchanges and to be processed, or cleared, through a third party to guarantee payment in the case of default.

It still has a gaping loophole: regulators have no clear legal authority to stop or undo a derivatives deal that has not been properly cleared and exchange-traded. The House bill gives regulators more authority, but a final bill needs clear rules, with clear enforcement.

The Senate bill also waters down the “Volcker rule.” As proposed by President Obama, the rule would bar banks from making market trades for their own accounts and from owning hedge funds and private equity funds. The Senate calls for a study and a needlessly long implementation process. The House version — which was passed before the Volcker rule was proposed — only gives regulators the discretion to curb risky trading. The final bill should implement the Volcker rule without delay.

TOO BIG TO FAIL Both the House and Senate bills establish “resolution” procedures for dismantling firms if their failure threatens the system. The goal is to establish in law that stockholders and unsecured creditors — not taxpayers — will bear the losses of a failure.

The resolution power in the Senate bill is weaker than the House bill because it does not require banks to pay in advance to help cover the operational costs of dismantling a big institution. (The House bill would create a $150 billion fund.) By making banks pay for the risks they create, a resolution fund could also perform the important function of encouraging them to curtail their riskiest activities.

PROTECTING CONSUMERS AND INVESTORS Consumers of financial products would gain protections in both bills against deceptive lending and other credit abuses. Both are marred — though in different ways — by exceptions to the new rules, and by restrictions on the new consumer agency’s independence and rule-making authority. The final bill should establish an independent agency with full rule-making and enforcement powers.

The House bill imposes a fiduciary duty on brokers who give investment advice. The Senate bill does not. (Without that, brokers have leeway to pitch investments intended to boost their own or their firms’ profits, exposing investors to misleading pitches and overly expensive products.) After all that investors have suffered, it would be unconscionable not to include this provision.

All these reforms are essential for protecting investors, restoring confidence in the financial markets and ensuring that another meltdown does not happen. Congress still has work to do.

    Financial Reform, NYT, 21.5.2010, http://www.nytimes.com/2010/05/22/opinion/22sat1.html

Senate Passes Broader Rules for Overseeing Wall Street

May 20, 2010
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — The Senate on Thursday approved a far-reaching financial regulatory bill, putting Congress on the brink of approving a broad expansion of government oversight of the increasingly complex banking system and financial markets.

The legislation is intended to prevent a repeat of the 2008 crisis, but also reshapes the role of numerous federal agencies and vastly empowers the Federal Reserve in an attempt to predict and contain future debacles.

The vote was 59 to 39, with four Republicans joining the Democratic majority in favor of the bill. Two Democrats opposed the measure, saying it was still not tough enough.

Democratic Congressional leaders and the Obama administration must now work to combine the Senate measure with a version approved by the House in December, a process that is expected to take several weeks.

While there are important differences — notably a Senate provision that would force big banks to spin off some of their most lucrative derivatives business into separate subsidiaries — the bills are broadly similar, and it is virtually certain that Congress will adopt the most sweeping regulatory overhaul since the aftermath of the Great Depression.

“It’s a choice between learning from the mistakes of the past or letting it happen again,” the majority leader, Harry Reid of Nevada, said after the vote. “For those who wanted to protect Wall Street, it didn’t work.”

The bill seeks to curb abusive lending, particularly in the mortgage industry, and to ensure that troubled companies, no matter how big or complex, can be liquidated at no cost to taxpayers. And it would create a “financial stability oversight council” to coordinate efforts to identify risks to the financial system. It would also establish new rules on the trading of derivatives and require hedge funds and most other private equity companies to register for regulation with the Securities and Exchange Commission.

Passage of the bill would be a signature achievement for the White House, nearly on par with the recently enacted health care law. President Obama, speaking in the Rose Garden on Thursday afternoon, declared victory over the financial industry and “hordes of lobbyists” that he said had tried to kill the legislation.

“The recession we’re emerging from was primarily caused by a lack of responsibility and accountability from Wall Street to Washington,” Mr. Obama said, adding, “That’s why I made passage of Wall Street reform one of my top priorities as president, so that a crisis like this does not happen again.”

The president also signaled that he would take a strong hand in developing the final bill, which could mean changes to the restrictive derivatives provisions the Senate measure includes and Wall Street opposes. It is also likely that the administration will try to remove an exemption in the House bill that would shield auto dealers from oversight by a new consumer protection agency. Earlier, Mr. Obama had criticized the provision as a “special loophole” that would hurt car buyers.

As the Senate neared a final vote, Senator Sam Brownback, Republican of Kansas, withdrew an amendment to put a similar exemption for auto dealers into the Senate bill.

Mr. Brownback’s move had the effect of killing an amendment by Senators Jeff Merkley, Democrat of Oregon, and Carl Levin, Democrat of Michigan, to tighten language barring banks from proprietary trading, or playing the markets with their own money — a restriction generally known as the Volcker rule for the former Fed chairman Paul A. Volcker, who proposed the idea. Congressional Republican leaders, adopting an election-year strategy of opposing initiatives supported by the Obama administration, voiced loud criticism of the legislation while trying to insist that they still wanted tougher policing of Wall Street.

But while Republicans criticized the bill in mostly political terms, arguing that it was an example of Democrats’ trying to expand the scope of government, some experts have warned that the bill, by focusing too much on the causes of a past crisis, still leaves the financial system vulnerable to a major collapse.

The Senate bill, sponsored primarily by Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, would seek to curb abusive lending by creating a powerful Bureau of Consumer Protection within the Federal Reserve to oversee nearly all consumer financial products.

In response to the huge bailouts in 2008, the bill seeks to ensure that troubled companies, no matter how big or complex, can be liquidated at no cost to taxpayers. It would empower regulators to seize failing companies, break them apart and sell off the assets, potentially wiping out shareholders and creditors.

To coordinate efforts to identify risks to the financial system, the bill would create a “financial stability oversight council” composed of the Treasury secretary, the chairman of the Federal Reserve, the comptroller of the currency, the director of the new consumer financial protection bureau, the heads of the Securities and Exchange Commission and the Federal Deposit Insurance Corporation, the director of the Federal Housing Finance Agency and an independent appointee of the president.

The bill would touch virtually every aspect of the financial industry, imposing, for instance, a thicket of rules for the trading of derivatives, the complex instruments at the center of the 2008 crisis.

With limited exceptions, derivatives would have to be traded on a public exchange and cleared through a third party.

And, under a provision written by Senator Blanche L. Lincoln, Democrat of Arkansas, some of the biggest banks would be forced to spin off their trading in swaps, the most lucrative part of the derivatives business, into separate subsidiaries, or be denied access to the Fed’s emergency lending window.

The banks oppose that provision, and the administration has also said that it sees no benefit.

Concern about the derivatives provisions also led Senator Maria Cantwell, Democrat of Washington, to vote against the bill, saying it still included a dangerous loophole that would undermine efforts to regulate derivative trades. Senator Russ Feingold of Wisconsin was the other Democrat to oppose the measure.

The four Republicans to support the bill were Senators Susan Collins and Olympia J. Snowe of Maine; Scott Brown, the freshman from Massachusetts; and Charles E. Grassley of Iowa, who is up for re-election this year.

Among the differences between the House and Senate bills is the inclusion in the House measure of a $150 billion fund, to be financed by a fee on big banks, to help pay for liquidation of failing financial companies.

The administration opposes the fund, which it says it believes could hamper its ability to deal with a more costly collapse of a financial company. Republicans demanded that a similar $50 billion fund be removed from the Senate bill because they said it would encourage future bailouts of failed financial companies.

There are numerous other differences. For instance, the House bill addresses the consumer protection goals by establishing a stand-alone agency that would be subject to annual budget appropriations by Congress. The Senate bill establishes its consumer protection bureau within the Federal Reserve, limiting future Congressional oversight.

Lawmakers said that the bills would be reconciled in a formal conference proceeding, possibly televised.


Edward Wyatt contributed reporting.

    Senate Passes Broader Rules for Overseeing Wall Street, NYT, 20.5.2010, http://www.nytimes.com/2010/05/21/business/21regulate.html

Speedy New Traders Make Waves Far From Wall St.

May 16, 2010
The New York Times
By JULIE CRESWELL

RED BANK, N.J. — Above the Restoration Hardware in this Jersey Shore town, not far from the Navesink River, lurks a Wall Street giant.

Here, inside the humdrum offices of a tiny trading firm called Tradeworx, workers in their 20s and 30s in jeans and T-shirts quietly tend high-speed computers that typically buy and sell 80 million shares a day.

But on the afternoon of May 6, as the stock market began to plunge in the “flash crash,” someone here walked up to one of those computers and typed the command HF STOP: sell everything, and shutdown.

Across the country, several of Tradeworx’s counterparts did the same. In a blink, some of the most powerful players in the stock market today — high-frequency traders — went dark. The result sent chills through the financial world.

After the brief 1,000-point plunge in the stock market that day, the growing role of high-frequency traders in the nation’s financial markets is drawing new scrutiny.

Over the last decade, these high-tech operators have become sort of a shadow Wall Street — from New Jersey to Kansas City, from Texas to Chicago. Depending on whose estimates you believe, high-frequency traders account for 40 to 70 percent of all trading on every stock market in the country. Some of the biggest players trade more than a billion shares a day.

These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said.

But some in Washington wonder if ordinary investors will pay a price for this sort of lightning-quick trading. Unlike old-fashioned specialists on the New York Stock Exchange, who are obligated to stay in the market whether it is rising or falling, high-frequency traders can walk away at any time.

While market regulators are still trying to figure out what happened on May 6, the decision of high-frequency traders to withdraw from the marketplace is under examination.

Did their decision create a market vacuum that caused prices to plunge even faster?

“We don’t know, but isn’t that the point? How are we ever going to find out what’s going on with these high-frequency traders?” said Senator Edward E. Kaufman, Democrat of Delaware, who wants the Securities and Exchange Commission to collect more information on high-frequency traders.

“Whenever you have a lot of money, a lot of change, little or no transparency, and therefore, no regulation, you have the potential for a market disaster,” Senator Kaufman added. “That’s what we have in high-frequency trading.”

Some high-frequency traders welcome the closer scrutiny.

“We are not a no-regulation crowd,” said Richard Gorelick, a co-founder of the high-frequency trading firm RGM Advisors in Austin, Tex. “We were all created by good regulation, the regulation that provided for more competition, more transparency and more fairness.”

But critics say the markets have become unfair to investors who cannot invest millions in high-tech computers. The exchanges offer incentives, including rebates, which can add up to meaningful profits for high-volume traders as well.

“The market structure has morphed from one that was equitable and fair to one where those who get the greatest perks, who have the speed, have all of the advantages,” said Sal Arnuk, who runs an equity trading firm in New Jersey.

High-frequency traders insist that they provide the market with liquidity, thus enabling investors to trade easily.

“The benefits of the liquidity that we bring to the markets aren’t theoretical,” said Cameron Smith, the general counsel for high-frequency trading firm Quantlab Financial in Houston. “If you can buy a security with the knowledge that you can resell it later, that creates a lot of confidence in the market.”

The high-frequency club consisting of 100 to 200 firms are scattered far from the canyons of Wall Street. Most use their founders’ money to trade. A handful are run from spare bedrooms, while others, like GetCo in Chicago, have hundreds of employees.

Most of these firms typically hold onto stocks for a few seconds, minutes or hours and usually end the day with little or no position in the market. Their profits come in slivers of a penny, but they can reap those incremental rewards over and over, all day long.

What all high-frequency traders love is volatility — lots of it. “It was like shooting fish in the barrel in 2008. Any dummy who tried to do a high-frequency strategy back then could make money,” said Manoj Narang, the founder of Tradeworx.

A quiet man with a quick wit and a boyish enthusiasm, Mr. Narang, 40, looks like he came out of central casting from the dot-com era. Wearing jeans, a gray T-shirt and a New York Yankees hat, he takes a seat in front of his computer terminal and quietly answers questions about his business, glancing occasionally at the Yankees game in one of the windows on his PC.

After graduating from M.I.T., where he majored in math and computer science, Mr. Narang bounced around Wall Street trading desks before starting Tradeworx in the late 1990s.

At the time, Wall Street was at the beginning of a technological evolution that has changed the way stocks are traded, opening a variety of platforms beyond the trading floor.

The Tradeworx computers get price quotes from the exchanges, decide how to trade, complete a risk analysis and generate a buy or sell order — in 20 microseconds.

The computers trade in and out of individual stocks, indexes and exchange-traded funds, or E.T.F.’s, all day long. Mr. Narang, for the most part, has no idea which stocks Tradeworx is buying or selling.

Showing a computer chart to a visitor, Mr. Narang zeroes in on one stock that had recently been a winner for the firm. Which stock? Mr. Narang clicks on the chart to bring up the ticker symbol: NETL. What’s that? Mr. Narang clicks a few more times and answers slowly: “NetLogic Microsystems.” He shrugs. “Never heard of it,” he says.

If high-frequency traders crave volatility, why did Tradeworx and others turn off their computers on May 6?

Mr. Narang said Tradeworx could not tell whether something was wrong with the data feeds from the exchanges. More important, Mr. Narang worried that if some trades were canceled — as, indeed, many were — Tradeworx might be left holding stocks it did not want.

Now that the dust has settled, however, he has mixed feelings. “Several high-frequency trading firms that I know about stayed in the market that day,” he said, “and had their best day of the year.”

    Speedy New Traders Make Waves Far From Wall St., NYT, 16.5.2010, http://www.nytimes.com/2010/05/17/business/17trade.html

Building Is Booming in a City of Empty Houses

May 15, 2010
The New York Times
By DAVID STREITFELD

LAS VEGAS — In a plastic tent under a glorious desert sky, Richard Lee preached the gospel of the second chance.

The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”

Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.

Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.

Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.

“There’s a surprising rebound in the hardest-hit markets,” said Brad Hunter, chief economist with the consultant Metrostudy. “People are buying again.” From the recession’s lows, construction has nearly doubled in Las Vegas, Phoenix and Tucson. It is up 74 percent in inland Southern California and soaring in Florida.

Some of the demand is coming from families that are getting shut out of the bidding for foreclosures by syndicates that pay in cash, and some is from investors who are back on the prowl.

Land and labor costs have fallen significantly, so the newest homes are competitively priced. Some of the boom-era homes, meanwhile, are in developments that feel like ghost towns. And many Americans will always believe the latest model of something is their only option, an attitude builders are doing their utmost to reinforce.

In Phoenix, a billboard for Fulton Homes summed up the builders’ marketing approach. “Does your foreclosure have tenants?” it asks, next to a picture of a mammoth cockroach.

Brent Anderson, a marketing executive with another Southwest builder, Meritage Homes, said it bought 713 lots in stricken Arizona last year, and was on the verge of starting construction in a new Phoenix community called Lyon’s Gate.

“We’re building them because we’re selling them,” Mr. Anderson said. “Our customers wouldn’t care if there were 50 homes in an established neighborhood of 1980 or 1990 vintage, all foreclosed, empty and for sale at $10,000 less. They want new. And what are we going to do, let someone else build it?”

All of this goes contrary to the conventional wisdom, which suggests an improved market for builders is years away. Nationwide, new home sales at the beginning of this year plunged to a level below any recorded since 1963, when the figures were first officially tabulated.

Simply put, the country already has too many houses, the legacy of wide-scale overbuilding during the boom. The Census Bureau says there are two million vacant homes for sale, about double the historical level. Fewer new households, moreover, are being formed as families double up for economic reasons, putting a further brake on demand.

Even some builders agree with the pessimists when it comes to Las Vegas. Meritage Homes, for example, has largely withdrawn from the city. “We don’t think it will come back for a long time,” Mr. Anderson said.

American West is betting the opposite is true. The developer, which is privately held and is based here, builds nowhere else.

The evening under the tent with Mr. Lee was the official start of American West’s new community, called Reserve at Coronado Ranch. Before it opened, buyers began putting down money for the houses, which sell for under $300,000. “For the first time in three or four years, we have pent-up demand,” said American West’s vice president for sales, Jeff Canarelli.

Disregard what you may have heard about how hard times may usher in an era of restraint. “With our buyers, they always want bigger,” Mr. Canarelli said. An American West home introduced during the recession comes equipped with an elevator.

One of the initial buyers at Reserve is Josh Snider, a surgical technologist who decided a year ago he wanted to buy his first home. He sought out a foreclosure, deals that were supposedly plentiful and cheap. “What a nightmare that was,” recalled Mr. Snider, 38. “I put in five or six offers and was always outbid.”

He didn’t see any homes that were being sold by buyers in the traditional way. The price declines in Las Vegas have been so brutal that most homeowners with a mortgage owe more than their home is worth. If they must sell, their only option is a so-called short sale done with the approval of the lender, which can be a lengthy and frustrating process for all concerned.

Worried the market was going to turn around before he bought, Mr. Snider started checking out the new developments. He liked the floor plan, size and price of Reserve, which ultimately will have 310 houses.

A final incentive sealed the deal, this one courtesy of the United States government: he got a loan insured by the Federal Housing Administration, which meant his down payment was much smaller than a private lender would require.

The house, to be done in September, cost $273,500. “It’s not a bargain for everyone,” Mr. Snider said, “but it’s a bargain for me.”

He plans to live in the house with his girlfriend, Cindy Rojas, and his 12-year-old daughter.

Another early buyer is Irving Hallman, an investor from Hawaii. “I understand Vegas has its ups and downs, but we did the numbers and this house will hold its value,” Mr. Hallman said.

There is a benefit to the seeming madness in places like Las Vegas. Building homes is the traditional fuel of a recovery.

“Housing is construction. It’s tables. It’s paint. It’s couches. It’s toilets,” said Sally Taylor, a specialist in liquor and gambling establishments who attended the American West festivities. “If we build more houses, we’re creating more jobs.”

Across the street from Reserve’s three model homes is a new strip mall. Only one building is occupied, a gambling parlor. Others will start to be filled when more buyers join Mr. Snider and Mr. Hallman finds a renter.

Analysts have calculated that it could take as long as a decade for inventories to return to their precrash levels and for demand to once again exceed supply. That is a grim prospect for any owner who hopes to accrue equity through rising prices.

A few experts, however, are starting to think the path to a better market will be much shorter. Stephen F. Auth, chief investment officer at the financial services company Federated Investors, is a housing bull. He says he does not believe that many extended families will end up all living in one place, like the Waltons in the 1930s.

“That’s an unsustainable environment — Grandma coming home, Johnny moving back in with his new wife,” Mr. Auth said. “They’re going to move back out. The great housing depression is nearly over.”

New-home sales in March rose 27 percent. But most analysts attributed the jump to the pending expiration of yet another government incentive, a tax credit for buyers, and said sales would quickly slump again.

Even in Las Vegas, a community built on the willingness to be lucky, belief in a housing turnaround — and Mr. Lee’s portrait of a resilient city on its way to being a global “meetspace” — is provisional. Agents at the party said they had their hopes but were chastened by the horrors of the last three years.

Afterward, packing up his video equipment, Mr. Lee said the party itself heralded a recovery. “We used to do this every two weeks, starting in the 1990s,” he said. “But this is the first time in 18 months. Believe me, it’s been famine around here.”

    Building Is Booming in a City of Empty Houses, NYT 15.5.2010, http://www.nytimes.com/2010/05/16/business/16builder.html

Consumer Spending Rises as Factory Output Surges

May 14, 2010
Filed at 11:07 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Retail sales rose in April for the seventh straight month, factory production surged and businesses restocked their shelves. The trio of government reports Friday pointed to an economy that's improving modestly but steadily.

Consumers drove retail sales up 0.4 percent last month. The gain was less than the 2.1 percent growth in March. But that surge was boosted by an early Easter holiday and auto incentives.

Shoppers are closely watched because their spending accounts for 70 percent of economic activity. It rose in the first three months of this year at the fastest pace in three years, according to the Commerce Department report. As employers ramp up hiring, spending could rise further in coming months.

Industrial production also rose in April, posting an 0.8 percent gain. Factories, the biggest slice of industrial activity, ratcheted up output by a brisk 1 percent for a second straight month, the Federal Reserve report showed. Manufacturers have played a leading role in powering the recovery. They are boosting production because companies are starting to restore their depleted stockpiles of goods.

As evidence of that trend, business inventories grew for a third straight month in March, Commerce said in a separate report. Inventories rose 0.4 percent. And total business sales gained 2.3 percent -- the sixth straight increase and the best showing in four months.

A diverse group of manufacturing sectors reported gains in production in April. They included metal products and machinery, appliances, furniture and carpeting, and chemicals and plastics.

''The manufacturing recovery is getting more diffuse, with 17 of 19 major sectors increasing production,'' said David Huether, chief economist at the National Association of Manufacturers. ''It looks more durable and deeper.''

Investors appeared to look past the encouraging reports on the U.S. economy and focused more on concerns about how spending cuts in Europe might slow the continent's economy. The Dow Jones industrial average fell more than 150 points in morning trading.

Though the retail sales gains suggest a sustained recovery, some analysts sounded a cautionary note. They think the rebound will remain weaker than previous recoveries because of obstacles weighing on households.

''The decent gains in payroll employment in recent months have improved the outlook for spending,'' said Paul Dales, an economist at Capital Economics. But he said he still expects a sub-par recovery because of the ''continued weak fundamentals of heavy indebtedness, tight credit and high unemployment.''

The 0.4 percent rise in retail sales in March was led by a 6.9 percent surge in spending at hardware stores. Spending was also up at health and beauty shops and gasoline service stations. Most other categories either showed outright declines or smaller increases than in March.

Auto sales posted a small 0.5 percent advance. That was much lower than the 6.7 percent surge in the previous month. Shoppers had rushed in March to take advantage of sales incentives that were first offered by Toyota Motor Corp. to try to counter damaging publicity from its safety recalls.

Sales at department stores fell by 1.5 percent. And the broader category of general merchandise stores, which covers big retailers such as Wal-Mart and Target, reported a 0.4 percent decline.

In addition to the impact from an earlier-than-usual Easter, retailers had to contend with cold and rainy weather in much of the country in April. That depressed sales of spring clothing. Demand at specialty clothing stores fell 1 percent in April after having jumped 2.6 percent in March.

Sales at appliance and electronics stores fell 0.4 percent in April, after an even bigger 1.3 percent drop in March.

The 0.4 percent rise in sales excluding autos followed a 1.2 percent jump in activity outside of autos in March.

The overall economy, as measured by the gross domestic product, grew at annual rate of 3.2 percent. That gain was led by the biggest advance in consumer spending in three years.

Economists worry that spending could falter in the coming months without more growth in income. But there have been encouraging signs that job growth is picking up. In April, payroll jobs grew by 290,000, the most in four years.

Still, the unemployment rate rose to 9.9 percent as more people began or resumed job searches -- a sign that many are feeling more optimistic about the job market.

    Consumer Spending Rises as Factory Output Surges, NYT, 14.5.2010, http://www.nytimes.com/aponline/2010/05/14/business/AP-US-Economy.html

Computer Trades Are Focus in Wall Street Plunge

May 9, 2010
The New York Times
By GRAHAM BOWLEY and EDWARD WYATT

Investigators seeking an explanation for the brief stock market panic last week said Sunday that they were focusing increasingly on how a controlled slowdown in trading on the New York Stock Exchange, meant to bring about stability, instead set off uncontrolled selling on electronic exchanges.

It was an unintended consequence of a system built to place a circuit breaker on stocks in sharp decline. In theory, trades slow down so that sellers can find buyers the old-fashioned way, by hand, one by one. The electronic exchanges did not slow down in tandem, causing problems, according to two officials familiar with the investigation.

That could mean that the computers first flooded the market with sell orders that could not be matched with buyers. Then, just as quickly, many of these networks withdrew from trading. The combined effect might have set off a chain reaction that sent shares of many companies spiraling during the 15-minute frenzy.

After a weekend of analysis, many specialists at the major exchanges no longer believe that a single large sell trade in one stock, like that of Procter & Gamble, was the trigger, according to the people familiar with the investigation. Instead, they suspect that a mismatch in rules between the older New York Stock Exchange and younger electronic exchanges set off a frightening sequence of events.

It is not known exactly what caused the initial sell-off in the blue chips, but investigators say the earliest sign of trouble they have found was a sudden drop in the value of a futures contract on the Chicago Mercantile Exchange, based on the Standard & Poor’s 500-stock index. That pushed down a broad array of stocks in that index, all of them traded on the New York Exchange and other major exchanges, and sent many stocks on the New York Exchange into slow mode.

Ever since computerized trading became dominant in the nation’s stock markets in recent years, market experts have been warning that the lack of consistent rules among exchanges and the increasing complexity and speed of computer trading systems could destabilize markets. This appears to have happened last Thursday, when stock prices plunged and the Dow Jones industrial average fell roughly 600 points in a few minutes.

Officials of the Securities and Exchange Commission and the heads of the four main exchanges are to meet Monday in Washington to discuss applying circuit breakers across all exchanges. Today, only the New York Exchange applies circuit breakers on individual stocks. A Congressional hearing on the episode is scheduled for Tuesday.

Investigators say the rule on halting trading was created for a time when one exchange accounted for the vast proportion of stock trading. But over the last half decade the Big Board’s share of the market has dropped sharply — in part because of regulatory changes to encourage new competitors — while ever larger volumes of stocks are traded on electronic exchanges without circuit breaker rules.

Investigators are now focusing on the events of last Thursday, when several hundred stocks on the Big Board, including five major stocks that make up the Dow — Accenture, Procter & Gamble, 3M and two others — went into slow mode.

This decision forced a switch to slow-motion trading as traders on the floor tried to arrest the decline by manually seeking out bidders. But that did not work, because trading shifted immediately to broader markets controlled by computers, where the plunge continued.

Regulators and the exchanges continued over the weekend to review the tapes from the millions of trades made last Thursday. The investigations are looking at what effect the decision to halt trading in these stocks in New York had on broader market confidence — and on algorithms used by computerized traders.

The scale of the shutdown on may have been a new phenomenon for these computer systems. They may also have been programmed to shut down in such a cataclysmic moment of stress, which would have had a further cascading effect in withdrawing bidders from the market and putting further intense downward pressure on prices.

In Washington on Sunday there were cross-party calls to fix the system and criticism that regulators had still not fully identified the cause of the sell-off, even as markets, still jittery over Europe’s debt crisis and last week’s plunge, were due to open Monday. (Asian markets were up in early trading Monday, after European leaders authorized billions in new loans to the Continent’s debt-riddled nations.)

Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Banking Committee, said on “Face the Nation” on CBS that he believed market regulators should consider new “marketwide circuit breakers” to deal with the kind of market break that occurred on Thursday.

“This is an issue that raises systemic risk,” Mr. Dodd said, adding that he had called for hearings on the matter.

Mr. Dodd also criticized the S.E.C. “Clearly the S.E.C., the Securities and Exchange Commission, needs to act,” he said. “They need to step up very quickly and let us know what happened here and what steps need to be taken.”

Senator Richard C. Shelby of Alabama, the ranking Republican member of the banking committee, said on the same program that he believed “the technology has gotten ahead of the regulators.” Instead, he added, “the regulators have got to get ahead of the technology. That is going to be a big challenge down the road. Otherwise, we could have more of this.”

The Homeland Security Department said Sunday that there was no evidence that a computer attack had started the stock spiral.

In the talks on Monday, Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission, will meet with senior officials from the New York Stock Exchange, Nasdaq, BATS Exchange and Direct Trading.

Not one of the regulatory agencies has said anything more about the possible cause of Thursday’s market break since a statement on Friday afternoon identified disparate trading conventions and rules as a possible cause and said the review was continuing.

The lack of coordination among exchanges has been one part of the investigation and is considered by regulators to be more of a magnifying event than the trigger of the market’s sudden swoon, according to another person close to the investigation.

As trading has been dispersed among a dozen electronic exchanges, the S.E.C. and other market regulators have maintained no centralized database of stock trades, order sizes or prices. That has made it more difficult for regulators to piece together what exactly happened on Thursday.

The S.E.C. has been warned in recent months by market participants, publicly traded companies and other regulatory agencies that the lack of coordination between trading platforms, as well as the expansion of high-speed trading in alternative markets, has furthered systemic risk, encouraged regulatory arbitrage and increased opportunities for market manipulation.

The staff of the Financial Industry Regulatory Authority wrote to the S.E.C. in April that “no single regulator has a full picture of all trading activities in the U.S. equity markets.”


Edward Wyatt contributed reporting.

    Computer Trades Are Focus in Wall Street Plunge, NYT, 9.5.2010, http://www.nytimes.com/2010/05/10/business/10markets.html

High-Speed Trading Glitch Costs Investors Billions

May 6, 2010
The New York Times
By NELSON D. SCHWARTZ and LOUISE STORY

The glitch that sent markets tumbling Thursday was years in the making, driven by the rise of computers that transformed stock trading more in the last 20 years than in the previous 200.

The old system of floor traders matching buyers and sellers has been replaced by machines that process trades automatically, speeding the flow of buy and sell orders but also sometimes facilitating the kind of unexplained volatility that roiled markets Thursday.

“We have a market that responds in milliseconds, but the humans monitoring respond in minutes, and unfortunately billions of dollars of damage can occur in the meantime,” said James Angel, a professor of finance at the McDonough School of Business at Georgetown University.

In recent years, what is known as high-frequency trading — rapid automated buying and selling — has taken off and now accounts for 50 to 75 percent of daily trading volume. At the same time, new electronic exchanges have taken over much of the volume that used to be handled by the New York Stock Exchange.

In fact, more than 60 percent of trading in stocks listed on the New York Stock Exchange takes place on separate computerized exchanges.

Many questions were left unanswered even hours after the end of the trading day. Who or what was the culprit? Why did markets spin out of control so rapidly? What needs to be done to prevent this from happening again?

The Securities and Exchange Commission and the Commodity Futures Trading Commission said they were examining the cause of the unusual trading activity.

Mary L. Schapiro, chairwoman of the S.E.C., and Gary Gensler, the head of the C.F.T.C., held conference calls with overseers of the exchanges who were reviewing trading tapes from the day.

One official said they identified “a huge, anomalous, unexplained surge in selling, it looks like in Chicago,” about 2:45 p.m. The source remained unknown, but that jolt apparently set off trading based on computer algorithms, which in turn rippled across indexes and spiraled out of control.

Many firms have computers that are programmed to automatically place buy or sell orders based on a variety of things that happen in the markets. Some of the simplest triggers are set off when a stock drops or rises a certain percent in the trading day, or when an index moves a specific amount.

But these orders can have a cascading effect. For example, if enough programs place sell orders when the overall market is down, say, 4 percent in a single day, those orders could push the market down even more — and set off programs that do not kick in until the market is down 5 percent, which in turn can have the effect of pushing stocks down even more.

Some circuit breakers do exist, a legacy of the reforms made following the 1987 stock market crash, but they only kick in after a huge drop — and only at certain hours. Before 2 p.m., a 10 percent drop in the Dow causes New York Stock Exchange to halt trading for one hour. Between 2 p.m. and 2:30 p.m., the pause shrinks to a half-hour and after 2:30, there is no halt in trading.

If there is a 20 percent drop, trading stops for two hours before 1 p.m. and by one hour between 1 and 2 p.m. After 2 p.m., the market closes.

Glitches in individual stocks have happened before — what was different Thursday was the scale of the problem. In April 2009, shares of Dendreon, a small biotech company, dived by more than 50 percent in less than two minutes, just before a presentation by Dendreon executives, Mr. Angel said.

Trading was halted on the Nasdaq, where Dendreon is listed, but there was no news as it turned out, Mr. Angel said, and when trading resumed the stock returned to its previous levels. “It took a human two minutes to discover something was wrong and halt trading,” he said.

What happened Thursday was different because it moved hundreds of stocks sharply at the same time, many of them blue chips that form the foundation of individual investors portfolios as well as major indexes like the Dow and the Standard & Poor’s 500-stock index.

The near-instantaneous swings left brokers dumbfounded. Dermott W. Clancy, who runs a New York Stock Exchange broker, said Thursday was one of the five worst days he has seen in 24 years in the business. When the market dropped across all indexes in a matter of minutes, customers were calling him nonstop.

“They’re calling saying ‘Is there something I’m missing? Is there somebody valuing these securities at this level? Is there some news in the marketplace I’m not aware of?’ ” he said.

The answer — that it all started with an apparent error — infuriated Mr. Clancy. “The market was never down one thousand points,” he said. “Procter & Gamble should never have traded at $39. But a lot of people lost money as if the prices were meant to drop.”

For a short while, traders started to distrust what they were seeing.

“There was no pricing mechanism,” Mr. Clancy said. “There was nothing. No one knew what anything was worth. You didn’t know where to buy a stock or sell a stock.”


Jackie Calmes and Binyamin Appelbaum in Washington contributed reporting.

    High-Speed Trading Glitch Costs Investors Billions, NYT, 6.5.2010, http://www.nytimes.com/2010/05/07/business/economy/07trade.html

U.S. Markets Plunge, Then Stage a Rebound

May 6, 2010
The New York Times
By GRAHAM BOWLEY

A bad day in the stock market turned into one of the most terrifying moments in Wall Street history on Thursday with a brief 1,000-point plunge that recalled the panic of 2008.

It lasted just 16 minutes but left Wall Street experts and ordinary investors alike struggling to come to grips with what had happened — and fearful of where the markets might go from here.

At least part of the sell-off appeared to be linked to trader error, perhaps an incorrect order routed through one of the nation’s exchanges. Many of those trades may be reversed so investors do not lose money on questionable transactions.

But the speed and scale of the plunge — the largest intraday decline on record — seemed to feed fears that the financial troubles gripping Europe were at last reaching across the Atlantic. Amid the rout, new signs of stress emerged in the credit markets. European banks seemed to be growing wary of lending to each other, suggesting the debt crisis was entering a more dangerous phase.

Traders and Washington policy makers struggled to keep up as the Dow Jones industrial average fell 1,000 points shortly after 2:30 p.m. and then mostly rebounded in a matter of minutes. For a moment, the sell-off seemed to overwhelm computer and human systems alike, and some traders began referring grimly to the day as “Black Thursday.”

But in the end, Thursday was not as black as it had seemed. After briefly sinking below 10,000, the Dow ended down 347.80, or 3.2 percent, at 10,520.32. The Standard & Poor’s 500-stock index dropped 37.75 points, or 3.24 percent, to close at 1,128.15, and the Nasdaq was down 82.65 points, or 3.44 percent, at 2,319.64.

But up and down Wall Street, and across the nation, many investors were dumbstruck. Experts groped for explanations as blue-chip stocks like Procter & Gamble, Philip Morris and Accenture plunged. At one point, Accenture fell more than 90 percent to a penny. P.& G. plunged to $39.37 from more than $60 within minutes.

The crisis in Greece, high-speed computer program trading, the debate over regulatory reform in Washington, talk of errant trades — all were pointed to as possible catalysts. But most agreed the plunge would not have been as bad had the markets not already been on edge over the debt crisis in Europe.

“There is a recognition that the Greek crisis has morphed into not only a European crisis but is going global,” said Mohamed A. El-Erian, chief executive of Pimco, the money manager.

On the trading floor of the New York Stock Exchange, traders shouted or watched open-mouthed as the screens lighted up with plummeting prices and as phones rang off the hook. “It was almost like ‘The Twilight Zone.’ ” said Theodore R. Aronson of Aronson, Johnson & Ortiz, a money management firm in Philadelphia.

Wall Street managers wandered their trading floors, trying to calm their people and figure out what was going on. They began to notice wild movements in stocks like P.& G. and Philip Morris. Many traders said computer program trades accelerated the slide as market indexes fell through crucial levels.

In Washington, Treasury officials began combing market tapes for answers. By the evening they still had not gotten to the bottom of it, but they discovered some aberrations — market blips — in trading coming out of Chicago.

The Treasury secretary, Timothy F. Geithner, was returning to the Treasury about 2 p.m. from the Capitol when he saw on his BlackBerry that the market was down 3 percent. He called the Treasury’s market room, which constantly monitors financial exchanges; officials there theorized that the cause was Greece’s and Europe’s financial woes.

Minutes later in the Treasury hallway, Mr. Geithner looked again at his BlackBerry and saw that the market was down nearly 9 percent. He told colleagues it had to be a mistake.

Mr. Geithner immediately called the market room and then the Federal Reserve. He held a conference call with Fed officials and Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission. About 3:15, Mr. Geithner walked to the Oval Office to brief President Obama.

Next Mr. Geithner spoke with European central bankers. After the markets closed, at 4:15 and again at 5:45, he joined conference calls with the heads of the Fed, the New York Fed, the S.E.C. and the Commodity Futures Trading Commission; the calls were expected to continue into the evening.

The Group of 7 industrial nations’ ministers and governors, including Mr. Geithner, plan a conference call at 7:30 a.m. Friday Eastern time.

As of about 6 p.m., all the officials knew was that there had been what one called “a huge, anomalous, unexplained surge in selling, it looks like in Chicago, at about 2:45.” The source remained unknown, but it had apparently set off algorithmic trading strategies, which in turn rippled across everything, pushing trading out of whack and feeding on itself — until it started to reverse.

Federal officials fielded rumors that the culprit was a single stock, a single institution or execution system, a $16 billion trade that should have been $16 million. But they did not know the truth.

What happens to the day’s market losers will depend on the nature of the cause and whether it can be identified. That is a question for the S.E.C. The Nasdaq market said in the evening that it would cancel all trades in hundreds of stocks whose prices had swung wildly between 2:40 p.m. and 3 p.m.

As Wall Street reeled, anchors on CNBC, Bloomberg and the Fox Business Network turned their attention to the Dow.

When the Dow was down more than 900 points and the CNBC anchor Erin Burnett observed that the P.& G. stock had dropped 25 percent, Jim Cramer, the former hedge fund trader and the host of “Mad Money,” seemed to calm the conversation a bit by basically saying, “Buy, buy, buy.”

“If that stock is there, you just go and buy it,” he said of P.& G. “That is not a real price. Just go buy Procter & Gamble.”

The day’s uncertainty pushed the euro to its lowest level against the dollar in 14 months. It slipped to $1.2529 at one point before closing at $1.2602. The dollar’s rise, and the mounting fear of a slowdown in global growth, sent commodities prices lower. Crude oil fell $2.86 to settle at $77.16 a barrel.

By the close, when calm was restored, the focus was on working out what had happened.

The S.E.C. and the Commodity Futures Trading Commission said they were reviewing “unusual trading activity.” But already markets were turning attention back to Europe — whether German lawmakers would approve the Greek bailout on Friday, whether warning signals would flash brighter, whether the euro zone would stay together, or whether this was a precursor of more gyrations to come.


Eric Dash, Christine Hauser, Nelson D. Schwartz, Jackie Calmes and Binyamin Appelbaum contributed reporting.

    U.S. Markets Plunge, Then Stage a Rebound, NYT, 6.5.2010, http://www.nytimes.com/2010/05/07/business/07markets.html

Plummet, Then Recovery for Dow

May 6, 2010
The New York Times
By CHRISTINE HAUSER

For a short time Thursday afternoon, Wall Street looked like 2008.

In a moment of uncontrolled selling, major indexes fell nearly 9 percent. The Dow Jones industrial average tumbled more than 550 points in about five minutes, falling almost 1,000 points on the day. The Standard & Poor’s 500-stock index and the Nasdaq followed suit. Computer programs intensified the selloff as markets fell through trading limits.

And then, almost as quickly, the markets recovered most of the decline.

At the close, the Dow was down 347.80 or 3.2 percent, to 10,520.32. The S.&P. dropped 37.75 points or 3.24 percent to 1,128.15, and the Nasdaq was down 82.65 points or 3.44 percent, to 2,319.64.

The uncertainty pushed the euro to its lowest level in 14 months, slipping to $1.2529 to the dollar at one point. The dollar’s rise sent commodities prices lower. Crude oil fell $2.81 to $77.16 a barrel.

“I wish I had a definitive answer,” said William Fitzpatrick, an equities analyst at Optique Capital Management. “I think the information from Greece and Europe continues to get worse and that is what is weighing on investors.”

But Peter Cardillo, the chief market economist of Avalon Partners, said there were a number of negative comments on Thursday about that Greek crisis was expanding beyond Europe, including a remark, by James Bullard, president of the Federal Reserve Bank of St. Louis. Mr. Bullard said debt problems in Greece and other European countries posed a risk to the United States economic outlook.

That aside, Mr. Cardillo said, “what really happened here, gold was going through the roof and the euro went down to 1.25. There was a lot of panic selling that came in and the market fell apart.”

It was the third day of sharp declines. The Dow had already dropped 284 points on Tuesday and Wednesday.

“I think three days makes a pattern, and we as investors grew complacent that every time we had a bad day we had a good day,” Jake Dollarhide, chief executive of Longbow Asset Management, said. “This is a terrible, terrible day.”

Mr. Dollarhide also said that the realization that the debt crisis could go beyond the Greek borders finally hit home.

“What is the next foreign problem that is going to rear its ugly head,” he said. “What has kept the E.U. markets together was the notion that the E.U. was going to have a unified front.”

Europe’s debt worried continued to play out Thursday, both on the streets and in legislative chambers. Greek lawmakers late Thursday approved a crucial austerity bill needed to tap into a $141.9 billion aid package from the 15 other countries that use the euro and the International Monetary Fund.

And German lawmakers were expected to vote Friday on Berlin’s 22.4 billion-euro share of the bailout package.

The Greek government needs $11.6 billion by May 19 to cover debt payments. But a resolution of its problems is considered only a temporary fix — similar issues are looming for Spain and Portugal, which both had their debt ratings downgraded in recent days.

In London, the FTSE 100 was down 1.5 percent, the DAX in Frankfurt dropped 0.84 percent while the CAC-40 in Paris dropped 2.2 percent.

The unrest in Greece, which continued on Thursday, has threatened to polarize Greek society at a time when millions are already reeling over the effects of the financial crisis. During protests on Wednesday, police said protesters set fire to a bank in Athens, killing three workers.

Earlier on Thursday, investors listened to hear if the European Central Bank would announce measures — like buying government bonds or even cutting rates — that would have calm the markets. While the central bank president, Jean-Claude Trichet, offered some reassuring words — saying that Athens was not in danger of defaulting and that countries like Portugal and Spain are substantially different from Greece — some analysts said he did not do enough.

“They would have loved to have seen something bold,” Phil Orlando, chief equity market strategist at Federated Investors, said of investors. “And certainly a cut in the rate would have qualified.”

Art Hogan, the New York-based chief market analyst at Jefferies & Company, said “It is fair to say that we know the E.C.B. is going to stick to their script for a while.”

Mr. Hogan said that it was difficult to figure out just what was driving the market. “We have got a lot of competing forces,” he said.

In economic news, the Labor Department reported new claims for jobless benefits fell less than expected last week. And while productivity rose more than expected in the first quarter, much of it was the result of a drop in labor costs, which typically doesn’t bode well for consumer spending.

And the retailing industry collectively posted a 0.5 percent year-over-year sales increase at stores open at least a year, Thomson Reuters said. In April 2009, the industry suffered a 2.7 percent decline.

Combined sales for March and April, however, rose 4.8 percent, Thomson Reuters said.

Mr. Hogan characterized April retail sales as weak and “that is not helping”, Mr. Hogan said. Other economic data was “typically in line with the string that we have seen. It is in line and it is positive.”

    Plummet, Then Recovery for Dow, 7.5.2010, http://www.nytimes.com/2010/05/07/business/07markets.html

Consumers Help Drive U.S. Economy to 3.2% Growth Rate

April 30, 2010
The New York Times
By CATHERINE RAMPELL

The United States economy continued to expand in the first quarter, but economists cautioned that the pace of growth is still not nearly fast enough to recover ground lost during the recession.

National output grew at a seasonally adjusted annual rate of 3.2 percent in the quarter, the Commerce Department reported Friday. The economy had increased 5.6 percent in the fourth quarter of 2009 and 2.2 percent in the third quarter.

The steady growth has quelled fears that the downturn is not quite over.

“It’s been a case of, when will they stop worrying and learn to love the boom?” said Robert Barbera, chief economist at ITG, who said that many economists have been too hesitant to acknowledge the steady recovery because the job market is still weak.

At last, consumers were a major contributor to economic growth. Consumer spending grew at an annual rate of 3.6 percent in the first part of the year, after growing at an annual rate of 1.6 percent in the previous three months.

Economic growth at the end of 2009, on the other hand, had been primarily a result of a slower drawing down of companies’ inventories — that is, businesses were not running down their stockroom shelves as quickly as they had been. Inventory growth accounted for about half of the expansion in the first quarter of 2010.

Consumer spending makes up more than 70 percent of the total economy, and itusually drives growth during economic recoveries. Consumers’ lackluster spending last year had worried experts about how sustainable a recovery driven primarily by changes in stockroom shelves could be.

Economists are hopeful that families will continue to pick up the pace of purchasing, although consumers may be hesitant to open their wallets too much further given the tepid growth in job creation and personal income.

“We haven’t had consumer spending growth this strong in three years,” said Nigel Gault, chief United States economist at IHS Global Insight. “But the caveat is that with real disposable incomes not growing, this was all done through the saving rate. We cannot rely on consumers continually driving down their savings. They need income support from hiring.”

Hiring only recently began to turn around, with the economy adding 162,000 jobs on net in March, of which 48,000 were temporary Census-related positions. The economy had destroyed about eight million jobs since the recession began in December 2007.

“Unless the pace of growth picks up significantly we will see high unemployment rates for years to come,” said Josh Bivens, an economist at the Economic Policy Institute, a liberal research organization in Washington.

The unemployment rate has hovered around 10 percent for the last eight months, and most recently was 9.7 percent in March. New numbers will be released by the Labor Department next week.

In the meantime, companies have been enjoying their new customers.

Nate Evans, who owns a pottery-making business with his wife, Hallie, in New Albin, Iowa, said that their sales in 2009 were the worst ever but that they were just starting to see things pick up. The Evanses sell their pottery from their home workshop as well as in galleries in nearby states, and at crafts shows in Wisconsin, Minnesota, Iowa and Illinois.

“I felt like the energy of the crowd was better,” Mr. Evans said of their first fair this year, in Minnesota. As did other crafts sellers, he said. “Most of the people we talked to said it was better than last year. Hey, it’s not great, but it’s better than last year.”

The biggest contributors to consumer spending growth were purchases of durable goods like cars. In addition to consumer spending, exports and nonresidential fixed investment also played a role in overall output growth. Businesses’ purchases of equipment and software, for example, grew at an annual rate of 13.4 percent last quarter, after a 19 percent increase in the last quarter of 2009.

“This is very good news, since it indicates businesses are feeling more confident about the expansion to start spending some of their cash,” Mr. Gault said. “If businesses are spending more on equipment, usually that would go along with more hiring, too.”

Federal government spending, which includes remaining stimulus money, grew at an annualized rate of 1.4 percent in the first quarter of 2010. But this was more than offset by continued cuts from state and local governments, whose spending decreased 3.8 percent. It was the third quarter in a row in which state and local spending fell.

“Government spending contracted, for all the ballyhoo about stimulus,” said John Ryding, chief economist at RDQ Economics. “This recovery is going to have to stand on the backs of private-sector demand, not on government demand, given all the current fiscal challenges.” Even though any pickup in business is welcome, modest improvement may not be enough to alleviate the lasting pain caused by the so-called Great Recession, many economists say.

The nation’s gross domestic product — a broad measure of goods and services produced in the country — is far below its potential, according to economists’ projections of where the economy would have been if it had followed its long-term trend. Output would need to grow at least 5 percent annually for several years to get back on track — and perhaps more importantly, to lead to enough job creation to employ the 15 million Americans already out of work and the 100,000 new workers joining the labor force each month.

Right now, many economists are expecting that the nation’s output will instead expand by just 2.5 percent or 3.5 percent this year.

“The economy is not any longer falling into a hole, but it’s also not getting out of the hole quickly enough either,” said Ian Shepherdson, chief United States economist at High Frequency Economics.


Christine Hauser contributed reporting.

    Consumers Help Drive U.S. Economy to 3.2% Growth Rate, NYT, 30.4.2010, http://www.nytimes.com/2010/05/01/business/economy/01econ.html

U.S. Said to Open Criminal Inquiry Into Goldman

April 29, 2010
The New York Times
By LOUISE STORY and MICHAEL J. de la MERCED

Federal prosecutors have opened an investigation into trading at Goldman Sachs, raising the possibility of criminal charges against the Wall Street giant, according to people familiar with the matter.

While the investigation is still in a preliminary stage, the move could escalate the legal troubles swirling around Goldman.

The Securities and Exchange Commission, which two weeks ago filed a civil fraud suit against Goldman, referred its investigation to prosecutors for the Southern District of New York, which has now opened its own inquiry.

Goldman has vigorously denied the accusations by the S.E.C., which accused Goldman of defrauding investors involved a complex mortgage deal known as Abacus 2007-AC1.

Federal prosecutors would face a higher bar in bringing a criminal case against Goldman, whose role in the mortgage market came under sharp scrutiny this week during a marathon hearing in the Senate. In contrast to civil cases, the burden of proof is higher in criminal ones, where prosecutors must prove their case beyond a reasonable doubt.

The stakes are high for Goldman, but they are also high for the United States attorney’s office. Prosecutors from the Eastern District of New York lost a case last year filed against two hedge fund managers at Bear Stearns, whose collapse presaged the turmoil on Wall Street.

Prosecutors built much of that case around internal e-mail messages at Bear Stearns, much the way the S.E.C. and senators have pointed to e-mail at Goldman in which employees had disparaged investments that they were selling to their customers.

In the end, however, prosecutors were unable to prove to a jury any criminal wrongdoing by the Bear Stearns employees.

A spokesman for Goldman declined to say whether the bank knows about a criminal case, but he said “given the recent focus on the firm, we’re not surprised” to learn about a criminal inquiry. The spokesman said Goldman would cooperate with any investigators’ requests for information.

A spokeswoman for the Southern District also declined to comment.

The opening of the Justice Department investigation was first reported Thursday evening by The Wall Street Journal’s Web site.

Goldman has said it will defend itself against the S.E.C.’s accusations. The firm’s executives discussed the case last week during their quarterly earnings call, and this week, they testified about their mortgage operations in a nearly 11-hour hearing in Washington before a Senate subcommittee.

That hearing focused broadly on Goldman’s mortgage operations, and the Senate subcommittee released reams of new internal documents from Goldman. The Senate Permanent Subcommittee on Investigations is looking into many other mortgage deals beyond the one cited by the S.E.C.

The deal at the heart of the S.E.C. case was one of 25 mortgage securities that Goldman created in a program it called Abacus. The agency has hinted that it may expand its inquiry to other Wall Street firms.

Those securities were synthetic collateralized debt obligations, which are bundles of derivatives that mimic the performance of mortgage bonds. The securities allowed people who believed that the housing market would collapse to buy insurance against certain mortgage bonds they thought might fail. When those mortgage bonds did fail, the investors in the Abacus deals suffered major losses.

The Abacus deals were, however, very profitable for the parties that were negative on the housing market. In the Abacus 2007-AC1 deal, the hedge fund manager John A. Paulson raked in about $1 billion when the bonds he helped select hit trouble.

Mr. Paulson has not been named in the S.E.C.’s case because he was not involved in marketing and selling the deal.

Many in Congress have been pressing for a criminal inquiry. This week, 62 House members sent a letter to the Justice Department asking it to conduct an investigation into Goldman’s actions.


Charlie Savage contributed reporting.

    U.S. Said to Open Criminal Inquiry Into Goldman, NYT, 29.4.2010, http://www.nytimes.com/2010/04/30/business/30case.html

Ford Reports Profit of $2.1 Billion in Quarter

April 27, 2010
The New York Times
By NICK BUNKLEY

DEARBORN, Mich. — The Ford Motor Company reported its fourth consecutive quarterly profit in Tuesday and said higher sales produced its largest pretax operating profit in six years.

Ford said it earned a net profit of $2.1 billion, or 50 cents a share, and that it expected “solid profits” and positive cash flow from its automotive operations for 2010, a year sooner than it had previously forecast. In the quarter a year ago, Ford lost $1.4 billion, or 60 cents a share.

“The Ford team around the world achieved another very solid quarter, and we are delivering profitable growth,” the chief executive, Alan R. Mulally, said in a statement. “Our plan is working, and the basic engine that drives our business results — products, market share, revenue and cost structure — is performing stronger each quarter, even as the economy and vehicle demand remain relatively soft.”

Revenue increased to $28.1 billion in the first quarter of 2009, during the heart of the recession.

Ford, the only one of the three Detroit automakers to avoid seeking bankruptcy protection last year, has earned a profit in four consecutive quarters for the first time since 2005. The total profit for that 12-month period was $3.4 billion.

Ford also continued a trend of surpassing expectations on Wall Street, where analysts had projected a first-quarter profit of 31 cents a share, excluding one-time items. On that basis, Ford’s profit was 46 cents a share, or $2 billion.

The company earned $1.2 billion from its automotive operations, compared with a loss of $2 billion in the first quarter a year ago. Ford Motor Credit earned $828 million, compared to a $36 million loss.

The automaker earned $1.2 billion in North America, compared with a $665 million loss a year ago. Ford said it planned to build 625,000 vehicles in the United States and Canada in the second quarter, 9 percent more than the first quarter and 39 percent more than the year-ago period.

“This is a more encouraging start to the year than we anticipated,” Ford’s chief financial officer, Lewis W. K. Booth, told reporters at Ford’s headquarters. “The fact that we’ve got our cost structure under control is also helping the bottom line.”

However, Mr. Booth said the company does not necessarily expect each of the next three quarters to be as strong as the first, particularly if an improving economy leads to higher interest rates later in the year.

“It would be unwise to think of $2 billion as a running rate for the year,” he said.

Ford still has considerably more debt — $34.3 billion at the end of March — than cash, which stood at $25.3 billion. The company paid off $3 billion in debt earlier this month, but Mr. Booth declined to discuss Ford’s plans to pay down more debt.

The profits are in large part a result of the new products Ford has been bringing to its dealers’ showrooms, including the revamped Taurus sedan whose sales in the United States were 96 percent higher than its predecessor in the first quarter.

Later this year, it is introducing new subcompact and compact models, the Fiesta and Focus, which it hopes will capture a larger share of the fast-growing market for small cars. New versions of the Edge crossover and the Explorer sport utility vehicle — which will become a more fuel-efficient crossover — will also arrive in the months ahead.

Analysts say Ford undoubtedly was helped by Toyota’s recall of more than nine million vehicles since November, causing some shoppers to look at brands they might not have bought or even considered otherwise.

Ford has also seen its image improve since General Motors and Chrysler began borrowing billions of dollars from the federal government. But Ford’s executive chairman, William Clay Ford Jr., said the company’s momentum was mostly attributable to its own efforts rather than to problems its competitors have suffered.

“I don’t know how much it really helped because it’s all about the product,” Mr. Ford told reporters after a speech in Detroit this month. “People will come into our showrooms but if they don’t see anything they like, they’ll go elsewhere.”

Ford’s share of the United States market rose to 16.6 percent in the first quarter, up 2.7 percentage points from a year earlier. It outsold G.M. in February, something that had not happened in more than 50 years, aside from several months in 1998 when G.M. workers were on strike.

Shares of Ford have nearly tripled in the past year, to more than $14 a share.

General Motors plans to report its first-quarter earnings in May. G.M. executives have said they think a profit is possible this year, and the company paid off the remaining balance on its $6.7 billion loan from the federal government last week.

Chrysler last week said it lost $197 million in the first quarter but that its operations were on pace to break even this year.

This article has been revised to reflect the following correction:

Correction: April 27, 2010

An earlier version of this article misstated the number of cars Ford plans to build in the United States and Canada in the second quarter.

    Ford Reports Profit of $2.1 Billion in Quarter, NYT, 27.4.2010, http://www.nytimes.com/2010/04/28/business/28ford.html

Op-Ed Columnist

The Goldman Drama

April 27, 2010
The New York Times
By DAVID BROOKS

Between 1997 and 2006, consumers, lenders and builders created a housing bubble, and pretty much the entire establishment missed it. Fannie Mae and Freddie Mac and the people who regulate them missed it. The big commercial banks and the people who regulate them missed it. The Federal Reserve missed it, as did the ratings agencies, the Securities and Exchange Commission and the political class in general.

It’s easy to see why this happened. People who make it into the establishment work and play well with others. They are part of the same overlapping social networks, and inevitably begin to perceive the world in similar, conventional ways. They thrive in institutions where people are not rewarded for being cantankerous intellectual bomb-throwers.

Outside the establishment herd, on the other hand, there were contrarians who understood the bubble (which was the easy part) and who figured out how to take counteraction (which was hard). Michael Burry worked at a small hedge fund in Northern California. John Paulson ran an obscure fund in New York. Eventually, there were even a few traders at the big investment banks who also foresaw the imminent collapse. One of them was “Fabulous” Fabrice Tourre of Goldman Sachs.

If this were a Hollywood movie, the prescient outsiders would be good-looking, just and true, and we could all root for them as they outfoxed the smug establishment. But this is real life, so things are more complicated. According to Gregory Zuckerman’s book, “The Greatest Trade Ever,” Burry was a solitary small-time operator far away. Paulson was cold and diffident.

And as for Fabulous Fab, he seems to be the product of the current amoral Wall Street culture in which impersonal trading is more important than personal service to clients, and in which any product you can sell to some poor sucker is deemed to be admirable and O.K.

In this drama, in other words, the establishment was pleasant, respectable and stupid, while the contrarians were smart but hard to love, and sometimes sleazy.

This week the drama comes to Washington in two different ways. First, as is traditional in our culture, the elected leaders of the clueless establishment have summoned the leaders of Goldman Sachs to a hearing so they can have a post-hoc televised conniption fit on the amorality of Wall Street.

This spectacle presents Goldman with an interesting public relations choice. The firm can claim to be dumb but decent, like the rest of the establishment, and emphasize the times it lost money. Or it can present itself as smart and sleazy, and emphasize the times it made money at the expense of its clients. Goldman seems to have chosen dumb but decent, which is probably the smart narrative to get back in the establishment’s good graces, even if it is less accurate.

The second big event in Washington this week is the jostling over a financial reform bill. One might have thought that one of the lessons of this episode was that establishments are prone to groupthink, and that it would be smart to decentralize authority in order to head off future bubbles.

Both N. Gregory Mankiw of Harvard and Sebastian Mallaby of the Council on Foreign Relations have been promoting a way to do this: Force the big financial institutions to issue bonds that would be converted into equity when a regulator deems them to have insufficient capital. Thousands of traders would buy and sell these bonds as a way to measure and reinforce the stability of the firms.

But, alas, we are living in the great age of centralization. Some Democrats regard federal commissions with the same sort of awe and wonder that I feel while watching LeBron James and Alex Ovechkin.

The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.

If you take this as your premise, the Democratic bill is fine and reasonable. It would force derivative trading out into the open. It would create a structure so the government could break down failing firms in an orderly manner. But the bill doesn’t solve the basic epistemic problem, which is that members of the establishment herd are always the last to know when something unexpected happens.

If this were a movie, everybody would learn the obvious lessons. The folks in the big investment banks would learn that it’s valuable to have an ethical culture, in which traders’ behavior is restricted by something other than the desire to find the next sucker. The folks in Washington would learn that centralized decision-making is often unimaginative decision-making, and that decentralized markets are often better at anticipating the future.

But, again, this is not a Hollywood movie. Those lessons are not being learned. I can’t wait for the sequel.

    The Goldman Drama, NYT, 27.4.2010, http://www.nytimes.com/2010/04/27/opinion/27brooks.html

Goldman Sachs Messages Show It Thrived as Economy Fell

April 24, 2010
The New York Times
By LOUISE STORY, SEWELL CHAN and GRETCHEN MORGENSON

In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making “some serious money” betting against the housing markets.

The e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, appear to contradict some of Goldman’s previous statements that left the impression that the firm lost money on mortgage-related investments.

In the e-mails, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November of 2007 that the firm indeed had lost money initially. But it later recovered from those losses by making negative bets, known as short positions, enabling it to profit as housing prices fell and homeowners defaulted on their mortgages. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

In another message, dated July 25, 2007, David A. Viniar, Goldman’s chief financial officer, remarked on figures that showed the company had made a $51 million profit in a single day from bets that the value of mortgage-related securities would drop. “Tells you what might be happening to people who don’t have the big short,” he wrote to Gary D. Cohn, now Goldman’s president.

The messages were released Saturday ahead of a Congressional hearing on Tuesday in which seven current and former Goldman employees, including Mr. Blankfein, are expected to testify. The hearing follows a recent securities fraud complaint that the Securities and Exchange Commission filed against Goldman and one of its employees, Fabrice Tourre, who will also testify on Tuesday.

Actions taken by Wall Street firms during the housing meltdown have become a major factor in the contentious debate over financial reform. The first test of the administration’s overhaul effort will come Monday when the Senate majority leader, Harry Reid, is to call a procedural vote to try to stop a Republican filibuster.

Republicans have contended that the renewed focus on Goldman stems from Democrats’ desire to use anger at Wall Street to push through a financial reform bill.

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrast with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Mr. Levin said in a statement Saturday when his office released the documents. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

A Goldman spokesman did not immediately respond to a request for comment.

The Goldman messages connect some of the dots at a crucial moment of Goldman history. They show that in 2007, as most other banks hemorrhaged losses from plummeting mortgage holdings, Goldman prospered.

At first, Goldman openly discussed its prescience in calling the housing downfall. In the third quarter of 2007, the investment bank reported publicly that it had made big profits on its negative bet on mortgages.

But by the end of that year, the firm curtailed disclosures about its mortgage trading results. Its chief financial officer told analysts at the end of 2007 that they should not expect Goldman to reveal whether it was long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets and leaving out the amount it made on its negative bets.

Goldman and other firms often take positions on both sides of an investment. Some are long, which are bets that the investment will do well, and some are shorts, which are bets the investment will do poorly. If an investor’s positions are balanced — or hedged, in industry parlance — then the combination of the longs and shorts comes out to zero.

Goldman has said that it added shorts to balance its mortgage book, not to make a directional bet that the market would collapse. But the messages released Saturday appear to show that in 2007, at least, Goldman’s short bets were eclipsing the losses on its long positions. In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker wrote, there was “good news”: “we own 10 mm in protection.” That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.

Documents released by the Senate committee appear to indicate that in July 2007, Goldman’s daily accounting showed losses of $322 million on positive mortgage positions, but its negative bet — what Mr. Viniar called “the big short” — came in $51 million higher.

As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only to hedge its mortgage holdings in 2007 and said the firm had not been net short in that market.

The firm said in its annual report this month that it did not know back then where housing was headed, a sentiment expressed by Mr. Blankfein the last time he appeared before Congress.

“We did not know at any minute what would happen next, even though there was a lot of writing,” he told the Financial Crisis Inquiry Commission in January.

It is not known how much money in total Goldman made on its negative housing bets. Only a handful of e-mail messages were released Saturday, and they do not reflect the complete record.

The Senate subcommittee began its investigation in November 2008, but its work attracted little attention until a series of hearings in the last month. The first focused on lending practices at Washington Mutual, which collapsed in 2008, the largest bank failure in American history; another scrutinized deficiencies at several regulatory agencies, including the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

A third hearing, on Friday, centered on the role that the credit rating agencies — Moody’s, Standard & Poor’s and Fitch — played in the financial crisis. At the end of the hearing, Mr. Levin offered a preview of the Goldman hearing scheduled for Tuesday.

“Our investigation has found that investment banks such as Goldman Sachs were not market makers helping clients,” Mr. Levin said, referring to testimony given by Mr. Blankfein in January. “They were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis. They bundled toxic and dubious mortgages into complex financial instruments, got the credit-rating agencies to label them as AAA safe securities, sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the financial instruments that they sold, and profiting at the expense of their clients.”

The transaction at the center of the S.E.C.’s case against Goldman also came up at the hearings on Friday, when Mr. Levin discussed it with Eric Kolchinsky, a former managing director at Moody’s. The mortgage-related security was known as Abacus 2007-AC1, and while it was created by Goldman, the S.E.C. contends that the firm misled investors by not disclosing that it had allowed a hedge fund manager, John A. Paulson, to select mortgage bonds for the portfolio that would be most likely to fail. That charge is at the core of the civil suit it filed against Goldman.

Moody’s was hired by Goldman to rate the Abacus security. Mr. Levin asked Mr. Kolchinsky, who for most of 2007 oversaw the ratings of collateralized debt obligations backed by subprime mortgages, if he had known of Mr. Paulson’s involvement in the Abacus deal.

“I did not know, and I suspect — I’m fairly sure that my staff did not know either,” Mr. Kolchinsky said.

Mr. Levin asked whether details of Mr. Paulson’s involvement were “facts that you or your staff would have wanted to know before rating Abacus.” Mr. Kolchinsky replied: “Yes, that’s something that I would have personally wanted to know.”

Mr. Kolchinsky added: “It just changes the whole dynamic of the structure, where the person who’s putting it together, choosing it, wants it to blow up.”

The Senate announced that it would convene a hearing on Goldman Sachs within a week of the S.E.C.’s fraud suit. Some members of Congress questioned whether the two investigations had been coordinated or linked.

Mr. Levin’s staff said there was no connection between the two investigations. They pointed out that the subcommittee requested the appearance of the Goldman executives and employees well before the S.E.C. filed its case.

    Goldman Sachs Messages Show It Thrived as Economy Fell, NYT, 24.4.2010, http://www.nytimes.com/2010/04/25/business/25goldman.html

Op-Ed Columnist

Don’t Cry for Wall Street

April 23, 2010
The New York Times
By PAUL KRUGMAN

On Thursday, President Obama went to Manhattan, where he urged an audience drawn largely from Wall Street to back financial reform. “I believe,” he declared, “that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector.”

Well, I wish he hadn’t said that — and not just because he really needs, as a political matter, to take a populist stance, to put some public distance between himself and the bankers. The fact is that Mr. Obama should be trying to do what’s right for the country — full stop. If doing so hurts the bankers, that’s O.K.

More than that, reform actually should hurt the bankers. A growing body of analysis suggests that an oversized financial industry is hurting the broader economy. Shrinking that oversized industry won’t make Wall Street happy, but what’s bad for Wall Street would be good for America.

Now, the reforms currently on the table — which I support — might end up being good for the financial industry as well as for the rest of us. But that’s because they only deal with part of the problem: they would make finance safer, but they might not make it smaller.

What’s the matter with finance? Start with the fact that the modern financial industry generates huge profits and paychecks, yet delivers few tangible benefits.

Remember the 1987 movie “Wall Street,” in which Gordon Gekko declared: Greed is good? By today’s standards, Gekko was a piker. In the years leading up to the 2008 crisis, the financial industry accounted for a third of total domestic profits — about twice its share two decades earlier.

These profits were justified, we were told, because the industry was doing great things for the economy. It was channeling capital to productive uses; it was spreading risk; it was enhancing financial stability. None of those were true. Capital was channeled not to job-creating innovators, but into an unsustainable housing bubble; risk was concentrated, not spread; and when the housing bubble burst, the supposedly stable financial system imploded, with the worst global slump since the Great Depression as collateral damage.

So why were bankers raking it in? My take, reflecting the efforts of financial economists to make sense of the catastrophe, is that it was mainly about gambling with other people’s money. The financial industry took big, risky bets with borrowed funds — bets that paid high returns until they went bad — but was able to borrow cheaply because investors didn’t understand how fragile the industry was.

And what about the much-touted benefits of financial innovation? I’m with the economists Andrei Shleifer and Robert Vishny, who argue in a recent paper that a lot of that innovation was about creating the illusion of safety, providing investors with “false substitutes” for old-fashioned assets like bank deposits. Eventually the illusion failed — and the result was a disastrous financial crisis.

In his Thursday speech, by the way, Mr. Obama insisted — twice — that financial reform won’t stifle innovation. Too bad.

And here’s the thing: after taking a big hit in the immediate aftermath of the crisis, financial-industry profits are soaring again. It seems all too likely that the industry will soon go back to playing the same games that got us into this mess in the first place.

So what should be done? As I said, I support the reform proposals of the Obama administration and its Congressional allies. Among other things, it would be a shame to see the antireform campaign by Republican leaders — a campaign marked by breathtaking dishonesty and hypocrisy — succeed.

But these reforms should be only the first step. We also need to cut finance down to size.

And it’s not just critical outsiders saying this (not that there’s anything wrong with critical outsiders, who have been much more right than supposedly knowledgeable insiders; see Greenspan, Alan). An intriguing proposal is about to be unveiled from, of all places, the International Monetary Fund. In a leaked paper prepared for a meeting this weekend, the fund calls for a Financial Activity Tax — yes, FAT — levied on financial-industry profits and remuneration.

Such a tax, the fund argues, could “mitigate excessive risk-taking.” It could also “tend to reduce the size of the financial sector,” which the fund presents as a good thing.

Now, the I.M.F. proposal is actually quite mild. Nonetheless, if it moves toward reality, Wall Street will howl.

But the fact is that we’ve been devoting far too large a share of our wealth, far too much of the nation’s talent, to the business of devising and peddling complex financial schemes — schemes that have a tendency to blow up the economy. Ending this state of affairs will hurt the financial industry. So?

    Don’t Cry for Wall Street, NYT, 23.4.2010, http://www.nytimes.com/2010/04/23/opinion/23krugman.html

Microsoft’s Income Rises 35%, Driven by Sales of Windows 7

April 22, 2010
The New York Times
By ASHLEE VANCE

Sometimes breaking a sales record isn’t good enough. Just ask Microsoft.

In the span of a couple of weeks, analysts and investors following the technology industry have had their expectations swell for a powerful recovery. Sales at giants like Intel, Apple and EMC have surged past prerecession levels to hit new highs. Both consumers and corporations have increased their technology spending, and there is talk once again of hiring in Silicon Valley.

Microsoft, the world’s largest software maker, added to the good cheer on Thursday, as it too reported record results for its third quarter, with sales rising 6 percent to $14.50 billion. But Microsoft’s numbers left investors wanting more.

Shares of Microsoft promptly fell about 4.5 percent to $29.98 in after-hours trading on Thursday, after the release of third-quarter figures.

“They had strong results, but the expectations from investors were higher,” said Sasa Zorovic, an analyst with Janney Capital Markets. “This was a sign that we probably need to be a little more realistic, and that things are moving slower than you would believe by the recent euphoria.”

The hopes for a blowout quarter from Microsoft rose in recent weeks as other technology companies reported their results, and as data about the PC industry was made public.

Intel, for example, just reported record sales of its PC chips, noting particularly strong demand for faster, more expensive laptop chips. In addition, a number of analysts raised their predictions for 2010 sales of PCs, in some cases predicting as much as 25 percent growth for the industry.

Microsoft’s third-quarter figures backed up this optimism around the PC market.

Its net income rose 35 percent, to $4.01 billion or 45 cents a share, from $2.98 billion, or 33 cents, in the period a year ago. Analysts polled by Thomson Reuters expected Microsoft to earn 42 cents a share.

Executives at Microsoft pointed to Windows as the main driver of revenue during the quarter, as sales of the software rose to $4.42 billion, from $3.45 billion in the same period last year.

According to Microsoft’s estimates, the PC market grew 25 percent during the last quarter, with the consumer segment rising 30 percent and business market rising 14 percent. The strength of the sales to businesses was a real highlight for Microsoft, because many companies have resisted buying new PCs.

“We are encouraged by the recent uptick in business PC growth and expect this business PC refresh cycle will continue over a couple of years,” said Peter Klein, chief financial officer at Microsoft, during a call with Wall Street analysts.

Brendan Barnicle, a software analyst with Pacific Crest Securities, said in an interview, “The most important thing is that they’re seeing business PCs come back,” adding, “This is huge.”

Mr. Barnicle noted that rising corporate spending on PCs should drive Windows 7 sales as well as sales of Office 10, which will go on sale in June.

Microsoft also said its search, gaming and online software products performed well during the quarter.

Microsoft has tried to put the dark days of the recession and a string of product missteps behind it. The company spent much of the last 18 months retooling its core products. It now looks to rebuild its relationship with consumers over the next year via various pieces of software and gadgets.

For instance, Microsoft has worked to revitalize its smartphone software business, demonstrating a new smartphone operating system, Windows Phone 7, that will ship on cellphones late this year. In addition, the company just released a pair of new phones aimed at handling social networking tasks like posting photos and videos online in a bid to court a younger audience.

Other than the PC, Microsoft has some razzle-dazzle in store for video gamers. Later this year, it will begin selling a version of its gaming accessory code-named Project Natal. This product will allow people to do away with controllers altogether and instead play games using body gestures.

Katherine Egbert, an analyst with Jefferies & Company, has forecast that Microsoft could generate up to $1.3 billion in sales of the Project Natal systems over the first year of the product’s release if it is priced at about $100.

But even if the Project Natal device is a blockbuster, it will do little to impact Microsoft’s overall revenue, which remains highly dependent on the Windows and Office franchises.

“Microsoft’s entertainment division is important, but it just doesn’t really move the dial,” Ms. Egbert said.

    Microsoft’s Income Rises 35%, Driven by Sales of Windows 7, NYT, 22.4.2010, http://www.nytimes.com/2010/04/23/technology/23soft.html

Profit Rose 68% at Amazon, Topping Analysts’ Forecasts

April 22, 2010
The New York Times
By THE ASSOCIATED PRESS

SAN FRANCISCO (AP) — Amazon.com said Thursday that its first-quarter profit surged 68 percent, showing that consumers are even more comfortable opening their wallets to the online retailer as the economy slowly improves.

Earnings were $299 million, or 66 cents a share, in the January through March period. The amount was 5 cents more than analysts polled by Thomson Reuters had expected. Amazon had a profit of $177 million, or 41 cents a share in the year-earlier period. Revenue rose 46 percent to $7.13 billion, well above the $6.87 billion analysts had expected.

For the current quarter, Amazon expects revenue of $6.1 billion to $6.7 billion. That would be an increase of 31 percent to 44 percent over last year, but it also means Amazon’s revenue could fall below analysts’ expectations for $6.43 billion.

Amazon shares fell $9.49 to $141 in after-hours trading, after finishing regular trading up $4.06 at $150.49. Earlier in the day the stock hit a high of $151.09, adjusted for splits.

Revenue from books, CDs, DVDs and other media grew 26 percent to $3.43 billion. Electronics and other “general merchandise” revenue increased 72 percent to $3.51 billion.

The first quarter ended right before the arrival of a major competitor to Amazon’s Kindle e-reader, the Apple iPad tablet device. Like the Kindle, the iPad can wirelessly download books.

As in the past, Amazon declined to give details about Kindle sales.

It reiterated that the device is Amazon’s best-selling product, but the meaning of that is unclear, given that the Kindle can be bought only on Amazon’s site. Amazon will start selling the Kindle at some Target stores this month.

    Profit Rose 68% at Amazon, Topping Analysts’ Forecasts, NYT, 22.4.2010, http://www.nytimes.com/2010/04/23/technology/23amazon.html

Obama Issues Sharp Call for Reforms on Wall Street

April 22, 2010
The New York Times
By PETER BAKER

WASHINGTON — President Obama is traveling to the shadow of Wall Street on Thursday to counter what he calls “the furious efforts of industry lobbyists” trying to weaken or kill new financial regulations that he says are needed to stave off a second Great Depression.

As the Senate debates how to rewrite rules governing the financial industry, Mr. Obama will lay out the elements he insists must be in any legislation to get his signature. Among them are more consumer protections, limits on the size of banks and the risks they can take, reforms on executive compensation and greater transparency for controversial securities known as derivatives.

In flying to New York City, the president wants to confront the financial industry more directly through a sharp speech just a few minutes’ subway ride from Wall Street, and with some of its leading corporate titans in the audience. After castigating their “failure of responsibility” in recent years, he intends to call on them to stop resisting tighter regulation through the army of lobbyists now staked out on Capitol Hill.

“I am sure that many of those lobbyists work for some of you,” Mr. Obama plans to say, according to excerpts of the speech provided by the White House for release on Thursday morning. “But I am here today because I want to urge you to join us, instead of fighting us in this effort. I am here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of our financial sector.”

The fight for tougher regulation of the financial industry has become the president’s top legislative priority since he signed his health care program into law, and both parties are jockeying for position on the issue with midterm Congressional elections just six months away. The president and his allies have eagerly portrayed Republicans as handmaidens of Wall Street, while the Republicans have accused Democrats of trying to strangle the financial markets and even institutionalize the idea of bailouts in tough times.

The tensions appeared to ease somewhat in recent days as both sides predicted an eventual bipartisan compromise. A Senate committee on Wednesday sent to the floor a bill imposing tougher rules on derivatives, the complex securities at the heart of the 2008 financial crisis, and one key Republican senator joined Democrats in advancing the legislation.

In an interview with CNBC and The New York Times on Wednesday, and in the speech excerpts released ahead of the Thursday event, Mr. Obama avoided incendiary language attacking Republicans, suggesting he was angling for a deal with them. But in addition to setting demands for what to include in the bill, he included tough talk about the industry that he accused of putting profit ahead of propriety.

“Some on Wall Street forgot that behind every dollar traded or leveraged, there is a family looking to buy a house, pay for an education, open a business, or save for retirement,” he says in the excerpts released by the White House. “What happens here has real consequences across our country.”

The president’s address at Cooper Union in Lower Manhattan will circle back to another speech he gave at the same location in March 2008 warning of financial manipulation, market bubbles and the concentration of economic power. He repeats some of the same lines he gave two years ago and casts himself as a prescient forecaster before the collapse later that year.

“I take no satisfaction in noting that my comments have largely been borne out by the events that followed,” he says in the excerpts. “But I repeat what I said then because it is essential that we learn the lessons of this crisis, so we don’t doom ourselves to repeat it. And make no mistake — that is exactly what will happen if we allow this moment to pass — an outcome that is unacceptable to me and to the American people.”

In the address, Mr. Obama plans to embrace both the financial regulation bill passed by the House last year and the version now emerging in the Senate. The White House said that Mr. Obama in the speech will lay out five elements that “must be included” in the final bill:

¶Instituting a system to ensure that “American taxpayers are protected in the event that a large firm begins to fail.”

¶Imposing the so-called Volcker Rule, named after Paul A. Volcker, the former Federal Reserve chairman who proposed limits on the freewheeling trading and risks taken by banks.

¶Setting new transparency rules for derivatives “and other complicated financial instruments.”

¶Assuring “strong consumer financial protections.”

¶Instituting “pay reforms” to give investors and pension holders “a stronger role in determining who manages the companies in which they’ve placed their savings.”

The White House said Thursday’s audience would include leaders from the financial industry, members of the President’s Economic Recovery Advisory Board, consumer advocates, local elected officials, representatives of those affected by the economic downturn, and Cooper Union students and faculty members. Among those expected to attend, a White House spokeswoman said, is Gary D. Cohn, president of Goldman Sachs, the Wall Street firm sued by the Securities and Exchange Commission last week over fraud allegations — but not Lloyd C. Blankfein, Goldman’s chief executive.

    Obama Issues Sharp Call for Reforms on Wall Street, NYT, 22.4.2010, http://www.nytimes.com/2010/04/23/business/economy/23prexy.html

Chrysler Lost $4 Billion but Sees Signs of Improvement

April 21, 2010
The New York Times
By NICK BUNKLEY

DETROIT — Chrysler said Wednesday that it had lost $4 billion since emerging from bankruptcy protection almost a year ago. But it also reported positive cash flow and a small operating profit in the first quarter of 2010.

The results are the first official look at the U.S. automaker’s finances since it came out of bankruptcy June 10 under the control of the Italian automaker Fiat.

The chief executive of both companies, Sergio Marchionne, said Chrysler is on track to meet its 2010 targets, including a break-even-or-better performance, when excluding one-time charges. On that basis, Chrysler earned $143 million in the first quarter on revenue of $9.7 billion.

Counting one-off charges, Chrysler lost $197 million in the first quarter, mostly due to interest payments, compared with a $2.5 billion loss in the fourth quarter.

Chrysler also said it had $7.4 billion in cash on hand as of March 31, about $1.5 billion more than it had at the end of 2009.

Separately, Fiat reported a first quarter net loss of €25 million, or $34 million, significantly narrower than the €410 million of a year earlier. But the shares fell as many analysts had expected a small profit.

Sales rose to €12.9 billion, from €11.3 billion.

The figures were released ahead of the presentation of Fiat Group’s five-year business plan, expected to include a spinoff of its automotive unit, which produces the flagship Fiat brand.

The operating profit at Chrysler occurred even as its sales in the United States continued to decline, while many of its competitors began to report large year-over-year gains. Chrysler’s market share was 9.2 percent in the first quarter, down two points from a year earlier but up one point from the fourth quarter.

Mr. Marchionne said he expects improvement in Chrysler’s sales and balance sheet in the coming months.

“This positive operating result in the first quarter is a concrete indication to our customers, dealers and suppliers that the 2010 targets we have set for ourselves are achievable,” Mr. Marchionne said in a statement. “We are also generating cash to finance the investments being made in our product portfolio and brand repositioning.”

From June 10 to Dec. 31, the company lost $3.8 billion and had revenue of $17.7 million. It said $2.1 billion of that loss was a charge related to the trust fund that took over coverage of health care for United Automobile Workers retirees on Jan. 1. The rest was blamed largely on its steep decline in sales and “significant start-up costs.”

Mr. Marchionne said Chrysler has been strengthening its liquidity since bankruptcy through “improving trading margins, operational efficiencies and rigorous cost discipline.” The company said it has $2.4 billion remaining in its credit lines from the United States and Canadian governments.

Unlike General Motors across town, Chrysler is not in a position to begin paying back the money it borrowed from taxpayers and made no mention of repayment. Mr. Marchionne has previously said Chrysler would pay back the loans by 2014.

G.M. on Wednesday said it has paid off its $8.2 billion debt to the United States and Canada in full, five years ahead of its original repayment schedule. The company’s chairman and chief executive, Edward E. Whitacre, planned to make the announcement during a visit to G.M.’s assembly plant in Kansas City, Kansas.

(Mr. Whitacre also planned to reveal a $257 million investment in the Kansas plant and one in Michigan to build the next version of the Chevrolet Malibu sedan.)

G.M. did not repay all the $50 billion it borrowed from the United States. Most of that amount was converted to a 61 percent equity stake held by the U.S. Treasury Department.

Chrysler is 10 percent owned by the U.S. Treasury.

    Chrysler Lost $4 Billion but Sees Signs of Improvement, NYT, 21.4.2010, http://www.nytimes.com/2010/04/22/business/global/22chrysler.html

A State With Plenty of Jobs but Few Places to Live

April 20, 2010
The New York Times
By MONICA DAVEY

WILLISTON, N.D. — When Joey Scott arrived here recently from Montana, he had no trouble finding work — he signed almost immediately with a company working to drill in the oil fields. But finding housing was another matter.

Every motel in town was booked, some for months in advance. Every apartment complex, even every mobile home park, had a waiting list. Mr. Scott found himself sleeping in his pickup truck in the Wal-Mart parking lot, shaving and washing his hair in a puddle of melted snow.

“I’ve got a pocketful of money, but I just can’t find a room,” said Mr. Scott, 25.

North Dakota has a novel problem: plenty of jobs, but nowhere to put the people who hold them.

The same forces that have resulted in more homelessness elsewhere — unemployment, foreclosure, economic misery — have pushed laid off workers from California, Florida, Minnesota, Michigan and Wyoming to abundant jobs here, especially in the booming oil fields.

But in this city rising from the long empty stretches of North Dakota, hundreds are sleeping in their cars or living in motel rooms, pup tents and tiny campers meant for weekend getaways in warmer climes. They are staying on cots in offices and in sleeping bags in the concrete basements of people they barely know.

North Dakota has the lowest unemployment rate in the country, 4 percent, but advocates for the homeless say the number of people they see with nowhere to live — a relatively rare occurrence here until now — grew to 987 in 2009 from 832 in 2008, an increase of about 19 percent.

And the problem is certain to worsen this summer as oil companies call for more rigs and thousands more workers.

“It’s hard to know where this might end,” said E. Ward Koeser, the mayor of Williston, who met this month with the governor of North Dakota to plead for state help with the housing crisis. “It’s the one thing that sometimes wakes me up in the morning and doesn’t let me go to sleep,” he said, acknowledging that most mayors can only dream of having such a riddle.

Still, where will all these happily employed newcomers live?

“I don’t know,” said Mr. Koeser, whose city had about 12,000 people at last count, but may now be closer to 15,000. “We literally have no place.”

Cranes dot the city, proof that a building boom is under way, but not fast enough.

While the rest of the country was sinking into recession, North Dakota never did. Other states nursed budget deficits, but North Dakota, even now, has a surplus. The state has a wealth of other jobs. A rise in oil production here, especially, served as an antidote to any whiff of what the rest of the nation was witnessing.

Beneath an enormous expanse of land here, workers have pumped an ever-growing amount of crude oil from a formation called the Bakken, thanks in part to new horizontal drilling technology. Government estimates put the potential recoverable oil from the Bakken, which stretches into Montana, at 4.3 billion barrels.

Now, 109 oil rigs — with scores of workers for each — are drilling in North Dakota, and some officials say that figure could reach 150 this year.

In one of the least populated states in the nation, this sudden overcrowding has upended some axioms of ordinary life.

In motels here, some people have stayed so long that they know their neighbors down the hall. Dinner comes from a microwave. “It’s a horrible way to live,” said Chris Rosmus, a Minnesotan who moved into the Vegas Motel for a month and stayed a year and a half.

In the Buffalo Trails campgrounds, an odd assortment of wooden boards, tarps and pink foam insulation are pressed up around campers, desperate attempts to add shells against the bitter cold. Fred Wise, in a camper he called his “8-by-18-foot jail cell,” was watching “Dancing With the Stars” alone at a cramped table. He grimaced at memories of temperatures dipping well below zero during the six months he has been here, temperatures at which ice can form inside these campers or freeze a camper door shut. “You’ve got to man up for this,” said Mr. Wise, 58.

Families have been pressed and strained. Mercedes Allen, her boyfriend and their 4-month-old baby, Hunter, moved here from California. Their stay with relatives stretched on awkwardly. Her boyfriend was hired to the first oil job he sought, but the living arrangements — with four adults, two children and two babies all under one roof — grew tense. By early April, Ms. Allen said, her relatives had given her a week to move out.

“It hurts to have to say, ‘I found nothing again,’ ” Ms. Allen said, as her week was running out.

If the problems are bad for oil workers, who are well paid, they are worse for locals in less lucrative jobs, who have seen their rents soar.

There are still some houses for sale here, but many of the newcomers arrive from grim chapters — foreclosures, bankruptcies, layoffs. They have little hope of qualifying for mortgages.

In the end, a relative from California drove a 31-foot camper to North Dakota for Ms. Allen, and she moved by the appointed day. The camper sits in a mobile home park without working utility connections, like electricity, for now, but Ms. Allen said she was relieved. “At least we have our own place,” she said.

In desperation a few months ago, the city began allowing trailers, campers and skid shacks (nearly windowless portable homes) to park in one of the empty, overgrown trailer parks that had been abandoned after the last oil boom ended in the 1980s.

The more than 180 companies involved in the oil operations, including Hess, ConocoPhillips and Marathon Oil, are also concerned about housing. Some have rented out entire motels, and others are bringing in large, portable housing units — known as man camps — for workers to live on site, as Mr. Scott, the man sleeping in his truck, ultimately did.

Halliburton, with more than 300 employees in the area, has a 90-unit camp in place, and has asked to cart in a 158-bedroom camp used for the Winter Olympics. Some companies are helping workers make down payments on mobile homes.

For all of these struggles, few here say they wish to go back to where they came from.

Jana and Robert Stout stayed in motel after motel for four months, not finding one that could keep them for long. When Mr. Stout left for his oil job in the mornings, Ms. Stout climbed into her Buick and began the hunt for the next place. Often she sat much of the day in motel parking lots, waiting for vacancies to open up.

A few weeks ago, the Stouts got off a waiting list at a motel that had been booked for two years. They can stay there indefinitely for $450 a month. The room is tiny, big enough for a bed, a television and a hot plate. Ms. Stout’s grown daughter and granddaughter may need to stay on the floor, if they cannot find a place.

Still, the Stouts said they would never consider returning to Wyoming, where they used to live. “For what?” Ms. Stout said. “If I was home right now, I would be way worse. There is potential here.”

    A State With Plenty of Jobs but Few Places to Live, NYT, 20.4.2010, http://www.nytimes.com/2010/04/21/us/21ndakota.html

In Sour Home Market, Buying Often Now Beats Renting

The New York Times
April 20, 2010
By DAVID LEONHARDT

In much of the country, for much of the last decade, renting a home has usually been a better financial move than buying one. It’s been true in Southern California, San Francisco, Phoenix, Las Vegas and large parts of Florida, the Pacific Northwest and the Northeast.

Renting required you to suffer the scorn of many real estate agents and the skepticism of friends and relatives who believed that owning a home was almost always superior. But renting also would have typically saved you thousands of dollars a year.

Now, however, the situation is getting more complicated because the housing bust has been playing out unevenly across the country.

In some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis.

But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began. People who buy a home in these areas will face higher monthly costs than if they rented, even after taking tax deductions into account. As a result, buyers are effectively betting that prices will rise enough in future years to cover the difference.

The country’s two biggest metropolitan areas, New York and Los Angeles, are a microcosm of today’s more nuanced real estate market. Average house prices across both areas have fallen enough that buying may now be a good deal for many families. Yet there are still significant pockets where renting looks promising — including parts of Manhattan, the New York suburbs and Orange County, Calif.

The buy-versus-rent question is particularly relevant right now. To qualify for an expiring federal tax credit of up to $8,000, home buyers must sign a contract by April 30 and close on the house by June 30. Many economists also expect mortgage rates to rise in coming months.

Camela Witters, a 38-year-old trophy engraver in Las Vegas, plans to close on her first home purchase — a four-bedroom, $164,000 house nearly identical to the one she is now renting — in the next few days. She decided to buy, she said, when she found out she could save money by doing so. “I didn’t buy a house when everyone did,” said Ms. Witters, who lives with her companion and their children. “So I’m kind of taking advantage of all the foreclosures.”

The Times analysis is based on comparing the costs of buying and renting a similar home, using data from Moody’s Economy.com, a research firm, and from real estate agents. This kind of comparison can never tell someone for sure what the best financial move will be. But it does show whether a buyer will need a big jump in future prices to cover all the costs of owning — including the down payment, closing costs, property taxes, mortgage interest, repairs and co-op fees.

A simple way to do the comparison is to look at something called the rent ratio: the purchase price of a house divided by the annual cost of renting a similar one. The number 20 provides a useful rule of thumb. When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.

In many large metropolitan areas, including New York, Los Angeles, Chicago, Houston, Dallas, Atlanta and South Florida, the average ratio is now 16 or lower. It was more than 25 in several of these places at the peak of the bubble, about five years ago. With a ratio as low as 16 and interest rates as low as they are, the costs of owning can be less than the costs of renting — and buyers will end up worse off only if prices fall considerably more.

A two-bedroom Spanish-style condominium in Beverly Hills, Calif., for example, recently went on the market for $1.075 million, notes Don Heller of Prudential California Realty. Including taxes, condo fees and the tax deduction for mortgage interest, a typical buyer making a 20 percent down payment would face an effective monthly payment of about $6,000. Compare that with the monthly rent on a similar two-bedroom condo nearby — $7,600.

The math works out similarly in less costly areas, too, be it once booming cities like Phoenix and Orlando, Fla.; Midwestern cities like Minneapolis and Cleveland; or the outer-ring suburbs of most big cities. Much of New York’s outer boroughs appear to fall into this category.

The problem for potential buyers is that many real estate agents argue for buying even in places where the numbers don’t add up. In the Bay Area, the rent ratio remains around 30. In Seattle, it’s about 28. In parts of Manhattan, it appears to be about 25, according to current listings.

“In most markets, you’re better off buying,” Thomas Lys, an accounting professor at Northwestern University, says. “But once the ratio gets to 25 or 30, I’d say, ‘You know what? There may be a bubble.’”

The rent ratio has long been higher in New York and San Francisco than most places, perhaps because of zoning rules or because the cities are home to large numbers of affluent households willing to pay extra to own. So it’s possible that prices will not fall. But they are already high enough that the monthly costs of owning often exceed the cost of renting — even without taking into account the down payment or other one-time costs.

A big reason is that prices still haven’t fallen much in some places. In Rye, N.Y., the average per-square-foot sale price was only 9 percent lower early this year than at its 2007 peak, according to MDA DataQuick. Some similarly affluent parts of the Los Angeles, Miami and San Diego areas have experienced declines of 25 to 50 percent.

Obviously, owning a home brings benefits that are not strictly financial. It offers stability and, for many people, comfort. As I have written, I bought a house in 2008 (in part because the rent ratio in my area had fallen to about 16). Even in Manhattan, San Francisco or Seattle, a family confident that it will stay put for a decade or more may well be wise to buy today.

But it’s worth remembering that the advantages of homeownership are frequently exaggerated. The mortgage-interest tax deduction doesn’t eliminate the cost of borrowing money; it merely reduces it. The freedom to paint your house any color you wish comes with the responsibility of paying for a new roof when the time comes. The $15,000 or $30,000 or $50,000 that real estate agents’ fees add to the price of a house can wipe out a lot of other savings.

The most striking part of the current situation may be that despite everything that has happened in the last few years, there are still places where renting does not get enough respect.

    In Sour Home Market, Buying Often Now Beats Renting, NYT, 20.4.2010, http://www.nytimes.com/2010/04/21/business/economy/21leonhardt.html

U.S. Accuses Goldman Sachs of Fraud in Mortgage Deal

April 16, 2010
The New York Times
By LOUISE STORY and GRETCHEN MORGENSON

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

In a statement, Goldman called the S.E.C. accusations “completely unfounded in law and fact” and said the firm would “vigorously contest them and defend the firm and its reputation.”

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

“The product was new and complex, but the deception and conflicts are old and simple,” Robert Khuzami, the director of the S.E.C.’s division of enforcement, said in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Mr. Paulson is not being named in the lawsuit. In the half-hour after the suit was announced, Goldman Sachs’s stock fell by more than 10 percent.

In recent months, Goldman has repeatedly defended its actions in the mortgage market, including its own bets against it. In a letter published last week in Goldman’s annual report, the bank rebutted criticism that it had created, and sold to its clients, mortgage-linked securities that it had little confidence in.

“We certainly did not know the future of the residential housing market in the first half of 2007 anymore than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease.”

The letter continued: “Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ ” Instead, the trades were used to hedge other trading positions, the bank said.

In a statement provided in December to The Times as it prepared the article on the Abacus deals, Goldman said that it had sold the instruments to sophisticated investors and that these securities “were popular with many investors prior to the financial crisis because they gave investors the ability to work with banks to design tailored securities which met their particular criteria, whether it be ratings, leverage or other aspects of the transaction.”

Goldman was one of many Wall Street firms that created complex mortgage securities — known as synthetic collateralized debt obligations — as the housing wave was cresting. At the time, traders like Mr. Paulson, as well as those within Goldman, were looking for ways to short the overheated market.

Such investments consisted of insurance-like policies written on mortgage bonds. If the mortgage market held up and those bonds did well, investors who bought Abacus notes would have made money from the insurance premiums paid by investors like Mr. Paulson, who were negative on housing and had bought insurance on mortgage bonds. Instead, defaults spread and the bonds plunged, generating billion of dollars in losses for Abacus investors and billions in profits for Mr. Paulson.

For months, S.E.C. officials have been examining mortgage bundles like Abacus that were created across Wall Street. The commission has been interviewing people who structured Goldman mortgage deals about Abacus and other, similar instruments. The S.E.C. advised Goldman that it was likely to face a civil suit in the matter, sending the bank what is known as a Wells notice.

Mr. Tourre was one of Goldman’s top workers running the Abacus deal, peddling the investment to investors across Europe. Raised in France, Mr. Tourre moved to the United States in 2000 to earn his master’s in operations at Stanford. The next year, he began working at Goldman, according to his profile in LinkedIn.

He rose to prominence working on the Abacus deals under a trader named Jonathan M. Egol. Now a managing director at Goldman, Mr. Egol is not being named in the S.E.C. suit.

Goldman structured the Abacus deals with a sharp eye on the credit ratings assigned to the mortgage bonds associated with the instrument, the S.E.C. said. In the Abacus deal in the S.E.C. complaint, Mr. Paulson pinpointed those mortgage bonds that he believed carried higher ratings than the underlying loans deserved. Goldman placed insurance on those bonds — called credit-default swaps — inside Abacus, allowing Mr. Paulson to short them while clients on the other side of the trade wagered that they would not fail.

But when Goldman sold shares in Abacus to investors, the bank and Mr. Tourre only disclosed the ratings of those bonds and did not disclose that Mr. Paulson was on other side, betting those ratings were wrong.

Mr. Tourre at one point complained to an investor who was buying shares in Abacus that he was having trouble persuading Moody’s to give the deal the rating he desired, according to the investor’s notes, which were provided to The Times by a colleague who asked for anonymity because he was not authorized to release them.

In seven of Goldman’s Abacus deals, the bank went to the American International Group for insurance on the bonds. Those deals have led to billions of dollars in losses at A.I.G., which was the subject of an $180 billion taxpayer rescue. The Abacus deal in the S.E.C. complaint was not one of them.

That deal was managed by ACA Management, a part of ACA Capital Holdings, which changed its name in 2008 to Manifold Capital Holdings.

Goldman at first intended for the deal to contain $2 billion of mortgage exposure, according to the deal’s marketing documents, which were given to The Times by an Abacus investor.

On the cover of that flip-book, it says that the mortgage bond portfolio would be “selected by ACA Management.”

In that flip-book, it says that Goldman may have long or short positions in the bonds. It does not mention Mr. Paulson or say that Goldman was in fact short.

The Abacus deals deteriorated rapidly when the housing market hit trouble. For instance, in the Abacus deal in the S.E.C. complaint, 84 percent of the mortgage bonds underlying it were downgraded by rating agencies just five months later, according to a UBS report.

It takes time for such mortgage investments to pay out for investors who short them, like Mr. Paulson. Each deal is structured differently, but generally, the bonds underlying the investment must deteriorate to a certain point before short-sellers get paid. By the end of 2007, Mr. Paulson’s credit hedge fund was up 590 percent.

Mr. Paulson’s firm, Paulson & Company, is paid a management fee and 20 percent of the annual profits that its funds generate, according to a Paulson investor document from late 2008 titled “Navigating Through the Crisis.”

    U.S. Accuses Goldman Sachs of Fraud in Mortgage Deal, NYT, 16.4.2010? http://www.nytimes.com/2010/04/17/business/17goldman.html

Bank of America Continues to Improve

April 16, 2010
The New York Times
By ANDREW MARTIN

Bank of America may finally be returning to health.

The bank, which is often considered a bellwether for the American economy, said Friday morning that it clawed back to profitability in the first quarter after two consecutive periods of losses.

It had been battered over the last year by huge losses in consumer loans and a costly merger with Merrill Lynch that sank its share price.

Surprisingly, perhaps, profit from Merrill Lynch, the bank’s much-maligned brokerage firm, has helped to offset continued losses from consumer loans, though those losses also narrowed.

For the first three months, Bank of America reported net income of $3.2 billion, or 28 cents a share.

Total revenue was $32 billion, down 11 percent from $35.7 billion. Analysts polled by Thomson Reuters had expected revenue of $27.97 billion and 9 cents a share. Income attributed to common shareholders was $2.8 billion.

That compared with a loss of $194 million in the last quarter of 2009 and $1 billion in the quarter before that. For the year-ago quarter, strong trading results and favorable accounting adjustments led to a profit of $4.2 billion or 44 cents a share.

“With each day that passes, the 2010 story appears to be one of continuing credit recovery, and our results reflect a gradually improving economy,” the chief executive, Brian T. Moynihan, said in a statement.

Bank of America was the second major bank to report results this week; on Wednesday, JPMorgan Chase announced first-quarter profit of $3.3 billion, more than analysts had expected.

But where JPMorgan Chase had weathered the financial downturn better than most, Bank of America was once considered critically ill, requiring $45 billion in government bailout money. Bank of America paid back the government money last year.

As the nation’s largest lender with branches from coast to coast, Bank of America’s continued recovery could offer a further glimmer of hope for the broader economy, after positive data in recent weeks on jobs and consumer spending.

“The consumer credit cycle seems to be clearing up, pointing towards recovery mode,” said Anthony J. Polini, an analyst at Raymond James & Associates. The stock market certainly thinks so: bank shares have enjoyed a nine-week rally, he noted.

Bank of America’s stock closed up eight cents on Thursday at $19.48, the highest price for the shares since November 2008.

While the Merrill Lynch deal has been derided as an expensive dud, Merrill’s contributions to the bank’s bottom line are now reshaping views of the merger.

Profit from the global banking and markets units, which includes the Merrill Lynch investment banking operations, rose $709 million, to $3.2 billion. Revenue increased by $795 million as market conditions improved and write-downs decreased.

“It’s safe to say that the Merrill Lynch deal seems to be paying off sooner rather than later,” Mr. Polini said. Bank of America completed its purchase of Merrill Lynch in January 2009 in a deal valued at $29.1 billion, a price that was criticized as exorbitant.

Mr. Polini said the price was looking better given Bank of America’s earnings progress in the last four quarters, though he said the share price still had not fully recovered.

Bank of America was also helped in the first quarter by an improvement in consumer loans, albeit from horrific numbers. For instance, credit card loans that were at least 30 days late fell in March to 7.07 percent, compared with 7.23 percent the previous month.

The bank wrote off 12.54 percent of credit card balances as uncollectible in March, a brutally high number but nonetheless better than the 13.51 percent it wrote off in February. Losses grew, however, in its home mortgage business.

In the first quarter, the bank put aside $9.8 billion to cover bad loans, down from $10.1 billion in the fourth quarter.

But Richard X. Bove, an analyst at Rochdale Securities, was not so optimistic. On Thursday evening, he said he expected the bank’s credit card and mortgage divisions to remain in bad shape, and its revenues from deposits to be curtailed by new policies curbing revenue from overdraft fees.

While he predicted that earnings would remain inadequate, he said investors might be satisfied with any signs of optimism.

    Bank of America Continues to Improve, NYT, 16.4.2010, http://www.nytimes.com/2010/04/17/business/17bank.html

Editorial

Fighting Foreclosures

April 16, 2010
The New York Times

From the start, the central concern about President Obama’s antiforeclosure effort has been that it would postpone foreclosures but ultimately not prevent enough to ease the economic strain from mass defaults. That concern seems increasingly justified.

In the first quarter of 2010, there were 930,000 foreclosure filings — an increase of 7 percent from the previous quarter and 16 percent from the first three months of 2009, according to recent data from RealtyTrac, an online marketer of foreclosed properties. The surge seems to indicate that homes that were in the foreclosure pipeline are now being lost for good.

The administration’s figures are not encouraging either. The Treasury reported recently that as of March, nearly 228,000 troubled loans qualified under the Obama plan for long-term payment reductions; another 108,000 long-term modifications were pending. That’s up from February, but still far behind the need. Currently, some six million borrowers are more than 60 days delinquent.

Three oversight groups have issued reports in the past month criticizing the administration’s effort and predicting that it would fall far short of its goal of helping four million borrowers by the end of 2012.

And on Tuesday, officials from JPMorgan Chase and Wells Fargo told a Congressional panel that they were not inclined to fully embrace the administration’s latest foreclosure-prevention plan. Announced in late March, it calls for lenders to modify troubled mortgages by cutting the loan principal, which restores some equity to borrowers while lowering the payment. The bankers were unpersuasive. They generally objected to large-scale principal reductions, even though the administration’s plan applies relatively narrowly to borrowers who are deeply indebted and meet various other criteria.

The testimony was more proof that relying on lenders to voluntarily rework troubled loans is not working.

The hearing investigated a specific obstacle to widespread modifications: Investors, including pension funds and mutual funds, often hold the first mortgages. Banks often hold home-equity loans and other second mortgages. Investors reasonably believe that second liens should be reduced before the primary mortgage is modified, but banks balk at that because it would prompt write-offs they don’t want.

Some investors, notably the powerhouse group BlackRock, have called for a special bankruptcy process to resolve the standoff. The court would seek to reduce bankrupt borrowers’ total debt to affordable levels, starting with unsecured debt like credit cards, then undersecured debt, like second mortgages, and then, if necessary, the primary mortgage debt.

We have long called for using bankruptcy court to help resolve the foreclosure crisis. A big advantage of bankruptcy over government-subsidized modifications is that bankruptcy is a difficult process that does not entice anyone to purposely default in order to get better repayment terms.

Banks have argued for the status quo, in which bankruptcy judges are not allowed to modify the terms of primary mortgages, and they have prevailed in Congress and, apparently, within the administration. The result is an ongoing foreclosure crisis. It is time to revive the fight to open the courthouse door to bankrupt homeowners.

    Fighting Foreclosures, NYT, 16.4.2010, http://www.nytimes.com/2010/04/16/opinion/16fri1.html

U.S. Industrial Production Rose in March

April 15, 2010
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — Industrial production edged up 0.1 percent in March, lagging expectations despite growth in the crucial manufacturing sector.

The results, along with the latest jobless filings, underscore the unevenness of the recovery. The Labor Department said the number of newly laid-off people signing up for unemployment benefits rose sharply for a second week .

The Federal Reserve reported Thursday that manufacturing, the index’s largest component, rose 0.9 percent in March, led by gains in durable goods industries. But utilities dropped 6.4 percent after February’s snow increased output.

The modest overall gain of 0.1 percent matches February’s result, reflecting a slow but steady upswing at factories, utilities and mines. But analysts expected a rise of 0.3 percent.

The index’s recent gains, however, suggest the economic recovery is durable.

In its unemployment data the Labor Department reported Thursday that first-time requests for jobless benefits rose by 24,000 last week to a seasonally adjusted 484,000, the highest level since late February. Economists were predicting claims would fall.

It was the second week that claims took an unexpected leap. In the previous week, claims rose by 18,000 to 460,000.

A government analyst, however, cautioned against reading too much into both weeks’ figures, saying they were clouded by seasonal adjustment difficulties related to the Easter holiday, which falls on different weeks each year.

Even with the increases, the trend in claims has been drifting downward. Fewer people over all have been seeking unemployment insurance as the job market recovers.

For instance, for the same week a year ago, first-time claims totaled 609,000, compared with the current 484,000. Applications for jobless claims peaked during the recession at 651,000 in late March 2009.

The four-week moving average of claims, which smoothes out weekly volatility, also moved up. It grew by 7,500 to 457,750 last week, the highest since mid-March.

The number of people continuing to draw unemployment benefits moved higher. It rose to 4.64 million, from 4.57 million.

That figure lags the initial claims by one week. It does not include millions of people who have used up the regular 26 weeks of benefits typically provided by states, and are receiving extended benefits for up to 73 additional weeks, paid for by the federal government.

About 5.97 million people were receiving extended benefits in the week ended March 27, the latest data available.

On Capitol Hill, a bill restoring jobless benefits to people struggling to find work is back on track in the Senate. The $18 billion measure could pass Thursday and prevent people whose 26 weeks of state-paid benefits have run out from losing an average of $335 a week in federally funded benefits.

With the economy on the mend from the worst recession since the 1930s, employers are starting to add to their payrolls again.

Employers in March added 162,000 jobs, the most in three years. But the pace of the recovery and job creation will not be robust enough to quickly drive down the unemployment rate. It has been stuck at 9.7 percent for three months, close to its highest levels since the 1980s. And, competition for the jobs that do become available is fierce.

    U.S. Industrial Production Rose in March, NYT, 15.4.2010, http://www.nytimes.com/2010/04/16/business/economy/16econ.html

U.S. Trade Deficit Widened in February

April 13, 2010
The New York Times
By JAVIER C. HERNANDEZ

Trade data on Tuesday provided another piece of evidence that spending by consumers and businesses was picking up, bolstering hopes that the recovery was gaining momentum.

The Commerce Department’s monthly report on trade showed a 1.7 percent jump in imports, signaling greater demand. Exports barely rose, leading the trade deficit to increase 7.4 percent from January, to $39.7 billion, more than forecast.

The surge in imports, while reflecting a healthy pickup in spending, may be a drag on economic expansion in the short term. That is because the government subtracts imports when it calculates gross domestic product, the total value of goods and services in the economy.

But as stimulus programs fade later this year and domestic demand cools off, economists say exports may begin to outpace imports and contribute positively to G.D.P.

“On net, what we’re seeing is a positive development,” said Michael E. Feroli, chief United States economist for JPMorgan Chase. “Consumer and business demand still has a decent amount of momentum behind it.”

Much of from the growth in imports came from consumer goods, like televisions and pharmaceutical products, as the jobs market improved slightly and Americans began to spend more.

Businesses imported goods to restock inventories and replace aging equipment. Industrial supplies and capital goods, like machinery and tools, underpinned much of the growth.

“With most businesses looking to stabilize or modestly boost inventories, underlying demand for imports has picked up substantially,” Joshua Shapiro, chief United States economist for MFR, a consulting firm, wrote in a research note.

The politically sensitive trade gap with China fell to $16.5 billion from $18.3 billion a month earlier. China on Saturday reported its first monthly trade deficit in nearly six years, with imports surging but exports growing only modestly.

The dwindling trade deficit may take some pressure off China to allow its currency, the renminbi, to appreciate against the dollar. American policy makers have said China’s currency controls give Chinese companies an unfair advantage in global trade.

American exports rose 0.2 percent in February, reaching the highest levels since October 2008. Analysts expect growth in exports to continue as global demand picks up, with a weak dollar helping to make United States goods cheaper abroad. American businesses are hoping to tap into turbocharged markets like India and China, where demand is soaring.

President Obama has announced a broad effort to double exports in the next five years by easing restrictions on selling certain goods abroad and increasing credit to small and medium-size businesses seeking to enter the export market.

Imports of crude oil fell to the lowest level since 1999, reaching 243.1 million barrels, which economists attributed to a reluctance by strapped consumers and businesses to pay higher energy costs. Auto and food imports also declined.

Exports of cars and fuel oil rose, while food exports dropped.

    U.S. Trade Deficit Widened in February, NYT, 13.4.2010, http://www.nytimes.com/2010/04/14/business/economy/14econ.html

Consumers in U.S. Face the End of an Era of Cheap Credit

April 10, 2010
The New York Times
By NELSON D. SCHWARTZ

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”

Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.

Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.

From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.

Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.

Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.

The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.

“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”

Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

    Consumers in U.S. Face the End of an Era of Cheap Credit, 10.4.2010, http://www.nytimes.com/2010/04/11/business/economy/11rates.html

$4.3 Billion Loss at G.M. Masks Progress Since Bailout

April 7, 2010
The New York Times
By NICK BUNKLEY

DETROIT — General Motors said Wednesday that it lost $4.3 billion in the six months after emerging from bankruptcy protection but that it had positive cash flow of $1 billion in that period.

The automaker said it expected to make a profit in 2010, echoing previous predictions by several executives, and that it made progress toward that goal in the first quarter, without being specific.

Excluding one-time charges, the company lost about $600 million in the fourth quarter, its chief financial officer, Christopher P. Liddell, said.

“We don’t need to make that much improvement to get to profitability,” Mr. Liddell, who came to G.M. from Microsoft earlier this year, told analysts and reporters on a conference call. “It’s getting close to break-even if you get rid of those one-off items that happened in the fourth quarter.”

The one-time charges include a settlement with the United Automobile Workers union over retiree health care liabilities and a “foreign currency re-measurement loss.”

The results comprise G.M.’s first official financial report since emerging from bankruptcy protection on July 10. Under “fresh-start” accounting principles, which reset valuations of assets and liabilities, the results are not directly comparable to those from previous quarters.

The report, covering the period from July 10 through Dec. 31, listed $36.2 billion in cash reserves and marketable securities at year’s end. G.M. had $14.2 billion on hand a year earlier.

G.M. reiterated a commitment to pay off the balance of its debt to the American and Canadian governments by June. It made payments totaling $2.8 billion, including interest, in December and March toward an initial balance of $8.3 billion.

Most of the $50 billion G.M. borrowed was converted to a 61 percent equity stake held by the Treasury Department. The only way the Treasury can recover that debt is through the sale of its stock. Mr. Liddell said a public stock offering would occur “as soon as it makes sense” but only “when the markets and the company are ready.”

G.M. said it lost $4 billion in the fourth quarter, before interest and taxes, of which $3.4 billion was attributable to its troubled North American region. Its net loss for the fourth quarter was $3.4 billion, compared to $900 million from July 10 through Sept. 30.

Revenue for the new G.M., which was created from the desirable assets of the company after its June 1 bankruptcy filing, was $57.5 billion. Closed plants and other “bad assets” remain in bankruptcy protection and are being liquidated.

The new accounting valued G.M.’s assets at $142 billion. Plants, property and equipment were assigned a value of $19 billion, a reduction of $18 billion. G.M. also listed $30 billion in goodwill, $16 billion intangible assets such as technology and brands, and $8 billion in equity and cost-based investments.

G.M. has not earned a full-year profit since 2004. It lost $88 billion between 2005 and its bankruptcy filing June 1.

The company plans to release its results for the first quarter of 2010 next month.

    $4.3 Billion Loss at G.M. Masks Progress Since Bailout, NYT, 7.4.2010, http://www.nytimes.com/2010/04/08/business/08motors.html

U.S. Economy Added 162,000 Jobs in March, Most in 3 Years

April 2, 2010
The New York Times
By JAVIER C. HERNANDEZ

The American economy added 162,000 jobs in March, the Labor Department reported Friday, while the unemployment rate held steady at 9.7 percent.

In the strongest report since March 2007, private employers added 123,000 jobs in the month.

In its report, the government also said the economic picture in January and February was better than previously thought. The economy added 14,000 jobs in January, compared with a forecast of 26,000 losses. In February, 14,000 jobs were created, compared with the 36,000 losses originally estimated.

Recent strength has come from sectors like health care, which added another 27,000 jobs in March. In addition, as businesses tentatively expand their ranks, the number of temporary workers is rising. In March, employers added 40,000 temporary jobs, raising hopes that businesses might soon begin hiring permanently.

Manufacturing, which has been a rare bright spot, added 17,000 jobs in March, continuing an upward trend fueled by a surge in orders and production.

The snapshot of the job market was unusually hazy in March. The hiring of 48,000 census workers gave payrolls a powerful but temporary jolt. In addition, some gains may have been the result of unusually severe weather in February, which probably exaggerated the job losses that month.

Still, economists said the ambiguity surrounding the data did not change the underlying prognosis for the labor market. Many believe the economy has reached a turning point and will begin adding jobs at a slow, but steady, pace.

“We have had this massive disaster, but we’re at a place now where things are stabilizing,” said Heidi Shierholz, an economist at the Economic Policy Institutein Washington. “But it’s nowhere near the level of growth we need to start moving the dial.”

The economy must create 100,000 jobs each month just to absorb new entrants into the labor force, according to many projections. That sustained level of growth may not come until later this year, economists said, making pervasive unemployment a virtual certainty for some time to come.

Indeed, the government predicts the jobless rate will average 9.8 percent next year and 8.4 percent in 2012 before falling to 5 percent in 2016. The rate was 4.7 percent in November 2007, the month before the recession began.

Friday’s report was largely in line with expectations, but economists noted it may be difficult to gauge the health of the labor market for the near future. The hiring of thousands of part-time census workers will continue through end of the summer, inflating the numbers.

The economy has shown signs of renewal in recent months with the help of significant government spending.

Analysts generally believe the recovery will endure even in the absence of stimulus programs.

“Strength effectively feeds itself,” said James F. O’Sullivan, chief economist for MF Global. “What happens to the labor market is key to perceptions about the sustainability of the recovery.”

But substantial worries persist. Consumer spending remains tepid, though it has improved modestly in recent months. Real estate markets are still severely depressed, holding back hiring in critical industries like construction. And many state and local governments, facing ballooning deficits, are poised to make severe cutbacks.

Those uncertainties have left 15 million Americans out of work, many of them for at least six months.

In Roseville, Mich., a suburb of Detroit, Mark R. Hamlin, is nearing his fourth year without work. Mr. Hamlin, 49, was laid off from his position as a sales manager for a copper wire distributor just as the auto industry began to collapse. Though his wife has a job, the Hamlins struggle to keep up with a $900 monthly mortgage payment and $5,000 in credit card debt. To cut costs, they keep the heat at 55 degrees.

With his latest round of unemployment benefits expiring this week, Mr. Hamlin said he worries that he may not be able to give his 4-year-old daughter Kara a stable upbringing.

“I’m hoping, I’m praying, I have my fingers crossed,” Mr. Hamlin said. “I’ve got to find something this year. I’ve got to find something this year.”

    U.S. Economy Added 162,000 Jobs in March, Most in 3 Years, NYT, 3.4.2010, http://www.nytimes.com/2010/04/03/business/economy/03jobs.html