History > 2011 > USA > Economy (I)

Debt Limit Follies

January 31, 2011
The New York Times

At a recent gathering of House Republicans, lawmakers made it clear that they intend to hold an increase in the nation’s debt limit hostage to major spending cuts.

Clearly, the Republican aim is to demonstrate their fiscal prudence, as well as their new political power in the Republican-controlled House. Don’t be fooled. When it comes to debating the debt limit the facts matter little. It’s all about posturing.

The debt limit is a cap set by Congress on the amount the nation can legally borrow. The current limit, $14.3 trillion, will be hit sometime this spring. Unless Congress raises it before then, the government will have to resort to temporary tactics, like freeing up money to pay current bills by delaying payments to federal retirement funds. The longer a standoff endures, the worse the choices are. For instance, the government might defer other payments, like tax refunds, as it husbands resources to avoid a default on the public debt.

All that would surely be disruptive and could be disastrous if the nation’s creditors began to doubt America’s reliability.

The debt limit is a political tool, not a fiscal one. First enacted in 1917, it was intended to make lawmakers think twice before voting for tax cuts and spending increases that run up the debt. Unfortunately, it has never worked that way. Federal debt is high despite the limit because lawmakers repeatedly enter into expensive and recurring obligations without a plan to pay for them — in recent years that includes two wars, the George W. Bush-era tax cuts and the Medicare drug benefit.

As the costs pile up, the debt limit must be increased — not to make room for new spending, but to raise money to pay for past commitments.

It is, of course, utterly disingenuous to vote for policies that drive up the debt and then rail against raising the debt limit when the bills come due. It is akin to piling up purchases on credit and then threatening to bounce the payment check. But that is what Republicans are saying they will do unless they win deep cuts in future spending in exchange for a debt-limit increase today. So much for fiscal prudence.

A better approach would be to pay for legislation when it is enacted, generally by raising taxes or cutting other spending. The new House leadership has rejected that approach when it comes to their No. 1 priority: cutting taxes.

They have passed new budget rules that allow taxes to be cut without offsets to replace the lost revenue. The new rules also forbid raising taxes to pay for major new spending, like Medicare expansions, requiring instead that any such spending be offset by cutting other programs. That is a recipe for fiscal irresponsibility.

House Republican leaders have not said which spending cuts they will demand for a debt-limit increase. They know that voters don’t want to hear about losing college aid, environmental safeguards or investor protections. They may try to call for overall spending caps that would let them take credit for spending reductions without explaining or defending particular cuts.

What is known is that deep immediate spending cuts would be unwise at a time when the economy and so many Americans are still struggling. President Obama and Congressional Democrats need to push back by challenging House Republicans on the hypocrisy of their new budget rules and by making it clear that playing games with the debt limit is irresponsible.

Debt Limit Follies, NYT, 31.1.2011, http://www.nytimes.com/2011/02/01/opinion/01tue1.html

Unrest in Egypt

Unsettles Global Markets

January 30, 2011
The New York Times
By NELSON D. SCHWARTZ

On Wall Street, it is what is known as an exogenous event — a sudden political or economic jolt that cannot be predicted or modeled but sends shockwaves rippling through global markets.

Investors have largely shrugged off several of these unexpected developments recently, including the sovereign debt crisis in Europe, but the situation in Egypt has the potential to cause more widespread uncertainty, especially if oil and other commodities keep surging or the unrest spreads to more countries in the Middle East.

While Egypt’s banks and stock market were closed because of the protests there, other Middle Eastern markets declined in trading Sunday, with shares falling by 4.3 percent in Dubai, 3.7 percent in Abu Dhabi and 2.9 percent in Qatar.

By early Monday morning, Asian markets were also trending lower, with Japan’s Nikkei index falling 1.5 percent, while in South Korea, the Kospi index slid 1.4 percent.

Last week, the Dow Jones industrial average nearly surpassed the closely watched 12,000 level, but fell 166 points in late trading Friday as the protests in Egypt intensified and oil prices jumped 3.7 percent to $89.34.

With the United States economy seeming to gain a foothold only recently — government data released Friday showed the economy grew by 3.2 percent in the fourth quarter of 2010 — a sustained increase in oil prices could choke growth, analysts said. It could also undermine the more general optimism that lifted the Standard & Poor’s 500-stock index by 1.5 percent in January, after a 12.8 percent jump in 2010.

“A one-dollar, one-day increase in a barrel of oil takes $12 million out of the U.S. economy,” said Jason S. Grumet, president of the Bipartisan Policy Center, a Washington research group. “If tensions in the Mideast cause oil prices to rise by $5 for even just three months, over $5 billion dollars will leave the U.S. economy. Obviously, this is not a strategy for creating new jobs.”

In early electronic trading on the Nymex oil futures market Sunday night, prices edged higher to $90.23 a barrel.

Until now, the stock market in the United States has defied several outside threats, including the rising risk of food inflation, interest rate increases in China, and sovereign debt troubles in Europe, said Sam Stovall, chief investment strategist of Standard & Poor’s Equity Research.

“But as is usually the case, a boxer never gets knocked out by a punch he’s looking for,” he said. “This could be what triggers the decline. Geopolitical events are very, very hard to model.”

Egypt is not an oil exporter, nor is its stock market a regional heavyweight. As the home of the Suez Canal and the nearby Sumed pipeline, however, it is one of a handful of spots classified as World Oil Transit Chokepoints by the Energy Department, and events there can have an outsize impact on global energy prices.

The 141-year-old canal is just 1,000 feet wide at its narrowest, and it cannot handle supertankers, forcing shippers to rely on the pipeline or smaller vessels to move the crude.

Roughly 2.9 millions barrels of oil a day, 2.6 percent of global production, passed through the canal and the pipeline in 2009, the Energy Department said.

As a percentage of world oil demand, that may not sound like much, said William H. Brown III, a former Wall Street energy analyst who consults for hedge funds and financial institutions.

“But prices are determined at the margin and that’s a lot of oil in markets these days,” said Mr. Brown, who estimates global spare production capacity at 2.5 million barrels, the bulk of it in Saudi Arabia.

While prices are set globally, the immediate impact of any interruption would be felt primarily in Europe, which relies heavily on jet fuel, heating oil and other distillates refined in the Middle East and shipped via the canal and pipeline. Israel is also a major importer of Egyptian natural gas under a pact that dates to the 1978 Camp David accords.

Egypt is a major player in the global grain market, importing more wheat than any other country. Some analysts have speculated that Egypt and other Middle Eastern countries might increase grain purchases to placate angry consumers, which could eventually push wheat prices higher.

Given the confrontations with authorities in Cairo, Alexandria and other cities, many analysts expect oil prices, and global markets, to remain volatile in the coming days, even as the opposition in Egypt rallies around Mohamed ElBaradei.

“I would expect regional markets to remain very unsettled because we don’t look any closer to a political resolution than we did on Friday,” said Ann Wyman, head of emerging markets research in Europe for Nomura. “Instability in the Middle East makes global markets uncomfortable. We’ve entered a new and unpredictable phase of transitioning governments in the Middle East.”

Still, a few investors are looking for opportunities in the Middle East and Egypt itself despite the declines there and the expected instability. Egyptian stocks are inexpensive compared with shares in other markets, said David Marcus, chief investment officer of Evermore Global Advisors. “This is one of the oldest economies on earth.”

“We have to start doing our homework,” he added, noting that another troubled Mediterranean bourse, in Athens, has rallied sharply this year, after Greece’s near-default in 2010. “Egypt is pulling down the region because people panic and don’t ask questions. That makes us much more interested.”

Unrest in Egypt Unsettles Global Markets, NYT, 30.1.2011, http://www.nytimes.com/2011/01/31/business/global/31markets.html

Teacher,

My Dad Lost His Job.

Do We Have to Move?

January 30, 2011
The New York Times
By MICHAEL WINERIP

WORTHINGTON, Ohio — Diane and Eric Kehler tried not to talk about it in front of the children, but as Jen Hegerty, the guidance counselor at Wilson Hill Elementary School, says, “Children have eagle ears.”

Mr. Kehler lost his $90,000-a-year job as an information technology manager. And though he and his wife discussed their problems in whispers, eagle ears don’t miss much. Their son Mathias, 12, a quiet, cerebral sixth grader at Wilson Hill, got quieter. “Our house was sort of in a state of despair. We weren’t as happy as usual,” Mathias said. “I stopped having good ideas to talk about with my friends.”

Mrs. Kehler has a college degree but had chosen to be a stay-at-home mother. That ended. She took a job at McDonald’s to cover the cost of groceries. At school, Mathias and his sister, Leah, a fourth grader, qualified for reduced-price lunches.

Keeping all that worry bottled up hurt. While Leah would not tell anyone her worst fear, she told her speech teacher, Shelley Smith, the second worst: that her family would have to move away and Leah would lose her friends. “I was worried and scared and very worried,” recalled Leah, who’s 10.

She chose Mrs. Smith to tell because the two have the same, exact birthday and every year they celebrate by eating Mrs. Smith’s homemade cupcakes. “She was just the right person,” Leah said. “She’s very calm.”

The Kehlers have lots of company. While Wall Street is pumping, Main Street bleeds. This middle- to upper-middle-class suburban town of 14,000 bordering Columbus has 22 percent of its students getting subsidized lunches. That’s up from 6 percent in 2005, when the economy was booming.

Statewide, 43 percent of Ohio public school students are disadvantaged, as measured by free and reduced lunches, compared with 33 percent in 2005, according to a recent survey by KidsOhio, a nonprofit educational organization based in Columbus. A sign of how deep this recession has reached into the middle class: here in Franklin County, 44 percent of the disadvantaged attend suburban schools, compared with 32 percent five years ago.

There may be other factors involved, including an increase of poorer families moving out of Columbus to the suburbs. But many here — the KidsOhio researchers; the superintendent of Worthington schools, Melissa Conrath; the principal of Wilson Hill, Jamie Lusher — agree that the recession’s impact has played a large part.

A few houses down from the Kehlers on Deer Creek Drive, Bill Cameron, who has three children in high school, has been out of work for two years since losing his $119,000-a-year job as a manager at American Electric Power.

Over on Eastland Court, Grace Koo and her now ex-husband, who have two children at Wilson Hill, were both laid off and went from making about $160,000 a year to zero. Ms. Koo, who had been a store design and construction director for Limited Brands, attributed the divorce to many things gone wrong, including their sinking economic status. “For months, both of us were home together, unemployed,” she said. “We’d fight over money.”

On Buck Trail Lane, the Hymers went from $150,000 a year to zero. Their son, Zachary, a second grader, and their daughter, Kennedy, who’s in fourth, qualified for reduced-priced lunches. The Hislopes on Friend Street also qualified for reduced-priced lunches, but as things worsened — the father, Mike, a shop foreman, has been out of work two years — they qualified for free lunches.

Recently Worthington got its first soup kitchen.

The emotional strain on children is plain from the names of the support groups the guidance counselor, Ms. Hegerty, has created: the Chicken Little group; the Volcano Management group; the Family Change group.

Even as the district’s budget gets cut and class sizes in the school’s fourth and fifth grades creep up to 30, the staff at Wilson Hill works to make a difference. While Washington measures a school’s worth by test scores, here, on Northland Street, there’s more to it.

A few weeks before Christmas, a girl in Mrs. Smith’s class went to school with broken eyeglasses patched together with tape. Each time the girl looked down to read, the glasses fell off. This is a small town, and Mrs. Smith knew the girl’s family was struggling. At 9 a.m., Mrs. Smith asked to borrow the glasses; during her lunch period she drove to her eye doctor; by 12:30 the girl had new pink and green frames.

Because the guidance counselor position is split between two schools, Ms. Hegerty gets overloaded and has found two unpaid interns from nearby universities to help with the caseload.

Most children this age can’t verbalize what’s wrong, and Ms. Hegerty watches their worries seep out in the guise of other problems. “Separation anxiety, nightmares, bed wetting,” she rattles them off, “Obsessive behavior, won’t stay in own bed, acting out at school, acting out at home.”

Ms. Koo’s daughter, Trinity, a second grader, scratched her arms so much they bled. Trinity’s brother, Eliot, was misbehaving in kindergarten.

Ms. Hegerty showed them how to make worry envelopes to store their fears. She gave them a buckeye to carry in their pockets. “If you’re feeling bad, you hold it,” said Trinity, who’s stopped scratching. “You think about stuff, and then ‘O.K., this is over now, I’m fine.’ ”

Every day, Eliot’s teacher, Regina Malley, starts off each kindergartner with five cubes. If you’re bad, she takes away a cube. But if you hold on to all five cubes for the day, you get one prize ticket. After 10 tickets, you get to turn on the classroom computer and sit in the big chair (“It elevates them above everybody,” Mrs. Malley said). Thirty tickets and you get the grand prize, lunch alone with Mrs. Malley.

For a few days, Eliot was stuck on nine tickets. “Poor Eliot lost a cube today,” Mrs. Malley reported. “He banged a kid on the back of the head.”

And then Eliot made a comeback, earning two tickets in two days. As Mrs. Malley promised, he got to sit in the big chair and was loudly applauded.

Mrs. Malley has taught kindergarten in the same room for 31 years, and in that time she’s learned a thing or two about little boys. She predicts good things for Eliot. “Eliot’s very bright,” she said. “Even if he listens 50 percent of the time, he’s getting 75 percent more than other kids.”

While several parents interviewed for this column eventually got jobs, no one was making anything near their old salaries. The Hislopes, Hymers and Kehlers are making half. Ms. Koo is making a third. Mrs. Hislope’s two daughters have been able to continue playing sports because their schools waived participation fees and the sports booster clubs helped. The Hislopes were one of 10 families that the middle school picked to give $300 toward Christmas.

It was only during a visit from a reporter that Mrs. Kehler heard Leah tell her worst fear. “I instantly thought we’d be homeless,” Leah said. Every fall the school takes part in the Penny Harvest, collecting for the homeless, and Leah feared that the next harvest would be for her family.

“Really?” Mrs. Kehler said. Like mother like daughter. This was Mrs. Kehler’s worst fear, too.

“I didn’t know how we’d survive,” she said. “I was afraid we’d be homeless under an underpass in Columbus and the kids would go into foster care.”

When, after many months, Mr. Kehler could not find work, they bought a print cartridge recycling business. It’s off to a promising start. The first year, the Kehlers outperformed the previous owner. “We’re up 18 percent,” Mrs. Kehler said.

Eagle ears still hear almost everything, but thankfully, for the last several months, what they hear has not sounded so dire. “When Dad and Mom talked, they were getting calmer,” Mathias said. “We’re definitely higher than we were.”

    Teacher, My Dad Lost His Job. Do We Have to Move?, NYT, 30.1.2011, http://www.nytimes.com/2011/01/31/education/31winerip.html

Washington’s Financial Disaster

January 29, 2011
The New York Times
By FRANK PARTNOY

San Diego

THE long-awaited Financial Crisis Inquiry Commission report, finally published on Thursday, was supposed to be the economic equivalent of the 9/11 commission report. But instead of a lucid narrative explaining what happened when the economy imploded in 2008, why, and who was to blame, the report is a confusing and contradictory mess, part rehash, part mishmash, as impenetrable as the collateralized debt obligations at the core of the crisis.

The main reason so much time, money and ink were wasted — politics — is apparent just from eyeballing the report, or really the three reports. There is a 410-page volume signed by the commission’s six Democrats, a leaner 10-pronged dissent from three of the four Republicans, and a nearly 100-page dissent-from-the-dissent filed by Peter J. Wallison, a fellow at the American Enterprise Institute. The primary volume contains familiar vignettes on topics like deregulation, excess pay and poor risk management, and is infused with populist rhetoric and an anti-Wall Street tone. The dissent, which explores such root causes as the housing bubble and excess debt, is less lively. And then there is Mr. Wallison’s screed against the government’s subsidizing of mortgage loans.

These documents resemble not an investigative trilogy but a left-leaning essay collection, a right-leaning PowerPoint presentation and a colorful far-right magazine. And the confusion only continued during a press conference on Thursday in which the commissioners had little to show and nothing to tell. There was certainly no Richard Feynman dipping an O ring in ice water to show how the space shuttle Challenger went down.

That we ended up with a political split is not entirely surprising, given the structure and composition of the commission. Congress shackled it by requiring bipartisan approval for subpoenas, yet also appointed strongly partisan figures. It was only a matter of time before the group fractured. When Republicans proposed removing the term “Wall Street” from the report, saying it was too pejorative and imprecise, the peace ended. And the public is still without a full factual account.

For example, most experts say credit ratings and derivatives were central to the crisis. Yet on these issues, the reports are like three blind men feeling different parts of an elephant. The Democrats focused on the credit rating agencies’ conflicts of interest; the Republicans blamed investors for not looking beyond ratings. The Democrats stressed the dangers of deregulated shadow markets; the Republicans blamed contagion, the risk that the failure of one derivatives counterparty could cause the other banks to topple. Mr. Wallison played down both topics. None of these ideas is new. All are incomplete.

Another problem was the commission’s sprawling, ambiguous mission. Congress required that it study 22 topics, but appropriated just $8 million for the job. The pressure to cover this wide turf was intense and led to infighting and resignations. The 19 hearings themselves were unfocused, more theater than investigation.

In the end, the commission was the opposite of Ferdinand Pecora’s famous Congressional investigation in 1933. Pecora’s 10-day inquisition of banking leaders was supposed to be this commission’s exemplar. But Pecora, a former assistant district attorney from New York, was backed by new evidence of widespread fraud and insider dealings, shocking documents that the public had never seen or imagined. His fierce cross-examination of Charles E. Mitchell, the head of National City Bank, Citigroup’s predecessor, put a face on the crisis.

This commission’s investigation was spiritless and sometimes plain wrong. Richard Fuld, the former head of Lehman Brothers, was thrown softballs, like “Can you talk a bit about the risk management practices at Lehman Brothers, and why you didn’t see this coming?” Other bankers were scolded, as when Phil Angelides, the commission’s chairman, admonished Lloyd Blankfein, the chief executive of Goldman Sachs, for practices akin to “selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.” But he couldn’t back up this rebuke with new evidence.

The report then oversteps the facts in its demonization of Goldman, claiming that Goldman “retained” $2.9 billion of the A.I.G. bailout money as “proprietary trades.” Few dispute that Goldman, on behalf of its clients, took both sides of trades and benefited from the A.I.G. bailout. But a Goldman spokesman told me that the report’s assertion was false and that these trades were neither proprietary nor a windfall. The commission’s staff apparently didn’t consider Goldman’s losing trades with other clients, because they were focused only on deals with A.I.G. If they wanted to tar Mr. Blankfein, they should have gotten their facts right.

Lawmakers would have been wiser to listen to Senator Richard Shelby of Alabama, who in early 2009 proposed a bipartisan investigation by the banking committee. That way seasoned prosecutors could have issued subpoenas, cross-examined witnesses and developed cases. Instead, a few months later, Congress opted for this commission, the last act of which was to coyly recommend a few cases to prosecutors, who already have been accumulating evidence the commissioners have never seen.

There is still hope. Few people remember that the early investigations of the 1929 crash also failed due to political battles and ambiguous missions. Ferdinand Pecora was Congress’s fourth chief counsel, not its first, and he did not complete his work until five years after the crisis. Congress should try again.


Frank Partnoy is a law professor at the University of San Diego and the author of “The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals.”

Washington’s Financial Disaster, NYT, 29.1.2011, http://www.nytimes.com/2011/01/30/opinion/30partnoy.html

Wall Street Indexes Fall

on Concerns About Egypt

January 28, 2011
The New York Times
By THE ASSOCIATED PRESS

Shares on Wall Street fell sharply Friday, sent lower by some disappointing economic news and concerns about the growing street protests in Egypt.

Investors have begun to worry about what could happen over the weekend in Egypt. With President Hosni Mubarak of Egypt imposing a night curfew and the military ordered out onto the streets, the tensions across the Arab world’s most populous state remain high.

Following the upheavals that saw Tunisia’s longtime president flee the country Jan. 14., nerves are frayed about how the uprising in Egypt will end and which regional government could be next to face the wrath of its people.

At afternoon trading, the Dow Jones industrial average lost 158.94 points, or 1.3 percent. The broader Standard and Poor’s 500-stock index declined 20.55 points, or 1.6 percent. The technology heavy Nasdaq lost 66.71, or 2.42 percent.

In European trading, the DAX in Frankfurt dropped 0.74 percent, while the CAC 40 in Paris and the FTSE 100 in London lost 1.4 percent.

There is nothing like uncertainty to get investors fidgety especially as the weekend approaches when trades are hanging for longer. Uncertainty can breed a flight out of riskier assets into supposedly safer ones. For now the losers tend to be stocks and the euro, the winners the dollar, the yen and gold.

Prices of the benchmark 10-year Treasury bond rose as the yields fell to 3.32 percent from 3.39 percent.

Simon Derrick, a senior analyst at Bank of New York Mellon, said investors are aware that in a crisis, events can move faster than anticipated.

“This was true, for example, in September and October of 2008 in the aftermath of the collapse of Lehman Brothers and it was true in April and May of last year during the height of the Greek crisis,” Mr. Derrick said. “It therefore appears sensible to note quite how swiftly the Tunisian revolt built and equally, how rapidly street protests emerged in the cities of Egypt.”

Fitch Ratings lowered the outlook for the country’s credit rating to negative and warned of a possible downgrade to the credit rating itself if the unrest intensifies. Richard Fox, the head of the Middle East and Africa desk at Fitch said the move to a negative outlook was the result of the “recent upsurge in political protests and the uncertainty this adds to the political and economic outlook ahead of September’s elections.”

Markets on Wall Street were already tentative after taking in some disappointing earnings and a economic report that was slightly less than expectations.

The Commerce Department said that gross domestic product, the broadest measure of the economy, grew at an annual rate of 3.2 percent in the fourth quarter. That was up from the 2.6 percent growth in the previous quarter, but less than the 3.5 percent that many economists had expected.

The Ford Motor Company reported fourth-quarter earnings that fell short of analysts’ expectations. Ford, however, said that it earned $6.6 billion in 2010, its largest profit in 11 years. Ford’s shares were down 14.5 percent.

Two giant technology companies reported earnings after the market closed Thursday. Amazon.com missed Wall Street’s revenue forecast in its latest quarter after the company said that higher costs cut down profit margins. Its shares fell 9.3 percent. Microsoft shares dropped 4.7 percent after it said that the profitability of its Windows division was falling.

The Sara Lee announced a plan to split into two companies. One company, a food and retail business, will retain the Sara Lee name and will include brands Sara Lee, Jimmy Dean and Hillshire Farms. The other has yet to be named and will retain the current company’s beverages and baked goods lines. Sara Lee fell 2.3 percent.

Wall Street Indexes Fall on Concerns About Egypt, NYT, 28.1.2011, http://www.nytimes.com/2011/01/29/business/29markets.html

Ford Reports

Largest Profit in 11 Years

January 28, 2011
The New York Times
By NICK BUNKLEY

DEARBORN, Mich. — The Ford Motor Company said on Friday that it earned $6.6 billion in 2010, its largest profit in 11 years, a result of surging global sales and cost cuts made during a lengthy turnaround.

But the fourth quarter fell short of most Wall Street estimates, breaking from a recent trend of positive earnings surprises from the company.

The performance for the year, a substantial reversal from several years ago when Ford appeared to be the sickliest of Detroit’s automakers, means the company’s 40,600 hourly workers will receive profit-sharing checks averaging $5,000.

The checks, required under Ford’s contract with the United Automobile Workers union, will total more than $200 million and are the biggest Ford has handed out since 2001.

Ford ended 2010 with more cash than debt for the first time since before the recession began. The company eliminated 43 percent of its debt in 2010, though it still owed $19.1 billion.

“Our 2010 results exceeded our expectations, accelerating our transition from fixing the business fundamentals to delivering profitable growth for all,” Ford’s chief executive, Alan R. Mulally, said in a statement. “We are investing in an unprecedented amount of products, technology and growth in all regions of the world.”

From October through December, Ford earned $190 million, or 5 cents a share, after taking a $960 million charge related to a debt-conversion offer. That compared to earnings of $886 million, or 25 cents a share, in the period a year ago. Its fourth-quarter revenue rose $1.6 billion to $32.5 billion.

Excluding the debt-conversion charge and other one-time items, Ford earned $1.3 billion for the quarter, its sixth consecutive operating profit, though analysts had expected the company to do considerably better on an operating basis. Excluding one-time items, the automaker had a profit of 30 cents a share in the quarter; analysts had forecast 48 cents.

Lewis I. Booth, Ford’s chief financial officer, said that sales in Europe were lower than expected and that the company spent considerable resources introducing numerous new models around the world.

In addition, Ford’s debt level remains a concern for analysts. While General Motors and Chrysler were able to eliminate tens of billions of dollars in obligations during their 2009 bankruptcies, Ford now carries more debt relative to its rivals. It had $20.5 billion in cash as of Dec. 31, $4.4 billion less than a year earlier, though its total liquidity increased.

Mr. Booth said Ford would continue to pay down debt but did reveal any specific plans. The company hopes to improve its balance sheet enough to regain an investment-grade credit rating, which would reduce borrowing costs.

Ford said its debt-reduction efforts in 2010 cut annual interest costs by more than $1 billion.

The full-year profit of $6.6 billion — Ford’s second consecutive annual profit — was equal to $1.66 a share, and was more than twice as much as the $2.7 billion, or 86 cents a share, that it earned in 2009 when industrywide sales were in a historic slump. Revenue for the year rose $4.6 billion, to $120.9 billion.

Analysts have projected that Ford could perform significantly better in the year ahead, on the strength of new models like the Focus sedan that arrives at American dealerships shortly. The company said it expects “continued improvement” in its pretax operating profit and cash flow.

In North America, Ford earned a pretax profit of $5.4 billion in 2010, compared to a $639 million loss a year earlier. The U.A.W. profit-sharing checks are based only on the company’s performance in the United States, which the company does not report separately.

The checks, to be distributed in March, are the fourth-largest Ford has paid to its workers since profit-sharing was added to the union contract in 1983. The record was $8,000, given out in 2000 when the company had more than 100,000 hourly employees. A year ago, the checks averaged $450.

“It’s obviously a great pleasure that we’re a profitable company again,” Mr. Booth told reporters at the company’s headquarters. “We’ve always said all our stakeholders will benefit from the growth of the company.”

The checks precede the contract talks that Ford and the other Detroit automakers will have with the union this fall. Union leaders have said their members deserve to benefit from the industry’s upswing. Mr. Booth declined to discuss the negotiations.

Ford increased its market share in the United States for a second consecutive year, the first time it has achieved that since 1993. It surpassed Toyota, which struggled with quality issues related to numerous recalls, to become the nation’s second-largest seller of cars and trucks.

Shares of Ford have doubled in the last year and increased nearly tenfold in two years. They closed at $18.79 Thursday.

This article has been revised to reflect the following correction:

Correction: January 28, 2011

An earlier version of this article misstated Ford’s 2010 pretax profit for North America as $5.4 million.

    Ford Reports Largest Profit in 11 Years, NYT, 28.1.2011, http://www.nytimes.com/2011/01/29/business/29ford.html

U.S. Economy Grew

at 3.2% Rate in the 4th Quarter

January 28, 2011
The New York Times
By CATHERINE RAMPELL

The United States economy sped up its growth rate in the fourth quarter, chiefly on the backs of revitalized consumers and a narrowed trade deficit.

Gross domestic product, a broad measure of all the goods and services produced by the economy, grew at an annual rate of 3.2 percent in the fourth quarter, up from 2.6 percent in the previous period, according to the Commerce Department.

While an improvement, the latest output number was slightly below analysts’ expectations of 3.5 percent.

Consumer spending grew at an annual rate of 4.4 percent, its fastest pace in nearly five years and nearly double the rate from the previous quarter. As income rose and the stock market climbed, Americans felt comfortable spending again, and in some cases by dipping into their savings.

“Consumers have been on a recovering trend,” John Ryding, chief economist at RDQ Economics, said, citing stronger consumer confidence numbers released earlier this week. “Consumers came into the holiday season after probably having a couple of years of being fairly frugal, and with a bit more cash in their pockets, and a bit more willingness to spend that cash.”

The payroll tax cut and the extension of the Bush tax cuts that were passed in December are expected to further buoy consumer spending in 2011, with many economists expecting consumer spending to continue growing at about a 3 or 3.5 percent pace.

The economy slowed in the middle of 2010, in what had been perhaps prematurely dubbed as the Recovery Summer by the Obama administration. The slowdown was largely the result of rocketing growth in imports, which are subtracted from the government’s calculations of gross domestic product. In the fourth quarter, however, a combination of rising exports and shrinking imports contributed to the faster output growth rate.

“In the middle of last year, imports showed the biggest drag on G.D.P. growth in more than 60 years ,” said Dean Maki, chief United States economist at Barclays Capital. “That kind of rise in imports just wasn’t sustainable,” he said, and the return to more normal levels of imports later in the year helped the American economy regain some momentum.

Earlier this week, the Congressional Budget Office forecast that the economy would grow 3.1 percent in 2011, a figure echoed by many Wall Street economists.

While that rate would be faster than last year’s, it is still probably not robust enough to make a significant dent in the unemployment rate, which stood at 9.4 percent in December. In the couple of years before the Great Recession, which began in December 2007, the American jobless rate was less than half that.

“We’re still very much below the output growth rate needed to absorb the slack in labor market,” said Prajakta Bhide, a research analyst for the United States economy at Roubini Global Economics. “We’re expecting to end the year with an unemployment rate of 9 percent.”

U.S. Economy Grew at 3.2% Rate in the 4th Quarter, NYT, 28.1.2011, http://www.nytimes.com/2011/01/29/business/economy/29econ.html

Obama and Corporate America

January 27, 2011
The New York Times

President Obama is smart to extend an olive branch to American businesses. Our economic success depends on businesses investing, growing and creating new jobs. From expanding exports to improving infrastructure, government and businesses share important goals.

From a purely pragmatic political standpoint, reaching an entente with corporate leaders will make it easer to defuse the hostility he has faced. Some of it has been purely partisan and ideological, from groups like the United States Chamber of Commerce, which deployed millions to unseat Democrats in the Congressional elections last year.

Still, Mr. Obama must take care not to let his agenda be taken over entirely by corporate interests. They do not belong to the only constituency he serves.

Appointing William Daley to be a business-friendly White House chief of staff seems a good idea; so does drafting Jeffrey Immelt of General Electric to lead his Council on Jobs and Competitiveness. It’s fine to promise to weed out stupid business regulations, though past administrations that have done the same have found that most of the regulations aren’t stupid.

But Mr. Obama should keep in mind that the interests of corporations and their bosses are not necessarily always aligned with those of the country. All he needs to do is look at the pile of uninvested cash on which nonfinancial businesses are sitting — nearly $2 trillion — while the national unemployment rate remains above 9 percent.

Satisfying business interests can be tricky. Mr. Obama wants, for example, to reduce the 35 percent top corporate tax rate. That might sound like music to corporate ears, but it could easily run into powerful opposition. That’s because the president has rightly linked the reduction in the marginal tax rate to closing the loopholes in the tax code that allow many corporations to pay much less in taxes than they should.

Despite the high corporate tax rate, taxes on corporate income only raise an amount equal to 2.1 percent of the gross domestic product. That is way below the 3.5 percent of G.D.P. raised, on average, across the Organization for Economic Cooperation and Development. It puts the United States near the bottom of industrial nations. Even the most promising areas for cooperation — like increasing exports — are tricky. Business groups are right to urge the administration to obtain Congressional approval for the trade agreements with Colombia and Panama that were signed during the administration of George W. Bush. But Mr. Obama has been unwilling to face down trade unions and has placed the deals on the back burner.

President Obama should bring his party on board and pass the trade agreements. He should consult closely with business on his plans to invest in public infrastructure. But this is a two-way street. Some business lobbying groups have fought Mr. Obama on ideological, not policy grounds, opposing major initiatives tooth and nail, including health care reform. As Mr. Obama reaches out to them, corporate interest groups must abandon the politics of division and gridlock and reach back out to him.

    Obama and Corporate America, NYT, 27.1.2011, http://www.nytimes.com/2011/01/28/opinion/28fri1.html

A Reservist in a New War,

Against Foreclosure

January 26, 2011
The New York Times
By DIANA B. HENRIQUES

While Sgt. James B. Hurley was away at war, he lost a heartbreaking battle at home.

In violation of a law intended to protect active military personnel from creditors, agents of Deutsche Bank foreclosed on his small Michigan house, forcing Sergeant Hurley’s wife, Brandie, and her two young children to move out and find shelter elsewhere.

When the sergeant returned in December 2005, he drove past the densely wooded riverfront property outside Hartford, Mich. The peaceful little home was still there — winter birds still darted over the gazebo he had built near the water’s edge — but it almost certainly would never be his again. Less than two months before his return from the war, the bank’s agents sold the property to a buyer in Chicago for $76,000.

Since then, Sergeant Hurley has been on an odyssey through the legal system, with little hope of a happy ending — indeed, the foreclosure that cost him his home may also cost him his marriage. “Brandie took this very badly,” said Sergeant Hurley, 45, a plainspoken man who was disabled in Iraq and is now unemployed. “We’re trying to piece it together.”

In March 2009, a federal judge ruled that the bank’s foreclosure in 2004 violated federal law but the battle did not end there for Sergeant Hurley.

Typically, banks respond quickly to public reports of errors affecting military families. But today, more than six years after the illegal foreclosure, Deutsche Bank Trust Company and its primary co-defendant, a Morgan Stanley subsidiary called Saxon Mortgage Services, are still in court disputing whether Sergeant Hurley is owed significant damages. Exhibits show that at least 100 other military mortgages are being serviced for Deutsche Bank, but it is not clear whether other service members have been affected by the policy that resulted in the Hurley foreclosure.

A spokesman for Deutsche Bank declined to comment, noting that Saxon had handled the litigation on its behalf. A spokesman for Morgan Stanley, which bought Saxon in 2006, said that Saxon had revised its policy to ensure that it complied with the law and was willing to make “reasonable accommodations” to settle disputes, “especially for our servicemen and women.” But the Hurley litigation has continued, he said, because of a “fundamental disagreement between the parties over damages.”

In court papers, lawyers for Saxon and the bank assert the sergeant is entitled to recover no more than the fair market value of his lost home. His lawyers argue that the defendants should pay much more than that — including an award of punitive damages to deter big lenders from future violations of the law. The law is called the Servicemembers Civil Relief Act, and it protects service members on active duty from many of the legal consequences of their forced absence.

Even though some of the nation’s military families have been sending their breadwinners into war zones for almost a decade, some of the nation’s biggest lenders are still fumbling one the basic elements of this law — its foreclosure protections.

Under the law, only a judge can authorize a foreclosure on a protected service member’s home, even in states where court orders are not required for civilian foreclosures, and the judge can act only after a hearing where the military homeowner is represented. The law also caps a protected service member’s mortgage rate at 6 percent.

By 2005, violations of the civil relief act were being reported all across the country, some involving prominent banks like Wells Fargo and Citigroup. Publicity about the violations spared some military families from foreclosure, prompted both banks to promise better compliance and put lenders on notice that service members were entitled to special relief.

But the message apparently did not get through. By 2006, a Marine captain in South Carolina was doing battle with JPMorgan Chase to get the mortgage interest rate reductions the act requires. Chase eventually reviewed its policies and, earlier this month, acknowledged it had overcharged thousands of military families on their mortgages and improperly foreclosed on 14 of them. After a public apology, Chase began mailing out about $2 million in refunds and working to reverse the foreclosures.

For armed forces in a war zone, a foreclosure back home is both a family crisis and a potentially deadly distraction from the military mission, military consumer advocates say.

“It can be devastating,” said Holly Petraeus, the wife of Gen. David Petraeus and the leader of a team that is creating an office to serve military families within a new Consumer Financial Protection Bureau.

“It is a terrible situation for the family at home and for the service member abroad, who feels helpless,” Mrs. Petraeus said. “I would hope that the recent problems will be a wake-up call for all banks to review their policies and be sure they comply with the act.”

Chase’s response, however belated, is in sharp contrast to the approach taken by Deutsche Bank and Saxon in the Hurley case.

Sergeant Hurley bought the land in 1994 and “was developing this property into something special,” he said in a court affidavit. He put a double-wide manufactured home on the site and added a deck, hunting blinds, floating docks and storage buildings.

According to his lawyers, his financial troubles began in the summer of 2004, when his National Guard unit sent him to California to be trained to work as a power-generator mechanic in Iraq. Veterans of that duty advised him to buy certain tools not readily available in the war zone, he said in his affidavit. With that expense and his reduced income, he said, he fell behind on his mortgage — a difficulty many part-time soldiers faced when reserve and National Guard units were mobilized.

Believing he was protected by the civil relief act — as, indeed, he was, as of Sept. 11, 2004 — his family repeatedly informed Saxon that Sergeant Hurley had been sent to Iraq. But Saxon refused to grant relief without copies of his individual military orders, which he did not yet have.

Although Saxon’s demand would have been legitimate if Sergeant Hurley had been seeking a lower interest rate, the law did not require him to provide those orders to invoke his foreclosure protections.

Nevertheless, Saxon referred the case to its law firm, Orlans Associates in Troy, Mich., which completed the foreclosure without the court hearing required by law. The law firm filed an affidavit with the local sheriff saying there was no evidence Sergeant Hurley was on military duty. At a sheriff’s sale in October 2004, the bank bought the property for $70,000, less than the $100,000 the sergeant owed on the mortgage.

Orlans acknowledged in a court filing that one of its lawyers learned in April 2005 that Sergeant Hurley had been on active duty since the previous October. Nevertheless, neither Saxon nor the law firm backtracked to ensure the foreclosure had been legal or took steps to prevent the seized property from being sold, according to the court record. Lawyers for Orlans Associates did not respond to a request for comment.

When Sergeant Hurley sued in May 2007, the defendants initially argued that he was not allowed to file a private lawsuit to enforce his rights under the civil relief act. Federal District Judge Gordon J. Quist agreed and threw the case out in the fall of 2008.

That drew a fierce reaction from Col. John S. Odom, Jr., a retired Air Force lawyer in Shreveport, La., who is working with Sergeant Hurley’s local lawyer, Matthew R. Cooper, of Paw Paw, Mich.

Colonel Odom, recognized by Congress and the courts as an expert on the Servicemembers Civil Relief Act, knew Judge Quist had missed a decision that overturned the one he had cited in his ruling. In December 2008, Colonel Odom appealed the ruling.

In March 2009, Judge Quist reversed himself, reinstated the Hurley case, ruled that the foreclosure had violated the civil relief act and found that punitive damages would be permitted, if warranted.

Despite that legal setback, the defendants soldiered on. As the court docket grew, they argued against allowing Sergeant Hurley to seek compensatory or punitive damages in the case. Judge Quist ruled last month that punitive damages were not warranted — a ruling Colonel Odom has said he has challenged in court and, if necessary, will appeal.

“Nothing says you screwed up as clearly as a big punitive damages award,” he said. “They are a deterrence that warns others not to do the same thing.”

When the trial on damages begins in early March, Sergeant Hurley will have been fighting for almost four years over the illegal foreclosure, a fight he could not have waged without a legal team that will probably only be paid if the court orders the defendants to cover the legal bills.

Regardless of the trial outcome, Sergeant Hurley’s dream home is likely to remain as far beyond his reach as it was when he was in Iraq. Its new owner has refused to entertain any offers for it and recently bought an adjoining lot.

Sergeant Hurley said he still loved the wooded refuge he drives past almost every day. “I was hoping I could get the property back,” he said. “But they tell me there’s just no way.”

A Reservist in a New War, Against Foreclosure, NYT, 26.1.2011, http://www.nytimes.com/2011/01/27/business/27foreclose.html

Budget Deficit to Reach $1.5 Trillion

January 26, 2011
The New York Times
Filed at 11:58 p.m. EST
By THE ASSOCIATED PRESS

WASHINGTON (AP) — Far from slowing, the government's deficit spending will surge to a record $1.5 trillion flood of red ink this year, congressional budget experts estimated Wednesday, blaming the slow economic recovery and last month's tax-cut law.

The report was sobering new evidence that it will take more than President Barack Obama's proposed freeze on some agencies to stem the nation's extraordinary budget woes. Republicans say they want big budget cuts but so far are light on specifics.

Wednesday's Congressional Budget Office estimates indicate the government will have to borrow 40 cents for every dollar it spends this fiscal year, which ends Sept. 30. Tax revenues are projected to drop to their lowest levels since 1950, when measured against the size of the economy.

The report, full of nasty news, also says that after decades of Social Security surpluses, the vast program's costs are no longer covered by payroll taxes.

The budget estimates will add fuel to the already-raging debate over spending and looming legislation that would allow the government to borrow more money as the national debt nears the $14.3 trillion cap set by law. Republicans controlling the House say there's no way they'll raise the limit without significant budget cuts, starting with a government funding bill that will advance next month.

Democrats and Republicans agree that stern anti-deficit steps are needed, but neither Obama nor his resurgent GOP rivals on Capitol Hill are — so far — willing to put on the table cuts to popular benefit programs such as Medicare, farm subsidies and Social Security. The need to pass legislation to fund the government and prevent a first-ever default on U.S. debt obligations seems sure to drive the two sides into negotiations.

Though the analysis predicts the economy will grow by 3.1 percent this year, it foresees unemployment remaining above 9 percent.

Dauntingly for Obama, the nonpartisan agency estimates a nationwide jobless rate of 8.2 percent on Election Day in 2012. That's higher that the rates that contributed to losses by Presidents Jimmy Carter (7.5 percent) and George H.W. Bush (7.4 percent). The nation isn't projected to be at full employment — considered to be a jobless rate of about 5 percent — until 2016.

The latest deficit figures are up from previous estimates because of bipartisan legislation passed in December that extended George W. Bush-era tax cuts and unemployment benefits for the long-term jobless and provided a 2 percentage point Social Security payroll tax cut this year.

That measure added almost $400 billion to this year's deficit, CBO says.

The deficit is on track to beat the record of $1.4 trillion set in 2009. The budget experts predict the deficit will drop to $1.1 trillion next year, still very high by historical standards.

Republicans focus on Obama's contributions to the deficit: his $821 billion economic stimulus plan, boosts for domestic programs and his signature health care overhaul. Obama points out that he inherited deficits that would have exceeded $1 trillion a year anyway.

The chilling figures came the day after Obama called for a five-year freeze on optional spending in domestic agency budgets passed by Congress each year.

Republicans were quick to blame Obama for the rising red ink. Rep. Jeb Hensarllng of Texas, chairman of the House Republican Conference, said the report "paints a picture that is more dangerous than most Americans could anticipate."

"What is our leader in the White House doing about it? Asking Congress to raise the debt ceiling, proposing new spending and sticking future generations with a multi-trillion dollar tab," Hensarling said.

Democrat Kent Conrad, chairman of the Senate Budget Committee, pointed to a problem lawmakers are sure to keep facing:

"When the American people are asked what they want done and to prioritize what they want, they want the deficits and debt dealt with. But when they are asked very specifically, will they support changes in Social Security, the polls say no. Changes in Medicare? The polls say no. Changes in defense spending? The polls say no."

"I would've liked very much if the president would have spent a bit more time helping the American people understand how really big this problem is," added Conrad, D-N.D.

Republicans are calling for deeper cuts for education, housing and the FBI — among many programs — to return them to the 2008 levels in place before Obama took office.

But those nondefense programs make up just 12 or so percent of the $3.7 trillion budget, which means any upcoming deficit reduction package — at least one that begins to significantly slow the gush of red ink — will require politically dangerous curbs to popular benefit programs. That includes Social Security, Medicare, the Medicaid health care program for the poor and disabled, and food stamps.

Neither Obama nor his GOP rivals on Capitol Hill have yet come forward with specific proposals for cutting such benefit programs. Successful efforts to curb the deficit always require active, engaged presidential leadership, but Obama's unwillingness to thus far take chances has deficit hawks discouraged. Obama will release his 2012 budget proposal next month.

"The proposals we've seen so far from the president and congressional Republicans amount to little more than tinkering around the edges," said Concord Coalition Executive Director Bob Bixby.

"Somebody is going to have to bite the bullet and get this process going," said Maya MacGuineas of the Committee for a Responsible Federal Budget, a bipartisan group that advocates fiscal responsibility. "And that somebody has to be the president."

Obama has steered clear of the recommendations of his deficit commission, which in December called for difficult moves such as increasing the Social Security retirement age and reducing future increases in benefits. It also proposed a 15-cents-a-gallon increase in the gasoline tax and eliminating or scaling back tax breaks — including the child tax credit, mortgage interest deduction and deduction claimed by employers who provide health insurance — in exchange for rate cuts on corporate and income taxes.

CBO predicts that the deficit will fall to $551 billion by 2015 — a sustainable 3 percent of the economy — but only if the Bush tax cuts are wiped off the books. Under its rules, CBO assumes the recently extended cuts in taxes on income, investment and people inheriting large estates will expire in two years. If those tax cuts, and numerous others, are extended, the deficit for that year would be almost three times as large.

Tax revenues, which dropped significantly in 2009 because of the recession, have stabilized. But revenue growth will continue to be constrained. CBO projects revenues to be 6 percent higher in 2011 than they were two years ago, which will not keep pace with the growth in spending.

Budget Deficit to Reach $1.5 Trillion, NYT, 6.1.2011, http://www.nytimes.com/aponline/2011/01/26/us/AP-US-Budget-Deficit.html

Dissenters Fault

Report on Crisis in Finance

January 26, 2011
The New York Times
By SEWELL CHAN

WASHINGTON — The government commission’s account of what caused the 2008 financial crisis offers a broad indictment of regulatory weakness, Wall Street avarice and corporate incompetence. But that narrative is competing with alternative views by the Republicans on the panel, who released their dissenting reports on Wednesday.

One dissent points to broad economic forces that contributed to the credit and housing bubbles that built up during the last decade, including a glut of savings in developing Asian countries that began accumulating in the late 1990s and provided the fuel for mortgage-backed investments in the United States and Europe. It does not focus on the culpability of government and business leaders, as the main report does.

The other dissent argues that decades of government policies to promote homeownership are to blame for the creation of tens of millions of shoddy mortgages before the housing bubble burst in 2006-7. Though not the mainstream view, it could affect the looming debate over the future of Fannie Mae and Freddie Mac, the mortgage finance giants that have been in government conservatorship since 2008.

The disagreements threaten to blunt the impact of the main report. Those who had hoped for an authoritative account that would sear the public consciousness now seem pessimistic.

“I’m sad about it,” said Kenneth T. Rosen, a business school economist at the University of California, Berkeley, who testified before the commission last year. “This is a history, not a policy prescription. The fact that people read history so differently is a surprise to me. But I guess I shouldn’t be surprised at anything going on in Washington right now.”

Steve Fraser, a Wall Street historian, said he did not think that the report would do much to stop the financial sector’s return to business as usual.

“I am surprised — more than surprised, shocked even — that all that’s transpired since 2007-8 has produced as little as it has, in terms of reckoning with how out of control this financial system was and the damage it’s done,” he said.

Mr. Fraser said the Dodd-Frank regulatory overhaul law signed last July was helpful, but did not represent a far-reaching reassessment of the proper role of finance in American life.

“For a historian, it’s a baffling moment,” he said. “All the stars seemed aligned to produce real, fundamental change in the direction of public policy, and yet here we are with an administration itself bending over backwards to make friends with the financial industry.”

The main report, a 576-page paperback due in bookstores Thursday and titled “The Financial Crisis Inquiry Report,” offers ample ammunition for critics of Wall Street.

It cites “pervasive permissiveness” by regulators, “dramatic failures of corporate governance and risk management,” and “a systemic breakdown in accountability and ethics.”

It compares the financial system before the crisis with “a highway where there were neither speed limits nor neatly painted lines.” And it finds fault with the deregulatory orthodoxies of the last 30 years, saying of regulators, “The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves.”

But that analysis is “too broad,” according to three Republican commission members: Bill Thomas, a former congressman from California and the vice chairman of the commission; Keith Hennessey, who was an economic adviser to President George W. Bush; and Douglas Holtz-Eakin, a former director of the Congressional Budget Office.

In a 25-page dissent, the three Republicans say the Democratic report “is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is.”

The three men say that some of the majority report’s culprits — excessive political influence of Wall Street, a deregulatory ideology and a flawed regulatory structure — fail to account for the failure of financial institutions in Europe.

“By focusing too narrowly on U.S. regulatory policy and supervision, ignoring international parallels, emphasizing only arguments for greater regulation, failing to prioritize the causes and failing to distinguish sufficiently between causes and effects, the majority’s report is unbalanced and leads to incorrect conclusions,” they write.

The dissent also suggests that the Democrats were too quick to blame exotic financial instruments, like over-the-counter derivatives and collateralized debt obligations. The problem was not the instruments themselves, but a failure to use them appropriately, they write.

The dissenters also take a more charitable view of the pivotal decision in September 2008 by the Bush administration and the Federal Reserve to let Lehman Brothers fail. They say that three officials behind the decision — Henry M. Paulson Jr., then the Treasury secretary; Ben S. Bernanke, the Fed chairman; and Timothy F. Geithner, then the president of the Federal Reserve Bank of New York — “would have saved Lehman if they thought they had a legal and viable option to do so” and add, “In hindsight, we also think they were right at the time.”

The fourth Republican, Peter J. Wallison, who was the chief lawyer for the Treasury Department and then the White House during the Reagan administration, is offering his own, 99-page dissent, which argues that government housing policies fostered the housing bubble and the creation of 27 million subprime and so-called alt-A loans.

It was the losses associated with these weak and risky loans that brought down financial institutions, not deregulation or predatory lending, Mr. Wallison, now at the conservative American Enterprise Institute, writes. He argues that the Dodd-Frank law “seriously overreached” and will “have a major adverse effect on economic growth and job creation.”

    Dissenters Fault Report on Crisis in Finance, NYT, 26.1.2011, http://www.nytimes.com/2011/01/27/business/economy/27inquiry.html

So Was It a Good Year?

January 26, 2011
The New York Times

With the exception of Bank of America, the big banks were profitable in 2010, according to year-end reports filed earlier this month. But even standout results — like JPMorgan Chase’s profit surge or Citigroup’s first full-year profit since the financial crisis — were underwhelming on closer inspection.

One reason, as Eric Dash recently explained in The Times, is that profits reported at many banks, including Chase, were boosted by large withdrawals of money from reserves set aside to cover losses. To get a truer picture of a bank’s condition, you would need to look at the banks’ actual revenue, unaffected by loss reserves.

Industrywide, those revenues are off 17 percent from their peak before the financial crisis in 2007, according to Foresight Analytics, a research firm. The latest figures for the biggest banks — Bank of America, Chase, Citigroup, Wells Fargo and Goldman Sachs — all show declining revenue from the prior year, from a 3 percent drop at Chase for 2010 to a 13 percent slide at Goldman.

The declines are worrisome to the extent that they reflect the weak economy, with businesses unable to expand and borrowers sidelined by unemployment and damaged credit histories. Looked at more broadly, however, reduced revenues should be the norm even after the economy has recovered because a system that is truly safer and more fair will inevitably produce slower revenue growth. That may be disappointing to bankers and some investors, but it would be a sign of progress.

In the run-up to the financial crisis, bank revenues and profits were driven by reckless trading and dubious lending. Curbing those abuses through the Dodd-Frank reform law and other new rules — in effect, reducing risk in the system — will cut into revenue.

For now, regulations governing capital levels, derivatives, credit cards and other products and activities, are in the early stages of development and implementation and have only begun to hit revenue. But if the reforms, taken together, do indeed reduce riskiness to the point that another crisis is unlikely, the banks will make less money, especially in the near term, as they’re forced to alter their approaches. As that happens, the banks and their investors will undoubtedly clamor for relief from “overly burdensome” regulation. House Republicans are already vowing to dismantle financial reform.

Unless lawmakers and regulators stand firm, financial reform will fail. We were encouraged to hear President Obama push back in the State of the Union address, saying that he would not hesitate to enforce consumer protections and other rules in the reform law.

Dodd-Frank recognized that outsize bank profits depended on outsize risks and attempts to diminish that threat. If it works, the banks will still be big and multitasking, but not the money makers they once were. That would be a small price to pay for a more stable system.

    So Was It a Good Year?, NYT, 26.1.2011, http://www.nytimes.com/2011/01/27/opinion/27thu1.html

William Schreyer, 83,

Merrill Chief, Dies

January 24, 2011
The New York Times
By MARY WILLIAMS WALSH

William A. Schreyer, a former chief of Merrill Lynch who led the big brokerage house into the age of global financial markets, died on Saturday at his home in Princeton, N.J. He was 83.

A family spokesman, Jim Wiggins, said the death was of natural causes.

Mr. Schreyer’s career at Merrill spanned 45 years, starting in his teenage years, when he was hired by a local branch to write the day’s stock prices on a chalkboard after school. He became president in 1982, then chairman and chief executive in 1985, when Merrill was the nation’s largest brokerage but struggling to remain profitable.

As chief executive, Mr. Schreyer reshaped the company and improved its profitability by slimming down some of its retail operations and building up its investment banking business.

He rose to the top job in a management shake-up that followed a $42 million quarterly loss at the end of 1983. Mr. Schreyer led a high-level team that sought to identify what was wrong at the company. The team discovered that Merrill’s business model at the time, the so-called financial supermarket, was bringing in more and more revenue each year, but that the company’s costs were rising at the same time, leaving the bottom line stagnant.

There were unexpected expenses in the company’s new corporate headquarters, at the World Financial Center in Manhattan, and the company had a $377 million loss on the trading of mortgage-backed securities in 1987. That was also the year of the stock crash known as Black Monday and of a brewing savings-and-loan crisis.

Mr. Schreyer set out to cut costs and realign the company, pulling back from the financial supermarket concept, the legacy of a previous chief executive, Donald T. Regan, who left Merrill to join the Reagan administration as Treasury secretary.

One of Mr. Schreyer’s first major steps was to sell Merrill’s large real estate services division, which included a sprawling network of brokerage offices, a corporate relocation service and a mortgage finance unit.

The real estate business was entirely in the United States, and Mr. Schreyer believed Merrill’s future lay in the international securities business, with large presences in London and Tokyo, as well as in New York and around the United States.

“This is a statement about where we’re going in the 1990s,” he said of the divestiture in an interview with The New York Times in 1986. “It boils down to long-term fit; real estate is not where we should be now.”

In the years after, Merrill was among the first foreign firms admitted to membership in the Tokyo Stock Exchange and the first American investment bank to open a representative office in China. It also expanded its operations in London, Hong Kong and Singapore.

Mr. Schreyer retired from the company in 1993. A 1948 graduate of Penn State University, he remained active as a trustee of Penn State, including two terms as president of its board of trustees. In 1997 and 2006, he and his wife, Joan, provided a total of $55 million to endow a new honors college at Penn State, the Schreyer Honors College.

He also served on the boards of Schering-Plough, Deere & Company, Callaway Golf and Willis-Corroon, and as a trustee of the George H. W. Bush Presidential Library Foundation and the Center for Strategic and International Studies, where he worked on integrating financial analysis into its research activities.

The Merrill Lynch that Mr. Schreyer once led no longer exists as an independent entity. It agreed to be taken over by Bank of America in 2008, after huge losses on mortgage-backed securities. Lawsuits, fines and investigations followed, after it emerged that Merrill had paid $3.6 billion in bonuses just before it disappeared.

Mr. Schreyer published a memoir in 2009, “Still Bullish on America,” in which he said he continued to be an optimist, despite what had happened. “The pessimists are correct at any given points in history, but never over the long term,” he wrote.

Mr. Schreyer was born in Williamsport, Pa., where his father managed a local brokerage office that was eventually acquired by Merrill. After graduating from Penn State, he joined Merrill in its Buffalo office. In Buffalo, he met his wife, the former Joan Legg, who survives him.

His family said in a statement that his interest in international financial markets began to take shape in the early 1950s, when he spent two years on active duty as a lieutenant in the Air Force, stationed in Germany.

In addition to his wife, Mr. Schreyer is survived by his daughter, DrueAnne Schreyer, and two grandchildren.

William Schreyer, 83, Merrill Chief, Dies, NYT, 24.1.2011, http://www.nytimes.com/2011/01/25/business/25schreyer.html

U.S. Home Prices Slump Again,

Hitting New Lows

January 25, 2011
The New York Times
By DAVID STREITFELD

The long-predicted double-dip in housing has begun, with cities across the country falling to their lowest point in many years, data released Tuesday showed.

Prices in 20 major metropolitan areas fell 1 percent in November from October, according to the Standard & Poor’s Case-Shiller Home Price Index. The index is only 3.3 percent above the low it reached in April 2009 and has fallen fell 1.6 percent from a year ago.

“A double-dip could be confirmed before spring,” the chairman of S.&P.’s index committee, David M. Blitzer, said.

Eight of the 20 cities in the index fell to new lows for this cycle, including Atlanta; Charlotte, N.C.; Portland, Ore.; Miami, Seattle; and Tampa, Fla. Only a handful of places — essentially California and Washington — saw prices rise.

Analysts said the declines would continue even if they would be nowhere near as intense as in 2007 and 2008.

“The enormous supply overhang of existing homes (particularly factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time,” Joshua Shapiro, the chief United States economist of MFR Inc., said.

The housing market, which usually leads the economy out of a recession, is holding it back this time. New home sales are in the doldrums and mortgages are hard to come by. Government programs have stanched the bleeding but do not provide permanent relief.

In some cities, the decline over the last year was quite sharp.

Prices in Atlanta and Chicago fell more than 7 percent, exceeding even the drops in the perennially troubled Detroit and Las Vegas.

The Case-Shiller Index is a three-month average of prices. One hopeful sign is that on both a seasonally adjusted and an unadjusted basis, the declines measured in November were less than in October.

The 20 cities fell 0.5 percent on seasonally adjusted basis in November after a 1 percent drop in October.

U.S. Home Prices Slump Again, Hitting New Lows, NYT, 25.1.2011, http://www.nytimes.com/2011/01/26/business/economy/26econ.html

Mortgage Giants

Leave Legal Bills

to the Taxpayers

January 24, 2011
The New York Times
By GRETCHEN MORGENSON

Since the government took over Fannie Mae and Freddie Mac, taxpayers have spent more than $160 million defending the mortgage finance companies and their former top executives in civil lawsuits accusing them of fraud. The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.

The bulk of those expenditures — $132 million — went to defend Fannie Mae and its officials in various securities suits and government investigations into accounting irregularities that occurred years before the subprime lending crisis erupted. The legal payments show no sign of abating.

Documents reviewed by The New York Times indicate that taxpayers have paid $24.2 million to law firms defending three of Fannie’s former top executives: Franklin D. Raines, its former chief executive; Timothy Howard, its former chief financial officer; and Leanne Spencer, the former controller.

Late last year, Randy Neugebauer, Republican of Texas and now chairman of the oversight subcommittee of the House Financial Services Committee, requested the figures from the Federal Housing Finance Agency. It is the regulator charged with overseeing the mortgage finance companies and acts as their conservator, trying to preserve the company’s assets on behalf of taxpayers.

“One of the things I feel very strongly about is we need to be doing everything we can to minimize any further exposure to the taxpayers associated with these companies,” Mr. Neugebauer said in an interview last week.

It is typical for corporations to cover such fees unless an executive is found to be at fault. In this case, if the former executives are found liable, the government can try to recoup the costs, but that could prove challenging.

Since Fannie Mae and Freddie Mac were taken over by the government in September 2008, their losses stemming from bad loans have mounted, totaling about $150 billion in a recent reckoning. Because the financial regulatory overhaul passed last summer did not address how to resolve Fannie and Freddie, Congress is expected to take up that complex matter this year.

In the coming weeks, the Treasury Department is expected to publish a report outlining the administration’s recommendations regarding the future of the companies.

Well before the credit crisis compelled the government to rescue Fannie and Freddie, accounting irregularities had engulfed both companies. Shareholders of Fannie and Freddie sued to recover stock losses incurred after the improprieties came to light.

Freddie’s problems arose in 2003 when it disclosed that it had understated its income from 2000 to 2002; the company revised its results by an additional $5 billion. In 2004, Fannie was found to have overstated its results for the preceding six years; conceding that its accounting was improper, it reduced its past earnings by $6.3 billion.

Mr. Raines retired in December 2004 and Mr. Howard resigned at the same time. Ms. Spencer left her position as controller in early 2005. The following year, the Office of Federal Housing Enterprise Oversight, then the company’s regulator, published an in-depth report on the company’s accounting practices, accusing Fannie’s top executives of taking actions to manipulate profits and generate $115 million in improper bonuses.

The office sued Mr. Raines, Mr. Howard and Ms. Spencer in 2006, seeking $100 million in fines and $115 million in restitution. In 2008, the three former executives settled with the regulator, returning $31.4 million in compensation. Without admitting or denying the regulator’s allegations, Mr. Raines paid $24.7 million and Mr. Howard paid $6.4 million; Ms. Spencer returned $275,000.

Fannie Mae also settled a fraud suit brought by the Securities and Exchange Commission without admitting or denying the allegations; the company paid $400 million in penalties.

Lawyers for the three former Fannie executives did not respond to requests for comment. A company spokeswoman did not return a phone call or e-mail seeking comment.

In addition to the $160 million in taxpayer money, Fannie and Freddie themselves spent millions of dollars to defend former executives and directors before the government takeover. Freddie Mac had spent a total of $27.8 million. The expenses are significantly larger at Fannie Mae.

Legal costs incurred by Mr. Raines, Mr. Howard and Ms. Spencer in the roughly four and a half years prior to the government takeover totaled almost $63 million. The total incurred before the bailout by other high-level executives and board members was around $12 million, while an additional $18 million covered fees for lawyers for Fannie Mae officials below the level of executive vice president. Many of these individuals are provided lawyers because they are witnesses in the matters.

Employment contracts and company by-laws usually protect, or indemnify, executives and directors against liabilities, including legal fees associated with defending against such suits.

After the government moved to back Fannie and Freddie, the Federal Housing Finance Agency agreed to continue paying to defend the executives, with the taxpayers covering the costs.

But indemnification does not apply across the board. As is the case with many companies, Fannie Mae’s by-laws detail actions that bar indemnification for officers and directors. They include a person’s breach of the duty of loyalty to the company or its stockholders, actions taken that are not in good faith or intentional misconduct.

Richard S. Carnell, an associate professor at Fordham University Law School who was an assistant secretary of the Treasury for financial institutions during the 1990s, questions why Mr. Raines, Mr. Howard and others, given their conduct detailed in the Housing Enterprise Oversight report, are being held harmless by the government and receiving payment of legal bills as a result.

“Their duty of loyalty required them to put shareholders’ interests ahead of their own personal interests,” Mr. Carnell said. “Had they cared about the shareholders, they would not have staked Fannie’s reputation on dubious accounting. They defied their duty of loyalty and served themselves. At a moral level, they don’t deserve indemnification, much less payment of such princely sums.”

Asked why it has not cut off funding for these mounting legal bills, Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, said: “I understand the frustration regarding the advancement of certain legal fees associated with ongoing litigation involving Fannie Mae and certain former employees. It is my responsibility to follow applicable federal and state law. Consequently, on the advice of counsel, I have concluded that the advancement of such fees is in the best interest of the conservatorship.”

If the former executives are found liable, they would be obligated to repay the government. But lawyers familiar with such disputes said it would be difficult to get individuals to repay sums as large as these. Lawyers for Mr. Raines, for example, have received almost $38 million so far, while Ms. Spencer’s bills exceed $31 million.

These individuals could bring further litigation to avoid repaying this money, legal specialists said.

Although the figures are not broken down by case, the largest costs are being generated by a lawsuit centering on accounting improprieties that erupted at Fannie Mae in 2004. This suit, a shareholder class action brought by the Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio, is being heard in federal court in Washington. Although it has been going on for six years, the judge has not yet set a trial date. Depositions are still being taken in the case, suggesting that it has much further to go with many more fees to be paid.

Mortgage Giants Leave Legal Bills to the Taxpayers, NYT, 24.1.2011, http://www.nytimes.com/2011/01/24/business/24fees.html

Obama Sends

Pro-Business Signal

With Adviser Choice

January 21, 2011
The New York Times
By SHERYL GAY STOLBERG
and ANAHAD O’CONNOR

SCHENECTADY, N.Y. — President Obama, sending another strong signal that he intends to make the White House more business-friendly, named a high-profile corporate executive on Friday as his chief outside economic adviser, continuing his efforts to show more focus on job creation and reclaim the political center.

Here in the birthplace of General Electric, Mr. Obama introduced the new appointee, Jeffrey R. Immelt, the company’s chairman and chief executive officer, who will serve as chairman of his outside panel of economic advisers. Mr. Immelt succeeds Paul A. Volcker, the former Federal Reserve chairman, who is stepping down.

The selection of Mr. Immelt, who was at Mr. Obama’s side during his trip to India last year, and again this week during the visit of President Hu Jintao of China, is the latest in a string of pro-business steps taken by the president. He has installed William M. Daley, a former JPMorgan Chase executive, as his chief of staff; is planning a major speech to the U.S. Chamber of Commerce next month; and just this week ordered federal agencies to review regulations with an eye toward eliminating some.

Together, the moves amount to a carefully choreographed shift in strategy for the White House, both substantively and on the public relations front. Mr. Obama has started making the case that the United States has moved past economic crisis mode and is entering “a new phase of our recovery,” which demands an emphasis on job creation.

And with corporate profits healthy again, the president has begun engaging business leaders more on what it will take for them to start investing again in new plants and equipment and stepping up hiring.

As he moves into the second half of his term and lays the foundation for his 2012 re-election campaign, Mr. Obama is trying to frame the national conversation on the economy around this crisis-to-job-creation narrative. Republicans, who have spent their first weeks of the new Congress talking about repealing Mr. Obama’s health care bill and cutting federal spending, have given the president an opening to do so.

The themes the president struck here, on competitiveness and the turning point in the economy, are expected to be at the heart of the State of the Union address he will deliver Tuesday.

“The past two years were about pulling our economy back from the brink,” Mr. Obama said, standing against the backdrop of a huge generator in a well-lighted plant, with a giant American flag hanging from the ceiling.

“The next two years, our job now is putting our economy into overdrive.”

He went on, “Our job is to do everything we can to ensure that businesses can take root and folks can find good jobs and America is leading the global competition that will determine our success in the 21st century.”

It is not clear how much substantive influence Mr. Immelt’s new role will give him. Under Mr. Volcker, the panel met relatively infrequently, and Mr. Volcker at times appeared frustrated by a lack of access to the inner circles of White House decision-making.

The appointment of Mr. Immelt, who will retain his posts at G.E., is not without complications for Mr. Obama. G.E., one of the nation’s largest companies, routinely has a wide variety of regulatory, trade, contracting and other issues before the federal government, on matters as varied as television mergers, military hardware and environmental cleanup.

During the 2008 financial crisis, the Federal Reserve provided $16.1 billion to General Electric by buying short-term corporate i.o.u.’s from the company at a time when the public market for such debt had nearly frozen. Having the chief executive of such a company advising the White House on job creation at a time when Mr. Obama is assuming a more deregulatory posture could further alienate liberals and be seen as undermining the White House’s commitment to reducing the influence of lobbyists and special interests.

Another complicating factor is union uneasiness about outsourcing by G.E. Officials at the United Electrical Workers Union say the company has closed 29 plants in the United States and one in Canada in the past two years, eliminating more than 3,000 jobs.

“We understand the logic of asking someone like that to step up and play a leading role,” said Damon Silvers, the policy director for the AFL-CIO. “But there’s a real tension there in making a G.E. executive a central figure thinking about U.S. jobs.”

But Gary Sheffer, a General Electric spokesman, said the company has also been shifting operations back to the United States, and has added 6,000 jobs in this country, for a net increase. For example, Mr. Sheffer said, G.E. is moving all of its refrigerator manufacturing business back to the United States. He said 60 percent of G.E.’s revenues come from outside the country.

At the same time, G.E.’s exports have roughly doubled in the past five years, which makes the company a good showcase for a president who is trying to promote trade and exports as a way to repair the battered economy. Exports were a major theme of the president’s India trip and the state visit by President Hu; Mr. Immelt was among the business leaders who attended a high-level meeting with Mr. Hu, as well as the state dinner at the White House on Wednesday.

General Electric is benefiting from Mr. Obama’s emphasis on exports. When the president was in Mumbai, he announced a string of deals involving American companies, including a $750 million order from Reliance Power Ltd., in Samalkot, India, for steam turbines manufactured by G.E. Those turbines will be made here in Schenectady, a point Mr. Obama drove home in his remarks.

“This plant is what that trip was all about,” Mr. Obama said. “That new business halfway around the world is going to help support more than 1,200 manufacturing jobs and more than 400 engineering jobs right here in this community, because of that sale.”

Mr. Immelt’s White House job will be as chairman of the Council on Jobs and Competitiveness, a newly named panel that Mr. Obama is creating by executive order; the president said Friday that he intends to name additional members, including business and labor leaders and economists, “in the coming days.”

The change in the council’s name is intended to signify a shift in White House focus. It will be a reconfigured version of the board that Mr. Volcker led, the President’s Economic Recovery Advisory Board, of which Mr. Immelt was a member.

That body, created by Mr. Obama when he took office in the thick of the worst economic crisis since the Great Depression, is set to expire Feb. 6.


Christine Hauser contributed reporting from New York.

Obama Sends Pro-Business Signal With Adviser Choice, NYT, 21.1.2011, http://www.nytimes.com/2011/01/22/business/economy/22obama.html

Pay Doubles for Bosses at Viacom

January 21, 2011
The New York Times
By GRAHAM BOWLEY

Viacom presents: Big Payday II — the sequel.

Viacom awarded its chief executive, Philippe P. Dauman, total compensation for 2010 valued at about $84.5 million, more than double the 2009 figure, including salary, bonus and stock options, the company disclosed on Friday.

It awarded its chief operating officer, Thomas E. Dooley, total compensation valued at about $64.7 million, also more than double the 2009 compensation. Viacom disclosed the compensation in documents filed with the Securities and Exchange Commission after the market closed on Friday.

The company said, however, that the compensation was inflated by one-time stock awards linked to long-term contracts the executives signed last year. These contracts, for six and a half years, were unusually long for the industry, a spokesman, Carl Folta, said, and reflected Viacom’s recent better performance.

Without those one-time awards, Mr. Folta said, Mr. Dauman’s compensation was valued at about $30 million, including both cash and stock, and Mr. Dooley’s at about $23 million, both below their 2009 compensation.

However, the awards raised questions among compensation experts.

“This is spectacular money but where are the spectacular results?” said Brian Foley, a pay consultant in White Plains. “In terms of the stock price, they are back to where they were in 2008, about three years ago. That’s great, but is that really worth this award?”

Compensation for Viacom’s founder and executive chairman, Sumner M. Redstone, was more restrained. Mr. Redstone received compensation for the 2010 period valued at about $15 million, a decline from the $16.9 million he received in 2009, the company said.

Viacom’s 2010 fiscal year covered the three quarters from January to September.

Last year, the company changed its fiscal year to begin in October to align its financial reporting more closely with the seasonality of the television industry, giving it only three quarters last year. It is scheduled to report results from the first quarter of its latest fiscal year on Feb. 3.

The compensation is reminiscent of the large payouts Viacom’s top executives received in 2005. At that time, Mr. Redstone, then the chief executive, and Tom Freston and Leslie Moonves, both then presidents, received total compensation for the previous year valued at about $52 million to $56 million.

The company said Friday that about 90 percent of the compensation for its 2010 period was in long-term stock options, which aligned the executives’ interests with those of the company. It said the compensation was also justified by Viacom’s performance.

“In 2010 Viacom achieved outstanding operational and financial results, including double-digit growth in operating income, adjusted net earnings and total shareholder return,” Viacom said in the statement. “Viacom shares appreciated 33 percent during calendar year 2010, versus the S.& P. 500 gain of 12 percent.”

Mr. Folta predicted that executive compensation would be less for the current 2011 fiscal year because it would not be inflated by the one-time payments linked to the contract renewals.

In November, it reported third-quarter earnings that surpassed the expectations of analysts. Its flagship MTV has enjoyed something of a renaissance recently as a cultural tastemaker and a corresponding upswing in ratings. In that quarter, revenue rose 5 percent, to $3.3 billion.

    Pay Doubles for Bosses at Viacom, NYT, 21.1.2011, http://www.nytimes.com/2011/01/22/business/media/22viacom.html

At Google,

a Boost From E-Commerce

January 20, 2011
The New York Times
By CLAIRE CAIN MILLER

Google’s strong fourth-quarter earnings proved that it is now firmly ensconced in e-commerce, and also showed that, with its Android operating system and related apps, it is smoothly transitioning to the mobile world.

But that news, reported on Thursday, was quickly followed by the announcement that Larry Page, a Google co-founder, will replace Eric E. Schmidt as chief executive in April.

The move marks a return to the helm of the company for Mr. Page, who left the role in 2001 when Google was still a private company. Mr. Schmidt will become executive chairman, focusing on outside partnerships and government outreach, the company said.

The upheaval at the top may have overshadowed the earnings report, but the numbers were good. Google benefited from the best online holiday shopping season since 2006, as Web users increasingly began their shopping sprees at the search engine.

“Whenever e-commerce improves, we see more advertisers competing for the same keywords, and that means more revenue for Google,” said Sandeep Aggarwal, an Internet analyst at Caris & Company.

To make it easier for shoppers to find what they were looking for, Google in the run-up to the holiday season introduced tools like Boutiques.com and search results that showed which offline stores have an item in stock. It also began offering retailers product ads with images.

Google reported on Thursday that net income in the quarter ended Dec. 31 was $2.54 billion, or $7.81 a share, up from $1.97 billion, or $6.13 a share, in the year-ago quarter. Excluding the cost of stock options and the related tax benefits, Google’s fourth-quarter profit was $8.75 a share, up from $6.79.

The company said revenue climbed 17 percent, to $8.44 billion, from $6.67 billion a year earlier. Net revenue, which excludes commissions paid to advertising partners, was $6.37 billion, up from $4.95 billion.

“Our strong performance has been driven by a rapidly growing digital economy, continuous product innovation that benefits both users and advertisers, and by the extraordinary momentum of our newer businesses, such as display and mobile,” Mr. Schmidt said in a statement.

While Google’s e-commerce offerings drove its search business during the quarter, the company also began to convince investors that it is successfully moving into new businesses, particularly mobile and display ads.

On a call after the earnings report, Jonathan Rosenberg, senior vice president for product management, said the winners of 2010 were Google’s display advertising business, which now has two million publishers; YouTube, where revenue doubled; businesses that have begun using Google products; and Android, with 300,000 phones activated a day.

Mr. Rosenberg also said there were 10 times as many searches year over year done from Android devices, which translates into advertising revenue for Google.

Google has been selling display ads, those with images and sometimes video, on YouTube and other Web sites. The company does not break out display ad revenue, but eMarketer, a research firm, estimated that Google accounted for 13.4 percent of display ad revenue in the United States last year, up from 4.7 percent in 2009. Meanwhile, Yahoo, the market leader, lost share, eMarketer said.

Google’s mobile business is particularly promising, analysts said, as people increasingly neglect the laptops on their desks for the phones in their pockets.

For Google to maintain its dominance, it has needed to follow them, which it has been doing with apps to search the Web on the go, look up directions, watch videos, find local businesses and even make phone calls.

This year, Mr. Rosenberg said, the company will focus on products that allow people to access local information on mobile phones, as well as commerce, adding that the two are tied together.

“They key to unlocking mobile commerce was to make it easier for people to both search and then consummate the transaction on the mobile device,” he said.

“As smartphones become ubiquitous and local businesses put their inventory online, I think this will be the year that smartphones” change the way commerce is done, he added.

Still, other Google businesses have yet to find success. Google TV has faced delays and poor reviews; the Justice Department is still deciding whether to permit Google to acquire the flight software company ITA; and analysts are watching closely to see if the iPhone’s debut on Verizon affects sales of Android phones.

Also, analysts expressed concern about Google’s spending; the company is continually hiring and paid more than $2 billion for a building in New York to house growing operations.

At Google, a Boost From E-Commerce, NYT, 20.1.2011, http://www.nytimes.com/2011/01/21/technology/21google.html

In Wreckage of Lost Jobs,

Lost Power

January 19, 2011
The New York Times
By DAVID LEONHARDT

Alone among the world’s economic powers, the United States is suffering through a deep jobs slump that can’t be explained by the rest of the economy’s performance.

The gross domestic product here — the total value of all goods and services — has recovered from the recession better than in Britain, Germany, Japan or Russia. Yet a greatly shrunken group of American workers, working harder and more efficiently, is producing these goods and services.

The unemployment rate is higher in this country than in Britain or Russia and much higher than in Germany or Japan, according to a study of worldwide job markets that Gallup will release on Wednesday. The American jobless rate is also higher than China’s, Gallup found. The European countries with worse unemployment than the United States tend to be those still mired in crisis, like Greece, Ireland and Spain.

Economists are now engaged in a spirited debate, much of it conducted on popular blogs like Marginal Revolution, about the causes of the American jobs slump. Lawrence Katz, a Harvard labor economist, calls the full picture “genuinely puzzling.”

That the financial crisis originated here, and was so severe here, surely plays some role. The United States had a bigger housing bubble than most other countries, leaving a large group of idle construction workers who can’t easily switch industries. Many businesses, meanwhile, are reluctant to commit to hiring workers out of a fear that heavily indebted households won’t spend much in coming years.

But beyond these immediate causes, the basic structure of the American economy also seems to be an important factor. This jobless recovery, after all, is the third straight recovery since 1991 to begin with months and months of little job growth.

Why? One obvious possibility is the balance of power between employers and employees.

Relative to the situation in most other countries — or in this country for most of the last century — American employers operate with few restraints. Unions have withered, at least in the private sector, and courts have grown friendlier to business. Many companies can now come much closer to setting the terms of their relationship with employees, letting them go when they become a drag on profits and relying on remaining workers or temporary ones when business picks up.

Just consider the main measure of corporate health: profits. In Canada, Japan and most of Europe, corporate profits have still not recovered to precrisis levels. In the United States, profits have more than recovered, rising 12 percent since late 2007.

For corporate America, the Great Recession is over. For the American work force, it’s not.

Unfortunately, fixing the job market will take years. Even if job growth accelerated to the rapid pace of the late 1990s and remained there, the unemployment rate would not fall below 6 percent (which some economists consider full employment) until 2016. We could now be in only the first half of the longest stretch of high unemployment since World War II.

The best way to put people back to work is to lift economic growth. For Washington, lifting growth will first mean avoiding the mistakes of 2010, when the Fed, the White House and some members of Congress prematurely assumed that a solid recovery was under way. The risk this year is that they will start reducing the budget deficit immediately by cutting federal programs, rather than having the cuts take effect in future years.

Policy makers could also help the unemployed by spreading economic pain more broadly among the population. I realize this idea may not sound so good at first. Who wants pain to spread? But the fact is that this downturn has concentrated its effects on a relatively narrow group of Americans.

In Germany and Canada, some companies and workers have averted layoffs by agreeing to cut everyone’s hours and, thus, pay. In this country, average wages for the employed have risen faster than inflation since 2007, which is highly unusual for a downturn. Yet unemployment remains terribly high, and almost half of the unemployed have been out of work for at least six months. These are the people bearing the brunt of the downturn.

Germany’s job-sharing program — known as “Kurzarbeit,” or short work — has won praise from both conservative and liberal economists. Senator Jack Reed, Democrat of Rhode Island, has offered a bill that would encourage similar programs. So far, though, the White House has not pursued it aggressively. Perhaps Gene Sperling, the new director of the National Economic Council, can put it back on the agenda.

Restoring some balance to the relationship between employers and employees will be more difficult. One problem is that too many labor unions, like the auto industry’s, have been poorly run, hurting companies and, ultimately, workers. Of course, many other companies — AT&T, General Electric, Southwest Airlines — have thrived with unionized workers, and study after study has shown that unions usually do benefit workers. As one bumper sticker says, “Unions: The folks who brought you the weekend.”

Today, unions are clearly playing on an uneven field. Companies pay minimal penalties for illegally trying to bar unions and have become expert at doing so, legally and otherwise. For all their shortcomings, unions remain many workers’ best hope for some bargaining power.

The list of promising solutions to the jobs slump can go on and on. Reforming the disability insurance system so it does not encourage long-term joblessness would help. “Once people enter the system,” as Mr. Katz of Harvard says, “they basically never come back.” Improving high schools and colleges — reclaiming the global lead in education — would help even more. Remember, the jobless rate for college graduates is only 4.8 percent, and some highly skilled jobs continue to go unfilled.

The jobs slump has become too severe to disappear anytime soon. It will be part of the American economy and American politics for years to come. But there is no reason to treat it as a problem that’s immune from solutions. For starters, it would be worth figuring out what other countries are doing right.

In Wreckage of Lost Jobs, Lost Power, NYT, 19.1.2011, http://www.nytimes.com/2011/01/19/business/economy/19leonhardt.html

Apple’s Strong Holiday Season

Lifts Revenue 70%

January 18, 2011
The New York Times
By MIGUEL HELFT

SAN FRANCISCO — The holidays were really good to Apple.

Consumers around the world flocked into the company’s stores and other outlets to snap up iPhones and iPads at a dizzying rate. They also bought millions of laptops, especially the new ultralight MacBook Air.

Even businesses, which have historically shunned Apple’s costly gadgets, embraced its products in larger numbers.

As a result, Apple on Tuesday reported record sales and profits for the last three months of 2010 that far exceeded analysts’ bullish forecasts.

“Apple is already the envy of a lot of companies,” said Shaw Wu, an analyst with Kaufman Brothers. “Yet after they have reached such a high pinnacle, they seem to be able to distance themselves even further from the competition.”

Apple’s strong results are likely to go a long way toward easing investors’ worries — at least for now — over the health of Steven P. Jobs, the company’s co-founder and chief executive. Mr. Jobs, a survivor of pancreatic cancer who received a liver transplant in early 2009, said Monday that he would take an indefinite medical leave.

“We had a phenomenal holiday quarter with record Mac, iPhone and iPad sales,” Mr. Jobs said in a news release. “We are firing on all cylinders and we’ve got some exciting things in the pipeline for this year.”

In a conference call with top Apple executives, including Timothy D. Cook, the chief operating officer, who will be running the company during Mr. Jobs’s absence, analysts did not ask a single question about Mr. Jobs’s health.

Two analysts said they believed that Apple would not have answered them and that its executives would have been “irritated” by the questions. Apple said its net income in the last three months of 2010 rose 78 percent from a year earlier to a record $6 billion, or $6.43 a share, from $3.4 billion, or $3.67 a share, a year earlier. Revenue soared more than 70 percent to $26.74 billion, from $ 15.68 billion a year earlier.

On average, Wall Street analysts forecast that Apple would report revenue of $24.5 billion in the last three months of the year and have net income of about $5.38 a share.

While much of the focus on Apple recently has been on the company’s mobile products, sales of Mac computers have once again far outpaced the overall market for PCs, growing 22 percent, to 4.1 million units. Sales of laptops were particularly strong, growing 37 percent from a year earlier.

Sales of iPhones continued to defy expectations, as Apple sold 16.24 million units, 86 percent more than a year earlier. The company also sold 7.3 million iPads, 75 percent more than in the previous quarter. The iPad was not available for the 2009 holiday season.

Analysts said the results should give investors reason to think that the company could do well with or without Mr. Jobs.

“He is an iconic leader, but this is not a one-man operation and hasn’t been one for a long time,” said Barry Jaruzelski, a partner at Booz & Company and the head of its innovation practice. “There are steady hands at the tiller.”

Even before Apple reported its quarterly results, investors appeared to take in stride the news of Mr. Jobs’s leave. Shares dropped more than 6 percent after the opening bell, but recovered to close at $340.65, down $7.83, or 2.2 percent, from the Friday close. The decline was far smaller than the 10 percent drop that analysts had predicted.

Analysts said there was no accident in the timing of the release of news about Mr. Jobs on a federal holiday, when the markets were closed, and a day before it would report strong results.

“The precision of the spoon feeding of the news to everyone was classic Apple,” said Gene Munster, an analyst with Piper Jaffray.

During the conference call, Mr. Cook expressed confidence that Apple still had plenty of room to continue its torrid growth. He said that the company still had a relatively small share of the PC market and that the smartphone and tablet businesses were expanding quickly.

“We feel very, very confident about the future of the company,” Mr. Cook said.

Apple said that the only factor preventing it from selling even more iPhones was its inability to make them more quickly. While the company has solved backlog issues with the iPad and reduced the backlog of iPhone orders, demand is still exceeding supply, a factor that may accelerate when Verizon Wireless begins carrying the iPhone next month.

Mr. Cook said he felt good about the progress Apple had made in meeting iPhone demand and added: “It is not enough. We are working around the clock to build more.”


Christine Hauser contributed reporting from New York.

    Apple’s Strong Holiday Season Lifts Revenue 70%, NYT, 18.1.2011, http://www.nytimes.com/2011/01/19/technology/19apple.html

Obama Orders Review

of Business Regulations

January 18, 2011
The New York Times
By JACKIE CALMES

WASHINGTON — President Obama on Tuesday ordered “a government-wide review” of federal regulations to root out those “that stifle job creation and make our economy less competitive,” but exempted many agencies that most vex corporate America.

The executive order that Mr. Obama signed at the White House would not apply to federal agencies created to be largely independent of the White House and Congress, which includes most of those currently enforcing and writing rules for banks and other financial institutions mandated by the regulatory overhaul law that Mr. Obama signed last year to avoid future crises.

While it remains unclear what substantive impact Mr. Obama’s action will have, the political underpinning was apparent.

The president has made no secret of his desire for détente with the business community that was so alienated by the agenda of his first two years, in particular the laws strengthening financial regulatory system and overhauling health care and insurance. More broadly he has sought to tack to the political center after Democrats’ defeats in the midterm elections confirmed his party’s loss of support from independent voters.

Business and conservative groups welcomed the initiative, while liberal and consumer-oriented groups were more wary, even critical. But each side was mostly skeptical, as were nonpartisan policy analysts, about what might come of the regulatory review, since Mr. Obama is following in the well-worn tracks of presidents going back four decades, at least to Gerald R. Ford, in seeking to respond to businesses’ complaints about burdensome government rules.

“It’s more of a talking point than a policy,” said Robert E. Litan, the vice president for research and policy at the Kauffman Foundation, who oversees academic research relating to entrepreneurship.

“Even if you find a rule you don’t like, and they probably will, then they’re going to have to go through rule-making and then it’s going to take a year or two or longer,” Mr. Litan added. “And then somebody will sue them; if it’s not another industry it will be a consumer interest group or a Republican interest group.”

He recalled that one of Ronald Reagan’s first acts as president was to win repeal of a requirement for auto airbags that car-makers had fought. The insurance industry sued, arguing that the bags would save lives and medical costs, and ultimately won in the Supreme Court.

While administration officials denied that Mr. Obama was seeking to appeal to business and described the order as long in the making, the president announced it himself via an op-ed article in Tuesday’s Wall Street Journal.

Mr. Obama cited the automobile fuel economy deal negotiated with automakers, state and federal officials, auto workers and environmental advocates as an example of how difficult regulatory questions can be resolved through negotiation rather than confrontation. But that plan, which set a schedule for carmakers to increase auto and light truck fuel economy over the next five years, was possible in large part because two major American car companies — General Motors and Chrysler — were in bankruptcy and receiving federal bailout funds. They were not in a position to challenge the nationwide mileage regulations.

Automakers, who returned to profitability last year, are contesting proposed new federal fuel economy and emissions rules that would take effect beginning in 2017.

The Obama administration is also moving ahead with new regulations on greenhouse gas emissions from large stationary sources like power plants and refineries, but has said it would do so in a cost-effective and common-sense way. The first stage of the program took effect earlier this month, but the Environmental Protection Agency has said it would not impose new performance standards on such facilities until next year and that smaller plants would be exempt for several years.

The environmental agency has also delayed new rules governing smog and toxic emissions from industrial boilers, in part because of stiff opposition from industry and from newly assertive Republicans in Congress.

Business groups have welcomed the recent moves, but are wary about new clean air regulations on mercury, coal ash and other pollutants that are due later this year. Republicans in Congress have already announced they intend to mount a robust challenge to the administration’s announced plans to address climate change using executive branch rule-making authority rather than legislation.

Obama Orders Review of Business Regulations, NYT, 18.1.2011, http://www.nytimes.com/2011/01/19/business/19regulatoy.html

U.S. Shifts Focus

to Press China for Market Access

January 18, 2011
The New York Times
By HELENE COOPER
and MARK LANDLER

WASHINGTON — A year ago, the fight over how China’s cheap currency was hurting American companies in marketplaces at home and abroad was shaping up to be the epic battle between the world’s biggest power and its biggest economic rival.

But when President Hu Jintao walks into the Eisenhower Executive Office Building with President Obama on Wednesday to face a group of 18 American and Chinese business leaders, much of the clash will be about a new economic battlefield — inside China itself.

A series of trade restrictions imposed by the Chinese government within China, including administrative controls, requirements to transfer sophisticated technology, state subsidies to favored domestic companies and so-called indigenous laws meant to favor homegrown businesses, have angered many American manufacturing and high-tech companies, which are rapidly finding themselves cut out of the world’s fastest growing market.

The result is that the two countries have to resolve a wider range of economic tensions, including what American multinational corporations see as a deteriorating environment for investing and making money in what has become the world’s second largest economy.

So it is no longer just a fight over cheap Chinese textile, electronic and toy imports. China won that battle years ago. Now the question — reminiscent of trade tensions with Japan in the 1980s — is whether General Electric and Microsoft and other American companies that dearly want to expand into China’s rapidly expanding markets will find themselves beaten at their own game by Chinese companies, backed by the Chinese government, “competing at every point in the technology spectrum,” said Eswar Shanker Prasad, a former economist with the International Monetary Fund who now teaches trade policy at Cornell University.

Myron Brilliant, a senior vice president at the U.S. Chamber of Commerce, said, “It’s no longer just a question of Nucor complaining about dumping,” referring to the American steel manufacturing company that has accused China of selling steel fasteners and bolts at below-market prices abroad. “Those concerns may not be going away, but the noise out there now has additional voices. The voices are not just low-cost products coming here; the competition is about China’s marketplace.”

For Mr. Obama, the shift gives him stronger backing from American businesses for a tougher approach to China when he sits down with Mr. Hu. The Chinese president arrived in Washington on Tuesday afternoon for two full days of high-level meetings that began with a private dinner at the White House on Tuesday evening.

“The business community has historically been the bastion of support for the U.S.-China relationship,” said Michael Froman, the deputy national security adviser for international economic affairs, in an interview. “Now that support is more qualified.” Mr. Froman said that Mr. Obama and American officials would be “underscoring the importance of addressing these issues if we’re going to have a level playing field.”

American companies have always had a love-hate relationship with China — with the manufacturing companies in the South and steel companies in the Midwest urging the government to take tough action against China, and advanced manufacturers and high-tech companies that want access to the Chinese marketplace pressing for a more conciliatory tone.

Now, both sides seem to want the administration to get tough. Last year, Jeffrey R. Immelt of G.E. complained to a meeting of business leaders in Rome that it was getting harder for foreign companies to do business in China, and he expressed a growing irritation that China was protecting its own national companies at the detriment of American companies.

Google last March moved its Chinese service out of mainland China to avoid censorship rules. The American Chamber of Commerce in Beijing has also complained that is members are facing an increasingly difficult regulatory environment.

Treasury Secretary Timothy F. Geithner signaled the Obama administration’s stance in a speech last week, when he said that the United States would grant China more access to high-tech American products and expand trade and investment opportunities within the United States only if China opened its own domestic market to American products. That push for market access, administration officials said, will be at the top of Mr. Obama’s agenda with Mr. Hu, both during their one-on-one meetings and when they meet with the business leaders.

American multinational corporations, experts said, are hurt by Chinese regulations that openly favor Chinese companies over foreign ones for government contracts. These rules, which are intended to stimulate technological innovation in China, have the effect of cutting American and other non-Chinese companies out of many of the big contracts there.

“U.S. companies have issues with China in many different business sectors,” said John Frisbie, president of the U.S.-China Business Council in Washington. “But if I were to point to one single issue over the last year, it has been China’s innovation policies and how they link to government procurement.”

Under pressure from the United States and other countries, the Chinese have paused in their rollout of the rules. But Beijing has not scrapped them, and the administration will raise the issue again this week with Mr. Hu.

Mr. Frisbie also pointed to intellectual property rights as another “existential issue” for software developers and movie producers. There is some evidence of progress on this issue: at a meeting in Beijing last month, the Chinese government pledged to use only properly registered software in government offices.

As important as these issues are, some economists argue that they pale when compared with the distortions caused by an undervalued currency. While nationalistic rules that favor Chinese companies affect technology and entertainment giants, China’s cheap currency undercuts tens of thousands of small-scale American manufacturers — companies that still make their products at home.

“The small mom-and-pop companies, which are getting crushed by the renminbi, you never hear from them,” said Nicholas R. Lardy, an expert on the Chinese economy at the Peterson Institute for International Economics. “They don’t really have a voice. They just shrink and go out of business.”

While the renminbi, China’s currency, has risen 3.6 percent against the dollar since China loosened its link to the dollar last June, Mr. Lardy estimates that it is still undervalued by 15 percent to 17 percent on a trade-weighted basis.

Mr. Geithner has argued that it is in China’s self-interest to allow its currency to rise, to curb building inflationary pressures in the Chinese economy. The Chinese government has also declared that it wants to reduce the share of exports in overall economic growth.

But Mr. Lardy said he was skeptical that the Chinese would take the advice, given that they had not accelerated the rise in the currency last fall, when inflation began heating up. And in the wake of a financial crisis that originated in the United States, he said, China would be even less inclined to listen to economic prescriptions from Washington.

“They learned that the advice they’ve been getting from previous Treasury secretaries wasn’t worth the paper it was printed on,” Mr. Lardy said.

U.S. Shifts Focus to Press China for Market Access, NYT, 18.1.2011, http://www.nytimes.com/2011/01/19/world/asia/19prexy.html

Apple Says

Steve Jobs Will Take

a New Medical Leave

January 17, 2011
The New York Times
By MIGUEL HELFT

Steven P. Jobs, the co-founder and chief executive of Apple, is taking a medical leave of absence, a year and a half after his return from a liver transplant, the company said on Monday.

Mr. Jobs announced his leave in a letter to employees that said he was stepping aside “so I can focus on my health” but would continue to be involved in major strategic decisions at the company.

“I love Apple so much and hope to be back as soon as I can,” Mr. Jobs said.

As during his prior medical leave in 2009, Timothy D. Cook, the company’s chief operating officer, will run day-to-day operations, Mr. Jobs said.

“I have great confidence that Tim and the rest of the executive management team will do a terrific job executing the exciting plans we have in place for 2011,” Mr. Jobs said in the message.

Mr. Jobs recovered from pancreatic cancer after surgery in 2004, but has continued to be beset by health issues. In January 2009, Mr. Jobs went on a medical leave. During the leave Mr. Jobs secretly flew to Tennessee for a liver transplant.

In June 2009, Apple said Mr. Jobs was back at work, and he reappeared in public for the first time in September of that year. While he was energetic and exhibited his unique brand of salesmanship as he unveiled new products during 90-minute event, he continued to look gaunt. Since then, Mr. Jobs has headlined a string of product introductions, including the iPhone 4 and the iPad and a new line of MacBook Air laptops, where he was equally energetic and focused, but still looked frail.

At one such event in July 2010, a reporter asked Mr. Jobs about his health, and he replied, “I’m feeling great.”

In recent months, he has looked increasingly frail, according to people who have seen him.

In his message to the staff on Monday, Mr. Jobs said, “My family and I would deeply appreciate respect for our privacy.”

During his prior leave of absence, Apple kept details of Mr. Jobs’s health private, prompting criticism among some shareholders who contended that the company had an obligation to be more forthcoming with information.

Mr. Jobs suffers from immune system issues common with people who have received liver transplants and, as a result, his health suffers from frequent “ups and downs,” according to a person with knowledge of the situation, who agreed to speak on condition of anonymity because he was not authorized to discuss it.

In recent weeks, Mr. Jobs began a down cycle and slowed his activities at Apple, the person said. Mr. Jobs has been coming to the office about two days a week, and appeared increasingly emaciated, the person said. He frequently lunched in his office, rather than in the company cafeteria, the person said.

An Apple spokeswoman, Katie Cotton, said Apple would have no further comment beyond Mr. Jobs’s statement.

Apple’s stock immediately dipped on foreign exchanges Monday, falling 6 percent in Germany. Financial markets in the United States are closed on Monday in observance of Martin Luther King’s Birthday.

Analysts said that many investors might wonder whether Mr. Jobs will come back to Apple at all, and trade accordingly.

“It is natural that investors will expect the worse,” said Charles Wolf, an analyst with Needham & Company, noting that Apple has a history of “minimal disclosure” and “obfuscating” details about Mr. Jobs’s health.

Mr. Wolf said that regardless of whether Mr. Jobs returns to Apple, the company would probably continue doing well for the foreseeable future, though its long-term prospects are a matter of speculation. “Right now Apple has a management team that is one of the greatest in American business,” Mr. Wolf said. “Whatever trajectory the company is on will continue for two to five years, regardless of whether Steve comes back.”

    Apple Says Steve Jobs Will Take a New Medical Leave, NYT? 17.1.2011, http://www.nytimes.com/2011/01/18/technology/18apple.html

Facing Scrutiny,

Banks Slow Pace of Foreclosures

January 8, 2011
The New York Times
By DAVID STREITFELD

PHOENIX — An array of federal and state investigations into the way banks foreclose on delinquent homeowners has contributed to a sharp slowdown in foreclosures across the country, especially in hard-hit cities like this one.

Over the last several months, some banks have been reluctant to seize homes from distressed borrowers, economists and government officials say, as they face scrutiny from regulators and the prospect of sanctions when investigations wrap up in the coming weeks and months.

The Obama administration, in its most recent housing report, said foreclosure activity fell 21 percent in November from October, the biggest monthly decline in five years. Here in Phoenix, foreclosures fell by more than a third in the same period, reflected in the severe drop in foreclosed homes being auctioned on the courthouse plaza.

“There’s no product, just nothing to buy,” complained Sean Waak, an agent for investors, during a recent auction.

The pace of foreclosures could be curtailed further by courts. In a closely watched case, the highest court in Massachusetts invalidated two foreclosures in that state on Friday. The court ruled that two banks, U.S. Bancorp and Wells Fargo, failed to prove they owned the mortgages when they foreclosed on the homes.

If the slowdown continued through this month and into the spring, it could be a boost for the economy. Reducing foreclosures in a meaningful way would act to stabilize the housing market, real estate experts say, letting the administration patch up one of the economy’s most persistently troubled sectors. Fewer foreclosures means that buyers pay more for the ones that do come to market, which strengthens overall home prices and builds consumer confidence in housing.

“Anything that buys time, that reduces the supply of houses coming onto the market, is helpful,” said Karl Guntermann, a professor of real estate finance at Arizona State University.

It is not that borrowers have stopped defaulting on their mortgages. They are missing payments as frequently as ever, data shows. But the lenders are not beginning formal foreclosure proceedings or, when they are, do not complete them with an auction sale. And in the most favorable outcome for distressed borrowers, some lenders are modifying loans so foreclosure becomes unnecessary.

The drop in foreclosures began in late September when some lenders were revealed to have been using so-called robo-signers to process thousands of foreclosures without verifying the accuracy of the data. As the investigations into the problems proceeded, the uncertainty caused many lenders to become more cautious.

Their foreclosure procedures, the banks have repeatedly said, are sound. But preliminary results of several of the investigations have indicated substantial problems. Coordinating many of the inquiries is the Financial Fraud Enforcement Task Force, established by President Obama.

“The administration is committed to taking appropriate action on these issues where wrongdoing has occurred,” said Melanie Roussell, an administration spokeswoman.

The diminished supply of foreclosed homes has already had an effect on prices at the auctions on the courthouse plaza here, bidders said.

Houses change hands on the plaza with a minimum of ceremony. Three sets of trustees hired by the banks sit a few feet apart, their backs to a statue of a naked family looking for all the world as if its members had just been cast out of their home. The trustees call off properties in a monotone to bidders clustered around them. Winners must immediately hand over a $10,000 deposit in the form of a cashier’s check.

On a recent afternoon, one bidder, Pam Mullavey of Infoclosure, found herself in a bidding war with Chris Romuzga of Posted Properties for a 2001 house that had fetched $644,000 at the very peak of the boom.

This time around, the bank set the floor at $271,000. Ms. Mullavey and Mr. Romuzga rapidly pushed up the price in varying increments of $100 and $500. Mr. Romuzga’s client had planned to pull out at $307,000 but asked him to keep bidding as Ms. Mullavey sailed on. Her winning bid was $310,100, well above what a similar house might have fetched just a few months ago.

“Sometimes I wonder why people are bidding so much,” Ms. Mullavey said.

For Mr. Romuzga, it was the fourth time that afternoon he had been outbid. Only once had he secured a property.

The investors’ frustration could be a good thing for Phoenix homeowners, who have seen values fall 54.5 percent since 2006. In the last few months, home prices have started to drop again. A decline in foreclosures, economists say, could break the fall.

Cameron Findlay, chief economist with the mortgage company LendingTree, said that the shifting behavior of lenders had helped change perceptions about the foreclosed.

“Initially, society’s view was to run them out of the house,” he said.

That resulted in vacant and dilapidated homes, which blighted neighborhoods and drove potential buyers away.

“People should be hopeful the modification programs work — for their own benefit,” said Mr. Findlay.

More than four million households are in serious default and vulnerable to losing their homes. Lenders maintain that cases of borrowers improperly foreclosed are extremely rare.

But the Federal Reserve, which is investigating lenders’ policies in conjunction with other banking regulators, has found significant weaknesses in risk management, quality control, auditing and compliance.

Another investigation is being conducted by the Federal Housing Administration, which is examining whether loan servicers are exhausting all legally required options before foreclosing on government-insured mortgages. An agency spokeswoman said that initial reviews indicated “significant differences” in efforts by servicers to keep borrowers in their homes.

A third investigation is being conducted by the Executive Office for U.S. Trustees, part of the Justice Department. It is looking into documentation errors by lenders and their law firms in homeowners’ bankruptcy filings.

At the state level, there is a joint effort by all 50 state attorneys general, with the specific goal of changing the face of foreclosure in America by making it more difficult for lenders to act against homeowners. The effort, led by Iowa’s attorney general, Tom Miller, is in flux as several prominent attorneys general left office and their replacements decide whether to make foreclosure reform a priority.

There have been many attempts during the housing crash to stem the flow of foreclosures, only fitfully successful. Some experts think neither federal reforms nor any agreements brokered by the attorneys general will make much of a difference.

“Whether it is really true that there are millions of foreclosures that could be avoided if servicers were just more willing to do more modifications that make sense — meaning overall losses would be less than would otherwise be the case — is far from clear, and in fact highly unlikely,” said Tom Lawler, an economist.

Loan servicers are not set up to identify the true financial picture of each borrower having trouble, Mr. Lawler said, and cannot easily figure out who is likely to stop paying without a modification and who will keep sending a check every month.

The courthouse plaza bidders in Phoenix do not believe their livelihood is threatened. By the end of January, several bidders predicted, lenders would gear up and foreclosures would once again be abundant.

In the meantime, Tom Peltier watched unhappily as a house started at $68,000 and quickly spiraled up. He finally locked it in at $98,500. “That was about 20 grand more than I wanted to pay,” said Mr. Peltier, who planned to rent it to his sister as soon as he moved out the former owner.

Facing Scrutiny, Banks Slow Pace of Foreclosures, NYT, 8.1.2011, http://www.nytimes.com/2011/01/09/business/09foreclosure.html

The Downsizing in Detroit

January 6, 2011
The New York Times
By BILL VLASIC

WAYNE, Mich. — Ten years ago, the Ford Motor plant here churned out giant Expedition and Navigator sport utility vehicles that got 12 miles to the gallon — and it was one of the most profitable auto factories in the world.

Today, after a $550 million renovation, the 140-acre plant is a symbol of a very different Detroit: a greener, leaner industry focused on smaller, energy-efficient cars. The factory will now build Ford’s newest compact car, the Focus, in four different and progressively more fuel-efficient versions, including an all-electric one that will be unveiled on Friday and go on sale this year.

Although the transformation has been a long time coming, Ford and the rest of the domestic auto industry appear to be finally giving up their addiction to gas-guzzling trucks and sport utility vehicles. Prodded first by rising federal fuel economy standards, then shocked in 2008 by $145-a-barrel oil and a global credit crisis that forced General Motors and Chrysler to seek federal bailouts, Detroit is making a fundamental shift toward lighter, more fuel-conscious cars — and turning a profit doing so.

Japanese automakers still hold a lead in overall fuel economy, and Toyota, despite its recall troubles, remains the top seller of hybrids with its Prius.

But Detroit has closed the gap significantly. Last year, passenger cars made by Ford and G.M. averaged more than 30 miles per gallon, according to federal rankings, compared with 27 m.p.g. a decade ago.

G.M. began delivering a plug-in electric hybrid, the Chevrolet Volt, in December, and the company will show off a new compact Buick sedan next week at the Detroit auto show. It is expected to get 31 m.p.g. in highway driving, a far cry from the lumbering Buick Roadmaster of the past.

Of course, many American consumers have yet to give up their affection for larger vehicles, and the domestic automakers still rely on light trucks and S.U.V.’s for a large share of their profits. But the huge, 8,000-pound land yachts of yore have given way to slimmer so-called crossover vehicles that have less powerful engines but can still hold seven people.

With oil prices once again trading around $90 a barrel and gasoline topping $3 a gallon, the American auto companies are pushing hard to accelerate their green transition. G.M.’s new chief executive, Daniel F. Akerson, has told his product executives to plan for oil at $120 a barrel and gasoline at more than $4 a gallon, according to company insiders.

The Obama administration is also nudging the industry along with money for cutting-edge auto technology. The Energy Department has made nearly 50 grants worth $2.4 billion for research and manufacturing. G.M. alone received $241 million, most of it related to the Volt.

Ford, which avoided the disruptions of bankruptcy that befell G.M. and Chrysler in 2009, is further ahead than its hometown rivals in overhauling its fleet, and it is eager to get that message out.

On Friday, it will unveil the all-electric version of its Ford Focus — its answer to the Nissan Leaf and Chevrolet Volt — at an event in New York with its chairman, William Clay Ford Jr., and another in Las Vegas with its chief executive, Alan R. Mulally.

“All of us know energy is going to be more expensive going forward,” Mr. Mulally said in an interview. “Consumers are coming together around the world on quality as a reason to purchase and fuel efficiency as a reason to purchase.”

By 2012, the Focus compact will be available to buyers in four versions: gasoline-powered, conventional hybrid, plug-in hybrid and fully electric. All will be built in the Wayne plant, which can easily change the mix of vehicles produced.

While the American automakers still make more truck-based models than their foreign rivals, they have radically scaled back their production. Since 2004, G.M., Ford and Chrysler have closed 17 assembly plants in the United States and Canada that built pickup trucks, S.U.V.’s and vans. It was an unprecedented overhaul that removed about 3.5 million low-mileage vehicles from their annual manufacturing capacity.

The government-sponsored bankruptcies of G.M. and Chrysler, and significant reorganization at Ford on its own, have restored fiscal health to the industry, which had been reeling from overcapacity, huge health care costs and a collapse in consumer credit.

Now Ford can make money building the Focus in its former S.U.V. plant. Health care costs for retirees, which used to add about $1,500 to every vehicle made in a union plant, have been offloaded to a trust administered by the United Automobile Workers. The union has also trimmed staff levels and agreed to lower starting wage scales to bring down manufacturing costs.

“We’ve always had a great market for small vehicles in the United States,” Mr. Mulally said. “We didn’t have small vehicles because we couldn’t make them here profitably.”

Both G.M. and Ford are expected to report impressive profits for 2010, despite annual United States sales well below the 17 million that the industry sold a few years ago. Chrysler, which is still losing money, is lagging in the switchover from trucks to smaller cars as it awaits new products from its Italian partner, Fiat.

Skeptics concede that the domestic companies have narrowed the gap in fuel economy with Japanese automakers, but say that the American automakers need to extend their advanced gas-saving technology to all of their models.

“It’s clear that the Detroit manufacturers are aware of the right decisions and are selectively applying them,” said Jim Kliesch, a senior engineer in the clean-vehicle program at the Union of Concerned Scientists. “What we want to see them do is apply them across the board.”

Ford still sold nearly twice as many light trucks as cars in 2010 in the United States. But the vehicle size and mileage of its overall fleet of products have changed substantially.

Its best-selling S.U.V. last year was the smallest in the lineup, the compact Ford Escape, which gets 23 miles to the gallon and is available as a gas-electric hybrid that gets 32 miles a gallon. A decade ago, the iconic Ford Explorer was the industry’s top-selling S.U.V. at 15 m.p.g. (Ford just revamped the Explorer and improved its gas mileage by 25 percent.)

The company is also offering its first full-size pickup with a smaller, turbocharged engine instead of a traditional V-8. And once its big sedans like the Crown Victoria are discontinued, Ford’s largest passenger car will be the medium-size Taurus.

Analysts say that the auto industry’s big investments in electric and plug-in models will not pay off for some time in the marketplace but represent an attempt to gain an important foothold with environmentally conscious consumers.

“There are significant questions about the economic viability of battery-electric vehicles, yet all of the major auto companies are engaged in it,” said Jay Baron, the chairman of the Center for Automotive Research in Ann Arbor, Mich.

Last year, hybrid sales fell 8 percent, and accounted for just 2 percent of the overall domestic sales, of 11.6 million vehicles.

Far more important to reducing the nation’s fuel consumption are the industry’s efforts to make gasoline-powered cars and trucks more efficient.

“The domestic automakers have done a terrific job of catching up to some of the technology that’s been available, such as direct fuel injection,” Mr. Baron said. “Those technologies can get 30 percent improvements in fuel economy, but there is a limit.”

Even if consumers are not necessarily ready to buy hybrid and electric cars in big numbers, the carmakers say there is no turning back on their efficiency drive. New federal standards will require a fleet average of 36 miles per gallon by 2016. That is a 30 percent improvement from the 27 m.p.g. required for the 2011 model year.

“Are we going to stick with improving fuel economy? You don’t have a choice,” Mr. Akerson of G.M. said. “The government has told us what we have to do, and we will meet those goals.”

Nick Bunkley contributed reporting.

The Downsizing in Detroit, NYT, 6.1.2011, http://www.nytimes.com/2011/01/07/business/07green.html

Donald J. Tyson,

Food Tycoon,

Is Dead at 80

January 6, 2011
The New York Times
By ROBERT D. McFADDEN

Donald J. Tyson, an aggressive and visionary entrepreneur who dropped out of college and built his father’s Arkansas chicken business into the behemoth Tyson Foods, one of the world’s largest producers of poultry, beef and pork, died on Thursday. He was 80 and lived in Fayetteville, Ark. The cause was complications of cancer, Tyson Foods said.

Shrewd, folksy and often likened to fellow Arkansans Sam Walton, the late Wal-Mart tycoon, and former President Bill Clinton, Mr. Tyson was a risk-taking, bare-knuckle businessman who bought out dozens of competitors, skirted the edge of the law and transformed a Depression-era trucking-and-feed venture into a global enterprise with an army of employees and millions of customers in 57 countries.

Tyson Foods became a household name as he popularized the Rock Cornish game hen as a high-profit specialty item; helped develop McDonald’s Chicken McNuggets and KFC’s Rotisserie Gold, and stocked America’s grocery stores with fresh and frozen chickens — killed, cleaned and packaged in his archipelago of processing plants.

“It was pretty much Don’s vision that fueled the company,” Mark A. Plummer, an analyst for Stephens Inc., a Little Rock financial services firm, told The New York Times in 1994, the year before Mr. Tyson stepped down after nearly three decades as chairman. “He saw that if you added more convenience by further processing the chicken, consumers would pay for it.”

Mr. Tyson grew up on a farm with squawking chickens and became one of the world’s richest men, a down-home billionaire who dressed in khaki uniforms like his workers, with “Don” and the Tyson logo stitched over the shirt pockets. He looked like a farmer down at the feed co-op: a short, stocky man with a paunch and a round weather-beaten face, a baldish pate and a gray chin-strap beard.

But he cultivated presidents and members of Congress, threw lavish society parties, took glamorous young women to Wall Street meetings, jetted around the world and spent weeks at a time on his yacht fishing off Brazil or Baja California for the spear-nosed, blue-water trophy marlins that decorated his company headquarters and his homes in Arkansas, England and Mexico.

Critics said his tigerish corporate philosophy — “grow or die” — led to many acquisitions, notably the bitterly contested purchase of Holly Farms for $1.5 billion in 1989, which made Tyson Foods the nation’s No. 1 poultry producer, dwarfing ConAgra and Perdue Farms. But it also led to risky deals, questionable business practices and political ties that produced legal entanglements for him and the company.

Mr. Tyson and his son and future successor, John H. Tyson, were accused of helping to arrange illegal gifts to President Clinton’s first-term secretary of agriculture, Mike Espy, including plane trips, lodging and football tickets, when his agency was considering tougher safety and inspection regulations affecting Tyson Foods.

Mr. Espy resigned in 1994, but four years later was acquitted of accepting illegal gifts. In 1997, Tyson Foods pleaded guilty to making $12,000 in such gifts to Mr. Espy and paid $6 million in fines and costs. Don and John Tyson were named unindicted co-conspirators and testified before a grand jury in exchange for immunity from prosecution. (In an unrelated 2004 case, Don Tyson and Tyson Foods agreed to pay $1.7 million to settle a federal complaint that the company did not fully disclose benefits to Mr. Tyson.)

Mr. Tyson’s legal problems tainted but hardly overshadowed a career widely regarded as a stunning American success story. But his legacy of aggressive management continued to trouble the company when he served as the semiretired “senior chairman” after 1995 and even after he retired in 2001.

Environmentalists accused Tyson of fouling waterways. Animal rights groups said it raised chickens in cruel conditions. Regulators said it discriminated against women and blacks and cheated workers out of wages. Tyson Foods denied wrongdoing, but paid fines, back wages and penalties to settle some cases.

In 2001 the company and three managers were charged with conspiring for years to smuggle illegal immigrants from Mexico and South America to work in its plants, but all were acquitted.

Marvin Schwartz, who wrote a history of Tyson Foods, “Tyson: From Farm to Market,” said its culture reflected its leader. “Don is a gambler, and he’s very comfortable taking risks,” he said. “And in a state like Arkansas, where there are very few regulatory controls, corporations have more flexibility. The state motto was ‘The Land of Opportunity,’ and that’s why entrepreneurs like Sam Walton and Don Tyson have made it here.”

Donald John Tyson was born on April 21, 1930, in Olathe, Kan., to John and Helen Knoll Tyson. They settled in Springdale, Ark., and his father began hauling chickens from farms to markets in the Southeast and Midwest. The boy attended public schools and at 14 started working for his father. After graduating from Kemper Military School in Boonville, Mo., he enrolled at the University of Arkansas, but quit in his senior year in 1952 to join the business, which had added a hatchery and feed mill.

In 1952, he married Twilla Jean Womochil. He is survived by his son, John; three daughters, Carla Tyson, Cheryl Tyson and Joslyn J. Caldwell-Tyson; and two grandchildren.

In 1957, the company built its first poultry-processing plant, and in the 1960s began buying farms and competitors. It went public in 1963. Two years later, it introduced Rock Cornish game hens, which became enormously popular and profitable. Mr. Tyson became president in 1966 and chairman in 1967 after his parents were killed in a car-train wreck.

Over the next three decades, Tyson grew exponentially. It bought beef, pork and seafood companies, built 60 processing plants and diversified into 6,000 products. It supplied fast-food chains and secured markets abroad. When Mr. Tyson surrendered day-to-day control in 1995, the company ranked 110th on the Fortune 500 list, with sales of $5.2 billion.

Mr. Tyson supported Jimmy Carter, Bill Clinton and George W. Bush for president, along with many charitable, educational and development programs. He called himself a moderate Democrat, but went fishing with Republicans too, and made his Baja California home available for legislative junkets.

“My theory about politics is that if they will just leave me alone, we’ll do just fine,” he said in 1993. “We pretty much stay home and run chickens.”

Donald J. Tyson, Food Tycoon, Is Dead at 80, NYT, 6.1.2011, http://www.nytimes.com/2011/01/07/business/07tyson.html

A Bonanza in TV Sales Fades Away

January 5, 2011
The New York Times
By SAM GROBART

LAS VEGAS — By now, most Americans have taken the leap and tossed out their old boxy televisions in favor of sleek flat-panel displays.

Now manufacturers want to convince those people that their once-futuristic sets are already obsolete.

After a period of strong growth, sales of televisions are slowing. To counter this, TV makers are trying to persuade consumers to buy new sets by promoting new technologies. At this week’s Consumer Electronics Show, which opens Thursday, every TV maker will be crowing about things like 3-D and Internet connections — features that have not generated much excitement so far.

Unit sales of liquid-crystal and plasma displays were up 2.9 percent in 2010 from the previous year, according to figures from the market researcher DisplaySearch. That is tiny compared with the gains of more than 20 percent in each of the prior three years.

Those heady days of the last decade were the result of an unusual set of circumstances. The rise of flat-panel television technologies like plasma and LCD almost perfectly coincided with a government-mandated switchover to digital broadcasting and the availability of high-definition shows and movies — something these new televisions were all ready to display.

That sparked a mass migration of consumers from using the old cathode-ray tube television sets to the thinner and lighter plasma and liquid-crystal displays.

“Those were the golden years,” Paul Gagnon, director of North American TV research at DisplaySearch, said. “During that period, the whole pie grew. Technology inflated the size of the category.”

But now, most people who want a flat-screen TV already own one. Industry watchers and manufacturers estimate that nearly two-thirds of households in the United States have a flat-screen set.

“The laggards are stubborn,” Mr. Gagnon said. “They will not move as quickly as the rest of the market has.”

The industry’s response has been to promote 3-D and Internet capabilities. But these were also the buzzwords at last year’s show, indicating that after a period of consistent innovation and improvement — from higher resolutions to thinner displays — the TV market is maturing and stabilizing.

“In the next decade, the rate of change may not be the same,” said James Sanduski, Panasonic’s senior vice president for sales. “That said, it will still be significant.”

So far, 3-D has not prompted a rush to upgrade. John Revie, senior vice president for home entertainment at Samsung, said 3-D had been saddled with a perception that it stumbled out of the gate, even though its introduction compared favorably with other technological introductions.

“More than one million 3-D TVs were sold in 2010,” he said. “But LED, HD and Blu-ray each sold less than a million in their first year.”

That said, Mr. Revie acknowledged the perceived shortfall. “Frankly, Samsung was hoping to drive a bigger market.”

Some feel that 3-D’s appeal will remain limited. Riddhi Patel, director for television systems and retail services at iSuppli, a market researcher, said the sales pitch for 3-D was a complicated one.

“Consumers are aware of the hidden costs,” Ms. Patel said. “It’s not just the display, but now you need a 3-D Blu-ray player and 3-D media and additional glasses.”

She also questioned the payoff. “When everyone markets 3-D to you, they talk about ‘Avatar’ and the theatrical experience,” she said. “When you have a 42-inch TV or even a 50-inch TV, it’s not the same experience.”

Internet features are now common in new TV models. But recent missteps by technology companies like Google with its Google TV service, as well as the often confusing mosaic of streaming and download providers, has left the market looking a little muddled.

“Every manufacturer has their own way” of dealing with Internet video, Mr. Sanduski said. “There’s not one standard.”

One way manufacturers are trying to make these features friendlier is by using Apple’s iPhone model, allowing outside companies like Netflix to develop applications that work on their displays. On Wednesday, Panasonic and LG announced new Internet TV platforms that will open up the interfaces of their sets to outside developers.

One big issue for TV makers is price. From 2007 to 2010, the average price of an LCD TV dropped 36.3 percent, according to DisplaySearch. Plasma TV prices had an even more precipitous decline, dropping 51.6 percent in the same period.

But those price drops have slowed recently, as manufacturers have gotten a handle on what had been an oversupply of product and have started to charge more for the new features.

“It’s kind of like having the auto industry trying to raise the prices of cars by 20 percent by adding all these options to every vehicle,” Mr. Gagnon said.

In another bright spot for TV makers, consumers seem willing to upgrade their sets more frequently than they did in the tube era, when it was not uncommon for them to use the same sets for a decade or more. “People held on to their TV like an appliance,” Mr. Sanduski said.

Analysts and TV makers now assume a five-to-seven-year replacement cycle for televisions. For the manufacturers, that may feel like an awfully long time. But it is only slightly longer than the cycle for PCs, which are replaced every three to four years. “There’s a little bit of fatigue,” Mr. Sanduski said. “Many consumers are saying, ‘I just bought a TV. I’m going to wait.’ ”

A Bonanza in TV Sales Fades Away, NYT, 5.1.2011, http://www.nytimes.com/2011/01/06/technology/06sets.html

Unexpected Rise

in U.S. Factory Orders

in November

January 4, 2011
The New York Times
By REUTERS

WASHINGTON (Reuters) — New orders received by American factories unexpectedly rose in November, and orders excluding transportation recorded their largest gain in eight months, according to a government report on Tuesday that pointed to underlying strength in manufacturing.

The Commerce Department said orders for manufactured goods increased 0.7 percent after dropping by a revised 0.7 percent in October.

Economists polled by Reuters had forecast factory orders slipping 0.1 percent in November from a previously reported 0.9 percent decline in October. Orders have risen in four of the last five months and Tuesday’s data was the latest to offer evidence the recovery was now firmly on a sustainable path.

Manufacturing has been the star performer during the recovery from the worst recession since the 1930s and continues to expand even as businesses are starting to pull back in rebuilding their inventories.

On Monday the Institute for Supply Management said its index of national factory activity climbed to a seven-month high in December, hoisted by sturdy gains in new orders and production.

The Commerce Department report showed orders excluding transportation increased 2.4 percent in November, the highest since March, after a 0.1 percent gain the previous month.

Unfilled orders at American. factories increased 0.6 percent in November after rising 0.7 percent in October. Shipments increased 0.8 percent, rising for a third consecutive month, while inventories gained 0.8 percent after rising 1.1 percent in October.

The department revised durable goods orders for November to show a much smaller 0.3 percent fall rather than the previously reported 1.3 drop. Excluding transportation, orders for durable goods increased a bigger 3.6 percent in November instead of 2.4 percent.

Orders for non-military capital goods excluding aircraft, seen as a measure of business confidence, increased 2.6 percent after 3.2 percent decline in October.

Unexpected Rise in U.S. Factory Orders in November, NYT, 4.1.2010, http://www.nytimes.com/2011/01/05/business/05econ.html

Wall Street Starts New Year

With a Jump

January 3, 2011
The New York Times
By REUTERS

Indexes on Wall Street rose Monday as investors bet a 2010 rally would continue and factory and housing data pointed to a strengthening recovery.

At noon, the Dow Jones industrial average was 126.39 points, or 1.1 percent, higher while the broader Standard & Poor’s 500-stock index gained 17.99 points or 1.4 percent. The technology heavy Nasdaq added 48.29 points or 1.8 percent.

The Institute for Supply Management said its index of national factory activity rose to 57 points last month from 56.6 in November. That was in line with the median forecast of economists surveyed by Reuters. A reading above 50 indicates expansion in the sector.

“We are starting the year off on the right note here. Everybody’s back and suddenly everybody realizes that the economy is pretty good,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

“There is a lot of money in cash, a lot of money in bonds that would like out of bonds, and it’s only natural with the economic improvement it’s finding its way to equities.”

In addition, the Commerce Department said that construction spending rose more than expected in November to touch its highest level in five months, a government report showed on Monday, a further sign that the economic recovery was gaining momentum.

Construction spending increased 0.4 percent to an annual rate of $810.2 billion, the highest level since June, after rising by an unrevised 0.7 percent in October. November’s increase in construction outlays marked the third straight month of gains. “The New Year is starting off as expected, with a fresh surge showing enthusiasm and optimism for a solid market,” said Andre Bakhos, director for market analytics at Lek Securities in New York.

“This reflects the better economic backdrop that we’ve seen,” Mr. Bakhos said, “as many look at early January to be a barometer for the year ahead, and it appears we are starting off on the right foot.”

Marc Pado, United States market strategist at Cantor Fitzgerald in San Francisco. also pointed to the “January effect” of lifting stocks as fund managers are no longer engaged in window dressing and focusing on stocks they find attractive versus names that have done well for the year.

“You get to the first day of the new quarter, new year,” Mr. Pado said. “It’s an opportunity to invest in some names that you won’t have to show investors your for awhile.”

Adding to the optimistic economic picture, the official Chinese purchasing managers’ index edged down in December and fell short of forecasts, easing concerns that rising inflation would lead the government to take more steps to control growth.

The official Chinese purchasing managers’ index edged down in December from November and fell short of forecasts, easing concerns that rising inflation would lead the government to take more steps to control growth.

American indexes ended 2010 with double-digit gains, with the S.& P. 500 recording its best December since 1991. The gains marked a recovery to levels before the collapse of Lehman Brothers in September 2008. For the year, the S.& P. rose 12.8 percent, the Dow Jones industrial average climbed 11 percent, and the Nasdaq surged 16.9 percent.

In corporate news, Bank of America said that it would put aside $3 billion in the fourth quarter related to poorly underwritten mortgages it sold to Fannie Mae and Freddie Mac after the bank agreed to settle claims over the repurchase of those loans. Bank of America shares were up 4.7 percent.

The aluminum maker Alcoa gained 4.6 percent after Deutsche Bank upgraded the stock to “buy” from “hold,” citing “growing optimism on both aluminum’s likelihood of higher prices and a belief that Alcoa has turned the corner from an operational point of view.”

European shares also rose, led by the German automaker Porsche, which won a legal challenge from hedge fund groups.

The euro fell against the dollar on concerns the Continent’s sovereign debt crisis could resurface soon.

German government bond futures rose but pared earlier gains as stocks bounced and after the release of stronger-than-expected euro zone manufacturing data.

Gold prices held steady while oil extended its rally above $92 a barrel on optimism the global recovery was gaining momentum. American Treasuries prices fell, in anticipation of stronger economic data that would support rising yields.

With markets in Britain and parts of Asia closed, trading was very thin.

In early afternoon trading, the DAX in Frankfurt rose 1.2 percent, while the CAC 40 in Paris was up 2.3 percent.

Shares of Porsche rose nearly 14 percent in Frankfurt after a federal judge in the United States dismissed a lawsuit by hedge funds seeking more than $2 billion in damages.

Analysts said equity markets were expected to remain volatile in 2011 as issues including the euro zone debt crisis resurfaced.

A lot of the positive news has been priced into equities and the first half is going to be a bumpy ride for the equity market,” said Lutz Karpowitz, senior currency strategist at Commerzbank in Frankfurt. The euro dipped against the dollar, with traders and analysts warning that the euro zone debt crisis, and the year’s first sovereign debt auctions in the bloc, could weigh on the currency.

“Bond market spreads could be a bit of a burden for the euro,” Mr. Karpowitz said.

Germany and France are scheduled to sell bonds this week, and indebted Portugal sells treasury bills.

“There’s the question of whether things are going to blow up again with everyone having so much issuance to do and that will lead to more stresses on the periphery,” a debt trader said, referring to the euro zone’s weaker economies.

Crude oil in the United States traded 69 cents higher at $92.07 a barrel, .

Wall Street Starts New Year With a Jump, NYT, 3.1.2010, http://www.nytimes.com/2011/01/04/business/04markets.html

The Economy in 2011

January 1, 2011
The New York Times

When people say that the recovery does not feel like a recovery, they are describing reality. The economy is growing, but for many Americans life is not getting better. Unemployment remains high. Home values are depressed. And state budgets are in deep trouble, presaging more layoffs, service cuts and tax increases.

The question for 2011 is whether growth will ever translate into broad prosperity.

For that to happen, the federal government must ensure that the recovery does not falter for lack of adequate stimulus, while fostering job-creating industries and committing itself to long-term deficit reduction.

With corporate profits robust and a one-year payroll tax cut set to start this month, there are reasons to hope for continued growth in 2011. Yet, growth is not expected to be strong enough to make a real dent in unemployment, which at 9.8 percent remains close to the recession’s peak of 10.2 percent in October 2009.

Rising corporate profits should spur hiring, but recent history is not encouraging. Part of the problem is that companies are more apt to spend their cash on stock buy-backs and acquisitions that increase share prices but not hiring. Many companies that are hiring are doing it in fast-growing markets like China and India.

The rift between recovery and prosperity is also painfully evident in housing. Prices are likely to fall another 5 percent in 2011, as unemployment-related defaults and the failure to adequately address the foreclosure crisis add to the inventory of unsold homes. Some two million homes will probably be lost in 2011, on top of 6.8 million homes lost in the bust so far.

Joblessness and the housing bust will continue to batter state and city budgets in 2011. Promises by so many newly elected state officials to balance their budgets without raising any taxes are not only cynical, they are a recipe for more crises to come.

President Obama’s recent tax-cut deal with the Republicans included measures to support growth, notably extended unemployment benefits, and the payroll tax cut. Deep state budget cuts could offset much of that, unless Congress funnels more aid to states. The administration must continue to press banks for more and better mortgage workouts to help borrowers keep their homes.

Such efforts, while vital, are only the start. Competing in a global economy requires spare-no-expense effort to improve education. And Washington needs to do a lot more to help create globally competitive industries with jobs that pay well. We have heard President Obama talk about green jobs and rebuilding the nation’s infrastructure. The country and the economy need a big idea and a big project to move forward.

The federal deficit must be addressed. But cutting too deep, too fast will stall the recovery. There will have to be painful cuts ahead, and everything will have to be on the table, including entitlements and defense. Despite what the Republicans claim, there is no way to tackle the deficit and keep growing without raising taxes.

President Obama will need to make that case clearly in 2011 and challenge politicians — from both parties — to do what is necessary to ensure real prosperity.

The Economy in 2011, NYT, 1.11.2011, http://www.nytimes.com/2011/01/02/opinion/02sun1.html

The New Speed of Money,

Reshaping Markets

January 1, 2011
The New York Times
By GRAHAM BOWLEY

Secaucus, N.J.

A SUBSTANTIAL part of all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike.

Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, nearly the size of three football fields, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light.

Countless metal cages contain racks of computers that perform all kinds of trades for Wall Street banks, hedge funds, brokerage firms and other institutions. And within just one of these cages — a tight space measuring 40 feet by 45 feet and festooned with blue and white wires — is an array of servers that together form the mechanized heart of one of the top four stock exchanges in the United States.

The exchange is called Direct Edge, hardly a household name. But as the lights pulse on its servers, you can almost see the holdings in your 401(k) zip by.

“This,” says Steven Bonanno, the chief technology officer of the exchange, looking on proudly, “is where everyone does their magic.”

In many of the world’s markets, nearly all stock trading is now conducted by computers talking to other computers at high speeds. As the machines have taken over, trading has been migrating from raucous, populated trading floors like those of the New York Stock Exchange to dozens of separate, rival electronic exchanges. They rely on data centers like this one, many in the suburbs of northern New Jersey.

While this “Tron” landscape is dominated by the titans of Wall Street, it affects nearly everyone who owns shares of stock or mutual funds, or who has a stake in a pension fund or works for a public company. For better or for worse, part of your wealth, your livelihood, is throbbing through these wires.

The advantages of this new technological order are clear. Trading costs have plummeted, and anyone can buy stocks from anywhere in seconds with the simple click of a mouse or a tap on a smartphone’s screen.

But some experts wonder whether the technology is getting dangerously out of control. Even apart from the huge amounts of energy the megacomputers consume, and the dangers of putting so much of the economy’s plumbing in one place, they wonder whether the new world is a fairer one — and whether traders with access to the fastest machines win at the expense of ordinary investors.

It also seems to be a much more hair-trigger market. The so-called flash crash in the market last May — when stock prices plunged hundreds of points before recovering — showed how unpredictable the new systems could be. Fear of this volatile, blindingly fast market may be why ordinary investors have been withdrawing money from domestic stock mutual funds —$90 billion worth since May, according to figures from the Investment Company Institute.

No one knows whether this is a better world, and that includes the regulators, who are struggling to keep up with the pace of innovation in the great technological arms race that the stock market has become.

WILLIAM O’BRIEN, a former lawyer for Goldman Sachs, crosses the Hudson River each day from New York to reach his Jersey City destination — a shiny blue building opposite a Courtyard by Marriott.

Mr. O’Brien, 40, works there as chief executive of Direct Edge, the young electronic stock exchange that is part of New Jersey’s burgeoning financial ecosystem. Seven miles away, in Secaucus, is the New York Four warehouse that houses Direct Edge’s servers. Another cluster of data centers, serving various companies, is five miles north, in Weehawken, at the western mouth of the Lincoln Tunnel. And yet another is planted 20 miles south on the New Jersey Turnpike, at Exit 12, in Carteret, N.J.

As Mr. O’Brien says, “New Jersey is the new heart of Wall Street.”

Direct Edge’s office demonstrates that it doesn’t take many people to become a major outfit in today’s electronic market. The firm, whose motto is “Everybody needs some edge,” has only 90 employees, most of them on this building’s sixth floor. There are lines of cubicles for programmers and a small operations room where two men watch a wall of screens, checking that market-order traffic moves smoothly and, of course, quickly. Direct Edge receives up to 10,000 orders a second.

Mr. O’Brien’s personal story reflects the recent history of stock-exchange upheaval. A fit, blue-eyed Wall Street veteran, who wears the monogram “W O’B” on his purple shirt cuff, Mr. O’Brien is the son of a seat holder and trader on the floor of the New York Stock Exchange in the 1970s, when the Big Board was by far the biggest game around.

But in the 1980s, Nasdaq, a new electronic competitor, challenged that dominance. And a bigger upheaval came in the late 1990s and early 2000s, after the Securities and Exchange Commission enacted a series of regulations to foster competition and drive down commission costs for ordinary investors.

These changes forced the New York Stock Exchange and Nasdaq to post orders electronically and execute them immediately, at the best price available in the United States — suddenly giving an advantage to start-up operations that were faster and cheaper. Mr. O’Brien went to work for one of them, called Brut. The N.Y.S.E. and Nasdaq fought back, buying up smaller rivals: Nasdaq, for example, acquired Brut. And to give itself greater firepower, the N.Y.S.E., which had been member-owned, became a public, for-profit company.

Brokerage firms and traders came to fear that a Nasdaq-N.Y.S.E. duopoly was asserting itself, one that would charge them heavily for the right to trade, so they created their own exchanges. One was Direct Edge, which formally became an exchange six months ago. Another, the BATS Exchange, is located in another unlikely capital of stock market trading: Kansas City, Mo.

Direct Edge now trails the N.Y.S.E. and Nasdaq in size; it vies with BATS for third place. Direct Edge is backed by a powerful roster of financial players: Goldman Sachs, Knight Capital, Citadel Securities and the International Securities Exchange, its largest shareholder. JPMorgan also holds a stake. Direct Edge still occupies the same building as its original founder, Knight Capital, in Jersey City.

The exchange now accounts for about 10 percent of stock market trading in the United States, according to the exchange and the TABB Group, a specialist on the markets. Of the 8.5 billion shares traded daily in the United States, about 833 million are bought and sold on Mr. O’Brien’s platforms.

As it has grown, Direct Edge and other new venues have sucked volumes away from the Big Board and Nasdaq. The N.Y.S.E. accounted for more than 70 percent of trading in N.Y.S.E.-listed stocks just five years ago. Now, the Big Board handles only 36 percent of those trades itself. The remaining market share is divided among about 12 other public exchanges, several electronic trading platforms and vast so-called unlit markets, including those known as dark pools.

THE Big Board is embracing the new warp-speed world. Although it maintains a Wall Street trading floor, even that is mostly electronic. The exchange also has its own, separate electronic arm, Arca, and opened a new data center last year for its computers in Mahwah, N.J.

From his office in New Jersey, Mr. O’Brien looks back across the water to Manhattan and his former office on the 50th floor of the Nasdaq building at One Liberty Plaza, and he reflects wistfully on the huge changes that have taken place.

“To walk out of there to go across the river to Jersey City,” he says. “That was a big leap of faith.”

His colleague, Bryan Harkins, the exchange’s chief operating officer, sounds confident about the impact of the past decade’s changes. The new world is fairer, he says, because it is more competitive. “We helped break the grip of the New York Stock Exchange,” he says.

In this high-tech stock market, Direct Edge and the other exchanges are sprinting for advantage. All the exchanges have pushed down their latencies — the fancy word for the less-than-a-blink-of-an-eye that it takes them to complete a trade. Almost each week, it seems, one exchange or another claims a new record: Nasdaq, for example, says its time for an average order “round trip” is 98 microseconds — a mind-numbing speed equal to 98 millionths of a second.

The exchanges have gone warp speed because traders have demanded it. Even mainstream banks and old-fashioned mutual funds have embraced the change.

“Broker-dealers, hedge funds, traditional asset managers have been forced to play keep-up to stay in the game,” Adam Honoré, research director of the Aite Group, wrote in a recent report.

Even the savings of many long-term mutual fund investors are swept up in this maelstrom, when fund managers make changes in their holdings. But the exchanges are catering mostly to a different market breed — to high-frequency traders who have turned speed into a new art form. They use algorithms to zip in and out of markets, often changing orders and strategies within seconds. They make a living by being the first to react to events, dashing past slower investors — a category that includes most investors — to take advantage of mispricing between stocks, for example, or differences in prices quoted across exchanges.

One new strategy is to use powerful computers to speed-read news reports — even Twitter messages — automatically, then to let their machines interpret and trade on them.

By using such techniques, traders may make only the tiniest fraction of a cent on each trade. But multiplied many times a second over an entire day, those fractions add up to real money. According to Kevin McPartland of the TABB Group, high-frequency traders now account for 56 percent of total stock market trading. A measure of their importance is that rather than charging them commissions, some exchanges now even pay high-frequency traders to bring orders to their machines.

High-frequency traders are “the reason for the massive infrastructure,” Mr. McPartland says. “Everyone realizes you have to attract the high-speed traders.”

As everyone goes warp speed, a number of high-tech construction projects are under way.

One such project is a 428,000-square-foot data center in the western suburbs of Chicago opened by the CME Group, which owns the Chicago Mercantile Exchange. It houses the exchange’s Globex electronic futures and options trading platform and space for traders to install computers next to the exchange’s machines, a practice known as co-location — at a cost of about $25,000 a month per rack of computers.

The exchange is making its investment because derivatives as well as stocks are being swept up in the high-frequency revolution. The Commodity Futures Trading Commission estimates that high-frequency traders now account for about one-third of all volume on domestic futures exchanges.

In August, Spread Networks of Ridgeland, Miss., completed an 825-mile fiber optic network connecting the South Loop of Chicago to Cartaret, N.J., cutting a swath across central Pennsylvania and reducing the round-trip trading time between Chicago and New York by three milliseconds, to 13.33 milliseconds.

Then there are the international projects. Fractions of a second are regularly being shaved off of the busy Frankfurt-to-London route. And in October, a company called Hibernia Atlantic announced plans for a new fiber-optic link beneath the Atlantic from Halifax, Nova Scotia, to Somerset, England that will be able to send shares from London to New York and back in 60 milliseconds.

Bjarni Thorvardarson, chief executive of Hibernia Atlantic, says the link, due to open in 2012, is primarily intended to meet the needs of high-frequency algorithmic traders and will cost “hundreds of millions of dollars.”

“People are going over the lake and through the church, whatever it takes,” he says. “It is very important for these algorithmic traders to have the most advanced technology.”

The pace of investment, of course, reflects the billions of dollars that are at stake.

The data center in Weehawken is a modern building that looks more like a shopping mall than a center for equity trading. But one recent afternoon, the hammering and drilling of the latest phase of expansion seemed to conjure up the wealth being dug out of the stock market.

As the basement was being transformed into a fourth floor for yet more computers, one banker who was touring the complex explained the matter bluntly: “Speed,” he said, “is money. “

THE “flash crash,” the harrowing plunge in share prices that shook the stock market during the afternoon of May 6 last year, crystallized the fears of some in the industry that technology was getting ahead of the regulators. In their investigation into the plunge, the S.E.C. and Commodity Futures Trading Commission found that the drop was precipitated not by a rogue high-frequency firm, but by the sale of a single $4.1 billion block of E-Mini Standard & Poor’s 500 futures contracts on the Chicago Mercantile Exchange by a mutual fund company.

The fund company, Waddell & Reed Financial of Overland Park, Kan., conducted its sale through a computer algorithm provided by Barclays Capital, one of the many off-the shelf programs available to investors these days. The algorithm automatically dripped the billions of dollars of sell orders into the futures market over 20 minutes, continuing even as prices started to drop when other traders jumped in.

The sale may have been a case of inept timing — the markets were already roiled by the debt crisis in Europe. But there was no purposeful attempt to disrupt the market, the regulators found.

But there was a role played by some high-frequency machines, the investigation found. As they detected the big sale and the choppy conditions, some of them shut down automatically. As the number of buyers plunged, so, too, did the Dow Jones Industrial Average, losing more than 700 points in minutes before the computers returned and prices recovered just as quickly. More than 20,000 trades were ruled invalid.

The episode seemed to demonstrate the vulnerabilities of the new market, and just what could happen when no humans are in charge to correct the machines.

Since the flash crash, the S.E.C. and the exchanges have introduced marketwide circuit breakers on individual stocks to halt trading if a price falls 10 percent within a five-minute period.

But some analysts fear that some aspects of the flash crash may portend dangers greater than mere mechanical failure. They say some wild swings in prices may suggest that a small group of high-frequency traders could manipulate the market. Since May, there have been regular mini-flash crashes in individual stocks for which, some say, there are still no satisfactory explanations. Some experts say these drops in individual stocks could herald a future cataclysm.

In a speech last month, Bart Chilton, a member of the futures trading commission, raised concerns about the effect of high-frequency trading on the markets. “With the advent of ‘Star Trek’-like, gee-whiz H.F.T. technology, we are witnessing one of the most game-changing and tumultuous shifts we have ever seen in financial markets,” Mr. Chilton said. “We also have to think about the myriad ramifications of technology.”

One debate has focused on whether some traders are firing off fake orders thousands of times a second to slow down exchanges and mislead others. Michael Durbin, who helped build high-frequency trading systems for companies like Citadel and is the author of the book “All About High-Frequency Trading,” says that most of the industry is legitimate and benefits investors. But, he says, the rules need to be strengthened to curb some disturbing practices.

“Markets are there for capital formation and long-term investment, not for gaming,” he says.

As it tries to work out the implications of the technology, the S.E.C. is a year into a continuing review of the new market structure. Mary L. Schapiro, the S.E.C. chairwoman, has already proposed creating a consolidated audit trail, so that buying and selling records from different exchanges can be examined together in one place.

In speeches, Ms. Schapiro has also raised the idea of limiting the speed at which machines can trade, or requiring high-frequency traders to stay in markets as buyers or sellers even in volatile conditions. just as human market makers often did on the floor of the New York Stock Exchange. .

“The emergence of multiple trading venues that offer investors the benefits of greater competition also has made our market structure more complex,” she said in Senate testimony last month, adding, “We should not attempt to turn the clock back to the days of trading crowds on exchange floors.”

MOST of the exchanges have already eliminated a controversial electronic trading technique known as flash orders, which allow traders’ computers to peek at other investors’ orders a tiny fraction of a second before they are sent to the wider marketplace. Direct Edge, however, still offers a version of this service.

The futures trading commission is considering how to regulate data centers, and the practice of co-location. The regulators are also examining the implications of so-called dark pools, another product of the technological revolution, in which large blocks of shares are traded electronically and without the scrutiny exercised on public markets. Their very name raises questions about the transparency of markets. About 30 percent of domestic equities are traded on these and other “unlit” venues, the S.E.C. says.

For Mr. O’Brien, the benefits of technology are clear. “One thing has surprised me: people have looked at this as a bad thing,” he says. “There is almost no other industry where people say we need less technology. Fifteen years ago, trades took much longer to execute and were much more expensive by any measure” because market power was more concentrated in a few large firms. “Now someone can execute a trade from their mobile from anywhere on the planet. That seems to me like a market that is fairer.”

For others who work at the company or elsewhere in the financial ecosystem of New Jersey, it has been a boon.

“A lot of my friends work here or in this area,” says Andrei Girenkov, 28, one of Direct Edge’s chief programmers, over lunch recently in Dorrian’s restaurant in Direct Edge’s building. “It changed my life.”

But some analysts question whether everyone benefits from this technological upending.

“It is a technological arms race in financial markets and the regulators are a bit caught unaware of how quickly the technology has evolved,” says Andrew Lo, director of the Laboratory for Financial Engineering at M.I.T. “Sometimes, too much technology without the ability to manage it effectively can yield some unintended consequences. We need to ask the hard questions about how much of this do we really need. It is the Wild, Wild West in trading.”

Mr. Lo suggests a need for a civilizing influence. “Finally,” he says, “it gets to the point where we have a massive traffic jam and we need to install traffic lights.”

The New Speed of Money, Reshaping Markets, NYT, 1.1.2011, http://www.nytimes.com/2011/01/02/business/02speed.html

Public Workers Facing Outrage

as Budget Crises Grow

January 1, 2011
The New York Times
By MICHAEL POWELL

FLEMINGTON, N.J. — Ever since Marie Corfield’s confrontation with Gov. Chris Christie this fall over the state’s education cuts became a YouTube classic, she has received a stream of vituperative e-mails and Facebook postings.

“People I don’t even know are calling me horrible names,” said Ms. Corfield, an art teacher who had pleaded the case of struggling teachers. “The mantra is that the problem is the unions, the unions, the unions.”

Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules.

It is an angry conversation. Union chiefs, who sometimes persuaded members to take pension sweeteners in lieu of raises, are loath to surrender ground. Taxpayers are split between those who want cuts and those who hope that rising tax receipts might bring easier choices.

And a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending.

A brutal reckoning awaits, they say.

These battles play out in many corners, but few are more passionate than in New Jersey, where politics tend toward the moderately liberal and nearly 20 percent of the work force is unionized (compared with less than 14 percent nationally). From tony horse-country towns to middle-class suburbs to hard-edged cities, property tax and unemployment rates are high, and budgets are pools of red ink.

A new regime in state politics is venting frustration less at Goldman Sachs executives (Governor Christie vetoed a proposed “millionaire’s tax” this year) than at unions. Newark recently laid off police officers after they refused to accept cuts, and Camden has threatened to lay off half of its officers in January.

Fred Siegel, a historian at the conservative-leaning Manhattan Institute, has written of the “New Tammany Hall,” which he describes as the incestuous alliance between public officials and labor.

“Public unions have had no natural adversary; they give politicians political support and get good contracts back,” Mr. Siegel said. “It’s uniquely dysfunctional.”

Even if that is so, this battle comes woven with complications. Across the nation in the last two years, public workers have experienced furloughs and pay cuts. Local governments shed 212,000 jobs last year.

A raft of recent studies found that public salaries, even with benefits included, are equivalent to or lag slightly behind those of private sector workers. The Manhattan Institute, which is not terribly sympathetic to unions, studied New Jersey and concluded that teachers earned wages roughly comparable to people in the private sector with a similar education.

Benefits tend to be the sorest point. From Illinois to New Jersey, politicians have refused to pay into pension funds, creating deeper and deeper shortfalls.

In California, pension costs now crowd out spending for parks, public schools and state universities; in Illinois, spiraling pension costs threaten the state with insolvency.

And taxpayer resentment simmers.

Trouble in New Jersey

To venture into Washington Township in southern New Jersey is to walk the frayed line between taxpayer and public employees, and to hear anger and ambivalence. So many Philadelphians have flocked here over the years that locals call it “South Philly with grass.”

These expatriates tend to be Democrats and union members, or sons and daughters of the same. But property taxes are rising fast, and voters favored Governor Christie, a Republican. Bill Rahl, a graying plug of a retiree, squints and holds his hand against his throat. “I’m up to here with taxes, I can’t breathe, O.K.?” he says. “I don’t know about asking anyone to give up a pension. Just don’t ask for no more.”

Governor Christie faced a vast deficit when he took office last January, and much of the federal stimulus aid for schools was exhausted by June. So he cut deeply into state aid for education; Washington Township lost $900,000. That forced the town to rely principally on property taxes. (Few states lean as heavily on property taxes to finance education; New Jersey ranks 45th in state aid to education.) The town turned its construction office over to a private contractor and shed a few employees.

Assemblyman Paul D. Moriarty, a liberal Democrat, served four years as mayor of Washington Township. As the bill for pension and health benefits for town employees soared, he struggled to explain this to constituents.

“We really should not receive benefits any better than the people we serve,” he says. “It leads to a lot of resentment against public employees.”

All of which sounds logical, except that, as Mr. Moriarty also acknowledges, such thinking also “leads to a race to the bottom.” That is, as businesses cut private sector benefits, pressure grows on government to cut pay and benefits for its employees.

Robert Master, political director for the Communication Workers of America District 1, which represents 40,000 state workers, speaks to that difficulty.

“The subtext of Christie’s message to a lot of people is that ‘you’re paying for benefits you’ll never have,’ ” he says. “Our challenge is how to defend middle-class health and retirement security, not just for our members but for all working families, when over the past 30 years retirement and health care in the private sector have been essentially demolished.”

This said, some union officials privately say that the teachers’ union, in its battle against cuts to salaries and benefits, misread Mr. Christie and the public temperament. Better to endorse a wage freeze, they say, than to argue that teachers should be held harmless against the economic storm.

In the past, union leaders, too, have proven adept at winning gains not just at the bargaining table. In 2000, union lobbyists persuaded legislators to cut five years off the retirement age for police and firefighters — a move criticized as a budget-buster by a state pension commission. The next year, the budget still was flush and union leaders persuaded the Republican dominated legislature to approve a 9 percent increase in pension benefits. (The legislators added a sweetener for their own pensions.)

Those labor leaders, however, proved less successful in persuading their legislative allies to pay for such benefits. For much of the last two decades, New Jersey has shortchanged its pension contribution.

Governor Christie talked about tough choices this past year — then skipped the state’s required $3.1 billion payment. Now New Jersey has a $53.9 billion unfunded pension liability.

A recent Monmouth University/Gannett New Jersey poll found a narrow plurality of respondents in the state in favor of ditching the pensions for a 401(k)-type program. Public pensions, however, run the gamut, from modest (the average local government pensioner makes less than $20,000 a year while teachers draw about $46,000) to the gilded variety for police and firefighters, some of whom collect six figures. And then there’s the political class, which has made an art form of pension collection.

Some politicians draw multiple pensions as county legislators, called freeholders, and as prosecutors or union leaders. Back in Washington Township, people tend to talk of state government as a casino with fixed craps tables.

A white-haired retired undercover police officer, whose wrap-around shades match his black Harley-Davidson jacket, pauses outside the Washington Township municipal building to consider the many targets. He did not want to give his name.

“Christie has all the good intentions in the world but has he hit the right people?” he says. “I understand pulling in belts, but you talking about janitors and cops, or the free-loading freeholder?”

Good Jobs, at What Cost?

So how much is too much? On their face, New Jersey’s public salaries are not exorbitant. The state has one of the highest per-capita incomes in the country, and the average teacher makes $66,597, which even with benefits is on par with or slightly behind similarly educated private sector workers, according to Jeffrey H. Keefe, a Rutgers professor who studied the issue for the liberal-leaning Economic Policy Institute.

Mr. Keefe, however, uncovered some intriguing class splits. Blue-collar public workers make more money than their private sector counterparts. For such jobs, public unions have established a higher wage floor.

The sense that public workers enjoy certain advantages is not a mirage. Public employees pay into their pension funds, but health benefits often come at a fraction of the cost of most private sector packages.

Government employment also tends to be more secure. When the economy crashed, federal stimulus dollars safeguarded many public jobs. The alternative, many economists point out, was to force towns and cities into extensive layoffs, even as unemployment hovered around 10 percent and millions of Americans sought help from public agencies.

But it accentuated the perception that public workers, however tenuously, inhabited a protected class. That’s a tough sell in Washington Township.

Ask Michael Tini, 54, who works as a card dealer in Atlantic City, about teacher salaries and benefits and he taps his head, not unsympathetically.

“Look, I understand that teachers are the brains of the operation, O.K.? But my hours are cut, and my taxes are killing me.”

He taps his head again. “They have got to take it in the ear, too.”

Public Workers Facing Outrage as Budget Crises Grow, NYT, 1.1.2011, http://www.nytimes.com/2011/01/02/business/02showdown.html

Real Estate Developers Prosper

Despite Defaults

January 1, 2011
The New York Times
By CHARLES V. BAGLI

Larry Gluck, the apartment building king whose company defaulted on loans in New York, San Francisco, Los Angeles and Washington, recently bought the Windermere Hotel in Manhattan and Tivoli Towers, a subsidized housing complex in Brooklyn.

Ian Bruce Eichner, who lost two major New York skyscrapers to foreclosure in the early 1990s and defaulted on a $760 million loan for a Las Vegas casino resort in 2008, is working on a plan to rescue One Madison Park, a troubled 50-story condominium project.

Even Harry Macklowe, whose $7 billion gamble on seven Midtown skyscrapers at the top of the market almost cost him his entire empire, is out looking for new deals.

Industry lore has it that New York is one of the toughest, most unforgiving real estate markets in the world. The costs are so high, the unions so ornery, the politicians so demanding and the rivalries so fierce, that one false move invites financial disaster.

But the truth is that there have been surprisingly few career fatalities among New York developers, even though they have lost billions of investor dollars on overpriced real estate and have littered the city with unfinished apartment buildings. While a homeowner who lost a house to foreclosure would find it difficult to borrow for years, developers who defaulted on enormous loans have still been able to attract money.

The reasons, experts say, are that there is still plenty of money floating around and that the market has a very short memory.

“You can always find an investor who’ll put up equity with a guy, unless he’s Attila the Hun,” said Daniel Alpert, managing partner at Westwood Capital, a real estate investment bank.

For some of these developers, however, putting together a deal is not as easy as it used to be. Large banks and pension funds that endured huge losses have become very picky. Scott Lawlor, the founder of Broadway Partners, bought 28 office buildings in 2006 and 2007 and is now stuck with heavy debts on what is left of a portfolio whose value has dropped by at least a third. He is trying to come back with a focus on distressed residential real estate but has been unable to attract institutional money, according to lawyers and real estate executives who know him. He is now trying to line up wealthy investors.

Hedge funds and private equity funds are still offering backing for deals, believing that the real estate market will warm up again this year. There are also new investors looking to get into real estate, including funds based in China, and Norwegian pension funds.

And there have been casualties. Shaya Boymelgreen, the once-ubiquitous developer who built more than 2,400 apartments during the boom, broke with his money partner, was peppered with lawsuits from condominium buyers and was evicted from his offices in Brooklyn.

The $3 billion real estate portfolio that Kent Swig, a scion of a West Coast real estate family, put together over the past two decades is slowly slipping through his hands, and he warned last year that personal bankruptcy could be in the offing.

But while a homeowner who is foreclosed upon is often on the brink of financial ruin, many developers who defaulted emerged relatively unscathed themselves. Most of them invested relatively little of their own money in the deals, preferring “O.P.M.,” or “other people’s money.” One of the best-known examples is Tishman Speyer Properties, which lost $56 million on Stuyvesant Town and Peter Cooper Village, while lenders and other investors lost over $2.4 billion.

It was a rare stumble and, in perspective, a minor setback for the company, which controls Rockefeller Center and operates on four continents. It has since raised $2.5 billion to expand its portfolio and recently acquired two buildings in Paris, one in Washington and a 45-story office tower in Chicago.

Mr. Macklowe, an unabashed property gambler, is also considered a real estate genius with a keen eye for development, having turned the G.M. Building across the street from the Plaza Hotel into a gold mine. He sought to double his holdings in 2007 by buying seven office towers for $7 billion. Desperate for cash during the credit crisis 15 months later, Mr. Macklowe was forced to relinquish those buildings and to sell several other properties, including his beloved G.M. Building.

Now a new set of investors is bringing him back to develop a site he once owned, where the Drake Hotel stood, according to two real estate executives who work with him.

In 2005, Mr. Gluck and a partner bought the 1,232-unit Riverton Houses complex in Harlem for $131 million. The following year, he refinanced with $250 million in loans, allowing him to renovate the lobbies and elevators and to put tens of millions of dollars in his pocket.

But in less than two years, Mr. Gluck’s plan to replace residents of rent-regulated apartments with tenants paying higher rents unraveled. The lender foreclosed as the property’s value fell by half. Loan defaults followed in San Francisco, Los Angeles and elsewhere.

Most recently, Mr. Gluck and a partner, Rob Rosania, paid $70 million for a residential hotel in Manhattan, the Windermere. But the days of easy money, when Wall Street would lend 90 percent or more of the purchase price, are over, Mr. Gluck said. His lenders required his company to put up 28 percent of the purchase price and to provide an additional $10 million for renovations.

Mr. Gluck and Mr. Rosania said they were buyers again because they were better capitalized than their competitors and did not squabble with their lenders when the money ran out. “If you behave like a gentleman and don’t leave your partners and investors to fend for themselves, you will be rewarded for your loyalty,” Mr. Gluck said.

In his case and others, investors and lenders are forgiving losses incurred after a bubble in which everyone from the smallest homeowner to the largest bank was overleveraged. “Throughout my 30 years in the business,” Mr. Alpert said, “I have seen an enormous amount of forgiveness for market errors.”

It is an infuriating pattern for the city’s real estate aristocracy, like the Durst family, which has been measured in its borrowing and has never defaulted on a loan. Yet, Douglas Durst said, “That has not given us any advantage as we go through each financial cycle in which the bankers who made bad loans are let go, but the defaulting borrowers are waiting for the new team of bankers to start the process over again.”

Mr. Eichner has been up and down more than once. After lenders took over two of his skyscrapers in 1991, Mr. Eichner dismissed criticism that he was an example of the excesses of the 1980s boom. “Everyone who was aggressive in the ’80s suffered substantial losses,” he said in 1994.

Mr. Eichner’s lenders suffered the biggest losses, and at one troubled building, 1540 Broadway in Times Square, they paid him tens of millions of dollars in 1992 to relinquish control.

More recently, in Las Vegas, Mr. Eichner has said he was a victim of the credit crisis after he was forced to walk away from the Cosmopolitan Resort Casino in 2008. Unable to obtain new financing and plagued by cost overruns and environmental issues, he defaulted on loans from Deutsche Bank for the project.

Still, Mr. Eichner, who did not return calls requesting comment, vowed in 2008 that he would be back and that bankers would lend to him once again. He is now putting together a reorganization plan to salvage the bankrupt tower, One Madison Park. The lender, iStar, opposes Mr. Eichner’s involvement, arguing that his approach would unfairly slash the mortgage in half while Mr. Eichner would reap a huge return on his $40 million investment.

“Capital is blind,” said David W. Levinson, a founder of L & L Holding Company, a real estate firm that controls 11 Manhattan buildings. “It will go wherever it can for a return. That’s it in a nutshell.”

Real Estate Developers Prosper Despite Defaults, NYT, 1.11.2011, http://www.nytimes.com/2011/01/02/realestate/02developers.html