History > 2006 > USA > Economy (IV)

GAO chief warns economic disaster looms

Updated 10/29/2006 12:35 AM ET
By Matt Crenson, Associated Press
USA Today

AUSTIN — David Walker sure talks like he's running for office. "This is about the future of our country, our kids and grandkids," the comptroller general of the United States warns a packed hall at Austin's historic Driskill Hotel. "We the people have to rise up to make sure things get changed."

But Walker doesn't want, or need, your vote this November. He already has a job as head of the Government Accountability Office, an investigative arm of Congress that audits and evaluates the performance of the federal government.

Basically, that makes Walker the nation's accountant-in-chief. And the accountant-in-chief's professional opinion is that the American public needs to tell Washington it's time to steer the nation off the path to financial ruin.

From the hustings and the airwaves this campaign season, America's political class can be heard debating Capitol Hill sex scandals, the wisdom of the war in Iraq and which party is tougher on terror. Democrats and Republicans talk of cutting taxes to make life easier for the American people.

What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. The vast majority of economists and budget analysts agree: The ship of state is on a disastrous course, and will founder on the reefs of economic disaster if nothing is done to correct it.

There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.

"There's no sexiness to it," laments Leita Hart-Fanta, an accountant who has just heard Walker's pitch. She suggests recruiting a trusted celebrity — maybe Oprah — to sell fiscal responsibility to the American people.

Walker doesn't want to make balancing the federal government's books sexy — he just wants to make it politically palatable. He has committed to touring the nation through the 2008 elections, talking to anybody who will listen about the fiscal black hole Washington has dug itself, the "demographic tsunami" that will come when the baby boom generation begins retiring and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.

"He can speak forthrightly and independently because his job is not in jeopardy if he tells the truth," said Isabel Sawhill, a senior fellow in economic studies at the Brookings Institution.

Walker can talk in public about the nation's impending fiscal crisis because he has one of the most secure jobs in Washington. As comptroller general of the United States — basically, the government's chief accountant — he is serving a 15-year term that runs through 2013.

This year Walker has spoken to the Union League Club of Chicago and the Rotary Club of Atlanta, the Sons of the American Revolution and the World Future Society. But the backbone of his campaign has been the Fiscal Wake-up Tour, a traveling roadshow of economists and budget analysts who share Walker's concern for the nation's budgetary future.

"You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Walker says.

Polls suggest that Americans have only a vague sense of their government's long-term fiscal prospects. When pollsters ask Americans to name the most important problem facing America today — as a CBS News/New York Times poll of 1,131 Americans did in September — issues such as the war in Iraq, terrorism, jobs and the economy are most frequently mentioned. The deficit doesn't even crack the top 10.

Yet on the rare occasions that pollsters ask directly about the deficit, at least some people appear to recognize it as a problem. In a survey of 807 Americans last year by the Pew Center for the People and the Press, 42% of respondents said reducing the deficit should be a top priority; another 38% said it was important but a lower priority.

So the majority of the public appears to agree with Walker that the deficit is a serious problem, but only when they're made to think about it. Walker's challenge is to get people not just to think about it, but to pressure politicians to make the hard choices that are needed to keep the situation from spiraling out of control.

To show that the looming fiscal crisis is not a partisan issue, he brings along economists and budget analysts from across the political spectrum. In Austin, he's accompanied by Diane Lim Rogers, a liberal economist from the Brookings Institution, and Alison Acosta Fraser, director of the Roe Institute for Economic Policy Studies at the Heritage Foundation, a conservative think tank.

"We all agree on what the choices are and what the numbers are," Fraser says.

Their basic message is this: If the United States government conducts business as usual over the next few decades, a national debt that is already $8.5 trillion could reach $46 trillion or more, adjusted for inflation. That's almost as much as the total net worth of every person in America — Bill Gates, Warren Buffett and those Google guys included.

A hole that big could paralyze the U.S. economy; according to some projections, just the interest payments on a debt that big would be as much as all the taxes the government collects today.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

People who remember Ross Perot's rants in the 1992 presidential election may think of the federal debt as a problem of the past. But it never really went away after Perot made it an issue, it only took a breather. The federal government actually produced a surplus for a few years during the 1990s, thanks to a booming economy and fiscal restraint imposed by laws that were passed early in the decade. And though the federal debt has grown in dollar terms since 2001, it hasn't grown dramatically relative to the size of the economy.

But that's about to change, thanks to the country's three big entitlement programs — Social Security, Medicaid and especially Medicare. Medicaid and Medicare have grown progressively more expensive as the cost of health care has dramatically outpaced inflation over the past 30 years, a trend that is expected to continue for at least another decade or two.

And with the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses of those two programs are about to increase dramatically due to demographic pressures. People are also living longer, which makes any program that provides benefits to retirees more expensive.

Medicare already costs four times as much as it did in 1970, measured as a percentage of the nation's gross domestic product. It currently comprises 13% of federal spending; by 2030, the Congressional Budget Office projects it will consume nearly a quarter of the budget.

Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent Smetters of the University of Pennsylvania have an even scarier way of looking at Medicare. Their method calculates the program's long-term fiscal shortfall — the annual difference between its dedicated revenues and costs — over time.

By 2030 they calculate Medicare will be about $5 trillion in the hole, measured in 2004 dollars. By 2080, the fiscal imbalance will have risen to $25 trillion. And when you project the gap out to an infinite time horizon, it reaches $60 trillion.

Medicare so dominates the nation's fiscal future that some economists believe health care reform, rather than budget measures, is the best way to attack the problem.

"Obviously health care is a mess," says Dean Baker, a liberal economist at the Center for Economic and Policy Research, a Washington think tank. "No one's been willing to touch it, but that's what I see as front and center."

Social Security is a much less serious problem. The program currently pays for itself with a 12.4% payroll tax, and even produces a surplus that the government raids every year to pay other bills. But Social Security will begin to run deficits during the next century, and ultimately would need an infusion of $8 trillion if the government planned to keep its promises to every beneficiary.

Calculations by Boston University economist Lawrence Kotlikoff indicate that closing those gaps — $8 trillion for Social Security, many times that for Medicare — and paying off the existing deficit would require either an immediate doubling of personal and corporate income taxes, a two-thirds cut in Social Security and Medicare benefits, or some combination of the two.

Why is America so fiscally unprepared for the next century? Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders — primarily the central banks of China, Japan and other big U.S. trading partners — have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-percent credit card.

In her part of the fiscal wake-up tour presentation, Rogers tries to explain why that's a bad thing. For one thing, even when rates are low a bigger deficit means a greater portion of each tax dollar goes to interest payments rather than useful programs. And because foreigners now hold so much of the federal government's debt, those interest payments increasingly go overseas rather than to U.S. investors.

More serious is the possibility that foreign lenders might lose their enthusiasm for lending money to the United States. Because treasury bills are sold at auction, that would mean paying higher interest rates in the future. And it wouldn't just be the government's problem. All interest rates would rise, making mortgages, car payments and student loans costlier, too.

A modest rise in interest rates wouldn't necessarily be a bad thing, Rogers said. America's consumers have as much of a borrowing problem as their government does, so higher rates could moderate overconsumption and encourage consumer saving. But a big jump in interest rates could cause economic catastrophe. Some economists even predict the government would resort to printing money to pay off its debt, a risky strategy that could lead to runaway inflation.

Macroeconomic meltdown is probably preventable, says Anjan Thakor, a professor of finance at Washington University in St. Louis. But to keep it at bay, he said, the government is essentially going to have to renegotiate some of the promises it has made to its citizens, probably by some combination of tax increases and benefit cuts.

But there's no way to avoid what Rogers considers the worst result of racking up a big deficit — the outrage of making our children and grandchildren repay the debts of their elders.

"It's an unfair burden for future generations," she says.

You'd think young people would be riled up over this issue, since they're the ones who will foot the bill when they're out in the working world. But students take more interest in issues like the Iraq war and gay marriage than the federal government's finances, says Emma Vernon, a member of the University of Texas Young Democrats.

"It's not something that can fire people up," she says.

The current political climate doesn't help. Washington tends to keep its fiscal house in better order when one party controls Congress and the other is in the White House, says Sawhill.

"It's kind of a paradoxical result. Your commonsense logic would tell you if one party is in control of everything they should be able to take action," Sawhill says.

But the last six years of Republican rule have produced tax cuts, record spending increases and a Medicare prescription drug plan that has been widely criticized as fiscally unsound. When President Clinton faced a Republican Congress during the 1990s, spending limits and other legislative tools helped produce a surplus.

So maybe a solution is at hand.

"We're likely to have at least partially divided government again," Sawhill said, referring to predictions that the Democrats will capture the House, and possibly the Senate, in next month's elections.

But Walker isn't optimistic that the government will be able to tackle its fiscal challenges so soon.

"Realistically what we hope to accomplish through the fiscal wake-up tour is ensure that any serious candidate for the presidency in 2008 will be forced to deal with the issue," he says. "The best we're going to get in the next couple of years is to slow the bleeding."

    GAO chief warns economic disaster looms, UT, 29.10.2006, http://www.usatoday.com/news/washington/2006-10-28-economic-disaster_x.htm

Russia Led Arms Sales to Developing World in ’05

    Russia Led Arms Sales to Developing World in ’05, NYT, 29.10.2006, http://www.nytimes.com/2006/10/29/world/europe/29weapons.html?hp&ex=1162184400&en=ee804ed2509262d6&ei=5094&partner=homepage

U.S. Jobs Shape Condoms’ Role in Foreign Aid

October 29, 2006
The New York Times
By CELIA W. DUGGER

EUFAULA, Alabama — Here in this courtly, antebellum town, Alabama’s condom production has survived an onslaught of Asian competition, thanks to the patronage of straitlaced congressmen from this Bible Belt state.

Behind the scenes, the politicians have ensured that companies in Alabama won federal contracts to make billions of condoms over the years for AIDS prevention and family planning programs overseas, though Asian factories could do the job at less than half the cost.

In recent years, the state’s condom manufacturers fell hundreds of millions of condoms behind on orders, and the federal aid agency began buying them from Asia. The use of Asian-made condoms has contributed to layoffs that are coming next month.

But Senator Jeff Sessions, Republican of Alabama, has quietly pressed to maintain the unqualified priority for American-made condoms and is likely to prevail if the past is any guide.

“What’s wrong with helping the American worker at the same time we are helping people around the world?” asked the senator’s spokesman, Michael Brumas.

That question goes to the heart of an intensifying debate among wealthy nations about to what degree foreign aid is about saving jobs at home or lives abroad.

Britain, Ireland and Norway have all sought to make aid more cost effective by opening contracts in their programs to fight global poverty to international competition. The United States, meanwhile, continues to restrict bidding on billions of dollars worth of business to companies operating in America, and not just those that make condoms.

The wheat to feed the starving must be grown in United States and shipped to Africa, enriching agribusiness giants like Archer Daniels Midland and Cargill. The American consulting firms that carry out antipoverty programs abroad — dubbed beltway bandits by critics — do work that some advocates say local groups in developing countries could often manage at far less cost.

The history of the federal government’s condom purchases embodies the tradeoffs that characterize foreign aid American-style. Alabama’s congressmen have long preserved several hundred factory jobs here by insisting that the United States Agency for International Development buy condoms made here, though, probably in a nod to their conservative constituencies, most have typically done so discreetly.

Those who favor tying aid to domestic interests say that it not only preserves jobs and supports American companies, but helps ensure broad political support for foreign aid, which is not always popular.

On the other hand, skepticism of foreign aid is frequently rooted in the perception that the money is not well spent. Blame often falls on corrupt leaders in poor countries, but aid from rich nations with restrictions requiring it to be spent in the donor country can also reduce effectiveness.

The United States government, the world’s largest donor of condoms, has bought more than nine billion condoms over the past two decades. Under President Bush’s global AIDS plan, which dedicates billions of dollars to fight the epidemic, a third of the money for prevention must go to promoting abstinence. But that leaves two-thirds for other programs, so the federal government’s distribution of condoms has risen, to over 400 million a year.

Over the years, Usaid could have afforded even more condoms — among the most effective methods for slowing the spread of AIDS — if it had it bought them from the lowest bidders on the world market, as have the United Nations Population Fund and many other donors.

Randall L. Tobias, who heads Usaid, declined through a spokesman to be interviewed on this topic. His predecessor, Andrew Natsios, sought to weaken the hold of what he sometimes called a cartel of domestic interest groups over foreign aid. He tried, for example, to persuade Congress to allow the purchase of some African food to feed Africa’s hungry. Congress killed that proposal last year and again this year.

Hilary Benn, Britain’s secretary of state for international development, said in an interview that in 2001 his country untied its aid from requirements that only British firms could bid for international antipoverty work.

“If you untie aid, it’s 100 percent clear you’re giving aid to reduce poverty and not to benefit your own country’s commercial interests,” he said.

In recent years, most of the low-end condom business has moved to Asia, including Australia-based Ansell, which used to have plants in Alabama. American makers cannot compete with Asia on price — unless they have the federal contract.

The last American factory making condoms for Usaid sits anonymously in a pine-shaded industrial park here in Eufaula. Inside a modern, low-slung building owned by Alatech Healthcare, ingenious contraptions almost as long as a football field repeatedly dip 16,000 phallic-shaped bulbs into vats of latex, with the capacity to turn out a billion condoms a year.

The equation of need is never straightforward. Africa’s need to forestall its slow-motion catastrophe of AIDS deaths is vast. But there is need here, too.

Most of the 260 people employed at this factory and the company’s packaging plant in Slocomb are women, some the children of sharecroppers and textile factory workers, many of them struggling to support families on $7 to $8 an hour.

The most vulnerable among them — single mothers and older women with scant education — are the most fearful of foreign competition. All feel the looming threat.

“It’s cheaper, yeah,” said Lisa Jackson, 42, a worker in the packaging plant. “But we Americans should have first choice. We need our jobs to stay in America. We got to feed our families. I just wish it had never come to sending manufacturing jobs overseas.”

From 2003 to 2005, Alatech and one other company making condoms for Usaid fell behind on their orders, agency officials said. Last year, the other company went bankrupt. So Usaid ordered condoms from Asia, the first of which were shipped last year. With only a single American company still in line for the federal contract, agency officials are wary of ruling out Asian suppliers.

At such moments in the past, Alabama’s politicians have come to the rescue of the state’s condom industry. This time was no exception.

Senator Richard C. Shelby, a Republican on the Appropriations Committee, had a provision tucked into the 2004 budget bill requiring that Usaid buy only American-made condoms to the extent possible, given cost and availability. His spokeswoman, Kate Boyd, said the agency did not tell him it was worried about the relative cost of American and Asian-made condoms.

Senator Sessions wrote Usaid a letter last year saying it should purchase condoms from foreign producers only after it had bought all the condoms American companies could make, noting it was “extremely important to jobs in my state.”

Usaid assured the senator in writing that it “remains committed to prioritizing domestic suppliers.”

On the strength of that, Alatech bought the more modern Eufaula plant from its bankrupt rival. Without the government contract, the company’s president, Larry Povlacs, said, Alatech would go out of business.

In interviews, agency officials were noncommittal about whether they would halt all purchases in Asia. Condoms made there cost around 2 cents each, opposed to about 5 cents for those made here.

“At the end of the day, it’s all a political process,” Bob Lester, who recently retired after 31 years as a lawyer at Usaid, said of such decisions. “The foreign aid program has very few rabbis. Why make enemies when you don’t have to?”

Duff Gillespie, a retired senior Usaid official who is now a professor at the Johns Hopkins School of Public Health, said that over the years officials at Usaid raised the prospect of foreign competition to tamp down what he called “the greed factor” of Alabama condom manufacturers.

But whenever the staff pushed to buy in Asia, Alabama politicians pushed right back.

During the Reagan years, the offices of two Alabamans, Representative William Dickinson, a Republican, and Senator Howell Heflin, a Democrat, caught wind of one such move. Mike Houston, chief of staff to Senator Heflin, recalled being tipped off by Mr. Dickinson’s chief of staff.

“He says, ‘Well, A.I.D. is going to buy condoms from Korea,’ ” Mr. Houston recalled. “ ‘The reason is they can get three condoms for the price of one that they’re paying us.’ ” Mr. Houston said he asked in amazement, “You mean we’re making rubbers in Alabama?”

The congressmen’s staffs threatened to introduce amendments to require that condoms be made in America. The agency backed off.

Further attempts to open up bidding proved fruitless. Representative Jim McDermott, a Democrat from Washington State, had seen the devastation of AIDS firsthand in the 1980s as a State Department medical officer in Africa. But he said he could not break what he called the “stranglehold” of Alabama congressmen on the condom rules.

In the mid-to-late 1990s, Representative Sonny Callahan, a Republican from Alabama, served as chairman of the Appropriations subcommittee that shaped Usaid’s budget. Brian Atwood, who headed Usaid in those years, said no administrator “in his right mind” would have tried to cut Alabama out of the condom contract at a time when many Republicans were deeply hostile to foreign aid.

Then in 2001, after decades of negotiation, the United States and other wealthy donor nations reached a nonbinding agreement to open at least some foreign aid contracts to all qualified bidders. Included were those for commodities bound for the world’s poorest nations.

Usaid decided the agreement did not apply to condoms since some went to more advanced developing countries. Alabama’s manufacturers kept the condom business once again.

William Nicol, who heads the poverty reduction division of the Development Assistance Committee at the Organization for Economic Cooperation and Development, a group of economically advanced countries, scoffed at Usaid’s interpretation. “That’s rubbish,” he said in a telephone interview.

The condom companies’ inability in recent years to fulfill Usaid’s orders accomplished what the gentleman’s agreement did not: the entry of Asian competitors.

Usaid has asked Alatech to make 201 million condoms next year, less than half of this year’s order, and ordered another 100 million made in Korea and China.

Come Nov. 15, Alatech will lay off more than half its work force. Those jobs fell victim to Usaid’s smaller orders for condoms, foreign competition and automation.

The reactions of these workers ranged from philosophical to panicked.

One, Garry Appling, a 41-year-old single mother, has worked before as a $6-an-hour cashier at Krystal, the fast food restaurant, and another at $7.15 an hour in a chicken processing plant. She said her 10-year-old daughter, Anterria, worries that she will have to go back to the chicken plant, a place so cold and wet Ms. Appling often fell ill.

But even facing her own impending job loss, Ms. Appling took a moment to empathize with the women making condoms on the other side of the world.

“We need a job — I guess they do, too,” she said, during a brief pause from feeding condoms into an intricate, rotating, whooshing machine that tested them for holes. “It’s sad.

“At the same time, the United States can’t just keep helping overseas. They’ve got to help us, too.”

    U.S. Jobs Shape Condoms’ Role in Foreign Aid, NYT, 29.10.2006, http://www.nytimes.com/2006/10/29/world/29condoms.html?hp&ex=1162184400&en=a92173d62cb1edef&ei=5094&partner=homepage

Businesses Seek Protection on Legal Front

October 29, 2006
The New York Times
By STEPHEN LABATON

WASHINGTON, Oct. 28 — Frustrated with laws and regulations that have made companies and accounting firms more open to lawsuits from investors and the government, corporate America — with the encouragement of the Bush administration — is preparing to fight back.

Now that corruption cases like Enron and WorldCom are falling out of the news, two influential industry groups with close ties to administration officials are hoping to swing the regulatory pendulum in the opposite direction. The groups are drafting proposals to provide broad new protections to corporations and accounting firms from criminal cases brought by federal and state prosecutors as well as a stronger shield against civil lawsuits from investors.

Although the details are still being worked out, the groups’ proposals aim to limit the liability of accounting firms for the work they do on behalf of clients, to force prosecutors to target individual wrongdoers rather than entire companies, and to scale back shareholder lawsuits.

The groups hope to reduce what they see as some burdens imposed by the Sarbanes-Oxley Act, landmark post-Enron legislation adopted in 2002. The law, which placed significant new auditing and governance requirements on companies, gave broad discretion for interpretation to the Securities and Exchange Commission. The groups are also interested in rolling back rules and policies that have been on the books for decades.

To alleviate concerns that the new Congress may not adopt the proposals — regardless of which party holds power in the legislative branch next year — many are being tailored so that they could be adopted through rulemaking by the S.E.C. and enforcement policy changes at the Justice Department.

The proposals will begin to be laid out in public shortly after Election Day, members of the groups said in recent interviews. One of the committees was formed by the United States Chamber of Commerce and until recently was headed by Robert K. Steel.

Mr. Steel was sworn in last Friday as the new Treasury undersecretary for domestic finance, and he is the senior official in the department who will be formulating the Treasury’s views on the issues being studied by the two groups.

The second committee was formed by the Harvard Law professor Hal S. Scott, along with R. Glenn Hubbard, a former chairman of the Council of Economic Advisers for President Bush, and John L. Thornton, a former president of Goldman Sachs, where he worked with Treasury Secretary Henry M. Paulson Jr.

That group has colloquially become known around Washington as the Paulson Committee because the relatively new Treasury secretary issued an encouraging statement when it was formed last month. But administration officials said Friday that he was not playing a role in the group’s deliberations.

Its members include Donald L. Evans, a former commerce secretary who remains a close friend of President Bush; Samuel A. DiPiazza Jr., chief executive of PricewaterhouseCoopers, the accounting giant; Robert R. Glauber, former chairman and chief executive of the National Association of Securities Dealers, the private group that oversees the securities industry; and the chief executives of DuPont, Office Depot and the CIT Group.

Jennifer Zuccarelli, a spokeswoman at the Treasury Department, said on Friday that no decision had been made about which recommendations would be supported by the administration.

“While the department always wants to hear new ideas from academic and industry thought leaders, especially to encourage the strength of the U.S. capital markets, Treasury is not a member of these committees and is not collaborating on any findings,” Ms. Zuccarelli said.

But another official and committee members noted that Mr. Paulson had recently pressed the groups in private discussions to complete their work so it could be rolled out quickly after the November elections.

Moreover, committee members say that they expect many of their recommendations will be used as part of an overall administration effort to limit what they see as overzealous state prosecutions by such figures as the New York State attorney general Elliot Spitzer and abusive class action lawsuits by investors. The groups will also attempt to lower what they see as the excessive costs associated with the Sarbanes-Oxley Act.

Their critics, however, see the effort as part of a plan to cater to the most well-heeled constituents of the administration and insulate politically connected companies from prosecution at the expense of investors.

One consideration in drafting the proposals has been the chain of events at Arthur Andersen, the accounting firm that was convicted in 2002 of obstruction of justice for shredding Enron-related documents; the conviction was overturned in 2005 by the Supreme Court. The proposals being drafted would aim to limit the liability of auditing firms and include a policy shift to make it harder for prosecutors to bring cases against individuals and companies.

Even though Arthur Andersen played a prominent role in various corporate scandals, some business and legal experts have criticized the decision by the Bush administration to bring a criminal case that had the effect of shutting the firm down.

The proposed policies would emphasize the prosecution of culpable individuals rather than corporations and auditing firms. That shift could prove difficult for prosecutors because it is often harder to find sufficient evidence to show that specific people at a company were the ones who knowingly violated a law.

One proposal would recommend that the Justice Department sharply curtail its policy of forcing companies under investigation to withhold paying the legal fees of executives suspected of violating the law. Another one would require some investor lawsuits to be handled by arbitration panels, which are traditionally friendlier to defendants.

In an interview last week with Bloomberg News, Mr. Paulson repeated his criticism of the Sarbanes-Oxley law. While it had done some good, he said, it had contributed to “an atmosphere that has made it more burdensome for companies to operate.”

Mr. Paulson also repeated a line from his first speech, given at Columbia Business School last August, where he said, “Often the pendulum swings too far and we need to go through a period of readjustment.”

Some experts see Mr. Paulson’s complaint as a step backward.

“This is an escalation of the culture war against regulation,” said James D. Cox, a securities and corporate law professor at Duke Law School. He said many of the proposals, if adopted, “would be a dark day for investors.”

Professor Cox, who has studied 600 class action lawsuits over the last decade, said it was difficult to find “abusive or malicious” cases, particularly in light of new laws and court decisions that had made it more difficult to file such suits.

The number of securities class action lawsuits has dropped substantially in each of the last two years, he noted, arguing that the impact of the proposals from the business groups would be that “very few people would be prosecuted.”

People involved in the committees said that the timing of the proposals was being dictated by the political calendar: closely following Election Day and as far away as possible from the 2008 elections.

Mr. Hubbard, who is now dean of Columbia Business School, said the committee he helps lead would focus on the lack of proper economic foundation for a number of regulations. Most changes will be proposed through regulation, he said, because “the current political environment is simply not ripe for legislation.”

But the politics of changing the rules do not break cleanly along party lines. While some prominent Democrats would surely attack the pro-business efforts, there are others who in the past have been sympathetic.

People involved in the committees’ work said that their objective was to improve the attractiveness of American capital-raising markets by scaling back rules whose costs outweigh their benefits.

“We think the legal liability issues are the most serious ones,” said Professor Scott, the director of the committee singled out by Mr. Paulson. “Companies don’t want to use our markets because of what they see as the substantial, and in their view excessive, liability.”

Committee officials disputed the notion that they were simply catering to powerful business interests seeking to benefit from loosening regulations that could wind up hurting investors.

“It’s unfortunate to the extent that this has been politicized,” said Robert E. Litan, a former Justice Department official and senior fellow at the Brookings Institution who is overseeing the committee’s legal liability subgroup. “The objectives are clearly not to gut such reforms as Sarbanes-Oxley. I’m for cost-effective regulation.”

The main Sarbanes-Oxley provision that both committees are focusing on is a part that is commonly called Section 404, which requires audits of companies’ internal financial controls. Some business experts praise this section as having made companies more transparent and better managed, but many smaller companies call the section too costly and unnecessary.

Members of the two committees said that they had reached a consensus that Section 404, along with greater threat of investor lawsuits and government prosecutions, had discouraged foreign companies from issuing new stock on exchanges in the United States in recent months.

The committee members said that an increase in stock offerings abroad was evidence that the American liability system and tougher auditing standards were taking a toll on the competitiveness of American markets. But others see different reasons for the trend and few links to liability and accounting rules.

Bill Daley, a former commerce secretary in the Clinton administration who is the co-chairman of the Chamber of Commerce group, expects proposed changes to liability standards for accounting firms and corporations to draw the most flak. But he said that the changes affecting accounting firms are of paramount importance to prevent the further decline in competition. Only four major firms were left after Andersen’s collapse.

Another contentious issue concerns a proposal to eliminate the use of a broadly written and long-established anti-fraud rule, known as Rule 10b-5, that allows shareholders to sue companies for fraud. The change could be accomplished by a vote of the S.E.C.

John C. Coffee, a professor of securities law at Columbia Law School and an adviser to the Paulson Committee, said that he had recommended that the S.E.C. adopt the exception to Rule 10b-5 so that only the commission could bring such lawsuits against corporations.

But other securities law experts warned that such a move would extinguish a fundamental check on corporate malfeasance.

“It would be a shocking turning back to say only the commission can bring fraud cases,” said Harvey J. Goldschmid, a former S.E.C. commissioner and law professor at Columbia University. “Private enforcement is a necessary supplement to the work that the S.E.C. does. It is also a safety valve against the potential capture of the agency by industry.”

    Businesses Seek Protection on Legal Front, NYT, 29.10.2006, http://www.nytimes.com/2006/10/29/business/29corporate.html?hp&ex=1162184400&en=9358599aad440557&ei=5094&partner=homepage

Democrats Get Late Donations From Business

October 28, 2006
The New York Times
By JEFF ZELENY and ARON PILHOFER

WASHINGTON, Oct. 27 — Corporate America is already thinking beyond Election Day, increasing its share of last-minute donations to Democratic candidates and quietly devising strategies for how to work with Democrats if they win control of Congress.

The shift in political giving, for the first 18 days of October, has not been this pronounced in the final stages of a campaign since 1994, when Republicans swept control of the House for the first time in four decades.

Though Democratic control of either chamber of Congress is far from certain, the prospect of a power shift is leading interest groups to begin rethinking well-established relationships, with business lobbyists going as far as finding potential Democratic allies in the freshman class — even if they are still trying to defeat them on the campaign trail — and preparing to extend an olive branch the morning after the election.

Lobbyists, some of whom had fallen out of the habit of attending Democratic events, are even talking about making their way to the Sonnenalp Resort in Vail, Colo., where Representative Nancy Pelosi of California is holding a Speaker’s Club ski getaway on Jan. 3. It is an annual affair, but the gathering’s title could be especially apt for Ms. Pelosi, the House minority leader, who will be on hand to accept $15,000 checks, and could, if everything breaks her way, become the first woman to be House speaker.

“Attendance will be high,” said Steve Elmendorf, a former Democratic Congressional aide who has a long list of business lobbying clients. “All Democratic events will see a big increase next year, no question.”

While business groups contained their Democratic contributions to only a handful of candidates throughout the year, a shifting political climate and an expanding field of competitive Congressional races has drawn increased donations from corporate political action committees.

For the first nine months of the year, for example, Pfizer’s political action committee had given 67 percent of contributions to Republican candidates. But October ushered in a sudden change of fortune, according to disclosure reports, and Democrats received 59 percent of the Pfizer contributions.

Over all, the nation’s top corporations still placed larger bets on Republican candidates. But at the very time Republicans began to fret publicly about holding control of Congress, a subtle shift began occurring in contributions to candidates, particularly in open seats.

“We keep fighting up until the last minute of the last day,” said William C. Miller, vice president for political affairs at the U.S. Chamber of Commerce, carefully measuring his words to remain positive about the Republicans’ chances. “But when the smoke clears on Nov. 8, there are certainly going to be lots of opportunities for us to get to know the new freshman class.”

An analysis by The New York Times of contributions from Oct. 1 to 18, the latest data available, shows that donations to Republicans from corporate political action committees dropped by 11 percentage points in favor of Democratic candidates, compared with corporate giving from January through September.

Republicans still received 57 percent of contributions, compared with 43 percent for Democrats, but it was the first double-digit October switch since 1994. “A lot will hold their powder for now,” said Brian Wolff, deputy executive director of the Democratic Congressional Campaign Committee. “But after the election, we will have a lot of new friends.”

Even before the election, many new contributions were funneled toward open races, like the Eighth Congressional District in Arizona. The Democratic candidate, Gabrielle Giffords, received checks of $5,000 each from the political action committees of United Parcel Service and Union Pacific. Lockheed Martin split the difference, donating $3,000 to Ms. Giffords and sending the same amount to her Republican rival, Randall Graf.

Until October, Lockheed Martin, the giant military contractor, had been following its pattern from recent elections of giving about 70 percent of contributions from its political action committee to Republicans. But Lockheed Martin’s generosity shifted in the first half of October, with Democrats receiving 60 percent of donations, or $127,000.

While Republicans and Democrats are feverishly soliciting contributions until Election Day, campaign finance reports filed this week provide a window into the final days of a raucous midterm election campaign. The analysis of 288 corporate political action committees, which have contributed more than $100,000 this election cycle, found that at least 65 committees had increased their ratio of contributions to Democrats by at least 15 percentage points, including Sprint, United Parcel Service and Hewlett-Packard.

A notable exception to the flurry of last-minute giving is Wal-Mart.

“We had a two-year strategy to build up relationships with Democrats,” said Lee Culpepper, the vice president for federal government relations at Wal-Mart. “This wasn’t something that we decided in August that we needed to do and we ran out helter-skelter to try to do it.”

One sign of fresh interest in the prospects of Democratic Congressional races came one morning this week when more than 100 lobbyists crowded into Democratic Party headquarters on Capitol Hill. Over Dunkin’ Donuts and coffee, the executive director of the party’s Congressional committee, Karin Johanson, delivered a private briefing on the race to a sea of unfamiliar faces, despite spending 30 years in politics.

“People are excited,” she said later in an interview. “It was, by far, the best attended one ever.”

As some young Republican lobbyists fled Washington to spend the final days working on too-close-to-call races in Ohio or Pennsylvania, their senior counterparts stayed behind to begin studying prospective members of the new freshman class. Even if Republicans hold control, the next Congress will almost certainly include at least a handful of moderate Democrats who defeated Republicans and will be looking for allies in the corporate world.

Peter Welch, the Democratic candidate for Vermont’s single House seat, has already been telephoning some members of the Washington business lobby, offering an opportunity to begin a good relationship if he wins election. Never mind that his Republican opponent, Martha Rainville, has received a host of endorsements from the business community.

“The real story of the 2006 contributions is what happens in the early phase of 2007, with a change in party control,” said Bernadette A. Budde, senior vice president of the Business-Industry Political Action Committee. “There will be proverbial meet-and-greets all over town so we will have a sense of who these people are.”

Many of these meet-and-greet sessions will have a dual purpose: political action committees will offer contributions to help candidates wipe away debt their campaigns accrued during the race.

Spending in the midterm election campaign is forecast to reach $2.6 billion, according to the Center for Responsive Politics, including $1 billion from political action committees. While many business groups have been eager to appear as if they have been handily contributing to Democratic efforts, it was not until this month that the trend became apparent enough to quantify beyond party leaders or prospective committee chairmen.

Democrats who are not in tight races — or even standing for re-election in some cases — have seen their contributions increase more than some of those facing the most competitive contests. That is an easy way, lobbyists say, for political action committees to increase the share of their Democratic contributions, a percentage that is carefully tracked by party leaders when they reach the majority.

Representative Adam Smith of Washington, who leads a coalition of centrist Democrats, said he has detected a friendlier relationship with the business community in recent months, a welcome change from years of Republican rule when “Democrats were basically frozen out in every way.”

“I hope that the new Democratic majority will take a more open and cooperative approach,” Mr. Smith said in an interview. “I hope there won’t be a sense of, ‘Oh, you gave too much money to Republicans, so we’re not going to talk to you.’ ”

    Democrats Get Late Donations From Business, NYT, 28.10.2006, http://www.nytimes.com/2006/10/28/us/politics/28hedge.html?hp&ex=1162094400&en=1513adc13f012a0a&ei=5094&partner=homepage

Growth Slackened in Summer

October 28, 2006
The New York Times
By EDUARDO PORTER

Chilled by a summer slowdown in the housing market, the economy was held to a growth rate of 1.6 percent in the third quarter, the lowest since early 2003, the government reported yesterday.

But evidence of a decline in inflation coupled with vigorous consumer spending left most economists saying that the overall economy is unlikely to be dragged into a recession even as the housing market continues to falter.

“We are in a housing recession, but we are not in a broader economic recession,” said Richard B. Hoey, chief economist of Mellon Financial.

The government report, which showed growth slowing from a 5.6 percent pace in the first quarter and 2.6 percent in the second, appeared to validate the expectation of the Federal Reserve chairman, Ben S. Bernanke, that the economy is settling softly into a pace consistent with what he considers an acceptably low level of inflation.

“Ben Bernanke’s forecast was that past Fed tightening would slow demand,” Mr. Hoey said. “The forecast is tracking as far as I can see.”

Stocks fell and bond prices rose as investors factored in the weaker-than-expected growth this summer, concluding that the Fed was less likely to raise interest rates next year.

With the midterm elections little more than a week away, the Bush administration sought to persuade voters that the economy, while beating at a slower pace, remains healthy.

“We have a very strong, large resilient economy that can absorb a housing correction,” said Carlos M. Gutierrez, the commerce secretary. “If you isolate the impact of the housing correction and look at all the rest, those are solid numbers.”

But Democrats seized on the report to criticize the administration’s economic management.

“Economic growth has slowed even before most ordinary Americans have benefited from this recovery,” Senator Jack Reed of Rhode Island, the ranking Democrat on the Congressional Joint Economic Committee, said in a statement. “It’s clear that we need a new direction in policy to create an economy that works for all Americans.”

The economic deceleration in the third quarter was almost single-handedly brought about by the steep contraction in home building.

Residential investment plummeted 17.4 percent in the quarter, its biggest decline in more than 15 years. This alone reduced economic growth in the third quarter by over 1.1 percentage points.

The building of factories, warehouses and commercial structures picked up some of the slack. Business investment, including structures and machinery, added nearly 0.9 percentage point to gross domestic product in the quarter.

But what is most remarkable is that the pricking of the housing bubble has barely spilled over into consumer spending, which is still chugging along. The government reported that consumer spending grew 3.1 percent in the third quarter — nearly twice as fast as overall economic growth.

“We have the most reckless and relentless consumers in the world,” said David Kelly, economic adviser at Putnam Investments in Boston. “It’s wonderful.”

The housing freeze had long been expected to put a chill on consumers’ appetites. Sales of existing homes have declined almost 14 percent over the last year. The median price of new homes has fallen by almost 10 percent in the last 12 months and existing-home prices have started to decline nationwide.

Many economists assumed that just as consumers had leveraged their buying power by borrowing against the value of their homes when house prices were rising, now that house prices are falling they would start saving some money.

That, however, has not happened. Rather, increasing employment and falling gas prices seem to be providing consumers with new reasons to spend. The personal savings rate remained negative, at minus 0.5 percent of total disposable income.

The University of Michigan’s index of consumer confidence recorded its eighth-largest monthly gain in October, vaulting to its highest level since June 2005. Optimism was driven by falling gas prices as well as expectations of faster economic growth, larger wage gains and low unemployment.

Richard Curtin, who runs the university’s surveys of consumers, noted that consumers remain reluctant to buy a home, keenly aware of the decline in house prices. Still, their overall appetite to spend remains as brisk as ever.

Inflation, meanwhile, has started to abate — at least for now. The measure of inflation preferred by the Fed, which measures the prices of goods and services, excluding food and energy, that consumers buy, rose 2.3 percent in the third quarter. This is down from the 2.7 percent rate of the second quarter, bringing inflation closer to the 1-to-2 percent range Mr. Bernanke considers acceptable.

The growth rate reported by the government is only a preliminary approximation. Historical experience suggests that subsequent revisions could change it substantially, for better or worse.

But whatever the ultimate verdict on the summer period, several economists argue that growth in the fourth quarter is likely to be higher, as consumers spend the extra money in their wallets from lower gasoline prices on other items.

“So far the quarter is going swimmingly,” said Richard Yamarone, director of economic research at Argus Research.

The outlook for next year will depend on whether the continuing weakness in the housing market affects spending.

Orawin Velz, director of economic forecasting at the Mortgage Bankers’ Association, estimated that the fall in residential investment would continue to drag on the economy through the middle of next year, but that its impact would decline over time. “We think the third quarter will be the peak of the damage,” Ms. Velz said.

While many economists foresee a longer period of housing weakness, she said that supply and demand should come into balance by mid-2007 and that home construction would start rising next summer.

Still, if the weak housing market starts cutting into consumption, the drag on overall growth could be more intense.

While it is not yet evident in the official numbers, builders are starting to shed workers as older projects are completed and there are fewer new ones to take up the slack. This will probably cut into workers’ income and spending, slowing growth.

In contrast to many business economists, Dean Baker, co-director of the liberal Center for Economic Policy and Research in Washington, argued that a consumer reaction to the weak housing market would pull the economy into a recession next year.

“Homeowners had been pulling equity out of their homes at more than a $700 billion annual rate,” Mr. Baker wrote yesterday. “This borrowing will slow sharply in the quarters ahead.”

But others insisted that consumer appetites should not be underestimated. “Consumer spending hasn’t stopped growing in 59 straight quarters, and some pretty awful things have happened in those 59 quarters,” Mr. Yamarone said. “We all keep forgetting that the consumer is resilient.”

Jeremy Peters contributed reporting.

    Growth Slackened in Summer, NYT, 28.10.2006, http://www.nytimes.com/2006/10/28/business/28econ.html?hp&ex=1162094400&en=fc8b372396bc2cca&ei=5094&partner=homepage

Housing Market a Drag on Economic Growth

October 27, 2006
By THE ASSOCIATED PRESS
The New York Times
Filed at 8:44 a.m. ET

WASHINGTON (AP) --Economic growth slowed to a crawl in the third quarter, advancing at a pace of just 1.6 percent, the worst in more than three years.

The latest snapshot of the economy, released by the Commerce Department on Friday, showed that the slumping housing market figured prominently in the economy's dramatic loss of momentum. Investment in homebuilding was cut by the biggest amount since early 1991.

The reading on gross domestic product was weaker than the 2.1 percent pace many economists were forecasting.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic standing. Friday's report provided the last GDP reading before the Nov. 7 elections.

Economic matters are expected to influence voters' choices when they go to the polls. President Bush's approval rating on the economy is at 40 percent, among all adults surveyed in an AP-Ipsos poll. That remains near his lowest ratings. The people surveyed trusted Democrats more than Republicans to handle the economy.

The third quarter's 1.6 percent growth rate was the weakest since the first quarter of 2003, when the economy grew at a 1.2 percent annual rate.

The latest performance underscores just how much speed the economy has lost this year.

In the opening quarter, the economy grew at a brisk 5.6 percent pace, the strongest growth spurt in 2 1/2 years. But growth slowed to a 2.6 percent pace in the second quarter as consumers and businesses tightened the belt in response to the toll of rising energy prices and the impact of two-plus years of rising borrowing costs.

In the third quarter, consumers held up well, though. They boosted their spending at a rate of 3.1 percent, up from a 2.6 percent pace in the second quarter.

Businesses, meanwhile, increased spending on equipment and software at a 6.4 percent pace in the third quarter, an improvement from the 1.4 percent rate of decline in the second period.

The economy's softness in the third quarter stemmed in large part from the cooldown in the once-hot housing market.

Spending on home building dropped at a rate of 17.4 percent in the third quarter. That was the biggest drop since the first quarter of 1991 when such spending was sliced at a 21.7 percent pace.

Weak inventory building by businesses and the bloated trade deficit also played roles in weighing down economic activity in the third quarter.

An inflation gauge tied to the GDP report showed that core prices -- excluding food and energy -- advanced at a rate of 2.3 percent in the third quarter, which was down from 2.7 percent in the second quarter.

Over the last 12 months, however, this inflation measure rose by 2.4 percent, the largest annual increase since 1995.

Energy prices, which had surged in the summer, have since calmed down.

Gas prices are now hovering around $2.23 a gallon nationwide, compared with more than $3 a gallon in early summer. Oil prices are now just over $61 a barrel, down from $77.03, a record high close in mid-July.

That is supposed to help ease inflation and lead to better economic activity.

Lower energy prices leave people and companies with more money to spend on other things. If they spend and invest, that adds to economic growth. Many economists believe the economy will do better in the current October-to-December quarter, perhaps clocking in close to 3 percent.

The Federal Reserve held interest rates steady on Wednesday for the third meeting in a row. The Fed had hoisted rates 17 times since June 2004 to fend off inflation. The Fed's goal is to slow the economy sufficiently to thwart inflation but not so much that it tips into recession.

    Housing Market a Drag on Economic Growth, NYT, 27.10.2006, http://www.nytimes.com/aponline/business/AP-Economy.html?hp&ex=1162008000&en=637f0f9e820f1a13&ei=5094&partner=homepage

Microsoft Profit and Revenue Up 11% on Strength of Games and Servers

October 27, 2006
The New York Times
By STEVE LOHR

Microsoft reported solid quarterly results yesterday that slightly surpassed Wall Street expectations, with sales growth driven by its Xbox game business and software for server computers. Both revenue and profit rose 11 percent.

Demand for the company’s software for corporate databases and servers grew strongly, with sales up 17 percent, to $2.5 billion. Sales of Xbox game consoles, software and online game subscriptions jumped 70 percent, to more than $1 billion. Those two businesses accounted for most of Microsoft’s revenue growth in the quarter, the first in the company’s 2007 fiscal year.

Microsoft’s Internet services business, which competes with Google, Yahoo and others, continues to struggle. Revenue declined, and the unit lost $136 million.

The twin engines of Microsoft’s personal computer software business — the Windows operating system and Office productivity programs — grew modestly, awaiting the introduction of major new versions of both products this quarter. The Windows and Office business units accounted for 62 percent of Microsoft’s revenue, and nearly 90 percent of the profit of its operating divisions.

The company announced this week that it would offer free and discounted coupons for upgrades to the new Windows Vista and Office 2007, for consumers and businesses that buy personal computers in the holiday season, before Vista and Office 2007 are available. The effect, Microsoft said, would be to defer revenue of about $1.5 billion from the current quarter to later in the fiscal year.

“It’s an accounting shift from one quarter to the other, not something that is economically significant for us over the course of the year,” the chief financial officer, Christopher P. Liddell, said in an interview.

This fiscal year, which ends in June, Microsoft said it expected to report revenue of $50 billion to $50.9 billion, and earnings per share of $1.43 to $1.46.

After Microsoft reported its financial results, its shares rose for a time in late trading, as high as $28.54. In the regular session, the stock closed at $28.35, up 4 cents.

“This was a good quarter, and the company gave pretty strong guidance for the year,” said Charles Di Bona, an analyst with Sanford C. Bernstein & Company. “Microsoft is heading into a strong product cycle, and it looks as if Vista is going to be a bigger deal than a lot of people expected.

“The longer-term question, though, is around Microsoft’s online services business. We’re in the midst of this huge online advertising boom, and Microsoft is going sideways.”

In an interview this month, Steven A. Ballmer, Microsoft’s chief executive, noted that the MSN and other Web sites gave Microsoft a solid online presence and that the company had a number of initiatives in place to improve the performance of that business.

But the quarterly results at the online division underlined the challenge Microsoft faces. Revenue fell about 5 percent, to $539 million, and the business swung from a profit of $68 million a year earlier to a loss of $136 million.

Microsoft’s overall revenue for the quarter rose to $10.8 billion, compared with $9.7 billion in the period a year earlier. Net income increased to $3.48 billion, or 35 cents a share, compared with $3.14 billion, or 29 cents a share, including a charge of 2 cents a share for legal expenses last year.

The company’s earnings per share were 4 cents higher than the consensus estimate of analysts compiled by Thomson Financial, and revenue was a bit higher than expectations.

In a conference call with analysts, Mr. Liddell, the chief financial officer, said that Microsoft would be looking selectively for acquisitions and that online services was an industry where Microsoft might make a move, though he did not elaborate.

The Xbox game console and software unit is an area of investment that seems to be going according to the company’s plan. The entertainment and devices division, which includes Xbox, is still losing money but the losses are shrinking, to $96 million from $173 million a year earlier. The Xbox 360 machines went on sale last year, and six million have been sold worldwide. Software sales are going well, and Microsoft’s online game service, Xbox Live, has more than four million members.

That business, Mr. Liddell said, is on track to become profitable in the 2008 fiscal year, which begins next July.

    Microsoft Profit and Revenue Up 11% on Strength of Games and Servers, NYT, 27.10.2006, http://www.nytimes.com/2006/10/27/technology/27soft.html

New-Home Prices Fall Sharply

October 27, 2006
The New York Times
By JEREMY W. PETERS

Home builders, struggling to keep ahead in a weakening market, cut prices and offered a variety of other discounts in September to help sell their newly constructed houses, the latest government and industry statistics show.

The Commerce Department reported yesterday that the median price of a new home plunged 9.7 percent last month, compared with September 2005, falling to $217,100, the biggest such drop since December 1970.

Statistics from the National Association of Home Builders showed a similar slide. Builders reported cutting prices in September by 5 percent, according to the association’s most recent data.

Just two months ago, prices of new homes were still on the rise.

At least to some extent, the lower prices achieved the developers’ goal: the backlog of unsold new homes on the market fell in September for the second consecutive month, while the number sold, adjusted for normal seasonal variations, rose by 5.3 percent from the previous month.

But economists and industry experts noted that the reported numbers provide a somewhat distorted picture of market reality. While they seemed to suggest a rebound in sales and a precipitous drop in prices, the data was skewed by a higher number of sales in the South, where homes are cheaper, and fewer in the more expensive Northeast.

Last month, sales in the South accounted for 56 percent of all new homes sold in the country, compared with 52 percent a year earlier. The average square footage of a house sold in September declined as well, pulling down the median price.

While new-home prices across the country may not be falling quite as sharply as the reported numbers suggest, builders are also offering a variety of hidden price cuts in response to the much harsher housing climate that they now face.

“We’re going to run our business as if it’s going to stay tough for a while,” said Richard J. Dugas Jr., chief executive of Pulte Homes, one of the nation’s largest residential builders. On Wednesday, Pulte said its profit in the third quarter fell by more than half, compared with the same period a year earlier.

Indeed, profits are falling fast in many parts of the country for builders, who are rapidly scaling back on their future construction plans.

The home builders’ association reported that 45 percent of builders and developers said they cut prices in September to maintain sales volume. That was up from only 19 percent a year earlier. Similarly, the association reported that 55 percent offered amenities like granite counters or upgraded kitchen cabinets for no additional cost. Only 19 percent did so a year earlier.

The cost of those incentives was not reflected in the new-home price data, which suggested that builders were making even less money from each sale than the shrinking official prices would indicate.

“Builders do not like to lower prices because it sends the wrong signal to potential buyers,” Patrick Newport, an economist with Global Insight, said in a research note. “How much incentives matter today is difficult to gauge — but in markets in which power is quickly shifting from sellers to buyers, they probably matter quite a bit.”

Cancellations were also left out of the new-home statistics. The Commerce Department records a new home as sold when the buyer and builder sign a contract. The home builders association said that cancellations had jumped by 50 percent in the last year.

“The cancellation rate is really big,” said Dave Seiders, chief economist of the association. “It’s exploded over the last year.”

The new-home sales report followed a report that showed softness in the market for previously owned homes, which account for about 85 percent of all home sales.

The pace of existing-home sales in September slowed 14 percent from a year earlier to a seasonally adjusted annual rate of 6.2 million. That was the lowest rate reported since January 2004.

For new homes, the seasonally adjusted annual sales volume figure in September was 1.1 million — 14.2 percent lower than in September 2005.

Another closely watched economic barometer released this morning — the Census Bureau’s report on durable goods orders — showed an unexpected 7.8 percent rise for September from August. Durable goods, which include things like dishwashers, are monitored by economists as a gauge of business investment.

The upswing, however, was almost entirely a result of a surge in orders for aircraft. Boeing took orders for 175 planes last month, nearly tripling the nonmilitary aircraft component of the durable goods figure.

Over all, the latest economic data pointed to continued but slower growth through the end of the summer. When orders for the transportation equipment sector were stripped out, the gain in durable goods orders was only 0.1 percent.

    New-Home Prices Fall Sharply, NYT, 27.10.2006, http://www.nytimes.com/2006/10/27/business/27econ.html

Rent’s Bite Is Big in Kansas, Too

October 23, 2006
The New York Times
By SUSAN SAULNY

OLATHE, Kan. — New census data shows that people are paying more of their income for housing in almost every part of the country. And it is hardly surprising that places like Southern California and Manhattan are high on the list.

But Olathe? In northeast Kansas?

Olathe (pronounced oh-LAY-thuh), 20 miles southwest of Kansas City, showed the biggest jump in the percentage of people paying at least 30 percent of their income on rent, as well as in those paying at least 50 percent on rent.

In a largely rural state not known for growth or overwhelming prosperity, here is a minimetropolis of manmade neighborhood waterfalls, of seemingly endless construction of shopping malls and office parks. Executives and immigrant workers, retirees and young families have all been drawn to its abundance of jobs, parks and high-performing public schools.

“It’s basically been a supernova in terms of its growth,” said Arthur P. Hall, the executive director of the Center for Applied Economics at the University of Kansas School of Business. “It’s a major suburb of Kansas City and for whatever reason has become the place to go. And that I can’t explain.”

Ever since Olathe’s days as a stagecoach stop on the old Santa Fe Trail there have been newcomers at the crossroads here, usually to take a rest and to move on. But as this prairie town and former bedroom community of close to 120,000 looks back to celebrate its 150th birthday, it is clear what has changed: people come to stay. And they pay a lot to do it.

“We grow 10 people a day, every single day,” Mayor Michael Copeland boasts, and population statistics back him up: Olathe has expanded by about 4,000 people a year for the past several years.

Since 1980, the population has more than tripled. And in the last five years, the average price for a new home has doubled to about $350,000.

The census data was collected before the real estate market began softening over the last year, and it was based on a small sample size, experts cautioned. And at the high economic end, Olathe is dominated by homeowners who can afford their properties without mortgages, in one of the most prosperous counties in the country.

But still, that a city in the Great Plains surrounded by farmland registered at all on such a list of expensive places left some regional economic analysts scratching their heads.

Andrew A. Beveridge, a demographer at Queens College in New York who analyzed the national data, which came from the 2005 American Community Survey, said: “The rental burden is off the tracks there. Over all, a lot of people were stunned by the massive increases in the Midwest.”

DeeDee Palermo is one Olathe resident who feels crushed under the weight of the local housing market.

“I’m a single mom and I can’t make it on my own here, so I live with my mother,” said Ms. Palermo, 51, a retail store supervisor. “We’ve had all this massive growth, but for some people, things are worse than ever. I work full time plus some, and I can’t find a place to move to. Landlords want $800 and $1,300 a month. I just say, ‘What? That’s impossible!’ ”

Ms. Palermo, 51, earns $8.75 an hour. She moved her family to Olathe a few years ago because she thought they could live better here than in Southern California or Arizona, where Ms. Palermo held a variety of jobs. She is disappointed. “You can’t make it here unless you pair up,” she said. “I can’t even think about owning a home.”

The census data crystallized what many here like Ms. Palmero already knew: the housing burden is not carried uniformly, and it is particularly daunting for those with low or stagnant wages who have had to deal with the reality of escalating real estate costs. In that respect, some say, Kansas is not all that different from Manhattan or anyplace else.

But compounding the problem here is that growth has happened so quickly, the housing market is neither mature nor diversified, local economists and real estate agents said. Most new construction is expensive and geared toward single-family ownership.

The new economics are particularly hard on renters and those in search of affordable houses to buy, as is typically the case in fast-growth suburbs and exurbs around the country. Single-family homes designed for owner occupancy yield greater returns to developers and municipalities than cheaper multifamily or rental units. That reality often results in lopsided development favoring families with lots of money to spend on upscale housing.

“As communities develop, they tend to attract higher and higher prices for housing, and the community becomes more attractive,” said Dean Katerndahl, an analyst at the Mid-America Regional Council, a planning organization for greater Kansas City. “We’re trying to advocate that there needs to be more variety in choices of housing, in the price basis but also in types.”

In and around Olathe, a name from the Shawnee word for beautiful, corporate headquarters dot the grassy landscape. Sprint, Honeywell and Garmin International, to name a few, are major corporations that have brought thousands of jobs to the area in recent years.

A number of office parks are under construction, as are more than a dozen residential subdivisions. The city has added more than 30,000 jobs in the last five years by marketing itself to information-age companies and emphasizing the convenience of its location in the middle of America.

“We are really the suburb of the entire nation,” Mayor Copeland said. “You can get anywhere in three hours for $300.”

Olathe prides itself on its growing stock of executive-style housing for those whom Mr. Copeland calls “our captains of industry.” Custom-designed houses on landscaped streets with garage space for three or more cars are common.

Still, census figures show that per capita income is $28,373, and for those who do not own a home, the median rent is $676 for what is typically a six-room apartment.

Since 2000, the portion of the city’s population paying more than 35 percent of its income to rent grew to 42 percent from 19 percent, the same data shows. It also says there are almost three times as many owner-occupied units here than rental units, which number about 10,700.

The poverty rate is also increasing, because the area’s growth is also attracting people with lower incomes.

In interviews, city officials tended to say that the housing stock was sufficiently varied and, while expressing concern about growing poverty, showed a sense of pride in Olathe’s costliness.

“I think that’s a sign of success,” Mr. Copeland said. “It shows people are willing to pay a lot to live here.”

Susan Sherman, the assistant city manager, said, “It might just be that the location comes with such amenities that they’re willing to spend their hard-earned dollars on it.” She added, “We don’t have mountains or oceans, but we have some of the greatest people.”

Some builders and residents say the growing lack of low-cost housing cannot be viewed as good.

“It’s been unfortunate from our perspective in the last few years to see so many people who’d like to live in Olathe not be able to because the housing prices have gone up so much,” said Matt Derrick, the spokesman for the Home Builders Association of Greater Kansas City. “We have builders who say, I can’t build housing that my kids could afford to live in. That’s when it really starts to hit home.”

The growth in Olathe through the 1990’s was driven, incidentally, by what was then its affordable housing and by the rapidly developing high-tech industries here, experts said. But, over the years, demand for the area has priced out some long-term residents and newcomers whose wages are moderate to low — mainly the workers in retail and construction, whose numbers have been steadily increasing, too.

City officials could not say exactly where the newcomers have been coming from, but they sense that much of the migration is from rapidly depopulating farm counties in western Kansas, and from similarly struggling regions around the Midwest. The city also has a growing Latino population.

“We ask the same questions: Where are the new people from? And why are they coming here?” said Ms. Sherman, the assistant city manager.

Last year, there was an increase in the number of permits issued for attached housing and large apartment complexes, which may ease some of the housing burden.

Forty families are on a waiting list for emergency housing provided by the Salvation Army. More than 800 families applied in August for food assistance at the local Catholic Charities office. But looking around the well-kept city, it is hard to see signs of struggle. Even older neighborhoods and strip malls are neat, and the streets and highways are humming with traffic.

“There isn’t a stereotypical ghetto here, you’re not going to see skid row,” said Shirley Kelso, the manager of the Family Support Center at Catholic Charities. “It’s a different kind of below-the-surface thing. Most of our folks are working and spending half or more of their disposable income on shelter, and that doesn’t leave a lot.”

Tamara Fiehler finds herself in exactly that situation. Ms. Fiehler is behind on her mortgage payments and is training for a new job that does not pay until she begins working. “My money goes toward my kids and their lunches and clothes,” she said. “I’ve used up my savings trying to pay the mortgage, and I can’t anymore.”

Ms. Fiehler, 44, said she had thought about moving someplace cheaper but could not afford to leave her three-bedroom ranch house in Olathe.

“I’m very happy with the schools, and that’s one good reason to be here,” she said. “Plus, I’d have to get up on my feet before I’d have enough money to go anywhere else.”

    Rent’s Bite Is Big in Kansas, Too, NYT, 23.10.2006, http://www.nytimes.com/2006/10/23/us/23olathe.html?hp&ex=1161662400&en=7ccc1b9bf2fb0027&ei=5094&partner=homepage

Ford reports $5.8 billion Q3 loss

Updated 10/23/2006 12:01 PM ET
USA Today
By Sharon Silke Carty

DETROIT — Ford Motor (F), struggling to convince investors that its plan to return to profitability could actually work, on Monday posted its largest quarterly loss since 1992 and said it will restate earnings for every quarter back to 2001 due to an accounting misstep.

The automaker posted a $5.8 billion net loss for the third quarter, a $5.5 billion swing from last year's loss of $284 million. The bulk of that loss — $5.3 billion — came from one-time charges related to restructuring in North America and the re-evaluation of North American assets with the Jaguar and Land Rover brands.

The loss amounted to $3.08 a share for the July-September period, compared with last year's loss of 15 cents a share.

"Let me make it clear: These results are unacceptable," CEO Alan Mulally said on a conference call to discuss the quarter.

ON DEADLINE: Links to Ford's press release and more

The loss was Ford's largest since the first quarter of 1992. That $8.1 billion loss was mainly due to accounting changes.

Excluding restructuring costs, the company said it lost $1.2 billion, or 62 cents a share, from continuing operations. Excluding special items in the third quarter last year, Ford lost $191 million, or 10 cents a share.

Analysts had been expecting a loss of 61 cents a share for the quarter, according to Thomson Financial.

The automaker warned that third-quarter figures could change in as it looks at restating its finances.

Ford Chief Financial Officer Don LeClair said the restatement relates to how Ford accounted for some hedging derivatives in its Ford Credit operation. The automaker believed those credits were exempt from some accounting rules. A routine audit by PriceWaterhouseCooper uncovered the improper accounting.

"We've always prided ourselves on good internal controls," LeClair said. "We are, and I am, disappointed that we will have to restate financials."

Ford's restructuring plan aims to cut $5 billion in costs by the end of 2008, trimming 10,000 white collar workers through buyouts, early retirements and possibly layoffs and offering buyouts to all 75,000 hourly workers.

The company's plant in St. Louis, which made Ford Explorer, is already closed, and its plant in Atlanta that makes Ford Taurus should be closed by the end of this week.

Ford took an $861 million charge for jobs-bank benefits and employee separations for plant idlings, a $259 million charge for continued global personnel reduction and a $437 million charge for the cost of early retirements.

North American operations lost $2 billion in the quarter, compared with a loss of $1.2 billion a year ago, as sales fell nearly $3 billion to $15.4 billion.

The automaker said lower volume and unfavorable product mix were to blame. Ford's highly profitable trucks and SUVs have taken a beating this year, down 16% through the end of September, according to AutoData. Ford has been forced to offer higher rebates and incentives on those vehicles, giving buyers back an average of an additional $740 per truck or SUV through the period, AutoData says.

But North America is not the only problem for Ford. Its troublesome Premier Automotive Group (PAG) is showing signs of weakness, and sales in Asia Pacific were down as buyers in Australia showed a declining appetite for big trucks and SUVs as gasoline prices rose.

PAG posted a $593 million pre-tax loss for the quarter, compared with a pre-tax loss of $108 million a year ago, with sales down $300 million. Contributing: higher warranty costs at Jaguar and Land Rover and lower volume at all of PAG's brands, which also include Aston Martin and Volvo.

The company expected the restatement would improve results for 2002, but said other periods are under study.

"We are committed to dealing decisively with the fundamental business reality that customer demand is shifting to smaller, more efficient vehicles," Mulally said. "Our focused priorities are to restructure aggressively to operate profitably at lower volumes, and to accelerate the development of new, more efficient vehicles that customers really want.

Contributing: Sarah A. Webster, Detroit Free Press

    Ford reports $5.8 billion Q3 loss, UT, 23.10.2006, http://www.usatoday.com/money/companies/earnings/2006-10-23-ford_x.htm

In Deregulation, Power Plants Turn Into Blue Chips

October 23, 2006
The New York Times
By DAVID CAY JOHNSTON

Four big investment firms bought a group of Texas power plants in 2004 for $900 million and sold them the next year for $5.8 billion.

Sempra Energy, parent of the utility in San Diego, bought nine Texas power plants with two partners in 2004 for $430 million, selling two of them less than two years later for more than $1.6 billion.

Goldman Sachs and its partners bought power plants in upstate New York, Pennsylvania and Ohio starting in 1998 and sold them in 2001 at a profit of more than $1 billion.

These extraordinary profits have come during a decade-long effort in about half the states to overhaul the business of producing electricity — in the name of stimulating competition and lowering utility bills.

But even as some investors have profited handsomely by buying and sometimes quickly reselling power plants, electricity customers, who were supposed to be the biggest beneficiaries of the new system, have not fared so well. Not only have their electricity rates not fallen, in many cases they are rising even faster than the prices of the fuels used to make the electricity. Those increases stand in contrast to the significantly lower prices in other businesses in which competition was introduced, such as airlines and long-distance calling.

Some electricity customers are also being saddled with monthly surcharges to cover construction costs for plants that were sold at bargain prices and then resold at huge profits. Some of these surcharges will continue for years.

Analysts cite several reasons that the new system has not been as successful as hoped.

Regulators required some utilities to sell their power plants so that independent electricity producers could compete on equal footing with those plants. But not enough new competitors emerged.

And sometimes regulators allowed utility holding companies to transfer plants from their regulated utilities to unregulated wholly owned subsidiaries. When some of these unregulated sister companies still found it hard to turn a profit, regulators allowed the plants to become regulated companies again, so they were virtually guaranteed state-approved profit rates.

By last year, only 63 percent of the nation’s electricity generating capacity was owned by utilities, down from almost 90 percent 10 years ago. Often customers did not come out ahead, critics of the new system say.

Take the case of the Texas power plants. After the Texas Legislature, urged by Enron and big industrial customers, voted to make electricity generation a competitive business, the utility serving the Houston area sold 60 power plants that generate most of the power for the area to four investment firms — the Texas Pacific Group, the Blackstone Group, Kohlberg Kravis Roberts and Hellman & Friedman — which soon resold the plants at the $5 billion profit.

But state regulators have ordered electricity customers to pay an average of $4.75 monthly for 14 years to finish paying for the construction of the power plants, plus interest.

And the utility that sold the plants, Centerpoint, is suing for even higher payments from customers. Houston-area consumers now pay among the highest electricity rates, nearly double the national average.

Supporters of deregulation said customers would benefit from healthy competition among a growing number of electricity producers. But such competition has not developed. For one thing, many of the new power plants failed because, unlike many of the old plants, they almost all used natural gas to produce electricity. Demand for natural gas soared, and the price for that fuel tripled, making electricity from these plants too costly to be competitive.

The value of these plants collapsed, and some owners sought refuge in bankruptcy court. That is when investment firms, anticipating a much higher price for the plants’ electricity, bought them for as little as 20 cents for each dollar spent to build them.

And in fact the investment firms calculated doubly right: By paying so little for the plants, they made the construction costs of new plants by competitors seem prohibitively expensive. Over the last five years, few new power plants have been built, although demand for electricity has risen.

The story has been different for electricity customers. Many of the power plants that were sold are still owned by the utilities’ parent companies; they were simply transferred from the regulated utilities to unregulated sister companies. Some regulators allowed utilities to favor the sister companies with long-term contracts even if they did not offer the best price for electricity.

In fact, independent electricity producers argue that their modern generating plants often sit idle while older, inefficient plants owned by politically powerful utilities and their unregulated sister companies whir around the clock under long-term contracts. For example, Calpine, an independent generating company, and some big industrial customers have complained that Entergy, the Louisiana utility holding company, is favoring its own plants when Calpine’s power would be cheaper. Congress has ordered studies of the issue.

Because utilities are still allowed to pass on the cost of the power they buy, they have little incentive to choose a cheaper supplier. Electricity customers therefore end up paying more than they would have to if electricity production were truly competitive.

After Baltimore Gas & Electric transferred its 12 power plants to an unregulated affiliate and became only a distribution company, it continued to buy 70 percent of its electricity from the plants because there were not enough independent generators to supply the area’s needs. Baltimore Gas & Electric sought a 72 percent rate increase this year, causing such an outcry that Maryland regulators gave it only an immediate 15 percent, but with big additional increases virtually guaranteed over the next few years.

Paul Allen, a spokesman for the utility’s parent company, Constellation Energy, said that Baltimore Gas & Electric rates had been frozen since 1993 and that the increase largely reflected the higher price of producing electricity, including the cost of fuel. He said a rate increase was inevitable regardless of the new system.

But Robert McCullough, a utility economist and consultant, disagreed and blamed the new system. He said that in places like Baltimore, where a utility’s plants were sold to an unregulated sister company, “the same energy is generated by the same plants, owned by the same owners, and sold to the same customers, simply at a vastly higher price.”

Ralph Nader, head of the watchdog group Public Citizen, said that many power plants were sold for artificially low prices and that state regulators often failed to protect customers. He said regulators should have required price protection to shield consumers from a “double header corporate gouge, where the defenseless customer is paying twice for the same power plants.”

The American Electric Power Company, which owns utilities in 11 states, sold nine of its Texas power plants to SEMPRA, the parent of a San Diego utility company, and the Carlyle Group in 2004 for $430 million. SEMPRA and Carlyle quickly resold two of the plants for $1.6 billion.

American Electric wanted customers to pay an average of $9 a month for 14 years to cover the difference between the cost of building the plants and the lower price for which it sold them, plus interest. But because the resold plants went for 15 times as much per unit of generating capacity, state regulators questioned whether the utility should have sold the plants for higher prices. Still, regulators have required customers to pay on average $5 per month for 14 years, or more than $800 each.

There are persistent allegations that many plants have become inordinately profitable for their new owners; in some cases, disputes have arisen over just how profitable the plants are. In Connecticut, three plants together earn at least $700 million in annual profits, money that is over and above the 10 percent profit they would earn if they were still in the regulated system, Attorney General Richard Blumenthal said. He wants the state to end the new system and return to a more regulated system or even have a state agency provide power.

The plant owners, P.S.E.& G. and Dominion, said that the profit estimates were “wildly exaggerated” and that most of the power was sold at fixed prices with profits not significantly different from what regulated plants would earn. They did not release precise profit figures.

In Ohio, the state’s consumer advocate, Janine Migden-Ostrander, said the potential savings from a competitive electricity industry were undercut by favoritism that regulators showed to utility companies.

In effect, she said, Ohio regulators allowed an extremely favorable price when unregulated sister companies acquired power plants. The lower the price a sister company pays for a power plant, the more difficult it is for an independent power producer that must build an expensive new plant to compete. That “is how the utilities killed the market before it could be started,” she said.

Lynn Hargis, a longtime utility regulation lawyer who now volunteers as counsel to Public Citizen, said the terms under which power plants were sold are “the equivalent of selling your grandmother’s house for the price she paid 60 years ago, less depreciation. No one would do that.”

The utilities say that no one knew at the time the plants were sold that they would later soar in value. Floyd Le Blanc, a spokesman for Centerpoint, the Texas company that sold the 60 Houston-area plants, said, “We complied with all legal and regulatory requirements.” His remarks were echoed by other utilities.

But even after buying plants at low prices, some utilities have been unable to profit in a competitive setting after decades of operating in a regulated market, where profits are virtually guaranteed. State governments have provided a refuge.

Corporate parents with both regulated utilities and unregulated power plant companies have persuaded sometimes reluctant regulators to allow them to put failing plants into the hands of the regulated utilities, where they were almost certain to turn a profit, said Richard Stavros, executive editor of Public Utilities Fortnightly, a trade magazine. That has happened in Arizona, Missouri, Texas and other states.

Arizona Public Service, for example, brought five plants owned by its unregulated affiliate, Pinnacle Energy West, into the utility. The staff of the state board that regulates utilities at first opposed the deal, saying it was not in the best economic interests of customers. But the staff relented after Arizona Public Service promised it would not add any power plants to its regulated operations before 2015, which may encourage others to enter the market.

The Federal Energy Regulatory Commission recently approved a deal to move a Texas power plant back into a regulated utility, although it expressed concern that allowing utilities’ parent companies to salvage their failed investments in the competitive market could be unfair to competing generating companies.

The sale back to utilities of power plants that are not making money is “a disturbing national trend,” said Jan Smutny-Jones, executive director of Independent Energy Producers in Sacramento, Calif., a trade association for power plant owners.

“It’s a great deal,” he said, “having ratepayers cover your managerial mistakes.”

    In Deregulation, Power Plants Turn Into Blue Chips, NYT, 23.10.2006, http://www.nytimes.com/2006/10/23/business/23utility.html?hp&ex=1161576000&en=eed40071cf6e6552&ei=5094&partner=homepage

Editorial

Closing in on Hedge Funds

October 20, 2006
The New York Times

At first glance, the market-beating returns of hedge funds are impressive. But on closer inspection, things look less showy. Performance measures are based on voluntary reporting by hedge funds and thus tend to reflect outperformers rather than laggards and losers. And even some of the winners’ outsized returns are overstated because they are not adequately adjusted to reflect the huge risks that go hand in hand with big gains.

In addition to those concerns, Jenny Anderson of The Times has now articulated another: the strong possibility that hedge funds’ returns are juiced by insider trading.

Over the past several years, largely unregulated hedge funds have become a towering presence in the stock market, now accounting for roughly half of all trading on the New York and London exchanges. More recently, they have become major players in the debt market as lenders to companies, buyers of banks loans and investors in tricky derivative securities tied to companies’ credit quality.

The loan market is far larger than the stock market, and as such, of vast importance to the performance of the overall economy — a fact that on its own should entice regulators to inquire more about hedge funds’ potentially destabilizing positions and activities. A more immediate problem is that loan-market participants routinely deal in confidential information, including all of the details a company must divulge to qualify for a loan and frequent — nonpublic — financial updates while a loan is outstanding. With virtually no government oversight and generally fewer institutional controls than banks, hedge funds that are active in both equity and debt markets face huge temptations to trade on insider information.

Ms. Anderson reported that the Securities and Exchange Commission is looking into whether certain hedge funds improperly traded the shares of Movie Gallery, a movie rental chain, after taking part in a confidential conference call for the company’s lenders. Such an investigation may be just the tip of an iceberg. Even if it doesn’t uncover any wrongdoing, it has opened a window on how information travels on Wall Street.

On Monday, Senator Charles Grassley, chairman of the Senate Finance Committee, sent a letter to Treasury Secretary Henry Paulson Jr. and several other administration officials and members of Congress, soliciting views on how Congress could improve hedge fund transparency. The replies will, at the least, create a record of officials’ ability and willingness to respond to the obvious problems posed by hedge funds — before those problems become crises.

It is time for Congress and federal regulators to take an unflinching look at how deals really get done in today’s markets, and to come up with enforceable rules and laws to ensure market integrity and the overall soundness of the financial system.

    Closing in on Hedge Funds, NYT, 20.10.2006, http://www.nytimes.com/2006/10/20/opinion/20fri1.html

$5.4 Billion Bid Wins Complexes in New York Deal

October 18, 2006
The New York Times
By CHARLES V. BAGLI

Jerry I. Speyer, who controls some of the city’s most prominent landmarks, from Rockefeller Center to the Chrysler Building, yesterday signed the largest American real estate deal ever, agreeing to pay $5.4 billion for Stuyvesant Town and Peter Cooper Village, a vast corridor of 110 apartment buildings along the East River in Manhattan.

Mr. Speyer, the chief executive of Tishman Speyer Properties, and his partner, the BlackRock investment bank, outmaneuvered more than a half-dozen other bidders, including a group aligned with tenants who had hoped to preserve the two adjoining complexes on First Avenue between 14th and 23rd Streets as enclaves of middle-class housing.

But these are not typical real estate trophies. Built by Metropolitan Life for returning veterans in 1947, with the help of tax breaks and the government’s powers of eminent domain, Stuyvesant Town and Peter Cooper Village have served as an affordable redoubt for generations of police officers, teachers, nurses and other middle-class New Yorkers. The unremarkable brick buildings, with 25,000 people living in 11,232 units, are nestled among trees and fountains on 80 acres of some of the most valuable real estate in the world.

With rents and housing prices soaring in recent years, the pending sale turned the issue of affordable housing into a cause célèbre among New York politicians, including members of Congress, state legislators and City Council members. And the tenants feared that a new owner would transform the complexes into a luxury enclave.

But Mayor Michael R. Bloomberg stayed on the sidelines, and MetLife was intent on selling for the highest possible price. At $4.5 billion, the tenant offer lagged behind bids from some of the biggest names in real estate, from Apollo Real Estate Advisors in a joint offer with the Dermot Company, to the Related Companies with Lehman Brothers; the Millstein brothers; and Vornado Realty Trust.

An elated Mr. Speyer appeared well aware of the complexes’ place in the city’s culture and the political sensitivity of the sale.

“As a business with deep roots in New York City, we have a sincere appreciation for these cherished neighborhoods, and we are honored to become stewards of the property,” Mr. Speyer said. “We are committed to working closely with residents, elected officials and community leaders to ensure a dynamic and vibrant future for this New York community.”

His son, Rob Speyer, a senior managing director at Tishman Speyer, also tried to reassure tenants, emphasizing, “There will be no sudden or dramatic shifts in the community’s makeup, character or charm.” But he would not commit to preserving a large block of apartments as affordable housing, which the tenant group had sought.

MetLife said that the Speyers and BlackRock, a New York-based firm that is a major national real estate investor, would be “fine stewards of the property in the years to come.” Although Tishman Speyer is best known in New York for its commercial buildings, rather than residential development, the company has built housing in France, Germany, Brazil and soon, India. It built an apartment house in the late 1990’s on the Upper West Side and has another residential project in San Francisco.

Tishman Speyer and BlackRock were among about eight companies invited to make final bids for the complexes on Monday afternoon. Apollo, the No. 2 bidder, came in at $5.33 billion. MetLife and its broker, Darcy Stacom of CB Richard Ellis, negotiated with Rob Speyer into the early-morning hours, then signed a contract at 10 a.m. yesterday. They plan to complete the deal in a month — three times faster than most buyers close on a single house.

MetLife executives were not unfamiliar with the Speyers. Last year, his company bought the insurer’s 58-story skyscraper at 200 Park Avenue, at 45th Street, for $1.72 billion. “Clearly, Tishman Speyer has a proven track record with MetLife,” said Scott Rechler, chairman of Reckson Associates, who lost out in the bidding on that deal, despite a slightly higher offer.

Michael McKee, treasurer of the Tenants Political Action Committee, called the sale a “dark day for affordable housing.”

Many of the two complexes’ residents fear that their homes are destined to become luxury housing. Nearly three quarters of the apartments have regulated rents at roughly half the market rate. In recent years, MetLife has dislodged illegal sublettors and tenants whose units were not their primary residence.

Rent-regulated tenants cannot be forced out. Under the rent laws, however, an apartment can be “decontrolled” — and rented at the market rate — after it becomes vacant and the rent reaches $2,000 a month. The same can happen if the rent rises to $2,000 a month and the current tenant’s household income rises above $175,000 for two successive years. MetLife says that rents for 27 percent of the apartments are now at market rates. The company has suggested that another 1,800 units will be decontrolled over the next two years.

Nanette Ross, 45, recalled moving into Stuyvesant Town more than 20 years ago and thinking, “I’m in heaven,” even without air conditioning or a dishwasher. “The future for the lives of 25,000 people is at stake,” said Ms. Ross, who has two children and owns a pop art gallery with her husband, Jeff. “I find it very hard to believe that someone who would come up with $5 billion to buy a property like this wouldn’t be trying to make money, and the only way to make money on a property like this is to turn it into luxury housing.”

Daniel R. Garodnick, a city councilman who lives in Peter Cooper and helped organize the tenant offer, expressed disappointment that a symbol of middle class housing would be lost: “Eventually, I think what you will see is a market-rate, gated community, which is what MetLife was pitching to all the potential bidders.”

The tenant bid was intended to preserve about 20 percent of the apartments for middle-income families who rent and another 20 percent for residents who want to buy. Most of the remaining apartments, under that plan, would have been sold at market rates. In an attempt to bolster their offer, the tenants had sought tax breaks and exemptions from the Bloomberg administration.

But the mayor took a hands-off approach, saying, “MetLife owns it, and they have a right to sell it.”

Many tenant activists and urban planners criticized him for that.

“Stuyvesant Town was a national model for middle class people in an urban setting,” said John H. Mollenkopf, director of the Center for Urban Research at the Graduate Center of the City University of New York. “It wouldn’t have happened without eminent domain and favored tax treatment. It’s disingenuous to say there’s no public interest in what happens to this housing.”

Deputy Mayor Daniel L. Doctoroff said it was a matter of the best use of scarce resources. He said it would have cost the city nearly $500 million to provide the tax incentives the tenants’ wanted. For the same money, nearly $107,000 per unit, the city could build a new middle-income apartment, and possibly, preserve another affordable unit elsewhere.

Indeed, the city was expected to announce a deal tomorrow with the Port Authority of New York and New Jersey to build low- and moderate-income housing at Queens West, a waterfront development in Hunters Point, according to a Port Authority executive.

Born in Lower Manhattan nearly 140 years ago, MetLife was once a major force in the city’s economic and civic life. In the 1940’s, the company built thousands of apartments in a city hungry for housing, including Parkchester in the Bronx, Riverton in Harlem and Stuyvesant Town and Peter Cooper Village, on the rubble of the old Gashouse District.

In return for the government help, MetLife agreed to limit its profit to 6 percent a year for 25 years and maintain below-market rents. The company barred blacks from living in Stuyvesant Town for many years, and its president at the time, Frederick H. Ecker, once said, “Negroes and whites do not mix.”

MetLife has been a shrinking presence in New York since the 1960’s, when the company counted 17,000 employees here. There are fewer than 2,500 employees today. In recent years, the insurer sold its three major buildings in Manhattan for $3.3 billion, including its landmark 50-story clock tower and two towered headquarters on Madison Avenue.

After announcing the auction of these complexes earlier this year, MetLife executives insisted they had long ago met any obligation to preserve middle class housing.

“I knew they wouldn’t give it to us,” said Arthur Kellebrew, 44, who grew up in Stuyvesant Town and now has a family of his own. “It seems like now all they want is money. It affects the whole city, because middle class housing — you can’t find it any more.”

Damien Cave and Cassi Feldman contributed reporting.

    $5.4 Billion Bid Wins Complexes in New York Deal, NYT, 18.10.2006, http://www.nytimes.com/2006/10/18/nyregion/18stuyvesant.html?hp&ex=1161230400&en=18af7d1cafaf3774&ei=5094&partner=homepage

Wal-Mart Said to Be Acquiring Chain in China

October 17, 2006
The New York Times
By DAVID BARBOZA and MICHAEL BARBARO

SHANGHAI, Tuesday, Oct. 17 — Wal-Mart Stores, the largest retailer in the United States, is laying the groundwork to become the biggest foreign chain in China with the $1 billion purchase of a major retailer here, according to people briefed on the deal.

The move represents a large step for Wal-Mart’s strategy in China, allowing the American retailer to more than double its presence in a country that, despite its size and growing middle class, remains largely untapped by foreign retailers.

Though the size of the acquisition — of a Taiwanese-owned supermarket chain called Trust-Mart — may be modest for Wal-Mart, it is a critical one because the Chinese market is becoming much more pivotal in the retailer’s overall international strategy. For Wal-Mart, China represents an opportunity to tap a vast and fast-growing market abroad at a time when the company’s sales are lagging elsewhere and it has run into obstacles to expansion at home.

“China is the only country in the world that offers Wal-Mart the chance to replicate what they have accomplished in the U.S.,” said Bill Dreher, an analyst at Deutsche Bank Securities.

Wal-Mart expects to close the deal for Trust-Mart by the end of the year, but it still needs approval by Chinese authorities, according to a person briefed on the transaction.

The acquisition is likely to trigger an intense battle among foreign and domestic retailers to gain a strong foothold in the world’s fastest-growing economy.

The deal puts Wal-Mart neck-and-neck in China with Carrefour, the giant French retailer, which also bid for Trust-Mart. Wal-Mart, which has only 66 stores in China compared with Carrefour’s more than 200, outbid not only Carrefour, but also Tesco of Britain and one of China’s large retailers, Lianhua.

The purchase also highlights the staggering reach of the $300 billion Wal-Mart empire. The company started in rural Arkansas 45 years ago and has become the largest foreign retailer in Mexico and Canada. In numerous other foreign markets, however, Wal-Mart has been stymied, pulling out of Germany and South Korea, or has met strong challenges, as in Japan, where it has struggled to gain a share of the market.

By acquiring Trust-Mart, Wal-Mart will not only be able to match Carrefour, but also to compete with much bigger Chinese retailers, like China Resources and the Shanghai Brilliance Group, which are the country’s largest retailers with more than $3 billion in sales and more than 8,000 stores combined.

Trust-Mart has more than 100 stores with 30,000 employees in more than 20 Chinese provinces, but it operates mainly at the low end of the supermarket chains. One challenge for Wal-Mart will to determine where it will position itself in the retailing market.

China’s economy is expanding at a rate of 10 percent to 11 percent a year, making it by far the world’s fastest-growing major economy. Retail sales are even more robust, jumping by about 15 percent a year for the last several years.

Big retailers are fairly new in China, which for decades has been dominated by small regional chains. Indeed, China has no dominant national players in the retail market, which is why Wal-Mart and other international retailers are battling aggressively to expand there.

“China’s a very fragmented market and very diverse,” says George Svinos, head of Asia Pacific retail at KPMG’s office in Australia. “So in order to get any penetration into that market you’d need to make a big move.”

China, however, is a tricky market for American retailers. Chinese consumers spend less than Americans when they go into stores, but they shop more frequently.

The average Chinese shopper spends about $4 at Wal-Mart, compared with $20 for the average American, according to Wal-Mart.

But Wal-Mart and other retailers hope to lure the middle-class Chinese, one of the fastest-growing segments of the population. Already, middle-class shoppers crowd into Carrefour, Wal-Mart and Ikea.

Other retailers, like Toys “R” Us, Home Depot and Best Buy, have just announced plans to open outlets in China.

The government has opened its retail market to foreigners, but at the same time, it has also encouraged Chinese companies to merge. In one example, the Shanghai Bailian Group struck a deal with Dashang, which operates the second-largest chain store group, to create new stores.

Moreover, China’s biggest state-owned retailers and a handful of aggressive entrepreneurs are pushing to create national chains, like Beijing-based WuMart and Gome, the country’s largest consumer electronics store, which is owned by one of the country’s wealthiest men.

Carrefour, which is the largest foreign retailer in China by sales, with more than $2 billion, has been expanding much more aggressively than Wal-Mart. Carrefour plans to open 100 new superstores this year, which will raise its total to more than 300.

Analysts say that Wal-Mart’s expansion has stepped up only in recent years. Up until now, they say, the retailer has not had great advantages over its bigger competitors. It has had high costs in China because systems for purchasing, transportation and distribution are clogged and complicated in a country that is still largely inefficient and without a strong national highway grid.

Wal-Mart appeared to smooth the way for expansion in China in July when, for the first time, it allowed employees to form a trade union, the company’s first in China. The retailer has long battled unions in the United States, arguing they will make the company less efficient.

In the United States, where Wal-Mart has more than 4,000 mostly suburban stores, its performance has begun to trail that of major competitors, like Target, particularly in sales at stores open at least a year. And Wal-Mart has encountered growing resistance to locating new stores in urban areas.

A Wal-Mart spokeswoman, Beth Keck, declined to comment on the Trust-Mart transaction.

Wal-Mart entered China in 1996 with a supercenter under its own name and a Sam’s Club in Shenzhen, near Hong Kong. In a departure from its practice of buying domestic chains with strong local name recognition, Wal-Mart started by building its business in China on its own.

But the pace of Wal-Mart’s growth in China has been slow. A decade after arriving, it has just 66 stores, failing to crack the list of the country’s top 20 retailers; hence, the move to acquire Trust-Mart.

Wal-Mart operates stores in 13 countries, including Brazil, Japan, and England, but foreign sales represent just $64 billion, or 20 percent, of its more than $300 billion in annual sales.

In several countries, it has discovered its American formula for success — rock-bottom prices, zealous control of inventory and a wide array of products — simply does not translate.

In Germany, for example, Wal-Mart never established comfortable relations with the powerful unions, which dominate retail in the country. In South Korea, it failed to satisfy the tastes of finicky local consumers.

Thus, in a stinging admission of defeat, Wal-Mart pulled out of Germany and South Korea this year after failing to turn around poor sales.

Wal-Mart, however, remains committed to Japan, where it operates stores under the name Seiyu, despite lackluster performance.

A major obstacle overseas for Wal-Mart has been building a big enough network of stores to compete with local chains and to secure low prices from suppliers. That may explain, in part, why Wal-Mart is eager to grow in China.

Mr. Dreher, of Deutsche Bank, expects Wal-Mart to expand aggressively there. By the year 2010, he predicts the company will have as many as 400 stores in China.

David Barboza reported from Shanghai, and Michael Barbaro from New York. Keith Bradsher contributed reporting from Hong Kong.

    Wal-Mart Said to Be Acquiring Chain in China, NYT, 17.10.2006, http://www.nytimes.com/2006/10/17/business/worldbusiness/17walmart.html?hp&ex=1161144000&en=c8573d137721ed20&ei=5094&partner=homepage

As Lenders, Hedge Funds Draw Insider Scrutiny

October 16, 2006
The New YorkTimes
By JENNY ANDERSON

In early March, executives from Movie Gallery, a big movie rental chain, held a private conference call for their lenders to talk about how disastrous 2005 had been for the company. A string of Hollywood flops had kept customers away. More people were recording movies from television instead of renting them from a store. The executives said they needed more time to fix the problems, which included more than $1 billion in debt.

Most of the roughly 200 lenders were not bankers, but hedge funds. And what they heard was supposed to be confidential: it was inside information, as valuable to investors as a tip about an imminent takeover.

During the next two days, though, Movie Gallery’s shares were heavily traded, and its stock plummeted 25 percent.

A coincidence? Regulators are not so sure. The Securities and Exchange Commission is now looking into whether any of the hedge funds on the private call with Movie Gallery took their inside knowledge of the company’s struggles and traded on it. Movie Gallery announced earnings results to the public nearly two weeks after the private conference call.

The Movie Gallery case provides a window onto the growing power of hedge funds in financial markets, and raises questions about their role in how information flows on Wall Street. Hedge funds have become a dominant force in the New York and London stock exchanges, and now account for roughly half of all trading in those markets. But they also have recently become major players in the more opaque debt market, which includes bonds as well as loans, and is more than one and a half times as big as the stock market.

“If hedge funds are privy to inside information and they invest in different securities all over the capital structure, this raises lots of concerns” said Alistaire Bambach, assistant director for the Northeast regional office of the S.E.C. She declined to comment on any open investigation.

The power shift in the loan market has prompted the trade association for lenders to develop new guidelines, to be announced today, governing how confidential and material — meaning potentially market-moving — nonpublic information is used.

“There are laws against insider trading: you can’t trade securities on the basis of material nonpublic information,” said Elliot Ganz, general counsel of the industry group, the Loan Syndications and Trading Association. That goes for hedge funds as well as any other entity that owns or trades loans.

Lending was once a clubby world dominated by banks, which are highly regulated and go to great lengths to separate their various lines of businesses. To keep bankers from possibly sharing inside information with traders, some banks even separate their divisions on different floors and use coded identification tags to restrict access.

But hedge funds, which do not generally face such strict regulatory oversight, tend to be smaller than banks and have fewer information barriers. At some funds, the person trading loans, who may have access to confidential information, often sits next to the person trading the bonds — or, in some cases, may be the same person.

“You can’t put an ethical wall down the middle of someone’s brain,” said Herbert F. Bohnet, a lawyer at Ropes & Gray who represents hedge funds.

Many hedge funds have put in place information barriers to guard against trading on inside information. Silver Point, a $6 billion hedge fund focused on investing in various kinds of debt, physically separates the people who have inside information from those who do not, among other measures. “Silver Point has a sophisticated information barrier,” said Adam Weiner, a spokesman for the fund.

Some funds choose to restrict their trading. For example, Highland Capital Management, a $28.5 billion investment management firm that operates hedge funds, and Silver Point each say that when their public side receives any nonpublic information about a company, it restricts itself from trading any securities in that company. Other funds, to avoid even the appearance of having a trading edge, simply opt to receive only public information.

The hedge fund business has exploded in recent years, with more than 9,000 funds now managing more than $1.2 trillion for pension funds, endowments and wealthy individuals. Part of the appeal to these sophisticated investors is the funds’ greater freedom to bet on different markets, including exotic and risky investments. Many institutional investors use them to diversify their portfolios.

These funds are paid enormous fees — typically, 2 percent of the assets they manage and 20 percent of the profits — for the bets they make that pay off.

Searching for different returns from the stock and bond markets, hedge funds found fertile ground in the loan market. Institutions, including hedge funds, bought $224 billion of loans in 2005, compared with $50 billion in 2000, according to Reuters Loan Pricing Corporation. The percentage owned strictly by hedge funds is not known.

When a public company takes out a loan, it generally agrees to provide the lender with certain information, sometimes including monthly financial updates. Investors in a public company’s stock or bonds, by contrast, receive only quarterly reports.

If a company is considering whether to refinance debt or secure financing for a merger or acquisition, it may share those intentions with lenders. If a company is having problems that threaten to break the terms of its loans, it has to disclose that to its lenders, too.

As part of their role as lenders, hedge funds have also grown prominent in corporate bankruptcies, where they can make a cheap bet on a company’s recovery by buying its debt. By owning the debt, they can become powerful creditors and serve on committees that have a large say in the future of a company.

“Hedge funds have become a dynamic force in Chapter 11 cases,” said Harvey R. Miller, vice chairman at Greenhill & Company and the former head of the bankruptcy and reorganization group at Weil, Gotshal & Manges. “Where you used to have a syndicate of banks, today you have a syndicate that is mostly hedge funds, and it would appear they have different objectives than a syndicate of banks used to have. Their horizons are much shorter.”

Hedge funds have come to dominate certain riskier segments of corporate lending, including the second-lien loan market. In this market, if a borrower defaults, the primary lender gets repaid before the secondary lender; in exchange for shouldering this risk, that second-lien lender earns a higher interest rate from the borrower. In the first half of this year, companies borrowed $12.4 billion in second-lien loans, an increase of 195 percent over the same period in 2003, according to Reuters L.P.C.

A number of hedge funds are particularly active in extending and trading loans, including Highland Capital Management, Canyon Capital and Silver Point Capital. All three funds owned part of Movie Gallery’s loans, though each of them said they were not on the March 6 private conference call.

Determining whether any of Movie Gallery’s loan holders misused information will be difficult. The company’s stock had been volatile in the months before the private call because of the expensive acquisition of the Hollywood Entertainment movie rental chain. New technologies such as video-on-demand also worried many investors, as did the growth of DVD sales by discount retailers such as Wal-Mart.

Still, the trading patterns were unusual. Movie Gallery held two conference calls on March 6: one for lenders who agreed to receive only public information, and one for those who receive private information.

The next day, the price of its bonds fell to $63, from $65, and the stock dropped 5 percent, to $3.11. That evening, Debtwire, a subscription-only news service for debt-market traders, published some of the contents of the private meeting, attributing it to people who had been on the call. The next day, the bonds fell almost 10 percent and the stock more than 20 percent.

The situation at Movie Gallery raises tougher questions for regulators than more typical trades on inside information, such as someone getting wind of a big merger before it happens. Did the private information from the call become “public” once it has been released over Debtwire? Trading on public information is, of course, perfectly legal.

Movie Gallery, meanwhile, has hired advisers to help turn itself around. Its stock closed at $2.17 on Friday, down 73 percent from its closing price a year ago. Andrew Siegel, a spokesman for Movie Gallery, declined to comment.

As much as the S.E.C. is trying to root out instances of actual insider trading, it is also scrutinizing the broader issue of how companies manage the information they have access to as debt holders. In one case in 2005, for example, the S.E.C. sued Van D. Greenfield and his fund, Blue River Capital, accusing them of using fake trades to secure a position on the WorldCom creditors committee. That position enabled him to get inside information while his fund continued to trade in the securities of the company.

While the S.E.C. did not charge the fund with insider trading, it accused Blue River Capital of failing to have information barriers in place to prevent the misuse of such information.

Blue River withdrew its registration as a securities dealer and now operates as a private investment vehicle for the people who run it, according to Arthur S. Linker, Mr. Greenfield’s lawyer. Mr. Greenfield settled the case last year without admitting or denying guilt and, through his lawyer, declined to comment.

Mr. Miller of Greenhill said that the issue of managing secrets was a serious one for the industry. Walls may be in place, but people still run into each other outside the walls. “It is hard to be foolproof,” he said.

    As Lenders, Hedge Funds Draw Insider Scrutiny, NYT, 16.10.2006, http://www.nytimes.com/2006/10/16/business/16hedge.html?hp&ex=1161057600&en=9548b6bc943d05a3&ei=5094&partner=homepage

Corporate America’s Pay Pal

October 15, 2006
The New York Times
By GRETCHEN MORGENSON

YOU may not know Frederic W. Cook, but if you are a shareholder or employee who has watched executive pay rocket in recent years, you are likely to be acquainted with his work.

As the nation’s leading executive compensation consultant, Mr. Cook and his colleagues at Frederic W. Cook & Company are probably responsible for creating more wealth for executives over the last 20 years than any other pay advisers.

He and his associates have advised on the $1.1 billion option grant that Computer Associates gave its top three executives in 1998 and the $83 million pension benefit amassed by Hank McKinnell, Pfizer’s recently ousted chief executive. And in 2000, court documents show, Mr. Cook’s firm provided advice to Tyco International’s compensation committee, which heaped a $95 million pay package on L. Dennis Kozlowski, its chief executive at the time.

Mr. Cook also invented “reload stock options,” the financial equivalent of perpetual-motion machines, which helped bestow millions of lucrative shares on executives over more than a decade until an accounting change forced them into disfavor. This year, officials at the Business Roundtable, a corporate lobbying organization, hired Mr. Cook to counter critics of executive pay; his study tried to justify rapid increases in the packages.

The soft-spoken Mr. Cook, 65, does not see himself as corporate America’s Pied Piper of pay. Instead, he asserts, he is just a “foot soldier” in the army of capitalism. But in any study of executive compensation practices over the last 25 years, the contributions of this foot soldier are more akin to those of a field marshal.

“Fred Cook is the dean of compensation consultants,” said Broc Romanek, a former S.E.C. lawyer and editor of CompensationStandards.com, an educational service that provides guidance on pay issues.

An examination of Mr. Cook’s career, clients and counseling neatly parallels the explosive growth in executive compensation packages, offering a window onto the mechanics and machinations behind the growing windfalls. From 1970 to 2000, according to a Harvard study, the median compensation awarded to the three highest-paid officers at major American corporations rose to $4.6 million from $850,000. More recently, that figure has settled down to around $4.35 million.

Concerns about shareholder value, corporate governance and the economic and social impact of soaring C.E.O. pay has led to mounting criticism of compensation practices across the nation. Warren E. Buffett, in his annual report to Berkshire Hathaway shareholders this year, decried the role that consulting firms play in awarding lofty compensation packages that have little to do with how well a company performs. Mr. Buffett’s generic name for these accommodating firms is “Ratchet, Ratchet & Bingo.”

Since its founding in 1973, Mr. Cook’s firm has served more than 1,800 clients, including more than half the world’s 250 largest corporations. The firm, privately held, employs 50 people; it is based in New York and has offices in Chicago, Los Angeles, San Francisco and London. Cook & Company engineered compensation innovations that other consultants and corporations have emulated, innovations all made palatable by an argument that Mr. Cook propagated to justify this huge transfer of wealth to chief executives: that newfangled pay packages aligned the interests of shareholders and management.

IN corporate boardrooms across America, Cook & Company is renowned and relied upon when pay is in play. When the board of Empire HealthChoice Inc., a nonprofit insurer in New York, set out to increase its executive pay to reflect private-sector practices, it called on Mr. Cook. According to a 2002 examination of the company’s pay practices by the New York State Insurance Department, the nonprofit’s directors selected Mr. Cook “in an effort to be creative when considering total compensation.” After HealthChoice hired Mr. Cook’s firm, the insurer’s pay packages increased significantly; the insurance department’s report questioned assumptions that Mr. Cook’s study used to recommend pay raises at the insurer.

Creativity where executive pay is concerned is something in which Mr. Cook takes great pride. On many occasions — at conferences and before Congress — he has identified himself and his firm as “the thought leader” on matters involving executive compensation. Although Mr. Cook declined to be interviewed for this article, previous interviews with him, a review of his speeches, writings posted on his firm’s Web site and discussions with industry peers displays his singular influence on the development of executive pay practices.

In declining to be interviewed, Mr. Cook said that he could not comment on specific clients that he and his firm have worked with, because of confidentiality policies. But amid concerns about escalating compensation packages, some of those who advise corporations on pay say consultants like Mr. Cook can do more than simply engineer or rubber-stamp outsized salaries and stock options.

“It’s not so much that the consultant facilitates, but that the consultant doesn’t apply the brakes,” said Brian Foley, head of an independent consulting firm in White Plains. “You have to read clients the riot act from time to time — you have to be willing to walk away to the point of being fired.”

It is entirely possible that in recent years Mr. Cook and his colleagues have tried to brake the runaway pay train at some or all of the companies they advise.

On Thursday, Mr. Cook addressed 2,000 compensation professionals at a conference in Las Vegas. Mr. Cook told the gathering that he tried to advise companies to do the right thing on pay but was sometimes rebuffed. He cited two occasions when he encouraged clients to rein in exorbitant executive retirement plans but lost the argument. Asked if he ever thought about walking away from clients with whom he disagreed, he said, “It wasn’t a quitting issue.”

Even so, Mr. Cook’s willingness to attach his formidable name to the Business Roundtable’s study exonerating corporate compensation practices suggests that he is friend, not foe, to executives on the receiving end of lottery-sized payouts.

While reasonable people continue to argue both sides of the executive pay question — some say pay is exorbitant, others say it is justified — few dispute that consulting firms like Mr. Cook’s have given corporations the fuel they needed to put compensation growth on the fast track.

Compensation consulting firms range from smallish, independent shops like Cook & Company to huge conglomerates like Hewitt Associates and Towers Perrin that house sizable pay-advisory subsidiaries. Although nearly 50 compensation consultancies operate nationwide, up from just a handful 20 years ago, they have been largely hidden from investors’ view because publicly traded companies have not had to identify them in their pay disclosure filings. That is about to change: the Securities and Exchange Commission has instituted new rules that will require companies to identify their compensation consultants in public filings next year.

The business is very profitable, but analysts say that large firms often use pay consulting as a loss leader so they can snare more lucrative consulting contracts. Any consultant that pushes back on executive pay packages runs the risk of putting other consulting contracts at risk.

A spokeswoman for Hewitt Associates said it had strict policies in place to ensure the independence and objectivity of all its consultants, including those working on executive compensation.

A Towers Perrin spokesman said the firm “rigorously applies policies, safeguards and controls to ensure that the objectivity of our professional advice to clients on executive compensation matters is not compromised by any other consulting assignments we undertake for our clients.”

In that context, some consultants say, the new S.E.C. disclosure rules would have been more robust if, in addition to mandating disclosure of the consulting firm’s identity, they also required a rundown of other services a firm provides to each of its clients. But they do not. Pressure to do more business with a compensation client, some consultants say, has given advisers an incentive to push the boundaries of executive pay practices.

Consultants and the companies often justify pay packages by relying on comprehensive surveys of compensation practices among peer companies. It is out of these studies that the famous percentiles emerge that keep pay rising. Companies report their executives’ pay as landing in a particular percentile of their peer group — the 75th is common — to make it seem reasonable.

BUT the data set that these surveys use can be skewed to include, for example, large, one-time stock option grants given to corporate executives for a specific reason — to reward a promotion, for example, or to induce a top manager to join the company. Though these awards are unusual, they are included in surveys, driving up the pay of every executive who used them.

The bull market in stocks that began in 1982 and ran with some stumbles through the 1990’s also gave consultants an opportunity to juice their clients’ take by showing them that total compensation across corporate America was rising. Mr. Cook pointed this out in a speech last year. Because option grants were valued at the price of the underlying stock when awarded, he said, in periods of rising share prices, consultants could use the fact that total compensation from options was rising in their studies. For companies whose stock prices lagged behind the market or their peers, consultants recommended increasing the size of the option grants, to remain competitive.

“All the benchmarking data everyone is using has been inflated over the past 15 years so most of that data is useless,” Mr. Romanek said. “Everybody should start fresh.”

It is easy to see why compensation consultants are so popular — and powerful — with top executives today. But that was not the case when Mr. Cook started out. At the time, compensation consulting was usually a small subsidiary at firms like McKinsey & Company and Booz Allen Hamilton, and actuarial firms like Towers Perrin.

After graduating from Dartmouth, Mr. Cook spent four years as an infantry officer in the Marine Corps. He began his career at Towers Perrin in 1966, according to a 2001 profile of Mr. Cook in Workspan magazine, a publication for compensation and benefits professionals.

Mr. Cook struck out on his own in 1973, when he was 32 and, according to the magazine profile, he felt that he had little to lose. He cashed in $25,000 in a profit-sharing account he had at Towers Perrin and rented office space in the Murray Hill neighborhood of Manhattan. Cook & Company’s headquarters are still there.

Mr. Cook set himself apart early on, by bringing a keen interest in accounting to executive pay issues. Many companies were concerned about making awards that might prompt tax problems, so a consultant with accounting expertise was in demand. Compensation, meanwhile, was becoming more complex.

According to “Board Perspectives: Building Value Through Compensation,” a book by Paul Hodgson, an expert on compensation issues, stock options were popular throughout the 1960’s, before federal legislation in 1969 reduced their tax advantages. Then the bear market struck and millions of options were underwater. Other long-term incentives replaced options, and cash bonuses became more popular throughout the 1970’s.

During these years, few corporate boards had compensation committees. That changed in the 1980’s, when executive pay began to climb at a faster pace. In 1984, the Internal Revenue Service moved to limit the payment of large severance packages known as “golden parachutes.” Two years later, when the capital gains tax rate rose to 28 percent, cash and option gains found themselves on equal footing as far as taxes were concerned.

Enter Mr. Cook. In 1988, he came up with a new type of stock option — the reload — that put him and his firm on the map. Mr. Cook became the ambassador of reloads, selling them to corporate clients interested in pleasing executives. As he explained them, reload stock options were “enhancements” that allowed executives to increase their stock ownership, aligning their interests with those of shareholders.

IN reality, reloads were awards that were automatically replaced each time they were exercised. For example, if an executive received a grant of 1,000 options carrying a strike price of $10 a share, and later exercised them for $20 a share, he or she instantly got 1,000 more options with a new strike price of $20. Some reloads even had a special feature that covered the tax bills generated by option exercises. In these cases, the replacement option covered a larger number of shares than the original award to pay for taxes due, further diluting the equity stakes of existing shareholders.

Mr. Cook designed the first reload stock option plan for executives at the Norwest Corporation, a Minneapolis bank holding company. The plans soon spread through corporate America like wildfire. In a 1998 analysis of reloads, Mr. Cook noted one reason for their increased popularity. “As executives who have experienced the opportunities of reloads move to other companies or join boards of directors,” he wrote, “they are likely to influence the spread of reloads as a tool to obtain the benefits it provides.”

By 2001, reloads had become so popular that Mr. Cook told clients that about one in five of the largest United States companies were using them. About half that many were using tax reloads, he said. In 1997, for example, Sanford I. Weill received 20 different option grants, all with reload features, worth an estimated $142 million. Reloads contributed to an estimated $1 billion received by Mr. Weill over 17 years at the head of Citigroup and some of its predecessor companies. Through a spokesman, he declined to comment.

Some analysts eventually blamed reloads for an enormous and, some said, stealth transfer of wealth from shareholders to managers. James F. Reda, an independent pay consultant in New York, was among the first to raise a red flag. In a 1999 article in the Journal of Compensation and Benefits, he and Thomas Hemmer, now a professor at the London School of Economics, concluded that reloads were bad for shareholders and that limits should be placed on their use.

“I have a lot of respect for the technical aspects of reloads, but I didn’t like that they weren’t in the best interests of shareholders,” Mr. Reda said. “I was always surprised about how many board members thought it was in the shareholders’ interests. I never could figure out how.”

Reloads fell out of favor three years ago after accounting changes made them less attractive. But Mr. Cook has found other ways to keep compensation aloft, and his firm’s work on pay packages for executives at Computer Associates and Pfizer ended up angering some shareholders at both companies.

Cook & Company advised Computer Associates on a pay plan that in 1998 produced a $1.1 billion stock award for Charles B. Wang, its chief executive; Sanjay Kumar, its president at the time; and Russell M. Artzt, an executive vice president. The award was a result of an employee stock ownership plan approved by shareholders in 1995. Under the plan, the three men stood to share as many as six million options if the company’s stock traded above certain preset levels on at least 30 trading days over the following five years. Mr. Wang was to receive 60 percent of the grant; Mr. Kumar, 30 percent; and Mr. Artzt, 10 percent.

Computer Associates’ compensation committee told its shareholders that the plan would “promote the creation of stockholder value by encouraging, recognizing and rewarding sustained outstanding individual performance by certain key employees who are largely responsible for the management, growth and protection of the business.” The committee also said the plan would help shareholders by retaining key individuals.

The plan generated its first big payment to the executives in 1998. Mr. Wang received shares worth $670 million while Mr. Kumar got shares worth $335 million. Mr. Artzt got a grant worth $112 million. All three executives later returned 22 percent of the shares to settle a stockholder suit.

The company declined to comment beyond saying that the plan was no longer in place.

High-level executives at Computer Associates, now known as CA, were later found to have artificially inflated sales figures in 1999 and 2000. Mr. Kumar pleaded guilty earlier this year to eight counts of fraud and obstruction in the case. Neither Mr. Wang nor Mr. Artzt was named in the case, and Mr. Artzt remains with the company.

Mr. Cook’s firm also guided Pfizer on the pension plan that awarded $83 million to Mr. McKinnell. When the company disclosed the value of the plan, shareholders were outraged because their stockholdings had fallen by 50 percent on Mr. McKinnell’s watch. The pension became the source of picketing and angry questions at the company’s annual meeting in April.

Mr. McKinnell’s pension grew so large because it contained a highly unusual element, a Pfizer spokesman explained at the time. While most pension benefits are figured by using a multiple of an executive’s salary and bonus, the pension calculation for Mr. McKinnell included the value of Pfizer shares he had received under long-term incentive arrangements from 1993 to 2001. In 2000, Pfizer’s compensation committee decided to discontinue that unusual inclusion.

As for the Cook firm’s work for Tyco, which related to stock options, a spokeswoman for Tyco declined to comment.

Last year, Mr. Kozlowski was found guilty of looting the company and covertly selling shares while artificially inflating company results.

OF course, it is possible that Mr. Cook and his colleagues have tried to reduce the size of their clients’ pay packages over the years and have been overruled by them. Consultants are, after all, just advisers. They cannot force clients to follow their advice.

But in testimony before Congress last year on the subject of executive compensation, Mr. Cook argued that a bill to try to rein in pay — the Protection Against Executive Compensation Abuse Act — was undesirable. Mr. Cook used most of his testimony to criticize news-media reports on executive pay. “The media has been flooded with a multitude of distorted, misleading and oftentimes erroneous statistics chosen to portray U.S. C.E.O.’s and board governance in a negative light,” he said.

At an executive pay conference last year, attendees were buzzing after James Dimon, the chief executive of J. P. Morgan Chase, delivered his keynote speech. Mr. Dimon took pay consultants to task in his talk, decrying, among other things, the use of peer-group surveys to “ratchet things up.”

With Mr. Cook in the audience, Mr. Dimon also described the corporate deployment of stock options as “very capricious” and said that when he arrived in 2000 as Bank One’s new chief executive, he immediately cut back on pay items and perquisites — supplemental retirement plans, company cars and club memberships — awarded to top executives. It was too much, he said, because well-compensated professionals should be able to pay their own club dues and car bills. And he eliminated supplemental retirement plans at Bank One.

Who designed the plans that Mr. Dimon so happily and proudly scrapped? Cook & Company.

Gilded Paychecks

Articles in this series are examining executive compensation. Previous articles in the series can be found at nytimes.com/business.

Eric Dash contributed reporting for this article.

    Corporate America’s Pay Pal, NYT, 15.10.2006, http://www.nytimes.com/2006/10/15/business/yourmoney/15pay.html

Competitive Era Fails to Shrink Electric Bills

October 15, 2006
The New York Times
By DAVID CAY JOHNSTON

A decade after competition was introduced in their industries, long-distance phone rates had fallen by half, air fares by more than a fourth and trucking rates by a fourth. But a decade after the federal government opened the business of generating electricity to competition, the market has produced no such decline.

Instead, more rate increase requests are pending now than ever before, said Jim Owen, a spokesman for the Edison Electric Institute, the association for the investor-owned utilities that provide about 60 percent of the nation’s power. The investor-owned electric utility industry published a June report entitled “Why Are Electricity Prices Increasing?”

About 40 percent of all electricity customers — those in 23 states and the District of Columbia where new competition was approved — mostly paid modestly lower prices over the past decade. But those savings were primarily because states, which continue to have some rate-setting power, imposed cuts, freezes and caps at the behest of consumer groups that wanted to insulate customers from any initial price swings.

The last of those rate protections expire next year, and the Federal Energy Regulatory Commission and other federal agencies warn in a draft report to Congress that “customers may experience rate shock” as utilities seek to make up for revenue they did not collect during the period of artificially reduced prices and to cover higher costs of fuel. They warned that “this rate shock can create public pressure” to turn back from electricity prices set by the market to prices set by government regulators.

The disappointing results stem in good part from the fact that a genuinely competitive market for electricity production has not developed.

Concerned about rising prices, California and five other states have suspended or delayed transition to the competitive system.

And voters around two California cities, Sacramento and Davis, will decide next month whether to replace investor-owned utilities with municipal power in hopes of lowering rates. Drives are under way to expand public power in Massachusetts. In Portland, Ore., the city council tried and failed to buy the local utility company.

Electric customers in other states are facing rude surprises.

In Baltimore, an expected 72 percent rate increase in electricity prices has aroused so much protest that the state legislature met in special session, where it arranged to phase in the higher costs over several years. In Illinois, rates are about to rise as much as 55 percent.

The three New York area states opened their electricity markets to competition, with different results.

In Connecticut, residential electric rates rose up to 27 percent last year to an average of $128 a month, and are expected to go up as much as 50 percent more in January.

In New Jersey, rates rose up to 13 percent this year, and are poised to go much higher.

New York residential customers, by contrast, paid an inflation-adjusted average of 16 percent less in 2004 than in 1996, a state report said. It is not known how much of that is attributable to government-ordered rate cuts, but the state benefited from huge increases in power generated by its nuclear plants and by buying power from New England plants that, starting next year, may have less electricity to sell to New York.

The Federal Energy Regulatory Commission and five other agencies, in the draft of the report to Congress, are unable to specify any overall savings. “It has been difficult,” the report states, “to determine whether retail prices” in the states that opened to competition “are higher or lower than they otherwise would have been” under the old system.

Joseph T. Kelliher, the commission chairman, said Friday that eventually “market discipline will deliver the best prices” and noted that every administration and Congress since 1978 had pushed the industry toward competition. He added that the commission recognized a need for “constant reform of the rules.”

Under the old system, regulated utilities generated electricity and distributed it to customers. Under the new system, many regulated utilities only deliver power, which they buy from competing producers whose prices are not regulated. For example, Consolidated Edison, which serves the New York City area, once produced almost all the power it delivered; now it must buy virtually all its electricity from companies that bought its power plants and from other independent generators.

The goal is for producers to compete to offer electricity at the lowest price, savings customers money.

Independent power producers, free-market economists and the Clinton Administration cheered in 1996 when the federal government allowed states to adopt the new system. The new rules “will benefit the industry and consumers to the tune of billions of dollars every year,” Elizabeth A. Moler, then chairwoman of FERC, said at the time. She said the new rules would “accelerate competition and bring lower prices and more choices to energy customers.”

But that has not happened. A truly competitive market has never developed, and, in most areas, the number of power producers is small. In New Jersey, for example, only six companies produce power, and not all of them sell to every utility.

Some utilities have decided to buy electricity not from the cheapest supplier but from one owned by a sister to the utility company, even if that electricity is more expensive. That has been the case in Ohio.

And if electricity is needed from more than one producer, utilities pay each one the highest price accepted in the bidding, not the lowest. This one-price system, adopted by the industry and approved by the federal government, is intended to encourage investment in new power plants, which are costlier than older ones.

But critics say that, as in California five years ago in a scandal that enveloped Enron, the auction system can be manipulated to drive up prices, with the increases passed on to customers. What is more, companies that produce electricity can withhold it or limit production even when demand is at its highest, lifting prices. This happened in California, and the federal commission has found that it occurred in a few more instances since then. Critics say that more subtle techniques to reduce the supply of power are common and that the commission shows little interest in investigating.

Bryan Lee, a FERC spokesman, said complaints of manipulation are investigated, but only last year did Congress give the commission the legal tools to punish manipulators.

Under the new system there have been some big winners — including Goldman Sachs and the Carlyle Group, the private equity firm — that figured out that there were huge profits to be made in one area of the new system.

Such investors have in some cases resold power plants they just bought, making a large profit. In other cases, investors have bought power plants from the utilities at what proved to be bargain prices, then sold the electricity back at much higher prices than it would have cost the utility to generate the electricity.

Richard Blumenthal, the Connecticut attorney general, said the supposedly competitive market has been “a complete failure and colossal waste of time and money.”

He asked the federal commission to revoke competitive pricing in his state, but the commission dismissed the complaint last Wednesday, saying the state had not proved its case.

Advocates of moving to the new system say that, in time, the discipline of the competitive market will mean the best possible prices for customers. Alfred E. Kahn, the Cornell University economist who led the fight to deregulate airlines and who, as New York’s chief utility regulator in the 1970’s, nudged electric utilities toward the new system, said that he was not troubled by the uneven results so far.

“Change,” Professor Kahn said, “is always messy.”

But some advocates of introducing competition to the electric industry have soured on the idea. They include the Cato Institute, a leading promoter of libertarian thought that favors the least possible regulation and that concluded earlier this year that government and electric utilities have made such hash of the new system that the whole effort should be scrapped.

“We recommend total abandonment of restructuring,” Cato said. If the public rejects a greater embrace of markets, Cato wrote, the next best choice would be a “return to an updated version of the old” system.

The conflicting results among the many studies of electric prices stand in contrast to the sharp, unambiguous drops in the prices of telephone calls, air travel and trucking.

One study by the utility economist Mark L. Fagan, a senior fellow at the Kennedy School of Government at Harvard and a consultant to various businesses who favors a competitive system, found that the new system often produces better results. He found that in 12 of 18 states that restructured, prices were lower for industrial customers than they would have been under the old system. But he also found that prices were somewhat lower than his model predicted in seven of 27 states that did not open to competition.

In Virginia, a state that did not move to the new system, a report last month by the agency that regulates utilities found “no discernible benefit” to customers in the 16 states that had gone the farthest and warned that electricity prices in those states “may actually be increasing faster than for customers in states that did not restructure.”

And Professor Jay Apt, a former astronaut who runs the electricity study center at Carnegie-Mellon University, found that savings from introducing competition to sales of electricity to large industrial customers “are so small that they are not meaningful.”

Regardless of the debate over the effectiveness of the new system, electricity prices are expected to rise in the next few years for several reasons apart from any rise in the price of coal, natural gas, oil, uranium and other fuels.

A study issued in June by the Edison Foundation, which represents investor-owned utilities concluded that utilities would have to raise rates to upgrade local distribution systems and to finance long-distance transmission lines, as well as for new power plants. The study found that utility profit margins had thinned and financial strength had weakened. It called for relief in the form of higher rates.

    Competitive Era Fails to Shrink Electric Bills, NYT, 15.10.2006, http://www.nytimes.com/2006/10/15/business/15utility.html?hp&ex=1160971200&en=8e5ab9958c50c604&ei=5094&partner=homepage

Earnings for Insurers Are Soaring

October 14, 2006
The New York Times
By JOSEPH B. TREASTER

Insurance companies are expecting record profits in 2006 after predictions of another year of devastating hurricanes have so far come to naught.

Industry experts are estimating that profits may reach $60 billion, on a combination of higher premiums along the coasts, no major payouts for natural disasters and strong investment returns. The insurers also had high profits on other lines of coverage like auto insurance, workers compensation and general liability.

The record profits expected this year come after a terrible 2005, when insurers paid out $61 billion for damage from Hurricane Katrina and other storms. Even so, the insurers ended up with a profit of $43 billion for the year because of exceptionally good results on investments, declining claims on policies on homes away from the coast and profits on other lines of coverage.

But homeowners and businesses along the coasts, hit with much higher insurance costs after the barrage of hurricanes, probably will not get any relief as a result of the much quieter season, industry experts and consumer advocates said.

The hurricane season lasts another seven weeks, until Nov. 30, but no one is expecting any costly storms. “We’re fairly confident that the chances of a cataclysmic hurricane this year are behind us,” said Robert P. Hartwig, the chief economist of the Insurance Information Institute. “And we think we’re going to have some good numbers.”

The expected record profit this year will add momentum to a decades-long earnings streak, interrupted by only one annual loss — $7 billion in 2001, when the Sept. 11 attacks staggered the insurers.

Reinsurance companies — the sometimes obscure insurers that back up the most familiar name brands in insurance by selling them coverage to share the risks — are also expected to do exceptionally well in 2006. So will investors like hedge funds that began providing capital directly to insurers when they saw premiums along the coast climbing.

As the hurricane season began in June, the price of insurance stocks dipped. But the stocks began to come alive in August as some investors sensed that “this season was not going to be a disaster, nothing like last year,” said Adam Klauber, an analyst at Cochran Caronia Waller, an investment banking firm in Chicago.

The stocks are up an average of 12 percent since mid-August, Mr. Klauber said. Shares of Allstate, one of the biggest home insurers along the coasts, have jumped 13 percent in that period, closing at $62.93 yesterday. Shares of Renaissance Re, one of the largest companies providing catastrophe coverage for big insurers like Allstate and Chubb, have risen 17 percent, to close at $56.03 yesterday.

Insurers raised premiums on homes and businesses along the coasts by as much as 10 times over last year’s rates after a series of powerful hurricanes last year and in 2004 and forecasts of perhaps half a dozen major storms this year.

Complete industry results for 2006 will not be available until early next year. But based on data so far, Mr. Hartwig is estimating profits of $55 billion to $60 billion.

Jim Auden, who helps direct research and analysis of the industry at Fitch Ratings, a Chicago concern that tracks the financial strength of companies, estimated profits at $60 billion.

The industry’s optimism stems from an updated forecast this month from the University of Colorado that predicts no more than one mild hurricane in October and no hurricanes at all next month.

But owners of coastal homes and businesses should not expect any easing of their insurance costs.

“Just because there wasn’t a major storm this year, doesn’t mean there won’t be one next year or the year after,” Mr. Auden said. “Certain coastal markets are probably still underpriced.”

Consumer advocates, on the other hand, are crying foul.

“It’s unfair,” said J. Robert Hunter, the director of insurance at the Consumer Federation of American. “They have overestimated their losses and vastly overpriced. And now, when the money rolls in, there is no relief for consumers.”

Mr. Hunter, a former insurance commissioner in Texas, said he and other regulators agreed to sharp price increases after Hurricane Andrew devastated a swath of Florida south of Miami in 1992. The insurers agreed then, he said, to base their prices on long-term averages for damage.

After the powerful storms in 2004 and 2005, many insurers shortened their projections. “If you’re going to use a shorter time frame,” Mr. Hunter said, “you’ve got to lower rates when profits are good. You can’t just go up when it’s bad and stay there.”

Two University of Colorado forecasters, Philip J. Klotzbach and William M. Gray, said that an abrupt shift in El Niño, a periodic warming of parts of the Pacific Ocean that can stifle hurricanes in the Atlantic Ocean, interrupted a cycle of favorable conditions for hurricanes expected to run for another decade or so. By hurricane season next year, the university forecasters expect the El Niño conditions to be gone.

The insurers do not compile financial results by region, including the narrow strip of the Atlantic and Gulf Coasts most threatened by hurricanes.

In most of the country, away from the coasts, claims on home insurance have been falling, said Jeff Reider, president of the Ward Group, a national insurance consulting firm in Cincinnati. Many customers have stopped filing for minor damage, fearing that their policies might be canceled or that, at the least, their rates would rise, he said.

Over all, the insurers are expecting profits on their fundamental business of collecting premiums and paying claims — underwriting — to jump from a loss of $5.9 billion last year to a profit of $27 billion this year.

For 2006, Mr. Hartwig is forecasting a 12 percent dip in investment profits. But at $51 billion before taxes, those investment earnings would be among the industry’s better results over the last decade.

In most years, the insurers have lost money on underwriting and made their profits on gains from investing premiums until needed to pay claims.

The insurers have been raising prices sharply since the terrorist attacks in 2001. As a result, their underwriting losses declined from $52.6 billion in 2001 to $4.9 billion in 2003. In 2004, the insurers made a $4.3 billion profit on underwriting but reported the underwriting loss in 2005. This year, Mr. Hartwig said after paying an estimated $24 billion in taxes the industry’s net profit might rise to $60 billion.

    Earnings for Insurers Are Soaring, NYT, 14.10.2006, http://www.nytimes.com/2006/10/14/business/14insure.html?hp&ex=1160884800&en=40d24cfe76b17cfb&ei=5094&partner=homepage

Editorial

A Growing Free-for-All

October 13, 2006
The New York Times

By approving the merger between AT&T and BellSouth unconditionally, the Bush administration has again abdicated responsibility for protecting consumers when huge companies combine.

Fierce competition between private companies is at the core of the nation’s economic strength. But government still has an important role to play as referee, making sure that the rough-and-tumble game of capitalism doesn’t become perversely uncompetitive through significant concentrations of market power in the hands of a few companies.

From the very start, the Bush administration’s approach to antitrust and merger policy has been much more hands-off than its predecessors’. In an era of rapid consolidation and deregulation, the Justice Department hasn’t brought a single major monopoly case under the Sherman Antitrust Act since the Clinton administration went after Microsoft for illegally defending its monopoly for the Windows operating system. The department settled that case during President Bush’s first year in office.

That set the tone for a merger policy that often appears to be little more than “anything goes.” One gets the impression at times that the referee has left the playing field.

Perhaps the clearest example came earlier this year when the department cleared Whirlpool’s $1.7 billion acquisition of Maytag, which gave the combined company up to three-quarters of the market for some home appliances. As Stephen Labaton reported in The Times shortly thereafter, that decision actually demoralized career officials in the department’s antitrust division.

Not only has the government failed to bring many significant cases, it is opposing one brought and won by a third party. The Supreme Court will hear a case in which a jury found that Weyerhaeuser monopolized a market for logs in the Pacific Northwest. The Bush administration filed a brief asking the court to reverse the decision, already upheld on appeal.

A federal district judge is reviewing the antitrust settlements that previously allowed SBC Communications to acquire AT&T and Verizon to buy MCI. But by approving the AT&T-BellSouth merger without a single condition, the Justice Department has allowed this one to avoid judicial review.

That leaves the Federal Communications Commission. The commission has scheduled a meeting to discuss the merger today. It should take a long, hard look at the deal, and the overall trend toward consolidation in the telecommunications industry. There are strong arguments that competition with cable companies and Internet phone services have changed the playing field. But the commissioners should pursue the question thoroughly rather than wielding a rubber stamp as the Justice Department sometimes appears to. They must think first about protecting consumers, while bearing in mind that bigger is not always better.

    A Growing Free-for-All, NYT, 13.10.2006, http://www.nytimes.com/2006/10/13/opinion/13fri1.html

Fed Reports Resilience in Economy

October 13, 2006
The New York Times
By JEREMY W. PETERS

Maybe the sputtering housing market will not be that big of a drag on the economy after all.

Falling gas prices are leaving Americans with more money to spend, and inflation has become less of a threat in recent weeks, according to a report released yesterday by the Federal Reserve.

Wall Street reveled at the news. Stock prices — already buoyed by a series of strong corporate earnings announcements from companies like McDonald’s and Costco — surged even higher after the Fed’s report, the beige book, came out yesterday afternoon.

The benchmark Standard & Poor’s 500-stock index jumped to its highest close in more than five and a half years. The Dow Jones industrial average, which last week broke a record high that had stood since 2000, climbed past 11,900 to close fewer than 53 points short of 12,000. The Nasdaq composite gained more than a point and a half.

A separate report showing that the nation’s trade deficit reached a record high in August was apparently an afterthought for investors. The Commerce Department said that on a seasonally adjusted basis, Americans imported $69.9 billion more than they exported, up 2.7 percent from a $68 billion deficit in July. That increase was in large part a result of near record petroleum prices.

While the beige book was hardly a glowing picture of the nation’s economy, it did strike a generally optimistic tone. It described a “widespread cooling” in residential housing but noted that growth in commercial real estate activity was picking up some of the slack.

And there were a handful of areas where residential home sales “showed signs of resilience,” the report said. Manhattan, Houston and Sioux Falls, S.D., were among these pockets of strength.

“It seems like things are still stable,” said Marisa DiNatale of Moody’s Economy.com. “There may be moderating growth, but it’s certainly not a drastic slowdown.”

Other potential problem spots in the economy — rising prices and slower consumer spending — do not appear to be much of a problem at all in many areas of the country, the report said. Consumers spent freely, taking vacations and shopping for back-to-school items. Wage growth was described as generally “modest.” And there were few signs of pressure from higher prices as the cost of gasoline dropped.

Economists said falling fuel prices should be reflected in the next trade deficit report. Energy costs were the major reason for the widening trade gap in August, with the deficit in petroleum-related products accounting for nearly all of the $1.9 billion increase. The amount Americans spent on foreign-made household appliances and electronics also rose.

“The trade balance should improve significantly soon,” Dimitry Fleming, an economist with ING, said in a research note. “August, however, was never going to be the starting point, with the lagged effects of higher oil prices.”

The growing trade imbalance with China was another major factor in the ballooning trade deficit. The unadjusted trade deficit for August was $79 billion. Nearly a third of that, $22 billion, represented the gap in trade between the United States and China.

The numbers defied expectations. Economists who were surveyed before the numbers came out predicted that the overall deficit would fall in August, but it rose, seasonally adjusted, by $1.9 billion from July.

When the gap hit a record in July, economists said they believed that the numbers were nearing a peak. But as energy prices remained high this summer, the deficit continued to swell. Still, many economists said yesterday that they now believed that the turning point was near.

“This is probably as bad as it gets,” wrote Paul Ashworth, senior United States economist with the economics research firm Capital Economics.

Yesterday, the Chinese reported their own trade numbers, which showed a surplus of $15.3 billion for September. China’s trade surplus hit a record $18.8 billion in August.

While American reliance on foreign goods is showing no signs of weakening, exports also remained strong. After declining in July, exports grew in August by 2.3 percent, to $122.4 billion. But that rate of growth was not strong enough to offset the rise in imports, which reached $192.3 billion in August. That was an increase of 2.4 percent.

Peter Kretzmer, senior economist with Bank of America, said such strong import growth was a sign the economy would expand at a faster rate in the final months of the year. “We’ve been surprised by how strong import growth is,” he said. “This strong domestic demand may be a bit of a harbinger of a strong domestic economy going into the fourth quarter.”

    Fed Reports Resilience in Economy, NYT, 13.10.2006, http://www.nytimes.com/2006/10/13/business/13econ.html

U.S. Trade Gap Widens to $69.9 Billion

October 12, 2006
The New York Times
By JEREMY W. PETERS

The nation’s trade gap widened in August to a surprisingly large $69.9 billion, setting a new record for the ever-growing disparity between what Americans import and export.

Nearly a third of that deficit, $22 billion, represented the imbalance in trade between the United States and China.

The numbers, released by the Commerce Department this morning, defied expectations. Economists who were surveyed before the numbers came out predicted the deficit would fall in August, but it rose $1.9 billion from July.

When the gap hit a record in July, economists said they believed the numbers were nearing a peak. But as energy prices remained high this summer, the deficit continued to swell. Still, many economists said today they now believe the bottom is near.

“This is probably as bad as it gets,” said Paul Ashworth, senior United States economist with Capital Economics, an economic research firm in London.

Energy costs were the major reason for the widening trade gap, with the deficit in petroleum-related products accounting for $1.5 billion of the $1.9 billion increase.

“The trade balance should improve significantly soon,” said Dimitry Fleming, an economist with ING. “August, however, was never going to be the starting point with the lagged effects of higher oil prices.”

Also today, the Chinese reported a near-record trade surplus of $15.3 billion for September. China’s trade surplus hit a record $18.8 billion in August. The growing trade imbalance between the United States and China comes even as China has heeded calls from American officials to allow its currency to rise in value.

While American reliance on foreign goods is showing no signs of weakening, exports also remain strong. After declining in July, exports grew in August by 2.3 percent to $122.4 billion. But that rate of growth was not strong enough to offset the rise in imports, which reached $192.3 billion in August. That was an increase of 2.4 percent.

    U.S. Trade Gap Widens to $69.9 Billion, NYT, 12.10.2006, http://www.nytimes.com/2006/10/12/business/13econcnd.html?hp&ex=1160712000&en=13831ffe3a292de8&ei=5094&partner=homepage

Federal deficit now lowest in 4 years

Updated 10/11/2006 10:48 PM ET
AP
USA Today

WASHINGTON (AP) — The federal deficit fell to a four-year low in the budget year that just ended, a result President Bush pointed to Wednesday in claiming Republicans are better stewards of the economy than are Democrats.

The administration said the deficit dropped to $247.7 billion — welcome news for Republicans struggling to keep control of Congress. Bush boasted he had made good on a 2004 campaign promise to cut the deficit in half over five years.

"These budget numbers are proof that pro-growth economic policies work," Bush said.

Democrats said the improvement in the 2006 federal deficit was a temporary blip. They predicted rising deficits for years to come unless policies are changed.

"Only a president with such a historically bad economic record would be this excited about a $248 billion deficit," said Rep. Carolyn Maloney, D-N.Y. "Under his watch ... record surpluses turned into record deficits as far as the eye can see."

Republicans are trying to convince voters that the GOP champions tax cuts while Democrats will raise taxes if they gain control of Congress. Democrats contend the administration's tax cuts have primarily benefited the wealthy.

"There's a difference of opinion in the campaign about taxes," Bush said, predicting that the GOP still will lead the House and Senate after Nov. 7. "I would like to ... make the tax cuts permanent. And the Democrats will raise taxes."

The administration credits its tax cuts for the improving economy, contending they helped the nation withstand the 2001 recession, the terrorist attacks and corporate accounting scandals. The deficit narrowed sharply because revenues climbed by 11.8%, outpacing a 7.4% increase in spending.

Administration officials said the actual 2006 deficit is down to 1.9% of the gross domestic product. They said that is below the 40-year average deficit of about 2.3% of the GDP, which measures the value of all U.S. goods and services. This continues a positive trend that comes despite soaring war costs and $50 billion in emergency spending for hurricane relief, they said.

Still, the long-term deficit picture is bleak.

The non-partisan Congressional Budget Office projects that the deficit for the current budget year will rise to $286 billion. Over the next decade, the office forecasts that the deficit will total $1.76 trillion.

Bush's critics argue that the White House is using sleight of hand when boasting about the deficit.

The president can rightly state that he has fulfilled his 2004 campaign pledge to cut the deficit in half by the time he leaves office. In fact, he can say he has done it three years early. But in making that claim, the president is using the administration's original forecast of what the 2004 deficit was expected to be — not what it actually turned out to be.

Back when Bush made his promise, the administration was predicting that the 2004 deficit would be $521 billion. That prediction turned out to be off by $100 billion. To achieve the feat of slicing the actual 2004 deficit number in half, the federal deficit Bush was highlighting would have to have dropped to $206 billion, not $247.7 billion.

Democrats say the narrowing of the deficit will be temporary because when 78 million baby boomers retire, the cost of Social Security and the Medicare health care program for the elderly will soar.

"The fact that some are trumpeting this year's deficit number as good news shows just how far we've fallen. Our budget picture is extremely serious by any measure," said Sen. Kent Conrad, the senior Democrat on the Senate Budget Committee.

    Federal deficit now lowest in 4 years, UT, 11.10.2006, http://www.usatoday.com/news/washington/2006-10-11-budget-deficit_x.htm

Economix

Philanthropy From the Heart of America

October 11, 2006
The New York Times
By DAVID LEONHARDT

Valley County, not far from the center of Nebraska, seemed to be one of those Great Plains communities that was dying. From World War II to 2000 it had lost almost half its population, and the decline was gathering speed at the end of the century. The I.G.A. and Jack & Jill grocery stores closed, as did most mom and pop gas stations and the local dairy processing plant.

In the last five years, though, something utterly unexpected has happened. The decline has stopped. More people are moving to Ord, the county seat, than leaving, and the county’s population is likely to show its first increase this decade since the 1920’s.

The economics of rural America have not really changed. If anything, the advantages that Chicago, Dallas, New York and other big cities have over Nebraska have only continued to grow. But Ord has finally figured out how to fight back.

It has hired a “business coach” to help teach local stores how to sell their goods over the Internet and to match up retiring shop owners with aspiring ones. Schoolchildren learn how to start their own little businesses — like the sixth-grade girl who made a video of the town’s history and sells it at school reunions — so they will not grow up to think the only job opportunities are at big companies in Omaha or St. Louis. Graduates of Ord High School who have moved elsewhere receive mailings telling them about job opportunities back in town.

None of this happens naturally in a free-market economy, because the efforts cost money that will never be fully recouped. But it has happened nonetheless thanks to one of the few advantages that Ord does have over Chicago, Dallas and New York: it is in a state with some of the most generous wealthy people in the country.

In San Francisco, a retired money manager named Claude Rosenberg has founded a small organization called New Tithin g Group. It tries to persuade Americans to base their charitable giving on their assets as well as their income, given how many now have substantial assets. And using tax returns, NewTithing has put together a devilish ranking of the 50 states.

It began by estimating the liquid assets of households with more than $200,000 in annual income, counting cash, stocks, bonds and the like, but not houses or retirement accounts. Then, with the same federal tax data, it calculated what percentage of those assets the households have given to charity, on average, in recent years.

Nebraska ranked third, with its affluent residents giving away just over 1 percent of their assets each year. That does not include the state’s most famous donation, Warren E. Buffett’s huge gift to the Bill and Melinda Gates Foundation this year, which came too late to be counted in the ranking. But it does include many smaller gifts to local charities like the Nebraska Community Foundation, which is trying to resuscitate Ord and other towns.

What is striking about the top of NewTithing’s list is that it is dominated by a group of states that run from the Rockies through the Plains and down into the Southeast. The only ones ahead of Nebraska were Utah (where the Mormon Church asks members to donate 10 percent of their incomes) and Oklahoma, while Minnesota and Georgia came next.

As Emmett D. Carson, president of the Minneapolis Foundation, points out, these are places that do not have many beaches, famous cultural institutions or other obvious ways to attract residents. “So how do you build a community that is a destination?” Mr. Carson asked. “You have to be a lot more intentional about it.”

The states with beaches and museums, those that have been winning a growing share of the nation’s economic pie, generally failed to crack the top 20 in the ranking. The average affluent resident of New York (23rd on the list) or Florida (41st) owns about one-third more assets than the average affluent Nebraskan, but the Nebraskan still gives away a bigger pile of money. Also lagging are California (21st), Virginia (25th), Massachusetts (32nd), Texas (34th) and Washington (35th).

No single list, of course, can fully capture how generous a state’s residents are. Through federal taxes, wealthy states like California and New York transfer a significant amount of money to poorer states every year. The NewTithing ranking, by its nature, also fails to count donations that are not tax-deductible, like informal gifts and time spent on community service.

But the ranking makes an important point. The middle of the country has developed a culture of philanthropy that the coasts and the Southwest, for all their wealth, do not yet have. Ord is never going to turn into anything resembling New York, no matter what it does. But New York could become a little more like Ord and, in the process, blunt some of the rough edges of inequality that have come with prosperity.

There is even a bit of evidence that some people on the coasts are starting to catch on. Next week, Mr. Carson will be leaving the Minneapolis foundation he has run for 12 years to take over the Silicon Valley Community Foundation. Part of his mandate, he said, is to transplant some of Minnesota’s culture to the donors of Northern California.

“They have the wealth,” he said. “They want to capitalize on it and build a community.”

    Philanthropy From the Heart of America, NYT, 11.10.2006, http://www.nytimes.com/2006/10/11/business/11leonhardt.html?hp&ex=1160625600&en=ce464782cde0acac&ei=5094&partner=homepage

Dot-Com Boom Echoed in Deal to Buy YouTube

October 10, 2006
The New York Times
By ANDREW ROSS SORKIN

A profitless Web site started by three 20-somethings after a late-night dinner party is sold for more than a billion dollars, instantly turning dozens of its employees into paper millionaires. It sounds like a tale from the late 1990’s dot-com bubble, but it happened yesterday.

Google, the online search behemoth, agreed yesterday to pay $1.65 billion in stock for the Web site that came out of that party — YouTube, the video-sharing phenomenon that is the darling of an Internet resurgence known as Web 2.0.

YouTube had been coveted by virtually every big media and technology company, as they seek to tap into a generation of consumers who are viewing 100 million short videos on the site every day. Google is expected to try to make money from YouTube by integrating the site with its search technology and search-based advertising program. [Page C1.]

But the purchase price has also invited comparisons to the mind-boggling valuations that were once given to dozens of Silicon Valley companies a decade ago. Like YouTube, those companies were once the Next Big Thing, but some soon folded.

Google, with a market value of $132 billion, can clearly afford to take a gamble with YouTube, but the question remains: How to put a price tag on an unproven business?

“If you believe it’s the future of television, it’s clearly worth $1.6 billion,” Steven A. Ballmer, Microsoft’s chief executive, said of YouTube. “If you believe something else, you could write down maybe it’s not worth much at all.”

In a conference call to announce the transaction yesterday, there were eerie echoes of the late 1990’s boom time. There was no mention of what measures Google used to arrive at the price it agreed to pay. At one point, Google’s vice president, David Drummond, gave a cryptic explanation: “We modeled this on a more or less synergistic kind of model. You can imagine this would be hard to do on a stand-alone basis.”

The price tag Google paid may simply have been the cost of beating its rivals — Yahoo, Viacom and the News Corporation — to take control of the most sought-after Web site of the moment. It was also perhaps the only price that two YouTube founders, Chad Hurley, 29, and Steven Chen, 28, and their big venture capital backer, Sequoia Capital Partners, were willing to accept, given that they most likely could have continued as an independent company. A third YouTube founder, Jawed Karim, left the company to pursue an advanced degree at Stanford.

The deal came together in a matter of days. After rebuffing a series of other overtures, YouTube’s founders decided to have lunch on Wednesday with Google’s co-founder, Larry Page, and its chief executive, Eric E. Schmidt. The idea of a deal had been broached a few days earlier. The setting was classic Silicon Valley start-up: a booth at Denny’s near YouTube’s headquarters in San Bruno, Calif. The Google executives threw out an offer of $1.6 billion and autonomy to continue running the business.

That set off a marathon of meetings and conference calls over the next two days, which kicked into even higher gear on Friday, when news of the talks began to circulate, putting pressure on Google to sign a deal before a rival bid emerged. In fact, the News Corporation sent a letter to YouTube seeking to start talks but never received a response.

“The Google-YouTube deal has to feel a little like the 1990’s, but it isn’t,” said Dmitry Shapiro, chief executive of Veoh, a YouTube competitor that is backed by Time Warner and Michael D. Eisner, the former chairman of Disney. Arguing that online video represents an entirely new medium, he said, “If you knew then what you know now and you had the chance to acquire Amazon or eBay — which weren’t making any money either — you would have bought them.”

Of course, YouTube has also been compared to Napster, whose music-sharing service was eventually shuttered after a series of lawsuits. While YouTube has made some deals with content providers, including one yesterday with CBS, its users have uploaded millions of copyrighted clips, leading some to question whether Google is inheriting a legal minefield. YouTube has said it is different from the old Napster service because it removes content when a copyright holder complains.

“There are some issues with YouTube,” Sumner M. Redstone, chairman of Viacom, said last week on “The Charlie Rose Show.” “They use other people’s products,” he said, alluding to pirated video. “The only way they avoid litigation now is they stop doing it if you call them.”

Mark Cuban, who founded Broadcast.com, an early audio and video site that was bought by Yahoo, is even more skeptical of Google’s legal position, writing on his blog: “I still think Google lawyers will be a busy, busy bunch. I don’t think you can sue Google into oblivion, but as others have mentioned, if Google gets nailed one single time for copyright violation, there are going to be more shareholder lawsuits than Doan’s has pills to go with the pile-on copyright suits that follow.”

Yet the deal with Google was announced hours after YouTube disclosed deals with entertainment companies that appeared to reduce the risk that it would become mired in copyright disputes.

YouTube is Google’s first big acquisition after making a series of much smaller deals for companies, including Pyra Labs, creator of Blogger. Google now joins the Internet’s establishment — Yahoo, eBay and Amazon.com, among others — which have all made giant acquisitions to expand their businesses beyond their traditional trade.

But those companies have had mixed results. Yahoo paid $3.6 billion in 1999 for Geocities, a company that allowed users to create their own Web sites; today, MySpace, a social networking site bought by Rupert Murdoch’s News Corporation last year for only $580 million, far eclipses it. EBay, on the other hand, acquired PayPal, a rapidly growing start-up that lets people make payments via e-mail, for $1.5 billion in 2002. It now represents more than a third of eBay’s revenue.

Rather than pursuing big acquisitions, Google has been known for plowing money into research and development, spending $483.98 million last year, an increase of more than 114 percent over the previous year.

The success of the YouTube acquisition will probably lie in embedding video advertising into the clips that millions of people watch everyday from their computers. So far, YouTube’s management has been reluctant to include advertising within clips, for fear of alienating users.

Yesterday, however, Mr. Hurley, one of YouTube’s founders, appeared more open to experimenting, saying that he was even considering testing what’s known as a pre-roll — a 15-second ad before a clip — something he had long derided as potentially ruining the user experience.

While more marketers have been eager to advertise against online video, some big consumer companies have been reluctant to fully embrace advertising against user-generated content because it is difficult to differentiate good content from offensive material. YouTube has created an assortment of tools for users and content creators to police its site.

YouTube said it had struck accords to license content from two of the four major music conglomerates — the Universal Music Group and Sony BMG Music Entertainment — and the CBS television network in exchange for a percentage of YouTube’s advertising revenue.

YouTube is also expected to use new technology to identify copyrighted material that users have uploaded to the site without permission, and to share ad revenue with media companies that own the video or music content. (YouTube made a similar pact with the Warner Music Group last month, and had a previous advertising deal with NBC in June).

The deals reflect how media companies are rethinking the distribution of their entertainment content online.

The deal with Universal, the world’s biggest music corporation, drew particular attention because the company had said it was contemplating a lawsuit against YouTube over copyright issues.

Phil Leigh, the president of Inside Digital Media, said the new arrangements represented “a strong endorsement that the major media companies are going to see YouTube as a legitimate business partner.”

Mr. Leigh said that also suggested a rethinking of the approach the companies took to Napster. “It shows that very important, erstwhile reluctant media companies have got religion,” he said.

The YouTube alliances also came the same day that Google announced separate deals to license music videos from Sony BMG and Warner.

Under the terms of the deal, YouTube, which has about 60 employees, will retain much of its identity and will keep its name and its office in San Bruno, more than 25 miles from Google’s headquarters in Mountain View.

The transaction was announced after the stock market closed. Earlier, Google shares rose 2 percent, to $429, after DealBook, a Web log published by nytimes.com, reported that a deal would be announced at the end of the market day.

Benjamin Schachter, a UBS analyst, wrote in a note to investors. “The price tag of about $1.6 billion is difficult to justify on a spreadsheet and may be somewhat of a throwback to the days of paying for eyeballs and page views, but this is a strategic bet that Google would be placing for a long-term objective: to be the technology and distribution partner for content owners and publishers.”

Jeff Leeds contributed reporting.

    Dot-Com Boom Echoed in Deal to Buy YouTube, NYT, 10.10.2006, http://www.nytimes.com/2006/10/10/technology/10deal.html?hp&ex=1160539200&en=7f2e74db76870ea0&ei=5094&partner=homepage

Job Growth Slows in September

October 6, 2006
The New York Times
By JEREMY W. PETERS

American businesses created a surprisingly paltry 51,000 net new jobs in September, the Labor Department reported today. Still, the unemployment rate ticked down a notch to 4.6 percent.

Only people who are actively seeking work are counted as unemployed, so it is not unusual for the unemployment rate and the job creation figures to give apparently contradictory readings about the job climate. Still, economists had forecast much stronger job growth for the month — closer to the 150,000 or so that they say are needed to keep up with population growth.

At the same time, though, the Labor Department revised its job-growth figure for August sharply upward, to 188,000 net new private nonfarm jobs, from 128,000 initially reported a month ago. It also revised its figure for July slightly upward. So some of the job creation that economists expected to see in September actually happened a bit earlier.

The report is a mixed bag for Republicans, who are trying to retain control of Congress, and for Democrats, who argue that the Republicans have left the economy on a wobbly footing. Only one more employment report is due before the Nov. 7 midterm elections.

President Bush is scheduled to speak about the economy at 11:10 a.m. Eastern time at a FedEx facility in Washington. He will be able to say that the unemployment rate, probably the most widely watched of all economic indicators, has been inching steadily downward since peaking at 4.8 percent in July.

But by all accounts, economic growth is slowing, and today’s report shows that job creation has all but dried up.

“There are a lot of anomolies for sure,” said Julia Coronado, senior United States economist with Barclay’s Capital. “It’s like reading tea leaves.”

Still, Ms. Coronado said, the report shows that over all, the labor market remains fairly healthy despite the paucity of new jobs in September. “If you sort through all these pieces, the report can’t be viewed as particularly weak,” she said.

The Labor Department reported that the percentage of Americans who are employed was unchanged in September at 63.1 percent, and wages and average hours worked showed almost no change from August.

    Job Growth Slows in September, NYT, 6.10.2006, http://www.nytimes.com/2006/10/06/business/06econcnd.html?hp&ex=1160193600&en=28945eafae9adb56&ei=5094&partner=homepage

Subsidies Keep Airlines Flying to Small Towns

October 6, 2006
The New York Times
By JEFF BAILEY

PUEBLO, Colo. — Hoping for an empty seat beside you on your next flight? No problem — just schedule a trip to someplace like Kingman, Ariz.; Brookings, S.D.; or Pueblo.

They are among more than 100 locales around the country that receive federally subsidized airline service, and the average number of passengers on each flight is about three.

Most of these flights on 19-seat prop planes have plenty of elbow room — a rare luxury in this age of jampacked commercial jets. Some major airlines have cut their fleets about 20 percent since 2001 and have abandoned unprofitable routes, meaning planes are flying fuller than at any time since World War II.

The more tranquil cabins come courtesy of the Essential Air Service, put in place when the airline industry was deregulated in 1978. The idea was to help travelers in smaller cities adjust to the new competitive era of air travel. The intention was for the service to go away after 10 years, but it was renewed for a second decade — and then made permanent.

Over time, though, the program has come to seem mostly expensive and, to its critics, unessential.

After all, travelers adjusted very well after deregulation, and started driving the extra distance to busier regional airports nearby that offered increasingly cheap and plentiful jet service. That left the program with mostly empty planes, making them more costly to fly. Add in higher maintenance and fuel costs, and spending has more than quadrupled since 1996, to $110 million.

That, of course, is not a lot in the federal scheme of things. But the program is a good case study of how poorly the government sometimes keeps pace with the free market and consumer tastes, and how entrenched interests, even in the face of some creative map-drawing, can keep such a program aloft in the face of efforts to ground it.

Mike Boyd, a consultant to airports, said truly remote routes — those in Alaska, northern Maine, parts of the Western states — should be retained. But he said that most routes should be eliminated.

“The Essential Air Service program is one of those well-meaning federal programs that often results in money wasted on trying to recreate those wonderful days of the 1950’s,” Mr. Boyd said in a recent note to clients. “Somebody needs to tell Congress that Ozzie and Harriet are gone.”

From Lewistown, Mont., Jerry Moline, the airport manager, is used to driving 110 miles to shop at the Wal-Mart in Great Falls. Likewise, most of his neighbors drive 125 miles to the airport in Billings, which has jet service, rather than fly there on the subsidized 19-seaters. The Lewistown flights attracted fewer than three people a day in 2005; each passenger’s one-way ticket was subsidized with $472.78 paid by taxpayers.

The emptier the subsidized flights, it seems, the more cherished the program became. Members of Congress regularly pressured the Transportation Department to continue subsidies to towns they represented. A lobbying group sprang up solely to fight to preserve and expand the program.

To qualify for Essential Air Service, towns must have had scheduled commercial air service in October 1978 when deregulation occurred; be at least 70 miles from a large or medium hub airport; and be able to attract service from a regional airline with a one-way per passenger subsidy of no more than $200.

For towns more than 210 miles from a large or medium hub, however, there is no cap on the subsidy per passenger.

After Sept. 11, 2001, airlines withdrew from some smaller unsubsidized markets and more cities needed subsidies to maintain service. That pinched the Essential Air Service budget.

Over the next several years, the Transportation Department tried to weed out some locales.

The agency took a harder look at its map and decided that Brookings, S.D., was less than 210 miles from the Minneapolis-St. Paul International Airport; that Alamogordo, N.M., was similarly close to Albuquerque’s airport; and that Lancaster, Pa., was less than 70 miles from Philadelphia’s airport.

At those distances, Lancaster did not qualify for any subsidy and the two other markets qualified only for $200 or less per passenger, far less than needed to sustain service.

The towns made tempting targets. Flights from Brookings, which is less than an hour’s drive from jet service at Sioux Falls, were attracting about three passengers a day. Alamogordo drew four or five a day. Both required big subsidies. And Lancaster is not that far from competitive airports, with Southwest Airlines bringing low fares to Philadelphia and Baltimore.

The towns and a lobbyist, Maurice Parker, president of Regional Aviation Partners — it is financed by the Mesa Air Group, which flies subsidized routes — swung into action. The termination notices persuaded Senator Arlen Specter, Republican of Pennsylvania, and others in Congress to pass legislation that required the Transportation Department to measure the distances along the most commonly traveled routes. It also gave the governor of each state the final word on the matter.

“Lancaster is 66 miles from the Philadelphia International Airport if you travel along Route 30, which is the old Lincoln Highway, where there is a traffic light every other block,” Senator Specter said in introducing the legislation in June 2003. He added that “any rational person” would take Interstate 222 to the Pennsylvania Turnpike, a faster route, at about 80 miles. Similar arguments were made for Alamogordo and for Brookings.

The termination efforts were dropped. And all three markets retained subsidized service. Transportation Department officials declined to comment. Michael W. Reynolds, an acting assistant secretary, in testimony before a Senate subcommittee last month, said towns had come to view the program as “an absolute entitlement.”

Brookings, averaging 2.5 passengers a day in fiscal 2005, received a one-way subsidy of $677.11 per passenger.

Regional airlines in the program are paid a subsidy that, combined with fares they expect to collect from passengers, will allow for a profit. Fares vary widely. A recent one-way ticket from Pueblo to Denver, bought a few days before the flight, was $124.50.

Kerry Caruselle, a tax preparer for Army employees, was ready for the unexpected when she flew a Great Lakes 19-seater prop plane from Denver to her home in Pueblo last week. On her last flight on that route, a bumpy turboprop trip about a decade ago, she said, “My kids were in middle school and they both threw up.”

Last week’s 30-minute flight was smooth, yet Ms. Caruselle was the only passenger. “Just me,” she said. There was also a pilot and a co-pilot but no flight attendant.

Colorado Springs Airport, offering nonstop jet service to 14 major cities, is about 40 miles away. Denver’s huge hub is within about 110 miles. In fiscal 2005 Pueblo’s two daily subsidized flights to Denver drew a combined five passengers a day.

“That may be generous,” confided Jerry Brienza, manager of the Pueblo Memorial Airport. “We were close to three a day last year.” The government calculated the one-way subsidy at $255.06 a passenger.

Traffic has picked up to about eight a day in 2006, Mr. Brienza said.

Excluding Alaska, where many air routes are subsidized, the Transportation Department paid out about $74 for each one-way passenger in the program in fiscal 2005. That is more than Amtrak’s famously large per passenger subsidy, which is $19 to $52, depending on how it is calculated.

The Bush administration now wants to cut funding to $50 million. So, the Transportation Department is proposing changes to reduce the program costs. Towns more than 100 miles away from a large or medium hub would have to chip in on the subsidy. Towns closer than 100 miles would get a partial subsidy — for bus service to a hub.

But a perennial favorite with much of Congress, Essential Air Service seems unlikely to face cuts. Spending panels in each house of Congress favor a slight increase in funding for fiscal 2007, to $117 million. Many in Congress regard the program as a good way to connect remote towns to the air service system.

Probably the biggest beneficiary in recent years has been the Raytheon Company. It manufactured the 19-seat Beech 1900 prop planes that fly most of the subsidized routes. Tighter safety rules enacted in the mid-1990’s made operating those more expensive. And the rapid spread of regional jets preferred by passengers forced Raytheon to halt production of the 1900 in 2002.

“The average untrained traveler equates jets to safety,” said David Carter, a Raytheon spokesman. “They’re not so sure about turboprops.”

Having financed the acquisition of most of the 1900’s by regional carriers and others, Raytheon faced huge losses. It in essence still owned 511 of the planes valued at $1.6 billion. It wrote the value of those planes down by $693 million in 2001. Since then, it has slowly been selling the planes in overseas markets, but is still stuck with 218 of them as of June 25 of this year, valued at $435 million.

Without the subsidies, most of the roughly 100 1900’s remaining today in the United States could be idled, said Jonathan Ornstein, chief executive of Mesa Air, which once operated 122 of the planes and has cut its fleet to 20.

“We don’t make money in the program; we do it because we have the equipment” and owe more than $1 million on each of the planes, Mr. Ornstein said. Mesa, with annual revenue of more than $1 billion, mostly operates jets now. “No one I’m aware of has figured out how to operate the 1900 outside the Essential Air Service program.”

    Subsidies Keep Airlines Flying to Small Towns, NYT, 6.10.2006, http://www.nytimes.com/2006/10/06/business/06boonies.html?hp&ex=1160193600&en=303e5958a42b6137&ei=5094&partner=homepage

Working out of a 'third place'

Updated 10/4/2006 9:41 PM ET
USA Today
By Marco R. della Cava

SAN FRANCISCO — The fall morning is mercifully fog-free, which puts a spring in the step of Mordy Karsch as he rolls into work. In short order, he fires up the computer, turns on his cellphone and orders breakfast.

Though he has toiled on these premises for two years, he doesn't know anyone here well except for Angel Pinto, who brings him his hot coffee. That's because Karsch, 34, works out of The Grove, a bohemian eatery in this city's hip Marina district that caters to a growing army of office-less employees.

"Working from a place like this is less stressful than being in an office, and I find I get a lot more done," says Karsch, general manager of Spanish Sales Force, a Spanish-language marketing consultancy. "If you can make this work for you, you'll love it."

Call The Grove the office of the future, except the future is here.

An estimated 30 million Americans, or roughly one-fifth of the nation's workforce, are part of the so-called Kinko's generation, employees who spend significant hours each month working outside of a traditional office.

This rootless army is growing 10% annually, according to Gartner Dataquest research. The reason? Corporations are increasingly supportive of teleworking for reasons that range from saving money on office space to needing a backup in the event of a natural disaster or terror attack.

"With technology what it is, it's far easier to bring the work to the people than the people to the work," says Jim Ware of the Future of Work, a Bay Area enterprise that helps large companies such as Boeing anticipate workplace trends.

Ware says working out of a "third place" — neither home nor office, it's anything from Starbucks to the local library — does raise "a host of human resources issues related to keeping track of people you don't see much."

But in the end, "employers are realizing that it's about the work, not about the hours in an office."

You've surely seen this crowd while popping in for that morning macchiato. They claim prime tabletops and battle for electrical outlets, all with the zombie-like gaze of people who physically are there but mentally are engaged with phantoms at the other end of a wireless signal.

Just who are these people, and what are they so tuned into? Some e-mail new clients, others process incoming orders. A few surf the Web. Occasionally, there's a game of Solitaire. All in all, a wild array of mostly 40-and-under folks working in an impressive range of fields.

***

The Grove is open from 7 a.m.-11 p.m., but the teleworker crowd typically logs bankers' hours.

As work environments go, this place resembles a diner that has crashed into a flea market. Its wide wooden-plank floors look ripped from a working barn. The walls sprout antique sleds, oars and fishing nets. The furniture ranges from a bolted-down ski-lift chair to an old-fashioned school desk.

But the real lure are stiff wooden benches, behind which are tucked dozens of precious outlets.

"This is coveted real estate," says Justin Dock, 34, who is, in fact, a real estate consultant. He's here closing a deal with client Howard Epstein, 48. Dock is a regular at The Grove. It's his antidote to the "claustrophobic feeling I can get when I work from home."

He says waiters here don't hover. Instead, "there's an understanding that for every hour or so you're here, you'll buy something."

That arrangement works just fine for Keir Beadling, 38, who, when he isn't snacking, keeps the iced teas and coffees coming. As head of a company that markets Mavericks, an area big-wave surfing competition, Beadling has an office nearby. It's just that he finds he can't get any work done there.

"Here, I get the stimulation of being with others who are working, but not the distraction," he says.

That's because teleworkers tend to be exceedingly possessive of their space. Mariette Frey, 29, a regional sales representative for computer hardware and software reseller CDW, says she typically "will tell the people around me that I'll be meeting with someone and apologize in advance so we don't have to move" midmeeting.

For Frey, the odd headache — parking tickets when she forgets to feed the meter or nosy neighbors who appear to be listening in on her calls — are outweighed by the benefits of the cafe office.

"I can be here, finish a document and e-mail it to a nearby Kinko's, then pick it up on the way to the next meeting," she says. "Sitting in this spot, I have everything I need."

***

Ron Shaich adores the Mariette Freys of the world. They've fueled the growth of Panera Bread to 1,000 locations that court the office-less worker with living room-style seating, free Wi-Fi and Mediterranean-style food.

"We now live in a society where cubicles are considered the corporate equivalent of a tenement," says CEO Shaich. "What's most efficient for business and employee alike is a measure of flexibility."

But some question the permanence of such work. "It remains to be seen if this is a cultural breakthrough or a generational artifact," says Lee Rainie of the Pew Internet & American Life Project.

"The obstacles remain those bosses who insist on face time and bean counters who equate being outside the office with wasted time," he says. But the reality is "most businesses run on 24-hour work cycles that follow the sun around the globe. That means it's not where you are that matters, but what you're doing."

Even the federal government is pushing hard to see that one-quarter of its mammoth workforce has the option to occasionally telework.

"Government agencies usually aren't early adopters, but they are very pro this idea," says Stephen O'Keeffe, executive director of the Telework Exchange, a public/private partnership that studies this phenomenon. "In Washington, people spend more time commuting than on vacation."

***

The unspoken teleworker/waiter code is that you give up your table if the place starts hopping.

But it's 3 p.m., and the lunch crowd has long since left The Grove. Now it's caffeine-fueled crunch time. Nearly 20 laptops are whirring away in various parts of the cafe, both indoors and out. For all this energy, you can hear an espresso spoon drop. Silent focus radiates off the faces of the cultural rainbow assembled here.

Facing each other with open laptops like two guys playing Battleship, Jeff Stecyk, 35, and Keith Thesing, 40, confer over a presentation. As a West Coast sales duo for Virginia-based software company Managed Objects, the pair revel in their freedom.

"Between Wi-Fi, a conference call on our cellphones and two beers that no one knows about, we just go out and get the job done," Thesing says with a smile. "There are no office politics to deal with. It's just all about the work."

As it is for the studious type sitting across the way. Akiba Lerner, 35, is the son of Tikkun magazine editor Rabbi Michael Lerner and a Stanford doctoral candidate working on his dissertation on religious philosophy. Although there's an Internet cafe close to his house, he makes the 20-minute trek here for "the good lighting, the right chair and the vibe of the people."

Like most of the intense folks here, Lerner tends to soak up that vibe, yet infrequently makes the leap to talk to tablemates.

An exception is Noah Lichtenstein, 23, founder of MasterCPR.com, which provides one-stop shopping for corporate first aid and disaster-planning needs.

Lichtenstein is quick to make new friends at The Grove and likens the atmosphere to that of "a cool little alcove in the Stanford library where my friends and I would hang out and study."

While his growing company now has offices, he still prefers to return here, the place where his brainchild took wing. "We'd joke that The Grove was our international headquarters," says Lichtenstein. "What I love is that you can dial into the white noise here and focus on work, or pull your head up and people-watch. Right, Si?"

A chair away, Si Katara, 28, is lost in a haze of data-entry and headphone-delivered tunes. Only a hand waved in front of his face brings him back to the real world.

"It's an energy issue," says Katara, founder of Pavia Systems, a company that provides online training programs. He has a home office but prefers to work here exclusively. "At home, I'm isolated. This, it's sort of a surrogate coworker environment."

Not to mention a gold mine: Two Grove customers became backers.

And sometimes, you get even more. Like a phone number.

Mordy Karsch usually doesn't stop his stare-a-thon with his computer to marvel at the sights. But today he can't help but talk to Nicole Chetaud, 33, a designer for California Closets who comes to The Grove regularly to draw up dream storage for strangers.

Karsch admits he's often tongue-tied in clubs. But here, "there's a commonality that makes chatting easy." Chetaud agrees. They swap business cards and smiles.

"I love this place," says Chetaud, looking out at the eclectic restaurant and its workaholic regulars. "I love everything about it.

"Except for the $5 orange juices."

    Working out of a 'third place', UT, 4.10.2006, http://www.usatoday.com/tech/2006-10-04-third-space_x.htm

Board Redefines Rules for Union Exemption

October 4, 2006
The New York Times
By STEVEN GREENHOUSE

In a decision condemned by unions but praised by business, the National Labor Relations Board issued a ruling yesterday that will exempt registered nurses — and many other workers — from union membership if they have certain kinds of supervisory duties.

Some labor experts predicted that the ruling could affect more than eight million workers who might also be deemed supervisors, including teachers who oversee aides. The board’s 3-to-2 decision involved nurses overseeing shifts at a Michigan hospital.

But in two related cases, the board ruled that workers with limited supervisory duties were not supervisors.

Labor unions have long feared such a decision, so much so that, in an unusual move, they held demonstrations at the labor board’s offices in July to urge it not to issue an expansive ruling that would exempt many workers from union coverage.

In the majority decision, the three Republicans on the board adopted a broad definition of supervisor, saying it included workers who assigned others to a location, shift or significant tasks, like a nurse overseeing a shift who might assign another nurse to a particular patient.

The majority ruled that workers should generally be deemed supervisors, exempt from union membership, if they oversaw another employee and could be held accountable if that subordinate performed poorly. The majority also ruled that workers could be deemed supervisors if they were assigned supervisory duties just 10 percent to 15 percent of their total work time.

In a stinging dissent, the two Democrats on the board, Wilma B. Liebman and Dennis P. Walsh, wrote, “Today’s decision threatens to create a new class of workers under federal labor law: workers who have neither the genuine prerogatives of management, nor the statutory rights of ordinary employees.”

The dissenters asserted that most of the nation’s more than 20 million professional workers could fall into that category because many professionals, like a doctor overseeing nurses or a lawyer overseeing a secretary, could be deemed supervisors under the board’s new guidelines.

The case focused on workers who did not perform functions like hiring, promoting or laying off workers, but rather assigning and directing other employees — functions in which the supervisory role was more ambiguous. The board’s majority emphasized that to be considered a supervisor, workers had to exercise independent judgment, although it adopted a more expansive view of such judgment than previous labor boards had.

The majority comprised the chairman, Robert J. Battista; Peter C. Schaumber; and Peter N. Kirsanow.

Steve Bokat, general counsel for the United States Chamber of Commerce, said the decision did not go as far as business had wanted, adding that estimates that millions of workers would be exempted from union coverage were “outrageous numbers.”

“I think it’s a good test that the majority has laid out,” Mr. Bokat said, “a reasonable test, one that employers and their counsel can apply.”

John J. Sweeney, the president of the A.F.L.-C.I.O., said the ruling “welcomes employers to strip millions of workers of their right to have a union by reclassifying them as supervisors, in name only.”

Organized labor said the ruling continued a trend in which President Bush and the labor board had exempted groups of workers from union coverage, including graduate teaching assistants, disabled workers and many Defense Department employees.

The board’s ruling interprets a 2001 Supreme Court decision in which Justice Antonin Scalia, writing for a 5-to-4 majority, asserted that the labor board, then dominated by appointees of President Clinton, had adopted too strict a test in deciding when workers were supervisors.

Yesterday’s decision could exclude many retail workers, like department heads in supermarkets or discount stores, from joining unions. The majority wrote, “The assignment of an employee to a certain department (e.g., housewares) or to a certain shift (e.g., night) or to certain significant overall tasks (e.g., restocking shelves) would generally qualify” as having the supervisory responsibility of assigning.

The decision also stated, “If a person on the shop floor has ‘men under him,’ and if that person decides ‘what job shall be undertaken next or who shall do it,’ that person is a supervisor, provided that the direction is both ‘responsible’ ” and “carried out with independent judgment.”

William B. Gould IV, who was board chairman under Mr. Clinton, said the decision’s “shift in statutory interpretation is a seismic one.” Mr. Gould said that with the board setting forth rules on what employers must do to prove that employees are supervisors, “the potential for manipulation is substantial.”

The board’s main decision yesterday involved Oakwood Heritage Hospital, an acute care facility in Taylor, Mich., with 257 beds and 181 registered nurses. The decision focused on a dozen nurses who worked in intensive care, medical/surgical and other units, and oversaw several other nurses, nurses’ aides and technicians.

The union that sought to represent them, the United Automobile Workers, asserted that they should not be deemed supervisors on the ground that their supervisory duties were minor and routine, and required so little independent judgment. But the hospital argued that they should be considered supervisors on the ground that they assigned nurses and nurses’ aides to particular patients and directed them by giving them specific responsibilities, all while using independent judgment.

Another board decision released yesterday involved some 30 “lead persons” working for Croft Metals, a door and window factory in McComb, Miss. The board ruled that the company had not established that these workers exercised independent judgment in directing their crews. The board suggested that their judgment was simply routine.

A third decision involved the Golden Crest Healthcare Center, a nursing home in Hibbing, Minn. The board ruled that the employer had not established that the nurses in charge had met the definition of assigning or directing other workers. It found that the nursing home had failed to show that those nurses were held accountable when their subordinates failed to perform properly.

Pamela Thompson, chief executive of the American Organization of Nurse Executives, an industry organization, said, “Since hospital staffing can vary, not only hospital to hospital but hour by hour, this decision will play out differently hospital by hospital.”

    Board Redefines Rules for Union Exemption, NYT, 4.10.2006, http://www.nytimes.com/2006/10/04/washington/04labor.html

Stocks & Bonds

Dow Jones Index Hits a New High, Retracing Losses

October 4, 2006
The New York Times
By VIKAS BAJAJ

The best-known measure of the stock market, the Dow Jones industrial average of 30 major stocks, rose 0.49 percent yesterday to squeak past a closing high that was set in January 2000 amid a technology-driven market boom.

In contrast to those heady days, though, investors and market professionals are greeting the current rally with more relief than euphoria, noting that the broader stock market has yet to find its way back to previous highs.

“I am happy that it has now happened so that we can move onto something else,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Stocks have been climbing without fanfare since late in July, bolstered by a decline in energy prices and by mounting signs that the Federal Reserve will not raise interest rates again this year.

The spark for yesterday’s gains was a 4 percent drop in oil prices that pushed the next-month futures price of crude oil below $60 a barrel for the first time since March.

In 2000 and the years leading up to it, the rally was fueled by demand for computers and telecommunications and a belief that the Internet would transform business. The rally over the last few months has had more modest roots: signs that the economy is moderating and inflation is tame. Investors have been encouraged that falling crude oil and gasoline prices, while a sign of slowing demand, will restrain inflation and spur consumer spending. And investors have been heartened by what they hope is a gradual and orderly end of a five-year boom in home sales and construction.

Indeed, many on Wall Street argue that the housing pullback and the decline in energy prices has put the economy in a sweet spot: not growing fast enough to accelerate inflation, but not so slowly that it risks falling into recession.

“There is and will continue to be a building sense of a Goldilocks” market, said James W. Paulsen, chief investment strategist at Wells Capital Management.

Charles P. Mayer of Pioneer Investments, a mutual fund company, added that corporate profits were still growing at robust rates, further supporting stock prices.

Still, a significant number of skeptics say that this view does not fully take into account the risks that falling home prices and sales could crimp consumer spending and cause an economic slump next year. These people note that the Dow’s new high is hollow, given that broader gauges of the market have still not returned to their high-water marks.

There is also the reality that the Dow is a measure by dollar value of only 30 blue-chip companies, and so is not representative of the great majority of traded stocks.

Jane L. Caron, chief economic strategy at Dwight Asset Management, a Vermont specialist in bond investing, took a measured view. “There is a lot of concern that the housing market softening will spill over to the rest of the economy,” she said. “But if you look at the stock markets, they seem to think that everything is O.K.”

“Somebody is wrong,” she added.

The Dow industrials closed up 56.99 points yesterday, at 11,727.34, surpassing the record of 11,722.98 set on Jan. 14, 2000 — a day when stocks were buoyed by a strong profit report from Intel and by comments from Alan Greenspan, then the Federal Reserve chairman, that interest rates would rise only slightly.

Most other market measures were also higher yesterday. The broad-based Standard & Poor’s 500-stock index rose 0.21 percent, and the technology-focused Nasdaq composite index rose 0.27 percent. The Russell 2000 index of smaller-capitalization companies was fractionally lower.

Unlike the Dow, the S.& P. 500 index is still about 12 percent away from its record high in March 2000. The majority of those stocks have returned to their 2000 levels, but a large minority — including technology stars like Cisco Systems, Sun Microsystems and JDS Uniphase — are trading at a fraction of their prices six years ago. The Nasdaq composite index is still down about 55 percent from its March 2000 peak.

Seen another way, the stock market has spent the last six years exorcising the effects of the technology bubble, Howard Silverblatt, Standard & Poor’s senior index analyst, said. He noted that without the technology sector, the S.& P. 500 would be up 17 percent today. Though not a spectacular return for six years, it would be a far better outcome for investors than a 12 percent decline.

And by some measures, the Dow still has some way to go before it can be said to have reclaimed its previous heights. On an inflation-adjusted basis, the average would have to reach a level of 14,104.97 for it to match its January 2000 peak.

Only 10 of the 30 stocks in the Dow today are at or above their levels when the index last reached its high. Most of the highfliers from the late 1990’s and early 2000, including Microsoft, I.B.M. and Intel, are a long way from the lofty levels they were trading at then. Even companies like Home Depot, Alcoa and Merck are down more than 30 percent.

“This has been a really rotten five-year period,” said James K. Glassman, a fellow at the conservative-leaning American Enterprise Institute and an author of the 1999 book “Dow 36,000.”

“It really has, there is no doubt about it,” said Mr. Glassman, who maintains that his book was mischaracterized at the time as a forecast for the market. He argues that the fear of terrorism has held down stock prices.

Still, the Dow components that have led the charge back have done exceedingly well. The price of Altria, parent company of Philip Morris, fell to a five-year low early in 2000 because of its multibillion-dollar legal liabilities, but it has more than tripled since. The shares of Caterpillar, United Technologies and Boeing have soared because of strong global demand for their heavy industrial products. Exxon Mobil, the world’s largest publicly traded oil company, is up almost 60 percent on the rise in energy prices.

The last time the Dow inched close to the record, early in May, stocks tumbled from India to New York as investors worried that the Federal Reserve, in its eagerness to curb inflation, would raise rates so much that it would push the American economy into recession and precipitate the end of an era of relatively cheap financing worldwide. The Dow industrials fell more than 8 percent and the Nasdaq composite by 11 percent at the start of the summer.

A few months have made a lot of difference. The Fed left its benchmark short-term rate unchanged at 5.25 percent in its last two meetings, on the rationale that a slowing economy and its two-year campaign to raise rates might be enough to lower prices. Indeed, inflation has slowed and data for September is widely expected to show a further drop because of the recent fall in energy prices. Nationally, average retail gasoline prices are at $2.36 a gallon this week, compared with just over $3 at the start of August.

Declining home sales and construction activity has helped slow the economy without causing any major retrenchment, at least so far. The economy grew at a 2.6 percent annual pace in the second quarter after a 5.6 percent increase in the first three months of the year.

Bond investors remain more skeptical than stock buyers. The yields on long-term Treasury bonds, for instance, indicate that investors are assuming that the Fed will have to reverse course soon and cut interest rates to resuscitate the economy.

The yield on the benchmark 10-year Treasury note, which moves in the opposite direction from the price, has fallen to 4.61 percent, from 5.25 percent late in June. Investors demand higher yields when they are worried that inflation will eat deeper into the value of their holdings, and they push yields down when they think that interest rates are headed lower or when they are seeking shelter from tougher times.

Market historians have noted that stocks can take a long time to recover from periods of great excess. The Dow and the S.&. P., for instance, did not return to their 1929 pre-crash peaks until 1954, long after the Depression and World War II ended.

All this does not mean that investors have stood still in the last six years. Many foreign stock markets, especially those in developing countries, have outperformed American markets, as have commodities like oil, gold and copper. In the United States, the stocks of smaller companies have outrun larger ones, though that trend appears to have reversed.

Data on investment fund flows show that Americans have invested more in those faster-growing areas. They have also spent increasingly more on home purchases and improvements, as evidenced by the large run-up in housing sales and prices and the sharp increases in mortgage and home equity lending.

Will the Dow’s new record prompt skeptical investors to reconsider stocks, perhaps giving them a psychological boost? Momentum can help propel stock markets, but investors could also conclude that the Dow’s return to its early 2000 level means that the index has merely been treading water for six years.

“You’re telling me that I have gone six and a half years and gone even,” Mr. Silverblatt of S.& P. said. “What about the 19 percent inflation? Well, it’s better than being down, but it’s not as positive as you think.”

    Dow Jones Index Hits a New High, Retracing Losses, NYT, 4.10.2006, http://www.nytimes.com/2006/10/04/business/04stox.html?hp&ex=1160020800&en=09ddbf3f16d81a16&ei=5094&partner=homepage

Dow sets all-time high, passes January 2000 level

Tue Oct 3, 2006 12:40pm ET
Reuters

NEW YORK (Reuters) - The Dow Jones industrial average set an all-time high on Tuesday, pulling above the previous record set in 2000 as tumbling oil prices led investors to buy shares of consumer and industrial companies that benefit from lower crude prices.

The 110-year-old Dow rose to 11,754.55, surpassing the intraday record of 11,750.28 set on January 14, 2000.

The Dow Jones industrial average was up 81.08 points, or 0.69 percent, at 11,751.43. The Standard & Poor's 500 Index was up 6.43 points, or 0.48 percent, at 1,337.75. The Nasdaq Composite Index was up 12.09 points, or 0.54 percent, at 2,249.69.

Altria Group, the maker of Philip Morris cigarettes and Kraft foods, was by far the biggest contributor to the Dow's rise over the past 6 1/2 years, soaring about 220 percent.

    Dow sets all-time high, passes January 2000 level, R, 3.10.2006, http://today.reuters.com/news/articlenews.aspx?type=newsOne&storyID=2006-10-03T163943Z_01_N02335264_RTRUKOC_0_US-MARKETS-STOCKS.xml

Across Nation, Housing Costs Rise as Burden        NYT        3.10.2006
http://www.nytimes.com/2006/10/03/nyregion/03census.html?hp&ex=
1159934400&en=aee99cfd4b1ef740&ei=5094&partner=homepage 

Across Nation, Housing Costs Rise as Burden

October 3, 2006
The New York Times
By JANNY SCOTT and RANDAL C. ARCHIBOLD

The burden of housing costs in nearly every part of the country grew sharply from 2000 to 2005, according to new Census Bureau data being made public today. The numbers vividly illustrate the impact, often distributed unevenly, of the crushing combination of escalating real estate prices and largely stagnant incomes.

While many of the highest home values were on the coasts, in places like Southern California and Manhattan, many of the biggest jumps in the percentage of people paying a burdensome amount of their income for housing occurred in the Midwest and in suburbs nationwide, making it clear that the housing squeeze has reached deep into the middle class.

In New York City, more than half of all renters now spend at least 30 percent of their gross income on housing, a percentage figure commonly seen as a limit of affordability. In Staten Island, the percentage paying at least 30 percent of income rose to nearly 60 percent, up from 40.

Among suburban homeowners, there were big increases in the percentage of people with mortgages spending at least 30 percent in places like Loudon County, Va.; Morgan County, Ind.; Nassau County, on Long Island; and Bastrop County, Tex.

“Housing prices have gone up much more than incomes have,” said Christopher Jones, vice president for research at the Regional Plan Association in New York City. “Clearly, you can’t sustain that sort of imbalance over the long run. There’s only so long that housing prices can go up without sustained increases in income to support them.”

The data, from the American Community Survey, was collected throughout 2005, some of it before the real estate market began softening over the past year.

While the escalation in house prices that began in the mid-1990’s has slowed down in most places, and while prices are even dropping in some markets, rents are currently rising.

Historically, it is not unprecedented for housing prices to rise faster than household incomes, since housing prices fluctuate more than median incomes. In recent decades, median incomes have not risen at the rate that they did in the booming 1950’s and 1960’s, yet real estate prices in many parts of the country have escalated sharply in recent years.

“People want to hang on and stay in the market,” said William H. Frey, a demographer at the Brookings Institution in Washington, “and they are willing to stretch themselves to find or to rent a house that is suitable.”

The places with the highest overall percentages of people carrying a heavy housing burden were in fast-growing areas of California, Colorado and Texas.

In Southern California, Temecula and Hemet had the highest percentages of renters paying at least 30 percent, with 74 and 73 percent of renters at that level.

Boulder, Colo., and College Station, Tex., held the record for renters spending at least 50 percent, with 47 and 46 percent.

The biggest jump in the percentages of people paying at least 30 percent of their income on rent, as well as those spending at least 50 percent, occurred in Olathe, Kan., a booming suburb of 114,000 southwest of Kansas City.

S. Lawrence Yun, an economist with the National Association of Realtors, said renters in desirable cities might be spending more of their income on housing in hopes of getting a toehold in places with good schools, better homes and a good quality of life. He said, “There is certainly a concern that people are devoting a large portion of their income to housing, and one of the reasons is due to the more limited housing supply.”

In the New York region, a very high percentage of renters in urban counties spent a big share of income on housing. In the Bronx, Brooklyn and Queens, close to a third of all renters pay at least 30 percent.

But many of the biggest increases in housing burdens occurred outside the city.

Among homeowners, there were big increases in the percentage of people spending at least 30 percent on housing in counties like Nassau, Dutchess, Orange and Putnam. The percentage of households spending at least 50 percent of income also rose in those counties.

In Clifton, N.J., the percentage of mortgage holders spending at least 50 percent of their income on housing rose to 27 percent in 2005 from 12 percent in 2000, a 134 percent rise. In New Britain, Conn., the group paying at least 30 percent more than doubled, rising to 57 percent of people with mortgages, up from 27 percent.

Nationally, the biggest increase in homeowners spending more than 30 percent of their income on housing occurred in an unincorporated area southeast of Los Angeles called Florence-Graham, where more than a third of residents live in poverty. There, the figure climbed to 43 percent from 17 percent. Other places with big jumps included Wyoming, Mich.; Round Rock, Tex.; and Plymouth, Minn.

In general, the places with the highest overall percentages of homeowners spending that level of income were poorer cities. El Monte, Calif., a Los Angeles suburb, had the highest percentage of mortgage holders, 73 percent, spending more than 30 percent of their income on housing. In Newark, the figure was 72 percent; in El Cajon, Calif., east of San Diego, 69 percent; and in South Gate, Calif., 69 percent.

Jack Kyser, senior economist with the Los Angeles County Economic Development Corporation, said such cities are often the only places that people on the lowest rungs of the economic ladder can afford and they tend to stretch their resources to get in. He said El Monte and South Gate both are growing, largely because Latinos have been moving in.

“These communities are well located to employment opportunities and they can drive and it is not a horrendous drive,” he said. “They are also close to public transportation and use it.”

The numbers, which were analyzed for The New York Times by Andrew A. Beveridge, a demographer at Queens College, provided a glimpse of how hot — and how unhot — some areas had become.

Two Southern California coastal cities, Santa Barbara and Newport Beach, had the highest median house values, at $1 million.

Youngstown, Ohio, a city long hurting economically, had the lowest, at $48,000.

In New York State, the median value of owner-occupied homes actually declined slightly in a few upstate counties, including Oswego, Steuben and Madison. The median house value dropped 9 percent in Buffalo, to $60,800.

Housing values rose only barely in some upstate counties, including Cattaraugus, Cayuga, Chautauqua and Chemung.

Because of a change in census procedures, it was not possible yesterday to reliably gauge the increase in cost burden among homeowners in places with large numbers of condominium or cooperative apartments.

In 2000, the bureau did not count owner-occupied apartments in multifamily buildings; in 2005, it did. So the 2000 and 2005 figures could not be satisfactorily compared for places like Manhattan and San Diego.

In Manhattan, where the median value of all owner-occupied homes hit $718,000, the increase in median gross rents from 2000 to 2005 was 14 percent, well below the 20 percent jump in Suffolk County on Long Island, the 23 percent rise in the city of Passaic, N.J., and the 24 percent jump in Ulster County, N.Y.

The increase in the percentage of Manhattan renters paying at least 50 percent of their income on housing was 13 percent — well below the 50 percent rise in Rockland County.

The data also showed that, among couples living together in Manhattan, about 17 percent were unmarried in 2005, compared with 10 percent nationwide.

Manhattan appeared to have the second highest number of male couples living together, following Los Angeles.

Sam Roberts contributed reporting.

    Across Nation, Housing Costs Rise as Burden, NYT, 3.10.2006, http://www.nytimes.com/2006/10/03/nyregion/03census.html?hp&ex=1159934400&en=aee99cfd4b1ef740&ei=5094&partner=homepage

Wal-Mart to Add Wage Caps and Part-Timers

October 2, 2006
The New York Times
By STEVEN GREENHOUSE and MICHAEL BARBARO

Wal-Mart, the nation’s largest private employer, is pushing to create a cheaper, more flexible work force by capping wages, using more part-time workers and scheduling more workers on nights and weekends.

Wal-Mart executives say they have embraced new policies for a large number of their 1.3 million workers to better serve their customers, especially at busy shopping times — and point out that competitors like Sears and Target have made some of these moves, too.

But some Wal-Mart workers say the changes are further reducing their already modest incomes and putting a serious strain on their child-rearing and personal lives. Current and former Wal-Mart workers say some managers have insisted that they make themselves available around the clock, and assert that the company is making changes with an eye to forcing out longtime higher-wage workers to make way for lower-wage part-time employees.

Investment analysts and store managers say Wal-Mart executives have told them the company wants to transform its work force to 40 percent part-time from 20 percent. Wal-Mart denies it has a goal of 40 percent part-time workers, although company officials say that part-timers now make up 25 percent to 30 percent of workers, up from 20 percent last October.

To some extent, Wal-Mart is simply doing what business strategists recommend: deploying workers more effectively to meet the peaks and valleys of business in their stores. Wall Street, which has put pressure on Wal-Mart to raise its stock price, has endorsed the strategy, with analysts praising the new approach to managing its workers. In the last three years, the stock price has fallen about 10 percent, closing at $49.32 a share on Friday.

“They need to be doing some of this,” said Charles Grom, an analyst at J. P. Morgan Chase who covers Wal-Mart. It lets the company schedule employees “when they are generating most of their sales — at lunch, in the evening on the weekends.”

But Sally Wright, 67, an $11-an-hour greeter at the Wal-Mart in Ponca City, Okla., said she quit in August after 22 years with the company when managers pressed her to make herself available to work any time, day or night. She requested staying on the day shift, but her manager reduced her schedule from 32 hours a week to 8 and refused her pleas for more hours, she said.

“They were trying to get rid of me,” Ms. Wright said. “I think it was to save on health insurance and on the wages.”

Wal-Mart vigorously denies it is pushing out longtime or full-time employees and says its moves will ensure its competitiveness. The company says it gives employees three weeks’ notice of their schedules and takes their preferences into account, but that description differs from those of many workers interviewed. Workers said that their preferences were often ignored and that they were often given only a few days’ notice of scheduling changes.

These moves have been unfolding in the year since Wal-Mart’s top human resources official sent the company’s board a confidential memo stating, with evident concern, that experienced employees were paid considerably more than workers with just one year on the job, while being no more productive. The memo, disclosed by The New York Times in October 2005, also recommended hiring healthier workers and more part-time workers because they were less likely to enroll in Wal-Mart’s health plan.

Other big retailers, with or without unions, have begun using more part-time workers, adopted wage caps and instituted more demanding work schedules in one form or another. But because Wal-Mart is such a giant — its $312 billion in sales last year exceeded the sales of the next five biggest retailers combined — its new labor practices may well influence policies more broadly.

And Wal-Mart’s tougher scheduling demands could be especially taxing on workers because, unlike its competitors, the chain has many stores — more than 1,900 out of 4,000 — that are open 24 hours.

Human resources experts have long said that companies benefit most from having experienced workers. Yet Wal-Mart officials say the efficiencies they gain will outweigh the effects of having what labor experts say would be a less experienced, less stable, lower-paid work force.

Sarah Clark, a Wal-Mart spokeswoman, said the company viewed the changes as “a productivity improvement through which we will improve the shopping experience for our customers and make Wal-Mart a better place to work for our associates,” as Wal-Mart refers to its employees.

But some workplace experts point to the downside of the policies. Susan J. Lambert, a professor of social sciences at the University of Chicago who has written several research papers on retail workers, called it a burden for employees to cope with constant schedule changes.

“You have to set up child care for every day just in case you have to work,” she said, “and this makes it hard to establish routines like reading to your kids at night or having dinner together as a family.”

The adoption of wage caps has also been difficult for many workers to swallow. Workers will never receive annual raises if their pay is at or above the cap, unless they move to a higher-paying job category. Wal-Mart says the caps will encourage workers to seek higher-paying jobs with more responsibility.

To compensate for lost future wages under the new system, Wal-Mart made one-time payments of $200 to $400 to workers whose pay was near or over the caps. Several workers described that as “hush money.”

Ramiro Gonzalez, who works in the produce department of a Wal-Mart in El Paso, said that many longtime workers were fuming about the caps.

No matter how hard people work, “we won’t get anything else out of it,” said Mr. Gonzalez, who earns $11.18 an hour, or about $23,000 a year, after six years with Wal-Mart. “The message is, if I don’t like it, there is the door. They are trying to hit people who have the most experience so they can leave.”

In the confidential memo sent to Wal-Mart’s board last year, M. Susan Chambers, who was recently promoted to be Wal-Mart’s executive vice president in charge of human resources, questioned whether it was cost-efficient to employ longtime workers. “Given the impact of tenure on wages and benefits,” she wrote, “the cost of an associate with 7 years of tenure is almost 55 percent more than the cost of an associate with 1 year of tenure, yet there is no difference in his or her productivity.”

The memo said, “the shift to more part-time associates will lower Wal-Mart’s health-care enrollment” even though Wal-Mart was reducing the amount of time to one year, from two, that part-time workers would have to wait to qualify for health insurance.

Workers say there is some evidence that the goals outlined in Ms. Chambers’ memo are being put into practice. At several stores in Florida, employees said, managers have suddenly barred older employees with back or leg problems from sitting on stools after using them for years while working as cashiers, store greeters or fitting-room attendants. Wal-Mart said it had no companywide policy on stool use and did not have enough information to comment.

In August, Wal-Mart sent all store managers a confidential document called “Facility Manager Toolkit.” It instructed them to tell workers that the new pay system helped “establish pay levels that are competitive in the local job market, helping us to attain and retain the talent we need.”

If a worker asked whether the wage caps were “one more attempt to get rid of long-service Wal-Mart workers,” the manager was to respond that this was “not an attempt to ‘get rid’ of long term associates,” but was “consistent with our objective to maintain internally equitable pay levels,” according to the document. The memo was supplied to The New York Times by WakeUpWalMart.com, a group funded by the United Food and Commercial Workers, which has tried to organize Wal-Mart workers in the past.

Though some workers have quit in response to the pay caps and scheduling policies, Wal-Mart says it has received an average of seven applications for every job opening at a new store in the last three months.

Wal-Mart generally prohibits reporters from interviewing workers in its stores. The Times contacted employees through union-backed groups, Wal-Mart, employment lawyers and referrals from current and former workers.

A big area of discrepancy between what Wal-Mart says and what the workers say is whether the company has a policy of “open availability,” requiring employees to make themselves available around the clock. Ms. Clark, the Wal-Mart spokeswoman, said the company had no such a policy, adding, “Our main goal is to match the ratio of associates to customers shopping in our stores resulting in better customer service hour by hour.” Wal-Mart says it pays higher wages to night-shift workers.

But in March, workers from a Wal-Mart in Nitro, W.Va., held a small protest rally in the center of town after Wal-Mart managers demanded 24-hour availability and cut the hours of workers who balked. And workers from other stores around the country said in interviews that similar demands had been made on them.

Houston Turcott, the former overnight stocking manager at the Wal-Mart in Yakima, Wash., said that managers had told workers, “Either they had full, open availability so we can schedule them when we would like or we would cut their hours.”

Tracie Sandin, who worked in the Yakima store’s over-the-counter drug department until last February, said, “They said, if you don’t have open availability, you’re put on the bottom of the list for hours.”

Ms. Sandin said that many Wal-Mart employees disliked the tougher scheduling demands, which typically did not take seniority into account. “It makes it hard,” she said. “If you have a function with your child or you want to go to church on Sunday, you don’t want to miss those things.”

Tim Hahn, who oversees three workers as manager of the housewares department of a Wal-Mart in Lake St. Louis, Mo., said that two of his subordinates had left their schedules open, but one did not for family reasons. Mr. Hahn said “it helps a lot” to have two workers who have agreed to work during the day or night.

“Sometimes they work two nights a week and two days a week,” he said. “If there is an issue with a schedule, they can approach me. It’s something we will work to solve. If they need this day off, I am happy to give it to them.”

    Wal-Mart to Add Wage Caps and Part-Timers, NYT, 2.10.2006, http://www.nytimes.com/2006/10/02/business/02walmart.html?hp&ex=1159848000&en=5b8b226214562a4a&ei=5094&partner=homepage

American Album

A Farmer Fears His Way of Life Has Dwindled Down to a Final Generation

October 2, 2006
The New York Times
By CHARLIE LeDUFF

LEBANON, Kan. — The heart of the heartland, the exact geographic middle of the continental United States, is owned by a middle-aged Kansas man named Randall Warner. He exports wheat, beef and soon his second grown son to the city. He stands in his boots in his field and wonders what’s become of his way of life.

“I drive through the city and I wonder what all those people do for a living,” says Mr. Warner, a sturdy, square-faced man. “I see that, and it makes me sad that my children see it too and think that there is something better there for them.”

Lebanon, the nearby town where Mr. Warner learned to read and write, has lost nearly 25 percent of its population over the last 15 years.

Large corporate farmers are taking over. Mr. Warner doesn’t understand the ins and outs of the international trade policies and government subsidies that are changing the landscape, only that to make it nowadays “you work harder — sunup past sundown.”

Next year, Mr. Warner believes, there will be even fewer farmers here, in part because of fuel costs.

And he wonders what will become of his legacy and his land.

His son Travis, 18, wants to know more people besides his dad and the salesman at the John Deere dealership. The nearest pretty girl is 20 miles away.

He wonders if there isn’t something better than stumbling out to the fields with sleep still in your eyes and working past midnight. The summer air here is as stifling as corduroy drapes. Travis hasn’t spoken about this to his father, but his father suspects it just the same.

Travis is a state wrestling and hog breeding champion. He is going off to college soon and doesn’t know if he’ll ever come back. His brother, Dustin, left for good. “I like to work with people, I guess,” Travis says. “Be around people. And we come out here every day. It’s Dad and myself; that’s not working with people.”

He says this while sitting in the cab of his blue pickup, a dirty older model, eating the sandwich his mother made him.

His father is far off in the field, unable to hear the gloomy truth of the matter.

“I told my dad he could retire and cash-rent the land to the big farmer, but then what’s he going to do with his time? This is all he knows. Come out here and work daylight to dark.

“I don’t want that.”

The father says he would have to hire an old hand from down the road to help him work his 3,000 acres. He’ll have to do that and, if that doesn’t work, then start selling off the farm in pieces to the big farmer down the way.

This is how a town like Lebanon dies. The old Lebanon bank has caved in. Main Street is a peeling veneer. It’s a common scene across the Great Plains. People are losing their optimism.

Everything about Mr. Warner speaks of work. At 52, he stands erect, with skin as weathered as cattle hide. He is frugal, does not smoke or drink coffee or liquor. His home is average, a stolid two-story ranch at the edge of a wheat field with a barn outside the door. He is hardly ever home, mostly to eat and sleep, taking a half-day off for church. His wife, Linda, complains about the isolation. Is it too much to stop home while supper’s warm? Or go to town occasionally to see a motion picture? His wife talks of throwing it in sometimes too.

“My whole life is wrapped up in this,” Mr. Warner says while baling hay. “To tell you the truth, it can get a little monotonous. I’ve had four vacations my whole life.”

Still, it is a good life, he says. “The best kind of life there is.”

No political party seems to care much about the working man’s life, Mr. Warner feels. Stick a Republican and a Democrat in a sack, shake it up, pour it out, and the same rapacious thing crawls out. Creatures from a smoke-filled room.

Mr. Warner, a Pentecostal Christian, believes in miracles. He believes in speaking in tongues. He believes that abortion is taking a life and that gay marriage is an abomination. So he voted Republican.

What crumbs do the Democrats offer him? Two men in tuxedos on the steps of City Hall with a marriage license in hand? Handouts for those who won’t work? Mr. Warner says he could be peeled away from the conservatives if the liberals would talk to him about his values:

“God. Family. Work,” he counts them on his fingertips and adds them up. “Heritage.”

Do something to stop the corporate takeover of farm country. Give his son a reason to stay and you could have his vote. “F.D.R. was the greatest president this country ever had,” Mr. Warner says. “He provided security for the farmer.”

Father and son have moved on to spraying fly repellent on the cattle. The sun is going low, the sky is growing golden. The father’s gotten to thinking. The boy will soon go away to college.

His voice shows no trace of his natural confidence.

“Do you think you’ll come back to rural America? And farm? Raise cattle? Raise pigs?”

He talks obliquely, toward his son.

The son mumbles. “Depends if I find something better in the next couple years.”

“What could be better?” the father asks. “What could be better than life on the Great Plains where the wind blows and you catch fresh air every day?”

“That’s what I’m going to look for,” the boy says.

The boy turns his back. He returns to his work. The father watches after him.

    A Farmer Fears His Way of Life Has Dwindled Down to a Final Generation, NYT, 2.10.2006, http://www.nytimes.com/2006/10/02/us/02album.html?hp&ex=1159848000&en=4521e307c8ddf1ea&ei=5094&partner=homepage