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Analysts Hate These Five Stocks, So Buy Them Now: John Dorfman

February 1, 2010

Commentary by John Dorfman Feb. 1 (Bloomberg) — Wall Street analysts turn up their noses at Eli Lilly & Co. On a scale where 1.0 is “sell,” 3.0 is “hold” and 5.0 is “buy,” Lilly rates only a 2.9. Five analysts say to buy shares in the Indianapolis drugmaker, six say sell, and 12 duck for cover with a neutral rating. A 2.9 score might not seem too bad, but bear in mind that brokerage houses have a positive bias. They are, after all, in the business of selling stocks. The average rating for stocks on the New York Stock Exchange is 3.8. Fully 87 percent of all U.S. stocks with a market capitalization of more than $500 million score higher than 3.0. Lilly’s low rating doesn’t discourage me. In fact, I like the company. I prefer stocks that are unpopular. If most of the major brokerage houses have already endorsed a stock, where will the impetus come from for it to gain new fans? What’s more, when earnings improve or temporary problems dissipate, such stocks can garner analysts’ endorsements and attract capital. Lilly is one of five stocks I recommend this week that analysts couldn’t care less about. Like other big pharmaceutical companies, Lilly has major drugs with patents that will expire soon. Zyprexa, prescribed for patients with schizophrenia and bipolar disorder, accounts for about one quarter of Lilly’s sales; its patent expires in 2011. Patent Plight Still, according to a March 2009 analysis by Zacks Investment Research, Lilly’s patent plight is less severe than that of some major competitors. Zacks estimates that Merck & Co. will see about 35 percent of its 2012 revenue exposed to generic competition and that Pfizer Inc. will lose patents on drugs accounting for 40 percent of its 2012 sales. Its genuine problems notwithstanding, I consider Lilly an excellent value at its recent price of about $36, down from a high of more than $100 a decade ago. The stock sells for only eight times earnings. The dividend yield is 5.5 percent, and the payout seems secure to me. Investors fret about what they see as scanty new-drug pipelines at all the big pharmaceutical companies. They worry too much, I think. Lilly, for example, has about 60 drugs in various stages of development. Analysts hold CNA Financial Corp. in even greater disdain. Only four analysts bother to cover the Chicago-based commercial insurer, and none recommends it; there are three “hold” ratings and one “sell.” Low Expectations CNA is unlikely to win any awards as the best-run insurance company around. It has posted losses in four of the past 10 years, including 2008. That year it paid out $105.20 in claims and expenses for every $100 it collected in premiums. Why do I favor it, then? I recommend it because it is cheap, and investor expectations are low. With the stock at seven times the past four quarters’ earnings and 0.7 times book value (corporate net worth), there is ample room for positive surprises. Consider this oddity. CNA is 90 percent owned by Loews Corp. , a New York-based corporation controlled by the Tisch family. CNA accounts for the majority of Loews’s revenue. Yet Loews has a buy rating from most analysts, while CNA is endorsed by none. Andrew Tisch and James Tisch , who are CNA directors, both bought CNA stock on the open market in November, as did Joseph Rosenberg , chief investment strategist for Loews. Pipeline Profits Another big yawn, according to analysts, is Enbridge Energy Partners LP , a pipeline partnership based in Houston. Ten analysts give it a neutral rating, with one “buy” and two “sells.” Enbridge, the biggest transporter of oil to the U.S. from Alberta’s tar sands, has made a profit each year since 1992, which is as far back as Bloomberg data on the company goes. The stock sells for 13 times earnings and currently offers a dividend yield of more than 7 percent. Next up is Lexmark International Inc. of Lexington, Kentucky, the second-largest U.S. maker of computer printers. (Hewlett-Packard Co. is No. 1.) Lexmark has earned a profit every year since 1994. The bad news on Lexmark is that sales and earnings have declined in the past five years. With the stock at nine times earnings and less than 0.6 times revenue, it seems that investors don’t expect much. Neither do analysts, who slap a 2.7 rating on the stock. Riding the Recovery The third quarter showed a glimmer of hope: Lexmark’s sales ticked up, compared with the previous quarter. I think the stock will be buoyed by the U.S. economic recovery that I believe is in progress. My final recommendation is St. Louis-based Patriot Coal Corp. It is the fourth-largest eastern U.S. coal company, with annualized revenue of about $2 billion. The company’s stock-market value is just $1.5 billion, and shares are trading for only 0.6 times revenue. Analysts give the stock a kissing-your-sister grade of 2.9. I think it is more exciting than that. In 2008, for example, the company earned a 33 percent return on shareholders’ equity, which is sparkling. Lately that profit measure has subsided to about a 19 percent return, which I still consider good. I like the stock at eight times earnings. Disclosure note: I own shares of Merck personally and for clients. A few of my clients own Pfizer. I have no long or short positions in the other stocks discussed in this week’s column. ( John Dorfman , chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com .

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Toyota Recall Is Moment to Counter China’s Rise: William Pesek

February 1, 2010

Commentary by William Pesek Feb. 1 (Bloomberg) — Naoto Kan isn’t alone in his “sense of sadness.” He shares it with 126 million Japanese. Japan’s finance minister is blue over how quickly China is gaining on Asia’s biggest economy. Two years ago, anyone who said China would overtake Japan in 2010 was laughed into submission. Fantasy may soon become reality and the Japanese media can’t churn out enough dire stories about it. “Generally speaking, it’s a good thing that China and Asia are growing and Japan needs to make efforts to ensure it can benefit from that,” Kan, 63, told reporters in Tokyo last month. “Coming from a generation that experienced high growth, my honest feeling is a sense of sadness.” Far from being sad, Kan should see this moment for what it really is: one that shakes Japan out of its 20-year slumber. PricewaterhouseCoopers LLP’s recent prediction that China will overtake the U.S. as the largest economy by 2020 is the talk of Tokyo. It’s shock enough for Japan to fathom playing second fiddle in Asia, never mind China being the globally dominant power 10 years from now. Expect a corresponding surge in sake and whiskey sales around Japan. Adding insult to injury, the great Toyota Motor Corp . is recalling cars in China, and Japan Airlines Corp. is bankrupt. Add in deflation and the threat of a Standard & Poor’s downgrade and it’s hard not to conclude 2010 is getting off to a dreadful start for Japan. Silver Lining The silver lining is the China effect. On the face of it, China’s economy should be larger than Japan’s — its population is almost 11 times bigger. If China’s currency weren’t 40 percent or so undervalued, it would already be No. 2. As many in Japan say, though, size will matter more when China matches Japan on a per-capita income basis . Japan’s is 13 times China’s. That’s many a year off, of course. As the process unfolds, Japan could be well-positioned to benefit. What’s so bad about having a massive economy growing 10 percent in your neighborhood? With the U.S. consumer limping along, Japan needs all the demand for exports it can find. Policy makers in Tokyo are officially out of reasons to delay the radical change Japan needs. To date, they have had more than their share of warnings: the collapse of the 1980s bubble economy, the “Lost Decade” of the 1990s, the Asian crisis in 1997, the U.S. credit meltdown, you name it. They just haven’t answered them, opting to add more debt and yen to punt big reforms forward. Chinese Jolt China is a jolt that Japan can’t manage around. Muddling through isn’t an option when the largest manufacturer and exporter is bearing down on you. Also, China is now the U.S.’s main creditor, reducing Japan’s leverage in Washington. Amid all this China buzz, Japan is left to grapple with uncompetitive labor costs, a rapidly aging population and dwindling fiscal options. If Japanese officials intend to hit the snooze bar and sleep in for a few more years, S&P is standing by to give it a nudge. S&P last week lowered the outlook on Japan’s AA sovereign credit rating to negative because of diminishing flexibility to cope with the world’s largest public debt. China is making the world quake because of its $2.4 trillion of currency reserves. Japan is spooking the world with its financial frailty. Stability in China isn’t a given. The immediate risk is overheating. The longer-term problem, the one on which hedge- fund managers are fixated, is that today’s loans may turn sour tomorrow. China must get more serious about asset bubbles and narrowing the gap between rich and poor. Filling the Void Even moderate growth from China may help fill the void left by the highly leveraged U.S. consumer. Japanese Prime Minister Yukio Hatoyama is mending ties with China, whose global influence is increasing as America’s declines. Japan still needs the U.S. for security reasons, yet economic realities are drawing its attention toward Asia. One example of how China could be the catalyst that has eluded Japan is services. An obsession with manufacturing means Japan neglects its services industry, which is a far bigger part of the economy. China’s threat will focus attention where it needs to be: deregulating services and increasing productivity. And don’t count Toyota and JAL out in the long run. Toyota seems to be taking a page from Johnson & Johnson’s playbook with its total recall. In 1982, J&J pulled millions of bottles of Extra Strength Tylenol from store shelves after someone in the Chicago area put cyanide in the capsules, resulting in seven deaths. The recall restored J&J’s reputation. We could very well be witnessing Toyota’s Tylenol moment. JAL is now in the hands of electronics tycoon Kazuo Inamori after last month’s bankruptcy filing. His powerful political connections and maverick ways could give him the means to shake up Asia’s biggest carrier by sales in ways that none of his predecessors dared. China’s great economic leap forward is in many ways a good- news story for corporate Japan. Officials such as Kan clearly hear the alarm bells in their midst and must act accordingly. With China’s arrival, sleeping on the job isn’t an option. ( William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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Sullen Republicans Sit Through Obama Stand-Up: Margaret Carlson

January 29, 2010

Commentary by Margaret Carlson Jan. 29 (Bloomberg) — By the time President Barack Obama delivered the State of the Union, much of the drama had been leeched away. As with the Super Bowl, the pre-game run-up dwarfs the event itself. The press tells the president what he “has to do” in what’s always the “speech of his life.” The anchors, Diane, Katie, and Brian, went for lunch and doled out morsels from their doggie bag the rest of the afternoon. Other authorized tidbits were dished to favored scribes. Unauthorized ones were dished to lesser journalists by lesser aides wanting to feel in the middle of things. A diligent reporter could practically have written the 71-minute speech by the time Speaker Nancy Pelosi had her moment of high honor and distinct privilege. The remaining drama is all in the demeanor of the president and that of his audience. Obama was cool without being cold, with touches of acute frustration that stopped short of sounding malaise alarms. He shed his usual oratorical cadence to be chatty and informal. There were moments of ironic detachment when he acknowledged that the right side of the aisle — which actually was to his left — just wasn’t buying a thing he said, even when he was spooning ice cream. As for the chamber, Republicans won the award for most sullen party in a closer contest than you might have expected. The only consistent thought rippling across the room was, “How does this cut for my re-election?” After three kicks in the shins in elections during the past three months, Democrats are more uneasy than Republicans about the midterms. Eye on Independents Obama was careful not to speak down to Republicans, mindful to speak up to independents, who thought he’d have this partisanship thing worked out by now. And he was conscious of not letting himself or his party off the hook. He noted that he’d had political setbacks, “and some of them were deserved.” He admonished congressional Democrats that they enjoy the largest majority in decades. “People expect us to solve some problems, not run for the hills.” Although his spine was stiff and his brain fully engaged, Obama clung throughout to his big-hearted delusion that we can all get along. For most of the evening, Republicans did what they could, at least in mime, to prove him wrong. Unlike last time, Republicans realized they were sitting in the U.S. Capitol, not in the boisterous bleachers at a ballgame. The independents they’ve been attracting in recent elections don’t like rowdiness. There were no homemade signs, no boos, no obvious napping. Alito’s Mouth The closest thing to a “You lie” moment came from strange quarters. The quiet and decorous Justice Samuel Alito shook his head in disbelief, mouthing the words “not true,” when the president dressed down the Supreme Court for overturning a century of law to allow unlimited amounts of money from corporations to flow into our politics. While acting more mature, Republicans showed no shift from being the Party of No, even when Obama reeled off programs they like — new nuclear power plants, offshore oil drilling, tax credits, an emphasis on jobs over health-care reform, and a spending freeze. When Obama said the freeze wouldn’t go into effect until next year, Republicans rustled in their seats, particularly the perpetually orange-tanned House minority leader, John Boehner , whose body language said, That’s just what we expect from you undisciplined Democrats. Noticing, Obama ad-libbed, “That’s how budgeting works.” Not even his list of tax cuts moved the GOP. Obama’s audience was as tough as the one Jay Leno will face when he replaces the deposed Conan O’Brien . “I thought I’d get some applause on that one” he lamented. Sound of Silence The Republicans’ reticence bordered on perilous when, by their silence, they appeared not to agree with Obama’s bare- knuckled statement that “we all hated the bank bailout.” It was a good half hour before he brought up health care, pledging to see it through but without offering a road map to a conclusion. It was enough to hearten wavering Democrats. Yesterday Pelosi said she had the votes in the House to pass the Senate bill, if there were promises in blood that the bad parts would be fixed. The speech reminded us of the earnest, problem-solving technocrat Obama is. It was easy to forget him while the uninspiring Senator Max Baucus seemed to be running the country as Obama’s designated health czar. Inadvertently perhaps, Republicans reminded us why Obama, with majorities in both houses, can’t get anything done. Watching them sitting stone-faced in their seats, like the board of a country club sizing up an aspiring member, it all became perfectly clear. ( Margaret Carlson , author of “Anyone Can Grow Up: How George Bush and I Made It to the White House” and former White House correspondent for Time magazine, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Margaret Carlson in Washington at mcarlson3@bloomberg.net

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Wells Fargo Hedges Misbehave at Just Right Time: Jonathan Weil

January 28, 2010

Commentary by Jonathan Weil Jan. 28 (Bloomberg) — A strange thing happened last quarter at Wells Fargo & Co. A bunch of derivatives that were supposed to act as hedges on other assets seemed to go berserk. The good news for Wells shareholders is that the oddly behaving derivatives boosted the bank’s fourth-quarter earnings. There’s more to the story, though. The windfall might be a sign that Wells executives aren’t so great at judging some of the company’s risks, meaning there may be more risk than they think. The combined gains on the derivatives — which Wells calls “economic hedges” — and the assets they purportedly were hedging accounted for almost half of Wells’s $4 billion of pretax profit last quarter. That’s a lot of low-quality earnings. About $1.1 billion came from writing up the value of mortgage-servicing rights through changes to inputs in the mathematical models Wells uses to estimate their worth. Another $830 million came from gains on the derivatives that supposedly were hedging this portion of the servicing rights’ value. That’s right: The hedges and hedged items both went up. This scenario should have been as likely as both sides of a see- saw rising at the same time. Nothing quite like this had happened before at Wells, at least not to this magnitude. Indeed, while Wells may refer to the derivatives as hedges, they don’t qualify for hedge accounting under the Financial Accounting Standards Board’s rules, which is why Wells has to use the weasel word “economic” in the label. Airy Assets Mortgage-servicing rights are intangible assets that consist of rights to receive fees from third parties in exchange for doing things like collecting and forwarding monthly payments from homeowners. Unlike other intangibles, such as goodwill or trademarks, companies have the option under the accounting rules of marking them at their fair market values on a quarterly basis, and then running the changes in value through their earnings. Wells’s latest balance sheet showed $16 billion of mortgage-servicing rights that the company was carrying at fair value as of Dec. 31. The tricky part is that such assets are notoriously difficult to value. In accounting parlance, the gains on the mortgage-servicing rights were of the Level 3 variety. In layman’s terms, that means they can be pretty much whatever management wants them to be. Under the FASB’s rules , Level 1 means the value for a given asset comes from quoted prices in actively traded markets, known as mark-to-market. Level 2, or mark-to-model, means the value is measured using “observable inputs,” such as recent transaction prices for similar items where market quotes aren’t available. Make Believe Then there’s Level 3. This means a company measures the fair value of an asset using one or more “unobservable inputs,” or, as I call it, mark-to-make-believe. Companies can’t actually see the changes in value. Yet they get to book them through earnings anyway, based on management’s own subjective assumptions. The last time I took a close look at this subject for a column on Wells was in August 2007, after the company reported quarterly earnings that got a huge boost from Level 3 gains on its servicing rights. Back then Wells had reported a $2 billion gain, or more than half its pretax profits, from changes to inputs in its servicing rights’ valuation models. However, the company said I would be wrong to make comparisons between the size of its Level 3 gains and its overall profits. Up and Down Its argument: Doing so would ignore the effect that rising interest rates at the time had on the values of both the servicing rights (which went up) and the corresponding derivatives Wells said it was using as economic hedges (which went down). The derivatives, which generally fall into the Level 1 and Level 2 camps, had declined by about $2.2 billion. I wrote the column anyway, expressing skepticism that these derivatives were hedges in any real sense. It turns out I probably wasn’t skeptical enough. Wells’s spin on the latest results is that its hedges worked. On the company’s Jan. 20 earnings call, Wells’s chief financial officer, Howard Atkins , explained the gains by saying “hedging results in the mortgage business were strong” and “could remain relatively high as long as short-term rates remain low and the hedge performs effectively.” He added that Wells manages its mortgage business “very holistically” and that “actual hedge results in any quarter of course will reflect how much of the servicing asset we hedge and the effectiveness of the particular instruments we use to hedge.” Not Telling Similarly, in its earnings release, Wells said the $1.9 billion of gains largely reflected “the continuation of strong carry income and effective hedge performance.” What’s carry income? Actually, it doesn’t really matter, because Wells declined to disclose how much it was. And “effective” hedge performance? Give me a break. Remember, the gains on the derivatives were almost as large as the gains on the items they were supposed to be hedging. For all we know, there could come a time when Wells’s derivatives misbehave at the same time the market values of the mortgage-servicing rights plunge. That would mean a double hit to earnings, rather than a windfall. Oh, but what are the odds of that happening, since Wells seems to have it all figured out? Meantime, one step in the right direction would be for Wells to stop calling these things hedges, economic or otherwise. This bank’s derivatives seem to have a mind of their own. ( Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Jonathan Weil in New York at

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The Pelosi Fed Is the Dollar’s Worst Nightmare: Caroline Baum

January 27, 2010

Commentary by Caroline Baum Jan. 28 (Bloomberg) — Within days of the Republican upset in the Massachusetts special election for the late Ted Kennedy’s seat, Barbara Boxer saw the way forward. “It is time for a change — it is time for Main Street to have a champion at the Fed,” the three-term California Democratic senator said on Jan. 22. “Dr. Bernanke played a lead role in crafting the Bush administration’s economic policies, which led to the current economic crisis. Our next Federal Reserve chairman must represent a clean break from the failed policies of the past.” California voters are sympathetic to the idea of change, too. Boxer holds a slim lead over her three main Republican challengers in the 2010 Senate race. A Jan. 14 Rasmussen poll of 500 likely voters found Boxer leading former Hewlett-Packard Chief Executive Carly Fiorina by 3 points, 46 percent to 43 percent, an ominous sign. “Any incumbent who polls below 50 percent at this point in the season is considered potentially vulnerable,” said Scott Rasmussen , president of Rasmussen Research. Boxer’s support was at 46 percent in November when Fiorina was trailing by 9 points. Boxer wasn’t the only senator to have a sudden epiphany on needed change at the Fed. Twenty of her colleagues consulted their inner candidate and decided it was in their best interest to vote no on Bernanke. (Forty-nine will vote yes while 30 are undecided or declined to comment, according to a Bloomberg News tally.) Bernanke’s four-year term as Fed chairman ends Jan. 31. Policy Debate Boxer’s desire for a Main Street champion at the Fed is a transparent excuse for opposing Bernanke in the same way “the failed policies of the Bush administration” provide economic cover for the Obama administration. If Ms. Boxer senses the California Senate race is slipping out of her grasp, she could always throw her hat in the ring for Bernanke’s job. California is such a paragon of fiscal prudence, she might bring valuable input to the monetary policy process. All kidding aside, there are legitimate reasons for the Senate to debate Bernanke’s reappointment, but kowtowing to populist sentiment isn’t one of them. As a Fed governor from 2003 to 2005, Bernanke advocated interest-rate cuts to avoid deflation at a time when the economy needed just the opposite. He became Fed chairman in February 2006 as the housing bubble was cresting, failed to see the effect intertwined mortgage derivatives could have on the financial system and told us the subprime crisis was “contained.” No Character Questions But, hey, poor forecasting never disqualified anyone from a job at the Fed! The decisions the Fed made in 2008 to create a host of credit facilities to make loans to non-banks and support various markets were made under “unusual and exigent circumstances,” as specified in the Federal Reserve Act. No one would challenge that assessment of the financial backdrop. It’s easy in hindsight to be critical of this or that policy decision and offer alternative solutions. But do any of Bernanke’s newfound critics believe he acted in anything but the public’s best interest? “You can debate his policies, but you cannot impugn his character,” said David Kotok , chairman and chief investment officer of Cumberland Advisors in Vineland, New Jersey. “His record at Princeton, as a Fed governor, as an economic adviser to the president reveals not one single element of doubt on his character.” PR Campaign When Bernanke talked about his anger at having to bail out American International Group Inc. in a “60 Minutes” interview last year, his emotion was palpable. He did what he thought he had to do to avert Great Depression II. Just maybe Bernanke’s problem is poor public relations. If he weren’t a soft-spoken academic more comfortable in the classroom than the hearing room, he might be a stronger advocate for his reappointment. So Ben, here’s my advice. Take a leaf out of President Barack Obama’s book. Every time you give a speech or testify to Congress, invoke his disclaimer. Reiterate that “we inherited the worst economy since the Great Depression.” Link the crisis to your predecessor, Alan Greenspan , and George W. Bush in their shared aversion to regulation. And give everyone a taste of what Boxer envisions when she talks about a Main Street champion at the Fed. Populist Fed No doubt it would mean leaving the benchmark interest rate at zero until the unemployment rate falls to a politically palatable 5 percent. It would mean ignoring the potential for higher inflation. It would mean undoing everything you and your fellow central bankers across the globe have learned from trial and more errors than you care to remember: That — and you’ve said it best yourself — price stability is both an end in itself and a means to achieve maximum sustainable growth in employment and output. So the next time Boxer brandishes her faux populism, just tell the public you are turning interest-rate policy over to Nancy Pelosi . The dive in the markets will jolt those populists back to reality. ( Caroline Baum , author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .

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Goldman Parachute Awaits Geithner to Ease Fall: Caroline Baum

January 25, 2010

Commentary by Caroline Baum Jan. 26 (Bloomberg) — Treasury Secretary Timothy Geithner is scheduled to testify to the House Oversight and Government Reform Committee tomorrow. The hearing is certain to be good theater. Whether it reveals good government, or a government working for the few at the expense of the many, is another matter. If it turns out Geithner failed to act in the best interest of taxpayers in the bailout of American International Group, Inc ., he is unworthy of the public trust and should step down. That thought may have crossed President Barack Obama’s mind as well. When Obama proposed new limits on the size and scope of commercial banks last week, standing at his side was Paul Volcker , head of the president’s Economic Advisory Board, whose height (6 feet 7 inches) belies his diminished influence –until now. Volcker has long advocated banning commercial banks from speculating with federally insured deposits, but his voice was drowned out by the pro-Wall Street sympathies of Geithner and Larry Summers , another Obama economic adviser. The House Oversight Committee, chaired by Edolphus Towns , a Democrat from New York, subpoened documents from the Federal Reserve Bank of New York relating to the AIG bailout in September 2008, when Geithner was president of the New York Fed. The Fed turned over about 250,000 pages of documents, some of which have been leaked to the press. Lawmakers are particularly interested in the decision to pay AIG’s counterparties, including Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar to cancel, then and there, the credit default swaps the insurer sold them. They also want to know why the New York Fed pressured AIG to withhold that information in its regulatory filings. Secrecy’s Downside So do we. Secrecy surrounding the AIG bailout has worked to compound suspicions the New York Fed did something fishy, that it found a back-door way to pump money into the banks and, in the process, hosed the rest of us. Geithner has testified that the Fed’s hands were tied, that the bank could not “selectively default on contractual obligations without courting collapse.” If that’s the case, why hide the evidence? CDSs are customized, privately negotiated contracts. We have no idea how they were written. Only the parties to them do. Through a Treasury spokesman, Geithner has said he recused himself from “working on issues involving specific companies, including AIG,” after his Nov. 24 nomination as Treasury secretary. How likely is it Geithner was unaware or uninvolved in the negotiations? The New York Fed did not respond to multiple inquiries on the nature of the recusal. Body Language “It’s not necessary to speak words or render a decision to cause influence,” says Jacob Frenkel , a former federal prosecutor and Securities and Exchange Commission enforcement attorney now in private practice. “Mere presence can affect the outcome.” Geithner’s problems pre-date AIG. After Obama nominated him to the Treasury post, a job that put him atop the Internal Revenue Service, we learned he cheated on his taxes. He settled his 2003 and 2004 tax liability after a 2006 IRS audit but didn’t pay back taxes for 2001 and 2002 until Obama nominated him. Obama rushed Geithner’s confirmation process through the Senate on the grounds that he was the only man for the job. The main selling point? In his position at the helm of the New York Fed since 2003, he was familiar with the crisis story line and was involved in the various rescue efforts. He also fiddled while the biggest banks, most of which are in the New York Fed’s district, burned. Escape Clause Geithner has been a public servant his whole life, holding various positions at the Treasury, the International Monetary Fund and the Fed. Somehow he managed to shed the stigma of tax scofflaw, but now BOTH Democrats and Republicans in Congress want blood. His may be just the scalp Obama needs to pacify the populist outrage, especially since he’s perceived as being too cozy with bankers. Following the loss of the late Ted Kennedy’s Senate seat in Massachusetts, Obama is trying out his populist voice. By all rights, he should sacrifice one of his political advisers, who seem to have miscalculated the Massachusetts election and misjudged the public’s appetite for health-care reform when the chief concern is jobs . Axing Geithner might be good for president and Treasury secretary alike. Obama would be seen as an ally of the people. Geithner would be free to claim his just reward: that plum offer from Goldman Sachs. The circle would be squared. Obama would have his man on the inside. ( Caroline Baum , author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .

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Ten Stocks I Wouldn’t Touch With a 10-Foot Pole: John Dorfman

January 25, 2010

Commentary by John Dorfman Jan. 25 (Bloomberg) — Don’t buy Cablevision Systems Corp. Stay away from Moody’s Corp. and Dish Network Corp. Avoid Qwest Communications International Inc. and Mead Johnson Nutrition Co. Be leery of Pitney Bowes Inc., Delta Air Lines Inc., Morgan Stanley, Coca-Cola Enterprises Inc., and American International Group Inc. My reason for giving this advice: These companies, in my judgment, have some of the worst balance sheets in the U.S. The first five companies mentioned above have negative net worth; that is, their liabilities exceed their assets. Among the 727 U.S. companies with a stock-market value of $3 billion or more, only 17 have that unfortunate distinction. The next five companies have positive net worth (stockholders’ equity) but their total debt is at least five times equity, a trait shared by 26 of those 727 companies. There are compelling reasons to prefer businesses with low debt. A company with cash on hand and no bankers looking over its shoulder can buy troubled competitors or snatch assets that its debt-laden rivals need to shed. Take oil tankers as an example. Whenever I meet with tanker company executives these days, someone usually predicts that a shakeout will soon hit the industry. Ready to Pounce Tankers will be for sale cheap, they say, and they will be the shrewd ones who will pick up ships at bargain prices. Well, if such a shakeout happens, not every company can emerge as the canny victor. I put my money on Overseas Shipholding Group Inc. , a New York company with one of the strongest balance sheets in the group. Or look at how JPMorgan Chase & Co. used its balance-sheet strength during the financial crisis of 2008. Chief Executive Officer Jamie Dimon was able to take a firm stance in negotiations with the federal government, and won the right to swallow Bear Stearns Cos. at what I consider a bargain price of less than $10 a share. Bear Stearns, by the way, is a company I liked, admired, and did business with. But it got too close to the flame of excessive debt, leaving it inadequate room to maneuver when times got tough. Generally, I consider debt to be too high if it exceeds stockholders’ equity. Companies with steady cash flow — utilities, cable television operators, tobacco and liquor companies — can safely take on a bit more than that, so long as no game-changing events rock their industry. For portfolios I manage, I generally prefer companies where debt is less than 50 percent of equity. Cablevision, Moody’s Here’s my take on 10 debt-laden companies to avoid. Cablevision , based in Bethpage, New York, has posted annual losses in four of the past seven years. Like all cable operators, it faces potential competition from satellite and wireless technologies. Moody’s , a bond rating and financial information firm based in New York, has come under heavy criticism for issuing bond ratings that were too uncritical. I think profits could be hurt by lawsuits alleging biased ratings. Rivals such as Standard & Poor’s, a unit of McGraw-Hill Cos., face similar issues but have stronger balance sheets. Warren Buffett’s Berkshire Hathaway Inc. has been cutting its stake in Moody’s during the past six months. Dish Network , based in Englewood, Colorado, may struggle to pay back more than $6 billion in bonds between now and 2019. While the stock sells for about $19, corporate net worth is negative $3.09. Buggy Whips Qwest , with headquarters in Denver, offers phone and Internet service. It has a rich dividend yield of more than 7 percent, though I believe a dividend cut may occur. Also, the 2009 dividend will be taxed as ordinary income, the company said. Mead Johnson , a Glenview, Illinois, maker of infant formula, was spun off by Bristol-Myers Squibb Co. last year. Propped up by occasional takeover rumors, the stock trades for a pricey 22 times earnings. We all know the postage meters manufactured by Pitney Bowes of Stamford, Connecticut. But postage meters are a buggy-whip business in the age of e-mail. No wonder the company reduced the generosity of its pension plan in November and announced job reductions in December. Delta Air Lines , based in Atlanta, hit a 52-week high last week, partly on hopes for lower fuel prices. I believe those hopes won’t materialize and that Delta’s debt load of about 20 times equity is excessive. High Debt New York-based Morgan Stanley is the world’s biggest brokerage house, now disguised as a commercial bank. Its debt of 14 times equity makes me nervous, even though it is trying to emphasize steady businesses like asset management. Coca-Cola Enterprises , which bottles Coke’s soft drinks, has debt equal to almost 12 times equity. The Atlanta bottler has made little earnings progress since 2003. American International Group , a New York-based insurer that operates worldwide, lost so much money on derivatives that it required a costly government bailout. The government now owns 81 percent of the company, and it will take so long to repay Uncle Sam that profits for regular shareholders will probably be diluted to near-oblivion. Disclosure note: I own shares of Overseas Shipholding Group personally and for clients. I have no long or short positions in the other stocks discussed in this week’s column. ( John Dorfman , chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com .

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Self-Absorbed? Don’t Blame Me, Blame My Genes: Rich Jaroslovsky

January 22, 2010

Commentary by Rich Jaroslovsky Jan. 22 (Bloomberg) — I have fascinating genes. At least, they fascinate me. For the last several weeks, I’ve been getting up close and personal with my DNA as I compared three major do-it-yourself genetic-testing services. These services, which can indicate your risk of certain diseases, are outgrowths of the multibillion-dollar, multiyear effort to map the human genome . It’s where biotech meets infotech. Caveats are in order. First, biology isn’t destiny: Heredity may play only a small part in determining whether you actually develop a condition. Also, there’s a chance the services, two of which also provide ancestry information, turn up things you’d rather not know. If you can get past those issues, they represent perhaps the ultimate in self-absorption. To compare the three services — Navigenics , 23andMe and deCODEme — I signed up for all of them simultaneously. Once I registered and paid online, each sent me a kit to collect genetic material and a mailer to return it. I also returned the kits simultaneously. Navigenics and 23andMe both use saliva samples for analysis. DeCODEme has a slightly more involved process, using a scraping of the inside of your cheek. I was a little concerned about messing things up, but a video on the Web site showed me how to do it. Results were made available on password-protected Web sites, along with resources to help interpret the findings. Of the three, the $999 Navigenics service was generally the speediest and did the best job of keeping me posted on the process. Its kit arrived in a week, and my results were ready 11 days after I returned it. Solely on Health Navigenics, which is based in Foster City, California, focuses solely on health, covering 27 conditions from brain aneurysms to psoriasis. Findings are displayed on an easy-to- understand color-coded grid, with orange boxes indicating risks that may merit particular attention. Clicking on any box plunges you deeper into the results, including detailed explanations of the variations in your genes that may constitute disease markers, tips to mitigate your risk through controlling non-genetic factors and links to support groups and other resources. Navigenics also provides a toll-free number to discuss your results with a licensed genetic counselor; the one I talked to was clear and highly knowledgeable. The site also provides tips and tools for sharing results with your doctor. Slowest to Report 23andMe is based in Mountain View, California, not far from one of its investors, Google Inc. It was the slowest of the services to report: While the kit arrived just four days after I placed my order, it took 18 days for the company to acknowledge receiving my sample, and an additional 17 days before it posted results. I spent the weeks filling out 30 or so simple surveys whose results 23andMe uses for research purposes. Offsetting the long wait, the $499 test was the cheapest of the three, provided some of the most interesting (if not always important) information and incorporated social-networking and fun stuff along with the serious health material. My results were presented as “clinical reports” covering 48 diseases and traits, and “research reports” on less vital conditions or areas where scientific consensus hasn’t quite jelled. All Me The site does a good job of explaining the results, and genetics junkies can dive deeply into how their risks were assessed. Here is also where I learned that only about 4 pounds (1.8 kilograms) of my body weight can be blamed on genetics; the other 20 or so pounds I could stand to lose are all me. Unlike Navigenics, 23andMe provides ancestry information, and can scour its database to come up with an anonymous list of potential relatives — in my case, almost 1,000 of them, ranging from a possible second cousin to others far more distant. Users can message each other through the service with invitations to share names and family histories, and compare genomes. DeCODEme comes from DeCode Genetics Inc. , a Reykjavik, Iceland-based company that filed for bankruptcy protection in the U.S. just as I was signing up for the $985 service. The deCODEme kit was the last of the three to be delivered, 11 days after I ordered it. My results were available 22 days later, but only sort of. When I logged into the site, every item I clicked returned this message: “You cannot view further details until a health-care provider has reviewed your results.” Doctor’s Note Questions were referred to a toll-free customer-service number. The woman who called back politely explained that I needed to provide a letter from my doctor stating that he was prepared to discuss the findings with me, and pointed me to deCODEme’s terms of service. Buried in eight computer screens’ worth of legalese, New Jersey, where I live, is listed as one of 11 states requiring that “a qualified health-care professional is involved in the ordering and the delivery of results.” The other two services didn’t require such hoop-jumping. After I provided the doctor’s note, deCODEme required me to individually consent to see the results on each of the 48 health items it reported on. Even then I couldn’t get directly to my information; for each item, a pop-up window encouraged me to answer several optional research questions first. Once I finally waded through everything, deCODEme provided an impressive amount of material to put my health results in perspective. But I found the ancestry information confusing and generic, compared with 23andMe’s. The best part was a Facebook- like friend function where I could troll for and invite other deCODEme users to share information. I only felt a little like a DNA stalker. Broad Agreement Overall, the findings of the three services, which broadly agreed with each other, are undoubtedly a lot more interesting to me than to you. Among things I found out: While Type 2 diabetes runs on both sides of my family, the tests showed I have less of a genetic risk than most people — which may mean I got lucky in the gene pool, or just that there are other markers the tests don’t yet pick up. On the other hand, I may have slightly greater than average odds of developing glaucoma, though there’s no family history of it. Oh, and according to 23andMe, I metabolize caffeine faster than most people, which may explain why my four-shot Starbucks cappuccinos don’t send me rocketing through the ceiling. If you’re thinking there’s something just a bit narcissistic in all this: You’re right. So enough about me. Let’s talk about me. ( Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Rich Jaroslovsky in New York at rjaroslovsky@bloomberg.net .

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Goldman’s Escape Route Might Be the Private Road: David Reilly

January 22, 2010

Commentary by David Reilly Jan. 22 (Bloomberg) — Duck season? Rabbit season? It’s bank season. In the wake of this week’s Massachusetts Massacre, President Barack Obama and congressional Democrats may place banks in their sights as they try to appease populist anger and come up with some sort of achievement to take into this year’s midterm elections. No wonder Obama suddenly embraced the idea espoused by former Federal Reserve Chairman Paul Volcker of a Glass- Steagall-like separation of banking and trading activities. While legislative flesh still has to be put on the proposal — and it could easily be watered down — it marks a big shift in the administration’s stance toward banks. It may even signal that the White House and congressional Democrats are getting the guts to finally tackle the question of too-big-to-fail firms and the future shape of Wall Street. That leaves question marks hanging over the too-big-to-fail club. JPMorgan Chase & Co. , Bank of America Corp. , Citigroup Inc. and Morgan Stanley may all have to consider shedding or restructuring parts of their business. Who knows? Merrill Lynch & Co. or Bear Stearns Cos. may get a new lease on life. Of all these firms, though, Goldman Sachs Group Inc. may be in the most danger. The bulls-eye on that firm’s back is so big it may have to start thinking about contingency plans. Unfortunate Timing It didn’t help that as Obama was detailing his proposals, Goldman was reporting the most profitable year in its history. Goldman said net income in 2009 climbed to $13.4 billion, compared to $2.3 billion in the fiscal year ended November 2008. Revenue for 2009 of $45.2 billion was double that of the 2008 fiscal year. Underscoring the threat posed by Obama’s proposal, which he dubbed the Volcker Rule, Goldman reported that fourth-quarter revenue from trading and principal investments of $6.4 billion accounted for two-thirds of overall firm revenue. While other firms such as JPMorgan have big trading operations, none is of the same significance to the overall firm as Goldman’s. Even Morgan Stanley has over the past year been adding more traditional banking and brokerage operations. Never mind Goldman’s last-minute attempt to score some PR points by bringing down compensation as a percentage of revenue to about 35 percent. While that had Wall Street tongues wagging, Main Street will see only that Goldman still paid out $16.2 billion in 2009. That’s a lot of bonus bucks in an economy with 10 percent unemployment . The Private Option So what is Goldman to do? One possibility: spin off some of its businesses, say its hedge-fund, private-equity and asset management operations, while taking the remaining investment- banking firm private, or vice versa. Granted, that would be extremely difficult to pull off given the intertwined nature of the firm’s many businesses. That was a point made on yesterday’s earnings call by Goldman Chief Financial Officer David Viniar . Viniar also said that Goldman, if need be, could wall off its proprietary trading business, which is “not very big in the context of the firm.” Plus, regulators may find it tough to draw the line between proprietary trading — which is done on a firm’s own behalf — and trading done for the benefit of clients. Even Volcker admitted this during congressional testimony, and the president’s proposal noted that any prohibition on trading, hedge-fund or private-equity activity wouldn’t extend to business “serving customers.” How Big It’s also questionable if a return to private partnership, which Goldman was before going public in 1999, would leave a large-enough capital base to maintain the confidence of trading partners and wholesale funding markets. And if the firm’s capital base were big, a private Goldman would likely still be subject to the kind of regulatory scrutiny it was seeking to reduce in the first place. Then again, Goldman’s own employees may embrace such a move if it spared them and the firm the kind of public attention and ridicule that pushed Chief Executive Officer Lloyd Blankfein to chop compensation. And some investors have already been considering such a possibility. Back in December, Douglas Kass , general partner of hedge-fund firm Seabreeze Partners Management Inc., listed Goldman going private as one of his predictions for 2010. Noting the presence of Warren Buffett as an investor in Goldman, Kass predicted on the Web site realmoney.com : “Sick of the unrelenting compensation outcry, government jawboning and associated populist pressures, Warren Buffett teams up with Goldman Sachs to take the investment firm private. The deal is completed by year end.” Harsh Spotlight The spotlight on Goldman may only grow harsher. While Obama didn’t single out any particular firm during his press conference, investors reading between the lines can find none- too-subtle hints at Goldman. “When banks benefit from the safety net that taxpayers provide, which includes lower cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit,” the president said. “And that is especially true when this kind of trading often puts banks in direct conflict with their customers’ interests.” That seemed to be a dig at Blankfein, who scrambled at last week’s Financial Crisis Inquiry Commission hearing to defend Goldman’s trading practices in relation to clients. So too did Obama’s reference to “soaring profits and obscene bonuses.” Over the past year, banks have managed to blunt many financial-reform proposals. That may be changing if Democrats feel they need score a few banking scalps to improve their November election fortunes. In that case, Blankfein may find himself cast in the role of Elmer Fudd. ( David Reilly is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

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Kramlich’s $2.5 Billion Last Hurrah Has Silicon Valley Skeptics Buzzing

January 21, 2010

By Tim Mullaney Jan. 22 (Bloomberg) — Even some of Dick Kramlich ’s friends predict he’s headed for trouble, Bloomberg BusinessWeek reports in the Feb. 1 issue. The 74-year-old co-founder of the venture capital firm New Enterprise Associates just raised a new fund so large that many in Silicon Valley say he’ll never be able to keep up with the returns at other top firms. Chevy Chase, Maryland-based NEA’s $2.48 billion fund is 20 times the size of the average venture fund raised last year and the largest since the financial crisis. Bob Ackerman , the founder of Allegis Capital in Palo Alto, California, who made his first fortune with Kramlich, says NEA’s task would be tough in the best of circumstances and looks near-impossible now because it’s so hard for venture firms to sell their startups through initial public offerings. “Big funds need big IPOs to generate a return, and those have been in short supply for a very long time,” Ackerman said. Such skepticism is widespread as the Valley legend begins his last act. Kramlich, who works out of NEA’s office in Menlo Park, California, says his firm’s thirteenth fund will be his last as a full-time partner, capping a career in which he helped commercialize everything from balloon angioplasty to PowerPoint. When it’s over, he says, he’ll have the last laugh. “With me, you’re dealing with a different kind of cat,” he says. “I don’t have an ego. I have quiet confidence.” Dabs of Money Kramlich and NEA 13 are part of a broader debate about the best way to finance innovation. In the wake of the economic crisis and a decline in startups going public, many experts say the venture business has to get much smaller, shrinking individual funds and the total size of the $200 billion industry by as much as half. VCs like Ackerman, Greycroft Partners LP’s Alan Patricof , and Netscape co-founder Marc Andreessen say the best approach is to put dabs of money into lots of tiny companies, quickly discarding ideas that flame out and feeding those that work. They may initially invest $1 million in the average startup, rather than the $20 million NEA typically has. Bloomberg LP, or a subsidiary of the company, is an investor in Andreessen’s fund. Kramlich and his backers counter that startups need serious money if they’re going to tackle the kinds of issues that boost the economy and raise living standards. A new drug can cost hundreds of millions of dollars to develop. Tesla Motors Inc. has raised $223 million to build electric cars. “If you’re going to climb Mount Everest, you can’t do it with gym shorts and sneakers,” says Alan E. Salzman , chief executive of Vantage Point Venture Partners , a Tesla investor. ‘Flexible Strategy’ NEA took a year longer than expected to raise its thirteenth fund, largely because of Lehman Brothers’ collapse, says Suzanne King , the partner in charge of fund-raising. Kramlich and his partners ultimately got the money by convincing institutional investors of their approach: They plan to hedge their bets on newly formed companies by also backing more mature startups that have perfected their technology and will use NEA’s cash to grow. The fund will focus on health care, energy, and tech companies, while looking for opportune deals in other sectors. “We wanted a diversified fund with a flexible strategy, and that’s what these guys do,” says Vince Smith , chief investment officer of Kansas’ Public Employees Retirement System, which put $10 million into the fund. NEA 13 made 15 investments before the fund closed in early January. The biggest was in Boulder, Colorado-based Clovis Oncology , which plans to buy cancer treatments from inventors who lack the money or management skills to get them to market, said CEO Patrick J. Mahaffy. Clovis will run clinical trials, work with regulators, and handle marketing, splitting rewards with inventors. The NEA fund put $20 million into Montclair, New Jersey e-tailer Diapers.com, largely for marketing. It’s also invested in social-networking and energy startups. Triple Their Money The challenge for NEA is the math, say advocates for smaller venture funds, such as Ackerman. Historically, venture firms have had to triple their money over 10 years to give investors’ top-notch returns. In a stock market where it’s difficult to take even small companies public, that looks highly unlikely, say the skeptics. “Turning $150 million into $450 million is a lot easier than turning $2.5 billion into $7.5 billion,” says Ackerman. He figures NEA needs its portfolio companies to be worth a total of $50 billion. “In one fund, you need 50 $1 billion exits? Or 200 $250 million exits? Has that ever been done?” Laying Plans Still, big venture funds have done better than most others in the past. Of the 11 funds of $1 billion or more raised through 2005, all of them outperformed the average fund raised the same year, according to researcher Cambridge Associates . NEA has raised three funds of $1 billion or more, and all three rank in the top 30% of funds raised the same year, Cambridge says. In the last stretch of his career, Kramlich is giving more responsibility to younger NEA partners and laying plans to build a museum for digital and audio art. But before he goes part- time, he wants to show he can thrive during what may turn out to be the worst stretch for the venture business in decades. “The legacy I want,” he says, “is top-quality people and a top-quality institution that combines the venture art form with scale.” — Editor: Peter Elstrom , Jim Aley To contact the reporter on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net .

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Guys, Gals Hooking Up Is Sexy Idea to Trim Debt: William Pesek

January 20, 2010

Commentary by William Pesek Jan. 21 (Bloomberg) — Music shops in Tokyo would be wise to stock up on their Barry White . That may be among the more intriguing side effects of Finance Minister Naoto Kan this week asking his staff to work shorter days so they have more time for dates. He’s making good on his pledge to rein in the bureaucrats who run the economy. OK, so it sounds a bit creepy. Governments such as Singapore’s have created dating programs that drummed up more ridicule than long-term hook-ups. Yet there are three reasons to applaud Kan’s racy suggestion. One, it may increase Japan’s birthrate. Two, it may boost productivity. Three, it may help alter the mechanisms of Japan Inc . Progress in all three areas is vital to reducing a debt that is roughly double the size of Japan’s $4.9 trillion economy. And yet no finance minister has made an impression on any of them in the last two decades. It’s time for fresh thinking and unconventional policies. Anything that improves Japan’s plight even marginally is worth a try. First, the birthrate. Some demographers predict Japan may become Asia’s Switzerland, proving that living standards need not shrink with a nation’s population. Others point out that Japan’s enthusiastic embrace of robotic technology will lessen the fallout from a rapidly aging population. Demographic Fate Such views only make sense if a government aggressively plans for its demographic fate. The Liberal Democratic Party , which ran Japan virtually uninterrupted for 54 years until August, certainly didn’t. The current government has been preoccupied with short-term challenges, including a recession. Kan’s Democratic Party of Japan is working to tweak tax policies to encourage families to have more kids. Government inaction in general, though, has put the onus on private industry. In November 2008, for example, Keidanren , Japan’s biggest business organization, urged member companies to encourage employees to have more sex. Japan, after all, routinely scores low on annual sexual- frequency surveys by condom maker Durex. In the latest , 34 percent of Japanese respondents said they have sex once a week, compared with 87 percent in Greece and 53 percent in the U.S. That may go a long way to explaining why Japan’s population, now 126 million, is shrinking. Avoiding Japan Investors such as Jim Rogers , author of “A Bull in China,” cite the disconnect between Japan’s massive debt and declining birthrate when asked why they tend to avoid Asia’s biggest economy. Encouraging candle-lit dinners, seductive music and romance is hardly the purview of finance ministers. It’s still heartening to see Kan tiptoeing up to an issue that has been neglected for too long. Productivity is also an obstacle, particularly as the influence of low-cost China and India grows. The only way for high-cost Japan to maintain its prosperity is to get workers to produce more. The trick is to do that while enhancing a work- life balance for which Japan Inc. has rarely had any regard. “U.K. Treasury officials finish work at 6 p.m. or within regular hours and their productivity or work quality” isn’t inferior to Japan’s, Kan said at a Jan. 19 press conference. Japan Airlines Corp .’s bankruptcy shows the extent to which the corporate culture needs a giant rethink. Halting the tradition of pouring state funds into uncompetitive companies is a vital step. So is getting Japanese out of the mindset that they need to work 10 or 12 hours a day when eight should do. Fewer smoking breaks might help. Population Drag The Organization for Economic Cooperation and Development has long argued that increased labor productivity in Japan — which it puts at 30 percent below the U.S. level — is needed to offset the drag from an aging population. Bureaucrats personify barriers to getting there. One reason they work into the night and don’t date much is to craft talking points for Cabinet officials. Here’s a revolutionary thought: Let them speak for themselves, unencumbered by input from unaccountable apparatchiks pursuing their own agendas. Too many bureaucrats work for themselves, not Japanese taxpayers. The aim is to ride the “amakudari” gravy train. The word, meaning “descent from heaven,” refers to the offensive practice of public servants getting cushy gigs in industries they oversaw in government. Their incentive is to look out for their future employers, not the average Japanese household. The DPJ vows to curtail the practice, though that’s easier said than done. Such arrangements are the Japanese version of Whac-a-Mole. Just as you find one and knock it down, another pops up. Japan must kill this corrupt game for good. Getting staffers to go home earlier might reduce government personnel costs. The bigger issue is seeing to it that parliamentary members and Cabinet officials stop relying on entrenched desk-jockeys to do a job better done by themselves. Japan has relied on bureaucrats for decades and look where its economy is. It’s time for a change. If it helps to leave work at 6 p.m. and date more, then so be it. ( William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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Republicans Want the Senate Back With Just One Win: Ann Woolner

January 20, 2010

Commentary by Ann Woolner Jan. 20 (Bloomberg) — For the weight given yesterday’s Senate race in Massachusetts, you would think the Democratic majority status in the Senate hung in the balance. It didn’t. But its supermajority status did, and that’s what counts these days, sad to say. Without 60 votes to kill a threatened filibuster, it might take a legislative trick to get health-care reform passed, for example. This isn’t just about health care. Not long ago, either party would have considered itself on solid ground with 59 votes in the 100-member Senate. Filibusters aimed at killing bills were rarely undertaken or even threatened when a strong majority supported the measure. “It wasn’t thought appropriate for a minority in the Senate to view the filibuster as a way to actually stop legislation,” says Rick Pildes, a New York University law professor. Opponents would give their opinions, however passionately. With rare exception, such as in the area of civil rights , filibusters were considered losing propositions from the get-go. These days political parties are so polarized, so short on ideological moderates and so bent on each other’s demise that compromise on hot-button issues is the rarity. Bipartisanship has come to mean that Democrats cajoled one moderate Republican senator to join. There just aren’t many senators willing to buck party discipline to help chisel compromises. Better Dead For political reasons, many in the minority party would rather kill legislation than work to make it more acceptable to them. South Carolina Republican Jim DeMint last summer openly wished for a health-care defeat as a way to hurt Obama politically. “It will break him,” the senator said . At the same time, winning has become so crucial to Democrats that they gave the people of Nebraska Medicaid tax relief not granted any other state to bring their senator, Democrat Ben Nelson , back into the fold. This shameless dealing has prompted Republican state attorneys general to threaten a constitutional challenge. Lies are told by extremists to galvanize opposition and make it politically hazardous to discredit the disinformation or argue for moderation. So it was when Sarah Palin railed against nonexistent “death panels” and was seconded by party leaders. Democrats, taking a lesson from what their GOP counterparts did during the Clinton years, helped bring the Senate to this point by threatening filibusters against some of George W. Bush’s judicial nominees. They killed several nominations and delayed others. Lifetime Appointments I would argue that nominations to lifetime appointment on the federal bench for candidates from the ideological fringe are more worthy filibuster targets than policy issues or nominees to shorter-term offices. But Democrats accelerated the drive toward making 60 votes the minimum needed to get anything controversial through the Senate when they filibustered Bush’s judicial nominees. The U.S. Constitution implies that a simple majority is required for most issues to pass the Senate. Why else would it instruct the vice president to break any Senate vote that is “evenly divided”? If the Founders wanted a supermajority for everything, they would have said so. The Constitution specifies certain times when a two-thirds vote is needed, as with ratifying treaties or overturning a presidential veto. It says nothing about supermajorities to approve judicial nominations or a new federal program. Shutting Off Debate As for filibusters, the Constitution is silent. Procedures for shutting off debate have evolved through the years, with the current 60-vote majority spelled out in a rule the Senate adopted in 1975. Now senators don’t have to trouble themselves with non-stop speechifying to force the other side to find 60 votes. All a senator need do is threaten a filibuster and line up 41 senators to oppose any motion to shut off debate. That means a mere 41 senators can kill a bill by refusing to ever let the Senate vote on it. This is hardly democratic. Voters tossed Republicans out of the House, Senate and White House in the 2008 elections in a clear rebuff of the GOP. But none of that seems to matter in light of a single Senate race in Massachusetts yesterday. Opposing Health Care It’s true that on health care, a majority of Americans say they oppose the reform packages, making congressional support for it more tenuous. That’s a key reason why deeply blue Massachusetts was in dispute yesterday. But the trend toward requiring 60 votes goes beyond a single issue. When 41 senators have veto power over legislation with strong majority support, something is wrong. No wonder Vice President Joe Biden sounds so perturbed. “This is the first time every single solitary decision has required 60 senators,” Biden, a former senator, told a group last weekend. A bill with only 50 senators supporting it almost never comes to the floor. There goes one of the two jobs the Constitution gives him. With it goes the idea that the party so clearly rejected at the voting polls should take into account that the other guys won. ( Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net .

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Cadbury Bids Leave Investors With Cash to Burn: Matthew Lynn

January 19, 2010

Commentary by Matthew Lynn Jan. 19 (Bloomberg) — It takes a lot for the British to discover a sense of economic patriotism. Selling carmakers Jaguar and Land Rover to an Indian company was fine. Handing over Heathrow Airport to a Spanish firm didn’t ruffle too many feathers, either. But losing Cadbury Plc , which makes the Wispa bar and the Creme Egg, to the U.S.? That is a nibble too far. The potential sale of the company is provoking a backlash, both political and popular, in the U.K. Most of the arguments for keeping Cadbury British are either irrelevant or bogus. It doesn’t make any difference that it is a fine old business. Nor is there any point in the U.K. trying to emulate French-style national champions. There is, however, one solid reason for the shareholders to support the current management, and reject the bids. Cadbury is exactly the kind of asset that investors should want to own for the coming decade. If they get rid of it, they will just have to reinvest the money in something exactly the same. The contest for Cadbury is shaping up into the big trans- Atlantic merger battle of the year. Northfield, Illinois-based Kraft Foods Inc. has already offered 11 billion pounds ($18 billion) for the business — a bid that was rejected by management. Now Hershey, Pennsylvania- based chocolate maker Hershey Co. is preparing an offer. Once a bidding war gets going, it is very hard for a company to survive. Amid the competing bids, the price gets pushed up to a level where shareholders can hardly say no. National Pride And yet both Kraft and Hershey now have to reckon with one force they probably thought wouldn’t play a part in their calculations: British national pride. Over the past decade, the U.K. has been happy to sell many of its national assets to foreign owners, without a moment of regret or a whisper of protest. The British simply pocketed the cash and let someone else worry about how the country would earn its living. Cadbury is proving to be the one bid they find hard to swallow. U.K. Business Secretary Peter Mandelson has reminded institutional shareholders that they must focus on the long-term interests of the U.K. economy, not short-term profits, and he’s telling companies making acquisitions that they must show “real corporate stewardship.” The unions, perhaps predictably, have been complaining about the proposed takeover. But so has the Mail on Sunday, one of the U.K.’s biggest-selling newspapers, which is running a campaign to “ Keep Cadbury British .” Ridiculous Arguments In reality, most of the arguments for fighting off a foreign bid are ridiculous. They can be easily dismissed. First, it may well be true that Cadbury is an old company, with a tradition and history it can be proud of. And it may also be the case that it has legions of devoted snack lovers: Just take a look at the 785,000 fans its Wispa bar has on Facebook . But so what? Neither Kraft nor Hershey will pay 11 billion pounds for the company and then run it into the ground. They will nurture the brands just as carefully as the current owners have done. They might even invest more. After all, they will need to expand the business fast to justify all the money they are offering. They certainly aren’t going to destroy it. Second, the U.K. needs to rebalance its economy away from financial services, and that makes the timing of a hostile takeover for one of its few remaining world-class manufacturing companies particularly unfortunate. French Nationalism But there is no point in the British moving toward French- style economic nationalism now. The country doesn’t have much of a manufacturing base left to defend, nor has it ever had the kind of industrial-political elite that can make a strategy of building national champions work. Economic nationalism hasn’t been a great success in France — and it certainly isn’t going to work in the U.K. So what’s the case for rejecting the bid? It is this: There is nothing better for investors to do with their money. Let’s say the bid is successful. What are the shareholders going to do with that 11 billion pounds? Looking forward to the next decade, there are very few safe places to invest. Interest rates are so low you don’t want to be in cash. Vast deficits mean government bonds will inevitably collapse in price one day. Gold is already close to a record high — and you seldom make money by investing at the top of the market. Emerging markets may well have the brightest prospects, but it’s probably too late to buy into that boom. Safe Bet The few assets you would want to buy right now are safe, blue-chip consumer companies, with loyal customers and reliable profits and dividends. Such as? Well, Cadbury . If they take the cash, shareholders will be looking to reinvest it in something very similar. But the fewer of those companies there are, the harder it will be to invest in them, and the higher prices will get. Appeals to sentiment, or arguments about rebuilding the U.K. economy, are irrelevant to this battle. But in their own self-interest, shareholders should keep Cadbury British because it is precisely the kind of asset that is the safest home for their cash right now. ( Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net .

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Doomed Deals Spark Tug-of-Wars Between Creditors: Ann Woolner

January 14, 2010

Commentary by Ann Woolner Jan. 15 (Bloomberg) — Those who years ago bought Tribune Co. bonds now are hurling nasty claims at the so-deserving Sam Zell , the real estate magnate whose takeover loaded the storied newspaper company with so much debt that it fell into bankruptcy. Longtime bondholders accuse Zell of borrowing more than the company was worth to make the deal, thus jeopardizing their stakes in what had been until then a solvent company. The resulting leveraged buyout “was a virtually no-money- down LBO,” as bondholder attorney David Rosner said in court last month. We know from the mortgage meltdown the danger of no-money- down loans. So now Tribune bondholders are pitted against the banks and hedge funds that enabled the doomed deal by loaning the money. The question is who gets what ownership interest in the company when it comes out of bankruptcy. As with the multitude of Ponzi schemes hidden during good times and exposed by the recession, so it is with leveraged buyouts. When the market and the economy were bubbling up, no price seemed reckless. Now it falls to bankruptcy judges to sort out the rubble. Tribune Co. isn’t the only bankruptcy case prompting accusations of so-called fraudulent transfer . That is bankruptcy slang used when an insolvent company gives away more than it gets in return, or when that sort of fiscal carelessness drives the company into insolvency. Leveraged Takeovers At least three other companies went through heavily leveraged takeovers that seemed to have helped land them in bankruptcy court and left previously confident creditors fighting with newcomer lenders. Bondholders aren’t the least bit happy. A Florida bankruptcy judge in October declared homebuilder Tousa Inc. fraudulently transferred assets when it bailed out an affiliate six months before filing for reorganization. The creditors’ committee has sued Tousa’s directors over it. In Nevada, creditors for casino operator Station Casinos Inc. are asking a judge to let it sue directors, alleging the company’s 2007 leveraged buyout left it with $1.7 billion in new debt that catapulted the casino operator into bankruptcy. Likewise, creditors are suing in Manhattan over the 2007 leveraged buyout of Houston-based Lyondell Chemical Co., claiming that was partly a fraudulent transfer, too. Debt-Ridden Unit When entrepreneur Leonid Blavatnik used a debt-ridden unit of his Access Industries Holdings LLC to buy the chemical producer, “Every dollar of the $22 billion used to acquire Lyondell was borrowed money,” the creditors committee said in court papers. Within a year, the merged company was in bankruptcy court. Lyondell’s creditors are suing the major banks and hedge funds that put the deal together. Of all those deals gone bad, the one that grabs my gut is that of the Tribune Co. I’m a journalist with a deep need and soft heart for newspapers. I fret daily about what will become of them and the rest of us if they fail. Newspapers were in sufficient trouble without Zell coming along and pulling down some of the country’s best-known papers, the Los Angeles Times , the Chicago Tribune and the Baltimore Sun, all owned by Tribune. Now the company, which also owns a score of broadcast outlets, might actually make money if it could ever get out of bankruptcy court and settle its debts. Rightful Demand What is holding up reorganization is the bondholders’ rightful demand for an independent investigation of the buyout. They have asked the bankruptcy judge to appoint an examiner to look into their claims of fraudulent transfer. If the bondholders prove the LBO was a fraudulent transfer of assets, board members could be held liable for approving it. The banks that made the defective loans could lose their security interests and their claims against the operating companies, which amount to billions of dollars. They can’t blame Tribune’s problems on the sudden crash of the economy. That the deal was doomed from the start wasn’t only entirely predictable, it was widely predicted. Zell, who once called himself a “grave dancer” for happily jumping into companies others found moribund, told the Associated Press in 2007 that he was obviously more optimistic about newspapers than others. At the time he was putting together the Tribune deal as revenue was dropping. ‘Human Wrecking Ball’ Since then, he has been called a “human wrecking ball” for the toll his cost-cutting wreaked on his debt-laden newspapers. So said a Los Angeles-based columnist in a Washington Post op-ed piece. Asked this week on CNBC when his company will come out of bankruptcy, Zell called it “reasonable to assume that it will come out probably in the first half of this year.” It could happen within the first quarter if negotiations with creditors “go easier.” At the moment, they aren’t going easy. If his enablers in the merger would acknowledge the debt they owe to the bondholders who preceded them, then things might go a little smoother. ( Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net .

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Pin the Tail on Blankfein Is a Game Nobody Wins: David Reilly

January 13, 2010

Commentary by David Reilly Jan. 14 (Bloomberg) — Goldman Sachs Group Inc. , in the billiard room, with a rope and a blood-stained collateralized debt obligation. That seemed to be the answer the Financial Crisis Inquiry Commission was aiming for yesterday as it kicked off a giant game of “Clue” meant to solve the mystery of who killed the financial system. Now don’t get me wrong. A bit of Goldman bashing is good sport, since the firm is one of the biggest and most profitable on Wall Street. And there are plenty of serious questions that need probing regarding products it created and its dealings with American International Group Inc. It’s just that the commission’s first day of public hearings needed to focus less on Goldman and more on the wider rot within the financial system. This misfire made for an inauspicious start for the panel, whose hot seat was filled by Goldman Chief Executive Officer Lloyd Blankfein , JPMorgan Chase & Co. CEO Jamie Dimon , Morgan Stanley chief John Mack and Bank of America Corp. ’s newly minted honcho, Brian Moynihan . The poor showing will only reinforce the perception among many people that this commission, coming after financial-reform legislation has reached an advanced stage, is doomed to irrelevance. To avoid that fate, the commission in subsequent hearings, as well as in its final report due by year’s end, must do more than focus on the events of 2007 and 2008, or engage in academic discussions of risk-management practices. ‘Perfect Storm’ It’s imperative to employ a wider, and more historical, context than was displayed on the first day of hearings. That means questioning the very foundations of modern Wall Street and looking to which events over the past 20 years led the financial system to its current predicament. Commission Chairman Philip Angelides hinted at this possibility at one point, saying, “I do believe that one of the issues we must explore is: Was this purely a perfect storm, or was it a man-made perfect storm in which the clouds were seeded?” Figuring that out means asking the likes of Blankfein or Dimon basic yet pointed questions such as whether their business model was, and possibly still is, broken. That didn’t happen. Instead we got Commissioner John Thompson asking Morgan Stanley’s Mack for suggestions on “how to think about innovation and managing the risks associated with innovation.” Goldman’s Survival Similarly, the commission needed to spend less time grappling with Blankfein over whether Goldman would have survived without government assistance. That’s an unanswerable question that does little more than let Dimon chuckle over how easy a ride he gets compared with Blankfein. Commissioners also have to do more homework. Commissioner Peter Wallison wasted time quizzing the bankers about their leverage — borrowed money banks use to amplify returns. A staff member should have gone to the Securities and Exchange Commission’s Web site , called up the firms’ financial statements and plugged the balance-sheet figures into a spreadsheet. It’s that easy, and, once done, would have allowed Wallison to ask meaningful questions. The panel members also should lob questions at the right targets. It was surprising that Commissioner Brooksley Born aimed questions about over-the-counter derivatives at Blankfein and Mack, rather than Dimon, whose bank is the biggest player in the area. Let’s also be less solicitous of those testifying. The group’s stance should be adversarial, forcing witnesses to answer tough questions and cough up the names of individuals who contributed to the crisis. Pinning Accountability Holding individuals in government and on Wall Street accountable may well prove one of the commission’s toughest tasks. Yet it can’t shy away from it. And doing so means more than just playing pin the tail on Blankfein. Of course, Wall Street doesn’t want too much accountability. Speaking earlier this week on Bloomberg Television, Sullivan & Cromwell LLP Chairman Rodgin Cohen warned that “the worst thing that can come out of it is a search for villains, because if we vilify individuals we’re going to miss the real causes of the crisis.” Uh, no. As Angelides said, the storm that swamped markets wasn’t an act of God. “These were acts of men and women.” So name ‘em. There is also no need for the panel to duplicate work done in Congress. So rather than discuss how much interest a bank should retain in securitizations — an already well-plowed area — commissioners could have poked their nose into areas where Congress won’t go. Fannie and Freddie One potential gold mine: the intersection of politics and finance. Given that the firms represented yesterday pay out millions each year in congressional campaign contributions , a few questions about how they influence legislation would have been in order. In that vein, the commission is uniquely positioned to dig into the influence of Congress on the housing market and its stewards, Fannie Mae and Freddie Mac . The flip side is that the group can play a vital role in putting the crisis into a much-needed, non-political focus. Too many Americans view events of the past two years through a political prism. Those on the right believe all problems stem from Congress, specifically House Financial Services Committee Chairman Barney Frank , regulation and the doings of Fannie and Freddie; those on the left think unfettered greed at big banks and on Wall Street is solely to blame. The truth lies somewhere in between. Getting to it will require a wider, deeper and more coherent effort than we saw yesterday. ( David Reilly is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

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Hedge-Fund Guy Seduces Buffett to Safeguard Bonus: Mark Gilbert

January 13, 2010

Commentary by Mark Gilbert Jan. 14 (Bloomberg) — Dear investor, it’s that time of the year when we share our thoughts on how we plan to invest your money here at My, What Lovely Deep Pockets That Nice Mr. Warren Buffett Has Asset Management. Some of you may be wondering about the decision to rebrand our hedge fund. Hey, if a favor-currying name-change is good enough for the tallest building in the world, it’s good enough for us. We, too, would have doffed our caps to the sheikhs of Abu Dhabi, if we didn’t think they’ve got enough on their plates keeping the tower cranes of Dubai upright. If Mr. Buffett would like to show his gratitude, we take gold, Californian IOUs, or anything that isn’t a U.S. Treasury. I plan to pay my bonus this year in Venezuelan bolivars, just as soon as I can work out which of the multiple exchange rates is most advantageo . . . I mean, most appropriate. We are dismayed to say that the stellar profit we were hoping to deliver to you along with this report has been obliterated after a massive, coordinated, highly sophisticated attack on our computerized trading systems by a shadowy cabal known only as “the global trading community.” We suspect the hackers responsible are based in Beijing. Or Greenwich, Connecticut. Or possibly Mayfair, London. Anyway, they say life is binary, and by the close of trading last week all that was left in our profit-and-loss account was a lot of zeroes without that all-important “1” at the beginning to keep us afloat. So much for betting that our lenders would never be able to foreclose on our sinking Dubai real-estate investments. Flights of Fancy We considered telling you that we tied a bunch of balloons to your profits and claiming that they floated away on a strong breeze; our chief economist said the story would be about as believable as a Greek economic statistic. We thought about seeking a bailout from the International Monetary Fund, figuring Turkey will get its cash soon, and wanting to get in line before Greece finally realizes it’s about as popular with its fellow euro members as an orphaned suitcase at an airport. Frankly, we’d get better terms from Big Louis the Loan Shark; how is the global economic recovery supposed to take hold if I have to sell my Bentley? So, instead of a large dividend payment, enclosed with this report you will find a pair of flimsy plastic spectacles, through which we suggest you view the accounts printed at the end of the missive. Hey, if three-dimensional viewing works for a movie about blue-skinned aliens, it should easily enhance the optical aesthetics of our balance sheet. Secrets and Lies Some of you may be puzzled by the plethora of sentences that have been blacked out in this report. Our new lawyer, who used to work at the Federal Reserve Bank of New York when Treasury Secretary Timothy Geithner ran the shop, brought his special Goldman Sachs Group Inc. “anti-highlighter” pen with him. If anyone wants to know about the secret payments made to my Cayman Islands account, you know where to send the subpoena. The burning question we face for the coming year is how to grow your investments and the size of our fund so that we can join the “Too Big to Fail” gang, along with the global investment banks, thus ensuring an adequate level of taxpayer support will always be available should our sophisticated trading algorithms mistakenly choose red instead of black at the roulette table. One of the plans currently under consideration is whether we should split the portfolio in two to create a “good fund” and a “bad fund.” Unfortunately, rigorous statistical modeling designed to filter the current holdings of the fund through the gauze of a Gaussian screening filter suggests one fund will be left empty, while the second will contain a steaming pile of what, at the risk of descending into scatology, can only be described as two- year Greek government notes. The confidential nature of our proprietary analytical software precludes me from revealing which is which. Yours, Hedge-Fund Guy. ( Mark Gilbert is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

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Google Phone Threatens Droid More Than IPhone: Rich Jaroslovsky

January 11, 2010

Commentary by Rich Jaroslovsky Jan. 11 (Bloomberg) — It’s a nice phone. OK, it’s a very nice phone. But nothing about the new Nexus One smartphone from Google Inc. comes close to warranting the mass hysteria that attended its unveiling last week. The Nexus One isn’t revolutionary. Nor is it an iPhone killer — a phrase we should banish to the Tech Writers’ Hall of Cliches. It is, instead, a sleek phone with some advancements in display and processor technology that will surely be matched and then overtaken by others in the months ahead. True, the rapidly evolving competition among Google, Apple Inc ., Microsoft Corp. and Research in Motion Ltd. is fascinating to watch. And Google’s plunge into e-tailing — the Nexus One can only be bought directly from the company over the Web — has the potential to shake up how phones are sold. Me, though, I find it hard to swoon over a business model. The Nexus One, manufactured by Taiwan’s HTC Corp. to Google’s specifications, is similar in both size and shape to the iPhone — a smidge thinner and lighter, a trifle longer. It runs a new version of Google’s Android operating system that makes modest tweaks to the software that debuted on Motorola Inc. ’s Droid two months ago. Thing of Beauty If anyone ought to feel threatened by the Nexus One, it’s Motorola, which committed to using Android for all its smartphones and now has powerful new competition from its own partner. Just to cite one area, the Droid’s screen used to be my favorite: super-bright, with higher resolution than the iPhone. But the Nexus One uses new technology that provides an even richer display, with deeper colors and blacker blacks. It’s a thing of beauty. Under the hood, the Nexus One uses a Qualcomm Inc. processor that’s the most powerful ever put in a phone. It also has enhanced 3-D graphics, expanded speech-to-text features — you can now dictate your Facebook or Twitter updates rather than type them — a replaceable battery and a memory-card slot. At the same time, the Nexus One shares the shortcomings of previous Android and HTC phones. The number of Android apps trails far behind the iPhone. So does Android’s ability to sync with Microsoft Outlook for e- mail, calendars and contacts, though the Nexus One does come with a version of DataViz Inc.’s Documents To Go software that lets you work with Microsoft Word, Excel and PowerPoint files. Accidental Launches Its app icons, which now whiz onto the desktop instead of rolling up window shade-style, are too small and close together; I too often accidentally launch an app when all I’m trying to do is scroll through them. The included 4 gigabytes of storage is too small and inflexible, with only 190 megabytes set aside for apps. You can’t pinch your fingers together or move them apart to zoom in or out on a screen. The home, back, menu and search buttons below the screen require too much pressure to push, and the trackball seems superfluous except when it glows to signal a new call or message. The company’s real innovation is in how it’s selling the Nexus One and the other Google-branded phones to follow. Most phones in the U.S. are purchased tied to a specific carrier, which subsidizes the cost of the handset in return for your commitment to a service contract. Google is seeking to separate the handset from the service. You can buy it with a service plan for $179, or pay $529 and purchase service separately. T-Mobile At launch, there isn’t much of a choice: The only carrier currently offering a plan is T-Mobile USA, the U.S. mobile-phone division of Deutsche Telekom AG , which charges $79.99 per month. In theory, you can also use a SIM card from AT&T Inc., but the phone wouldn’t be able to use AT&T’s 3G network for data, only its older, slower Edge network. Outside the U.S., Google is shipping the unlocked Nexus One to the U.K., Hong Kong and Singapore. The choices will multiply over time. This spring will see a Nexus One that runs on the Verizon Wireless network, which uses a different technology than AT&T and T-Mobile. Also in the spring, Vodafone Group Plc is lined up to offer a service plan for the Nexus One in Europe. Google is responsible for delivering the phone — the one I ordered on launch day last week arrived in less than 48 hours — and will be the first point of contact if anything goes wrong. Weakening the carriers’ control and compelling them to compete with each other may eventually put more power into consumers’ hands — and, of course, Google’s. While all this is interesting, it’s hardly earth- shattering. When Apple introduced the iPhone in 2007, it changed the entire way people thought about wireless devices, ushering in the era of the mobile Web. The Nexus One? It’s just a very nice phone. ( Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Rich Jaroslovsky in New York at rjaroslovsky@bloomberg.net

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Stocks Analysts Hated Beat the Ones They Loved: John Dorfman

January 11, 2010

Commentary by John Dorfman Jan. 11 (Bloomberg) — As 2010 gets under way, the stock that Wall Street’s security analysts love most is CMS Energy Corp. It garners 14 “buy” recommendations, with no dissenting votes. One might think that this stock can’t miss. History suggests otherwise. Accenture Plc , which recently saw its Tiger Woods -centered advertising campaign turn to dust overnight, was analysts’ favorite stock in 2002. Sixteen analysts urged investors to buy the stock; not one said to hold or sell. How did Accenture do? Shares fell 33 percent that year. That result was not a fluke. For 11 of the past 12 years, I have studied the performance of analysts’ four favorite stocks, and the fate of the four they most scorned. My analysis covers 1998 through 2009, except for 2008, when I was temporarily retired as a columnist. Their favorites, on average, were flat during those years while the four stocks they hated most gained about 6 percent annually. The Standard & Poor’s 500 Index had an average gain of about 9 percent. Last year was particularly good for the despised stocks. Led by Sears Holdings Corp., they rose 47 percent compared with 23 percent for the analysts’ favorites. Pariahs Triumph How could the Wall Street experts have known that the raging recession and bear market, still in full force in January 2009, would give way to a stock-market recovery, and then an economic recovery? They couldn’t. And that is just the point. Analysts are not all-knowing. For the most part, they are intelligent, well informed and highly paid. But like most human beings, they extrapolate the recent past as a guide to what comes next. Of course, the stocks with the highest number of “sell” ratings don’t always beat the ones with the most “buy” ratings. In fact, they managed to do that only half the time in the 11 years, with one year (1998) a tie. All figures in my study are total returns including dividends. Most years the study included any stock covered by four analysts or more. In 2007 it was restricted to stocks in the Dow Jones Industrial Average. Let’s see which stocks currently have the highest — and lowest — ratings. CMS Energy , the analysts’ top favorite, is an electric and gas utility with headquarters in Jackson, Michigan. At 13 times earnings, it is fairly priced, in my opinion. The dividend yield, at 3.2 percent, is skimpy for a utility. In Favor 5N Plus Inc. , which has the unanimous approval of a dozen analysts, is based in Saint-Laurent, Canada. The company sells extremely pure metals and alloys to the electronics industry. It earned a healthy return on stockholders’ equity of 21 percent in fiscal 2009, and sells for 14 times earnings. I like 5N, but I’m slightly puzzled by analysts’ extreme enthusiasm, since they predict that fiscal 2010 earnings will be down about 22 percent. Reinsurance Group of America Inc. , whose headquarters are in Chesterfield, Missouri, is rated “buy” by 10 brokerage- house experts, again with no dissent. The stock appears cheap at nine times earnings. However, profitability in 2008 was skimpy, with a 6 percent return on equity. Fuel Systems Solutions Inc. , based in Santa Ana, California, also has 10 “buys.” It designs systems to help internal combustion engines run on clean fuels such as natural gas or propane. Shares are zig-zagging around $50, up from about $10 at the end of 2002. Perhaps it will prove a durable growth stock, but at 27 times earnings it is too expensive for a value investor like me. The Despised This year, I don’t much like the despised stocks either. General Motors, alias Motors Liquidation Co ., which was second on the most-hated list last year, heads the list this year. All four experts covering the stock say “sell.” Although GM last week boldly predicted a profit for 2010, I doubt the stock will do much this year. Its book value (corporate net worth per share) is negative $149 a share. Gabriel Resources Ltd. is a mining company based in Toronto that wants to mine gold in Romania. It has had no revenue in recent years. Four analysts say “sell,” one says “hold.” Rochester, New York-based Eastman Kodak Co . has been trying to reinvent itself as a digital photography company. Things are not going well: Revenue fell to $9.4 billion in 2008 from more than $19 billion in 1991. Four analysts say “sell,” two say “hold.” I have higher hopes for Post Properties Inc. of Atlanta, which develops upscale apartment communities in the Southeast and Southwest. I think Post may show some pep this year. Yet 11 of the 14 experts covering the stock say “sell” while three say “hold.” They estimate that it lost money in 2009, and expect it to post another loss in 2010. Disclosure note: I have no long or short positions in the stocks discussed in this week’s column, personally or for clients. ( John Dorfman , chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com .

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Even $4.9 Trillion Doesn’t Ensure Respect Today: William Pesek

January 7, 2010

Commentary by William Pesek Jan. 8 (Bloomberg) — Hirohisa Fujii , 77, always personified Japan’s shrinking-population problem. That he was tapped at all to be finance minister underscores the dearth of energetic leadership needed to enliven an economy that has underperformed for 20 years. And now, his untimely resignation reminds us why Japan’s funk will live on. A third “lost decade,” anyone? Let’s not cast too much blame Fujii’s way; his health is slipping. The fact remains, though, that Japan lacks a deep bench of policy makers to tackle deflation. This week, Naoto Kan became Japan’s sixth finance minister in 18 months. Having little fiscal-policy experience, the best we can say is that Kan’s age has a six-handle on it — he’s 63. It’s not ageist to point out the disconnect between Japan’s August election and the economic team that Prime Minister Yukio Hatoyama chose. The contest marked a generational shift in which aggrieved younger voters ended the Liberal Democratic Party ’s half-century rule. The average age of the new Democratic Party government was 48, compared with 55 for the previous one. Hatoyama’s first team to run the $4.9 trillion economy — Fujii and Financial Services Minister Shizuka Kamei , who was 72 at the time of his appointment — boasted an average age of 74.5. Yet it’s less about age than their experience. In the U.S., for example, I would have much preferred former Federal Reserve Chairman Paul Volcker , 82, to Timothy Geithner , 48, as Treasury secretary. Fujii and Kamei defected to the Democratic Party of Japan after decades with the tired party it defeated. If that’s “change,” perhaps officials in Tokyo should consult a dictionary. Nikkei Anniversary The two-decades-of-negligible-growth yardstick is useful. Last month marked the 20th anniversary of the Nikkei 225 Stock Average’s climb to 38,915 points. Today it stands at less than a third of its record high, and gross domestic product, unadjusted for prices, is at its lowest level since 1991. As deflation intensifies, Japan lacks conventional tools to stop it. The most important tool missing is fresh thinking. Kan might represent just that. His stature rose as health minister in the 1990s, when he exposed that agency’s role in allowing as many as 5,000 Japanese to contract HIV through contaminated blood products. He is a champion of wrestling power away from bureaucrats, something that is vital for Japan’s outlook. The odds don’t favor Kan being an economic maverick. He isn’t the deficit hawk that Fujii was, and economists in Tokyo are abuzz about a return of the public-works policies that created the largest government debt in the industrialized world. Japan’s Bust This year, meanwhile, marks the 20th anniversary of the bursting of Japan’s economic bubble. To this day, many blame then Bank of Japan Governor Yasushi Mieno for raising interest rates too much. The real cause of the bust was unsustainable asset prices in stocks and real estate and a misguided belief that Japan’s boom was unstoppable. Japan is poised this year to lose its title as second- largest economy, with China projected to slot behind the U.S. The psychological blow that will have on Japanese politicians and consumers isn’t getting the attention it deserves. Nor does Japan’s revolving-door economic leadership inspire confidence. It barely makes sense for peers at Group of Seven or Group of 20 meetings to learn the name of Japan’s latest finance minister. Why bother when he won’t be around very long? Ever-Changing Faces Few countries in Asia care more than Japan about how the rest of the world views itself. And yet little thought seems to go into how the ever-changing roster of leaders plays out abroad. That discontinuity also comes with a price domestically. By the time a new economic head gets up to speed and staffers adjust, he’s gone. Revolving-door politics make Japan’s biggest challenges even more insurmountable. They include reducing debt, shoring up the national pension system, raising productivity, increasing the birthrate so Japan has future income earners to support an ageing population and competing with the Chinese and Indian juggernauts. Any of these tasks are Herculean in the best of times given how task-oriented Japan’s bureaucrats tend to be. GDP is weak in Hokkaido? Build a couple of huge dams. Unemployment is rising in Osaka? A few new highways will help. Okinawans are feeling left out? Here’s a nice big bridge project to keep the peace. Antiquated Model What they aren’t good at is jettisoning an antiquated economic model. The government can issue all the fresh debt it wishes, yet it’s a short-term fix that distracts from where Japan wants to be in 10 years. Households know it and this lack of confidence in the future explains why they aren’t spending . The lack of market reaction over Fujii’s resignation is a cautionary tale. Investors shrugged it off because they are used to such departures. There also seems to be a tuning-Japan-out dynamic at play here. Japan’s economy is anything but irrelevant. It is home to Asia’s biggest stock and bond markets and has the region’s most international currency. Size still doesn’t guarantee that investors will remain active in an economy that is taking 20 years and counting to right itself. ( William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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Huff TV: Roy Sekoff On AIG-Fed Emails: This Has Got To Be The End Of Tim Geithner (VIDEO)

January 7, 2010

HuffPost Editor Roy Sekoff appeared on The Ed Show Thursday to weigh in on news that Tim Geithner and the New York Fed actively worked to keep details of bailed out insurer AIG’s payments to Wll Street banks hidden from the public–even though it was taxpayer money that was being used. Sekoff contends that this is just more evidence that the government has become “Of the bankers, for the bankers, and by the bankers.” “The fix is in,” he said. WATCH

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Initial Unemployment Claims in U.S. Climb Less Than Estimated to 434,000

January 7, 2010

By Courtney Schlisserman Jan. 7 (Bloomberg) — Fewer Americans than forecast filed claims for unemployment benefits last week, indicating job cuts are waning as companies become more confident the economy is recovering. Initial jobless applications climbed to 434,000 in the week ended Jan. 2, from a 16-month low of 433,000 the prior week, Labor Department figures showed today in Washington. The median estimate of economists surveyed projected an increase to 439,000. The number of people receiving unemployment insurance dropped, and those receiving extended benefits increased. Improving sales and production gains are prompting companies to slow the pace of firings as the economy recovers from the worst recession since the 1930s. Labor Department data tomorrow may show employment was unchanged in December after almost two years of job cuts. “This is clearly a strong number,” said Maxwell Clarke , chief U.S. economist at IDEAglobal in New York, who forecast claims at 435,000. “Looking forward, you should see slow and steady improvement and a return to positive payroll numbers.” The four-week moving average of initial claims, a less volatile measure, fell to 450,250 last week, the lowest since the Sept. 13, 2008, from 460,500 the prior one. Claims have fallen 36 percent since reaching a 26-year high of 674,000 in the week ended March 27. Economists forecast claims last week would rise 7,000 from a previously reported 432,000, according to the median of 28 projections in a Bloomberg News survey. Estimates ranged from 400,000 to 455,000. Stocks Maintain Declines Stock-index futures trimmed earlier losses after the report. Futures on the Standard & Poor’s 500 Index expiring in March were down 0.2 percent to 1,130.4 at 9:06 a.m. in New York. Employment was unchanged in December after an 11,000 decline a month earlier, according to the median forecast of 74 economists in a Bloomberg survey before tomorrow’s Labor Department report. Payrolls have declined every month since the recession started in December 2007. The jobless rate may have held at 10 percent. Continuing claims dropped by 179,000 to 4.8 million in the week ended Dec. 26, the fewest in almost a year. The continuing claims figure does not include the number of Americans receiving extended benefits under federal programs. Extended Benefits Today’s report showed the number of people who’ve used up their traditional benefits and are now collecting extended payments increased by about 165,000 to 5.44 million in the week ended Dec. 19. Thirty of the states and territories where workers are eligible to receive the government’s latest 13-week and six-week extensions have begun to report that data, a Labor Department spokesman said. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, fell to 3.6 percent in the week ended Dec. 26 from 3.8 percent, today’s report showed. Thirty-two states and territories reported a decrease in claims, while 21 reported an increase. These data are reported with a one-week lag. A report from ADP Employer Services yesterday showed companies in the U.S. cut an estimated 84,000 jobs in December, the fewest since March 2008. While that was greater than economists had anticipated, the survey has overstated the Labor Department’s estimate of private payroll losses by 85,000 a month on average in the six months to November. Job-Cut Announcements Another report yesterday showed employers last month announced the fewest job cuts since the recession began. Planned firings fell 73 percent in December, to 45,094 from 166,348 during the same month the prior year, Chicago-based placement firm Challenger, Gray & Christmas Inc. said. Job losses have hurt sales at Cintas Corp. and “we do not know when positive job growth will return,” chief executive officer Scott D. Farmer said in a statement Dec. 22. Cincinnati-based Cintas, the largest U.S. supplier of uniforms, said that profit excluding some items fell to 39 cents a share in the three months ended Nov. 30. “These job losses directly affect our business as many of our products are dependant on customer employee levels,” Farmer said. “It is unlikely that we will return to steady growth until the U.S. job market begins to recover. We anticipate that when job recovery does occur, it will be a slow and lengthy process.” Some companies continue to cut workers. Hugo Boss AG, Germany’s largest clothing maker, said it plans to close a factory in Ohio, its only U.S. plant, by the end of April, a spokeswoman said Dec. 30. The decision affects 300 jobs. To contact the reporter on this story: Courtney Schlisserman in Washington at +1-202-624-1943 or cschlisserma@bloomberg.net ; To contact the editor responsible for this story: Christopher Wellisz at +1-202-624-1862 or cwellisz@bloomberg.net

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Bond Auctions Survive Credit Freeze, Bankers’ Hex: Joe Mysak

January 5, 2010

Commentary by Joe Mysak Jan. 6 (Bloomberg) — Selling municipal bonds the old- fashioned way, at auction , still hasn’t gone out of style. This is welcome news for all those who believe in good government, and who also know that inviting banks to bid on bonds can save borrowers money. States and localities sold $60.6 billion in bonds at auction in 2009, or 15.6 percent of the $389 billion in fixed- rate issues marketed during the year, according to Bloomberg data. That’s down from 18.6 percent in 2008. Of the 11,583 bonds sold, 3,775, or about one-third, were sold at auctions. It looked like bankers’ four-decade push to eradicate auctions, or competitive sales, would succeed in 2009. For one thing, issuers began selling a new kind of security, Build America Bonds. New varieties of bonds are best sold through negotiation, with issuers awarding the business to a bank before setting the price. The thinking here is that new securities require additional sales efforts to educate investors about how the new products work. That’s the thinking. Also portending doom for auction sales was the state of the market as 2009 began: departures in the ranks of underwriters, flagging institutional demand and the collapse of the bond insurance industry. After the credit markets froze in September 2008, dozens of issuers canceled or postponed sales, afraid they wouldn’t get bids. Even AAA issuers selling tax-backed bonds, such as Utah and Georgia, found they could save money through negotiation. Reducing Risk Bankers prefer negotiation because it is less risky. In this process, issuers choose who is going to sell their bonds, sometimes soliciting requests for proposal, sometimes not. The bank then decides how to price the bonds. In a competitive sale, the issuer sets a date for an auction and collects bids. The bid that produces the lowest cost of funds wins the bonds. There’s a risk that the bank won’t be able to re-sell them to investors. Auction was the preferred way of sale since the beginnings of the municipal market in the 1800s. In the 1960s, bankers began persuading issuers to negotiate all deals, not just those for new or weak credits, or for large amounts. Negotiated sales outnumbered competitive ones in 1976, and have dominated since. For their part, issuers liked negotiation because it meant less work and gave politicians a new batch of goodies — bond underwriting assignments — to distribute. Pre-Sale Work I would like to think that issuers saw things that didn’t put negotiation in a very good light and acted accordingly. Take those Build America Bonds. In return for selling taxable debt, the issuer gets a 35 percent subsidy from the U.S. Treasury that lowers the cost of the debt even below the tax- exempt level. In 2009, issuers sold $64 billion in BABs. Experts say they will sell double that amount this year. What did we see almost from the beginning? BAB deals were priced, and within days the institutions that bought the bonds resold them at higher prices — flipping them exactly as those favored with shares of initial public offerings used to do. In other words, issuers paid too much in yield. What happened to all the pre-sale work that was the promise of negotiation? Then there is the Securities and Exchange Commission’s case filed in November against two former JPMorgan Chase & Co. bankers in connection with their work in Jefferson County, Alabama. In order to get the county’s business, the SEC alleges, the bankers paid local firms whose principals or employees were close friends of certain county commissioners, who appeared to be concerned solely with giving out patronage. The bankers say they will fight the charges. It was unseemly. Required Skill Or take the Chicago official who told his water authority’s board members this summer that he didn’t bother to set up a process to choose a financial adviser because of the “high degree of professional skill required.” State law allows agencies to dispense with the formalities in just such circumstances. I find that unseemly, too. I’d like to say that public officials saw these episodes and chose competition because it’s clean. Maybe some did. What saved competitive sale was a market rally that extended from June through September. While it ran, the Bond Buyer index fell 92 basis points, to its lowest level since the 1960s. Fueling the rally was a relative scarcity of tax-exempt bonds — so many issuers had decided to go the BAB route. I asked Eric Johansen , debt manager for Portland, Oregon, and a proponent of competitive sale, how auction sales have survived. Pushing Negotiation “I guess I should be happy that the competitive share hasn’t fallen even lower than it has, given the market turmoil of 2008,” he said in an e-mail. “However, it tells me that there are still far too many issuers relying on financial advice from investment bankers that are pushing negotiation.” “It would be interesting to determine the percentage of fixed-rate sales that meet the Government Finance Officers Association’s criteria for factors favoring a competitive sale, namely good ratings, strong security and straightforward debt structure,” he continued. “My sense is that the percentage of bonds meeting these criteria is probably well over 50 percent.” The SEC’s inquiry into anticompetitive practices in the municipal market is going to produce a series of sordid revelations. Maybe that will boost auction sales in 2010. ( Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

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Washington, Bernanke, Still Fighting Wrong War: Amity Shlaes

January 5, 2010

Commentary by Amity Shlaes Jan. 5 (Bloomberg) — Sometime soon the U.S. Senate is expected to confirm Federal Reserve Chairman Ben Bernanke for a second term. Soon the Senate will also vote on legislation to overhaul the financial industry. Neither action directly determines the U.S. monetary outlook. Yet a monetary assumption underlies all of Washington’s finance- or banking-related activity these days. The shared belief is that the potential for deflation or credit-and- deflation-related spirals deserve our near-exclusive attention. One task for the Financial Services Oversight Council that would be created by the House reform bill, for example, is to sort out which are the too-big-to-fail institutions and prevent future Lehmans . In other words, we need to further systematize the dumping of cash into companies and the economy or face apocalypse. Our leaders treat an inflation crisis as the lesser threat, a remote possibility that warrants lip service, at most. Thus over the weekend Bernanke mentioned the possibility of having to increase interest rates at some later point — but it was really just a passing reference. Depressions, in the general line of thinking, come from deflation. Linking deflation and depression has become second nature. It almost seems an alliterative link, as though the two go together because both start with the same letters. In their recent Man of the Year portrait of Bernanke, for example, Time magazine editors seem to use the word depression as a synonym for deflation. “The first thing any Depression scholar comes to understand is that nothing — not hyperinflation, megadeficits or irked Chinese creditors — is as bad as a full-on Depression,” it said. Effects of Deflation Deflation, as we hear so often now, hurts good people, strivers who over-borrow. What’s the reality about deflation and inflation? Deflation can cause depressions, as the U.S. saw in the early 1930s, the period Bernanke has studied so intensely. In the Great Depression, there wasn’t enough money around — literally. Lacking cash, banks collapsed, and good people did lose homes or farms. More banks collapsed. Deflation doesn’t always spell apocalypse. It can coexist with prosperity — or even perpetuate it. There was deflation in the 1920s. Prices fell in 1923, and 1925 through 1928. The money shortage hit one sector, farming, hard. Overall, the economy grew. Unemployment stayed low. Vigilance on inflation kept prices stable. Stable prices made life easier. Steady Tuition As Harvard University’s alumni magazine reported recently, in wonderment, Harvard’s tuition stood at the same level, $150, between 1870 and the beginning of World War II. Such consistency is something tuition-juggling families would trade a lot of financial-aid dollars for today. What about inflation? Many economists treat inflation as an acceptable evil. Over the weekend Bernanke spoke of concerns about a “possible unwelcome decline in inflation.” The trouble is that mild inflation can become significant inflation faster than central banks can act. And significant inflation can match deflation blow for blow. In the 1970s, inflation coexisted with slow growth or outright shrinkage of the economy. Those who don’t think about inflation also didn’t think about the first half of 1980, when West Coast mortgage rates rose to 17.5 percent. That meant people could afford less house than today. The U.S. homeownership rate dropped below 65 percent and did not come back until 1996. Wheelbarrows of Cash The German hyperinflation of the early 1920s lives in memory as a black-and-white visual of men with caps pushing around wheelbarrows of cash. This cartoon obscures bitter reality. Hyperinflation isn’t the opposite of depression. It’s a kind of depression. The effects of Germany’s hyperinflation were worse than the effect of our Great Depression. Like a deflation, the German hyperinflation ruined the lives of good people, many of whom were not rich. How? By making fixed incomes — pensions, government salaries — worthless. In the same years that deflation ruined the farmer in Minnesota, inflation was ruining the bureaucrat in Germany: “A man who had been saving for 40 years and who, furthermore, has patriotically invested his all in war bonds, became a beggar,” said the author Stefan Zweig, according to “Culture and Inflation in Weimar Germany” by historian Bernd Widdig. The creepy thing about hyperinflation is that it also ruins businesses, as well as charitable and educational institutions. None can plan. As Widdig notes in his book, “The Department of Canonical Law at the University of Munich had a budget of 2,000 marks in 1922. Yet the subscription price for a single scholarly journal was already 10,000 marks.” Inflation Misery Hyperinflation has a capacity to mock virtue that deflation lacks. Even that symptom that we tend to assume is unique to the Great Depression, raging unemployment, came eventually. In 1924, unemployment among German union workers was 24 percent. Hyperinflation helped make Hitler possible. Much more recently, in Zimbabwe, hyperinflation helped keep President Robert Mugabe in power. Serious inflation has dogged Latin America for a century, causing, overall, magnitudes more misery than even the storied deflation of Japan. It is monetary narcissism on the part of the U.S. to assume that just because serious inflation hasn’t occurred here lately, it can’t materialize in 2011, 2012 or 2015. Two centuries ago, the Prussian military expert Carl von Clausewitz warned that generals who fight the last war confront defeat in the next. Clausewitz’s rule holds true for 21st century monetary policy makers as well. There is nothing about deflation that is more modern than inflation. Optimal Fed The optimal Fed fights for stable money alone, not employment as well. The optimal financial governance reform replaces discretion with a rules-based system that treats inflation and deflation like twins. The current legislative proposals won’t yield either an optimal Fed or an optimal financial reform. So it’s all up to Chairman Ben. That means not only making statements about future bubbles, but using his moral authority to push through reforms that make it easier for our system to prevent inflation as well as deflation. Herr Bernanke, meet Herr Clausewitz. ( Amity Shlaes , senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

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Finding Prospects Among the 10 Least-Liked Stocks: John Dorfman

January 4, 2010

Commentary by John Dorfman Jan. 4 (Bloomberg) — To make good profits in the stock market, it pays to go against the crowd. One way I force myself to do this is by focusing periodically on the 10 stocks least popular with investors, as measured by their price-to-earnings ratios. The P-E ratio is simply a stock’s price divided by its earnings per share for the past four quarters. Stocks with very low ratios are, almost by definition, scorned by investors. But over the past 10 years I have found them to be a fruitful field of stocks that might achieve dramatic gains. They are often off the beaten path and little followed by analysts. I wrote about these stocks from 1999 through 2007 and called them “The Robot Portfolio.” Now I prefer the more descriptive term Low P-E Outliers. In looking at these stocks, I eliminate those with debt greater than stockholders’ equity (to reduce the chance of bankruptcy) and focus on ones with a market value of $500 million or more. As of Dec. 30, 1,261 stocks met those two qualifications. Here are the 10 with the lowest P-E ratios. The cheapest is BreitBurn Energy Partners LP , a publicly traded master limited partnership (MLP) based in Los Angeles that acquires and develops gas and oil properties. It trades for about three times earnings. Dividend Quashed Why is BreitBurn so cheap? MLPs are usually income vehicles, but BreitBurn suspended its dividend in April to comply with loan covenants. The dividend used to be 52 cents a quarter. Optimists hope the payout will be restored in the second quarter of 2010. Pessimists say it may take much longer. The company says it will “re-establish distributions when leverage has been reduced to acceptable levels.” Also, BreitBurn is being sued by its largest shareholder , Quicksilver Resources Inc. of Fort Worth, Texas, in a dispute that BreitBurn says is over “working control” of the company. The bullish case is that BreitBurn has a rich pool of energy assets, with gas and oil reserves in Michigan, California and elsewhere. I believe BreitBurn will eventually restructure its debt and resume dividend payments. I consider the stock a good speculation at $11 or less. Four other outliers, all based in Houston, are also energy companies. Plains Exploration & Production Co. , with a P-E of about four, has much of its oil and gas reserves in and off the coast of California, and may benefit if Governor Arnold Schwarzenegger succeeds in reviving oil drilling off the coast. Famed hedge fund manager George Soros is a major shareholder. Trading at less than book value (corporate net worth per share), the stock looks appealing to me. More Energy EV Energy Partners LP , which is an oil and gas MLP, has a P-E of about four. The company provides good dividend income, but I am a bit put off by it since it sells for more than four times revenue. I’ll pass on Linn Energy LLC , with a P-E of five, as the company has posted losses in three of the past five years. Gulfmark Offshore Inc. , with a P-E of six, operates a fleet of supply vessels that ferry men and equipment to and from offshore rigs, mostly in the North Sea and Southeast Asia. I like it, even though the supply-boat business tends to be volatile. Conseco Inc. , an insurer in Carmel, Indiana, with a P-E of five, sells life insurance and policies covering long-term care and cancer among other products. Only one of six analysts who cover the stock says to buy it. I like to be contrarian, but Conseco doesn’t excite me. Against the Crowd I prefer Atlanta-based Mirant Corp. , with a P-E of five. The company owns electric power generating stations. Only two of 11 analysts consider it a buy, but I would go against the crowd. Mirant beat Wall Street’s profit estimates in 2006 through 2008. It earned a 28 percent return on equity in 2008, a tough year for many companies. And its stock sells for only about half of book value. Earthlink Inc. , an Internet service provider also based in Atlanta, has a P-E of five. I fear it is a value trap. The company’s earnings declined 42 percent in the third quarter, and its subscriber base has been shrinking. It specializes in dial- up service, which continues to lose market share to broadband. Concord, North Carolina-based Speedway Motorsports Inc. which has a P-E of five, owns auto-racing tracks and sponsors and promotes car races. Lack of earnings growth in recent years has crippled the stock, which has fallen to about $17 from more than $43 in 1999. I think shares will rebound in 2010. In my opinion, Speedway, as a mature company, should raise its dividend, aiming to get the yield up to 4 percent or more from the current 2 percent. Lindner Family American Financial Group Inc ., located in Cincinnati, has a P-E multiple of six. I find this insurer’s stock attractively cheap, at below book value and 0.7 times revenue. Stay away if you don’t like family-dominated companies, though. Chairman Carl Lindner Jr . and his relatives control the corner offices and about 24 percent of the shares. Disclosure note: Personally and for clients, I own shares of Mirant. I have no long or short positions in the other stocks discussed in this week’s column. ( John Dorfman , chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com .

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Body Scan Isn’t Only Way to See Bomb in Underwear: Ann Woolner

January 4, 2010

Commentary by Ann Woolner Jan. 4 (Bloomberg) — Sixteen days before an al-Qaeda trained Nigerian with explosives in his underwear boarded a Detroit-bound plane, the U.S. director of terrorist screening crowed about the “true information success” of U.S. watch- listing. “An excellent example of interagency information sharing,” Timothy Healy told a Senate committee . These days Healy is eating those words as he tries to figure out how clues given U.S., Nigerian and British authorities about Umar Farouk Abdulmutallab’s apparent slide into terrorism didn’t subject him to at least more careful screening. That’s why we need airport scanning devices that capture every crevice and every bulge in every body, some argue. Already they’re in limited use here and abroad, including Amsterdam, where Abdulmutallab boarded. But airport officials there weren’t using the scans on U.S.-bound passengers at the request of U.S. officials who worried about the privacy of Americans. In reality, the cost and implausibility of installing full body scanners at every port of entry around the world make this impractical. And that’s if people can get over their privacy concerns or if modifications make the machines less graphic. No, what this country needs is focused screening of the population most likely to terrorize the U.S., meaning, Muslims, claim others. Bad idea. Even if you disregard constitutional and moral qualms about harassing a group of people because of their religion, the truth is that ethnic profiling is ineffective and counter-productive. Picking Targets Mostly innocents populate the target group, and plenty of terrorists-in-training exist outside it. Besides, good intelligence requires cooperation from the very people profiling-advocates would target. If you treat everyone within the group as enemy agents, they aren’t going to be your friends. It’s worth remembering that the best information the U.S. received about Abdulmutallab came from his father, who had become alarmed by his son’s extreme religious views and disappearance into Yemen. Targeting for close watch those groups that train people to attack the U.S. is what’s required, whether driven by religious fervor or not. Before spending billions on more sophisticated airport screeners, before approving government surveillance based on religion or nationality, look at what the U.S. already has in place. Ask why it didn’t stop Abdulmutallab from boarding Northwest 253 in Amsterdam wearing explosives between his legs. Mishandling Crucial Information What you’ll find is the same thing discovered in the wake of Sept. 11, 2001: Crucial information wasn’t given the attention or the distribution it deserved within government agencies. The Federal Bureau of Investigation in Minneapolis knew in August 2001 that a foreign national had been attending flight school but showed no interest in landing the giant jets he was learning to fly. French authorities confirmed Zacarias Moussaoui’s links to radical Islamic groups and to Osama bin Laden , who by then had declared war on the U.S. So while U.S. officials detained Moussaoui on an immigration violation, they didn’t push the investigation further to see whether a larger plot was afoot. No one connected that information to other intelligence pointing to a possible attack on the U.S. using commercial jetliners. Terrorist Screening Center Ah, but that was then. Since 2001, U.S. intelligence operations have had a consciousness-raising and have been ordered to join hands and share information to prevent another attack. In 2004 the government combined their disparate watch lists into one superlist, overseen by the FBI’s Terrorist Screening Center, which Healy directs. Vast improvement resulted. I have no doubt lives have been saved as a result. And yet . . . An internal FBI report last May found disturbing lapses. Fifteen percent of the subjects of terrorism investigations never were put on the watch list as they were supposed to be, according to the agency’s inspector general. That’s the big list naming about 400,000 people for whom authorities have at least some information indicating terrorist leanings. As more solid evidence emerges, or as one piece of intelligence is linked to another, the FBI compiles sub-groups for additional airport screening. In the worst cases, individuals are put on the no-fly list — about 4,000 currently. The inspector general found that while 15 percent of investigative subjects were omitted completely from the list, 80 percent were added belatedly. That is, agents took longer than guidelines required to add the names to the list. Not Making Connections And when agents received new information, usually they never got around to modifying the list accordingly. If no one adds a new dot, how can it be connected to the old one? Worse yet, the audit said that people had been entering the U.S. whose names matched subjects that were supposed to have been watch-listed but weren’t. So when Abdulmutallab boarded the flight to Detroit without so much as a round of questioning, “There was a mix of human and systemic failures that contributed to this potential catastrophic breach of security,” as President Barack Obama put it last week. Operating without information that clearly pointed to Abdulmutallab’s plan, government officials failed to link the bits of information that did come their way, John Brennan , Obama’s deputy national security adviser said on NBC and ABC programs Sunday. Warning Signs The Central Intelligence Agency knew in August that an unnamed Nigerian was being readied for a terrorist attack. In November, Abdulmutallab’s father contacted U.S. embassy officials in Nigeria to report his son’s disappearance and apparent shift toward radicalism. At that point, the CIA added the 23-year-old’s name to the watch list, which isn’t shared with other countries. If the U.S. and England had been comparing notes, someone might have noticed that the same Nigerian appeared on both. Then there is the question of why no airline personnel thought it odd that a man would book an international round trip carrying only a back pack. At the least, that should have led to more questioning. No fancy equipment needed. No ethnic profiling. Then we might have had what Healy called a “true information success.” ( Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net .

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Aaron Glantz: NAM Stimulus Investigation Reaches Over One Million Readers

January 4, 2010

America’s Recovery Capital Stimulus Loans You need to upgrade your Flash Player. Click here to get the latest Flash player for your browser. Click on each state to see the racial breakdown of America’s Recovery Capital small business loans compared to population and business ownerships.* My investigative report showing the by-passing of ethnic businesses in stimulus-funded small business loans has appeared — or is scheduled to run — in 29 publications across the country with a combined circulation of over 1.2 million readers. The report, which was originally published on the website of New America Media , has truly stuck a chord in ethnic communities across America who rightly see the success of small businesses in their neighborhoods as key to a meaningful economic recovery. In an editorial responding to our investigation, La Opinion— the largest Spanish-language newspaper in the country — wrote: “Community leaders are demanding an explanation and they are entitled to one. The stimulus package money comes from taxpayers and the banks are not assuming any risk at all with these loans, so the government should ensure that access to the program is equitable. It may have been smarter to have granted the loans directly through the Small Business Administration (SBA) rather than through the banks, which tend not to want to disclose how and why the make their decisions, even when they receive taxpayer assistance.” A translation of the La Opinion editorial is available on the NAM website : On it’s website, the Leadership Conference on Civil Rights, a coalition of over 200 of our nation’s leading civil rights organizations, commented on the importance of NAM’s findings and the ARC Loan program: “Minority communities have been hit hardest by the collapse of the housing market and the recession. African Americans are estimated to lose up to $93 billion dollars before the mortgage crisis is over. The ARC loan program is one of the few sources of capital to which many minority-owned businesses have access.” There were also a number of e-mails from ethnic media outlets thanking us for the story, including one from Mary Ratcliff, the editor of the San Francisco Bay View (the city’s black paper) “Huge thanks to you and Aaron for the stimulus stories. I’d been calling and emailing everyone I could think of to get those numbers. Nobody had a clue. SF HRC hung up on me. These stories are enormously helpful.”

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Bankers Get $4 Trillion Gift From Barney Frank: David Reilly

December 30, 2009

Commentary by David Reilly Dec. 30 (Bloomberg) — To close out 2009, I decided to do something I bet no member of Congress has done — actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill. Hunkering down by the fire, I snuggled up with H.R. 4173 , the financial-reform legislation passed earlier this month by the House of Representatives. The Senate has yet to pass its own reform plan. The baby of Financial Services Committee Chairman Barney Frank , the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders. I quickly discovered why members of Congress rarely read legislation like this. At 1,279 pages, the “Wall Street Reform and Consumer Protection Act” is a real slog. And yes, I plowed through all those pages. (Memo to Chairman Frank: “ystem” at line 14, page 258 is missing the first “s”.) The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt. If you’re a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises. Nuggets Gleaned Here are some of the nuggets I gleaned from days spent reading Frank’s handiwork: — For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery. — Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for “no-more-bailouts” talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate’s health-care bill look minuscule. — Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.” Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well. More Bailouts — The bill also allows the government, in a crisis, to back financial firms’ debts. Bondholders can sleep easy — there are more bailouts to come. — The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis. — Don’t worry, this time regulators will have better tools. Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy. — This group, among its many powers, can restrict the ability of a financial firm to trade for its own account. Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc. , we’re looking at you.” Managing Bonuses — The bill also allows regulators to “prohibit any incentive-based payment arrangement.” In other words, banker bonuses are still in play. Maybe Bank of America Corp. and Citigroup Inc. shouldn’t have rushed to pay back Troubled Asset Relief Program funds. — The bill kills the Office of Thrift Supervision , a toothless watchdog. Well, kill may be too strong a word. That agency and its employees will be folded into the Office of the Comptroller of the Currency . Further proof that government never really disappears. — Since Congress isn’t cutting jobs, why not add a few more. The bill calls for more than a dozen agencies to create a position called “Director of Minority and Women Inclusion.” People in these new posts will be presidential appointees. I thought too-big-to-fail banks were the pressing issue. Turns out it’s diversity, and patronage. — Not that the House is entirely sure of what the issues are, at least judging by the two dozen or so studies the bill authorizes. About a quarter of them relate to credit-rating companies, an area in which the legislation falls short of meaningful change. Sadly, these studies don’t tackle tough questions like whether we should just do away with ratings altogether. Here’s a tip: Do the studies, then write the legislation. Consumer Protection — The bill isn’t all bad, though. It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren , currently head of a panel overseeing TARP. And the first director gets the cool job of designing a seal for the new agency. My suggestion: Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke . — Best of all, the bill contains a provision that, in the event of another government request for emergency aid to prop up the financial system, debate in Congress be limited to just 10 hours. Anything that can get Congress to shut up can’t be all bad. Even better would be if legislators actually tackle the real issues stemming from the financial crisis, end bailouts and, for the sake of my eyes, write far, far shorter bills. ( David Reilly is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

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Next Decade Will Be Good One for Stock Investors: Matthew Lynn

December 28, 2009

Commentary by Matthew Lynn Dec. 29 (Bloomberg) — Even the most practiced soothsayer will struggle to make any detailed predictions for the next 10 years. It’s hard enough to know what will happen in the markets in January 2010, never mind December 2019. The main thing investors need to know about the coming decade can be summed up in one of those pithy Twitter updates. Will it be good or bad for stocks? Everything else is extraneous. The answer? Good. A shortage of capital from any source other than the stock market; moderate but persistent inflation; and the probability that economic growth will be stronger than many economists expect means that “the 10s” will be a time when equities start to have some rocket fuel in their engine again. Stock markets usually work in decade-long cycles. The “noughties” were bad for shares. Most of the major markets didn’t manage to make any progress at all over the course of the whole 10 years. The U.K.’s FTSE-100 index , for example, hit a record of 6,930 in December 1999. A decade on, it is now at about 5,300. Likewise, Germany’s DAX index passed 8,000 in March 2000, but is slightly less than 6,000 now. It doesn’t make much difference what benchmark you look at. A few emerging markets aside, they all had a dismal decade. Leaving aside the simplistic point that every run of under- performance by any asset class usually comes to an end sometime, there are three solid reasons for thinking that this decade will be a lot better for stocks than the last one. Capital Shortage First, there will be a shortage of capital. One reason why equities performed so miserably during the last decade was that companies, and their chief executives in particular, really didn’t need shareholders very much. Remember, a stock market is just a place where you can raise money for building new factories, shops or warehouses. But in the last decade, if you needed cash, there were lots of people who would give it to you: a bank, the bond market or a private-equity firm. So why bother looking after a lot of irritating shareholders when you didn’t really need anything from them? In the coming decade, that will change. Capital will be in far shorter supply. The only place many companies will be able to raise money will be in the equity markets. The result? Companies will have to make sure their shareholders are being well looked after — and that means steady dividends and a rising share price. Or else there won’t be much point in asking them for more money. Rising Prices Next, inflation. There are plenty of people out there — most of them gold enthusiasts — predicting hyperinflation. That might happen eventually, if central banks keep printing money like crazy. There is another stage to get through first: moderate, persistent inflation in the 5 percent to 6 percent range. That’s pretty good for equities. The big, multinational companies that dominate the main indexes can usually lift their prices along with the inflation rate. So long as they can do that, they can keep profits and dividends ticking over nicely, roughly in line with price gains. In that scenario, equities will be one of the few asset classes that can be depended upon to keep up with inflation. Even better, they should get an additional boost as investors switch their money out of bonds — which get hammered by inflation — to protect themselves against price increases. Economic Spurs Finally, there will be a growth surprise. Given that we have just been through the worst financial crisis of the last half-century, people are pretty gloomy about the global economy right now. And, in fairness, there is plenty to worry about: a damaged banking system, the demise of the dollar, and huge government deficits. Even so, let’s maintain some perspective. Earlier generations overcame famines, plagues and world wars, so a few dodgy banks and some deficits hardly seem that bad. The chances are that growth in the new decade will give us a pleasant surprise. There are plenty of reasons to be optimistic. As Zurich-based UBS AG said in a recent research note to investors, global population in the next three to four decades will grow by about 3 billion, mostly in the emerging markets where incomes and consumption are rising rapidly. That will act as a powerful spur to the global economy, even if it will put a huge strain on the environment. The developed economies have big potential to increase the number of people in the work force if they overhaul their welfare systems. The looming fiscal crunch might well be the trigger for finally making that happen. That, too, would be an economic boost. And technology, the main driver of innovation and progress, shows no sign of slowing down. If anything, with so many more smart people being born, it should speed up. That’s another reason growth should accelerate. Of course, there will be plenty of choppy economic water ahead. Some more banks may crash, the dollar might implode, and a war or two might be fought. Even so, the stage is set for a great decade for shares. The FTSE, the DAX and the other global benchmarks should end 2019 higher than they started in 2010. ( Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net .

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Obama’s Next Trillion Spending Might Be Worth It: Amity Shlaes

December 28, 2009

Commentary by Amity Shlaes Dec. 29 (Bloomberg) — President Barack Obama is under fire for saying he wants to boost investment in infrastructure in the next decade. The critics say this is flawed stimulus because infrastructure projects take too long to get started and don’t boost the economy now. Obama’s best move would be to stop spending. But given that he won’t, and that he has three more years in office, the right kind of infrastructure splurge might not be such a bad idea — especially if you don’t call it a stimulus. That at least is what the record of the 1930s, 1940s and 1950s suggests, especially when it came to the classic American infrastructure project, highway construction. Back in the 1930s, presidents started with the proposition that the primary aim of all spending should be to put people to work. Road construction was viewed as one of the tools to that end. In a single year, between June 1933 and April 1934, relief workers repaired 500,000 miles of highways. As historian Mark Rose has noted , in the mid-1930s, almost $3 billion, then a good share of an annual federal budget, was poured into highway projects by relief officials and the Bureau of Public Roads. But observers, including President Franklin Roosevelt himself, began to notice flaws with this plan. For one thing, as today, road projects were not shovel-ready — their lengthy planning coincided with the direst moments of recession. By the late 1930s, Roosevelt concluded that highway programs generally “do not provide as much work as other methods of taking care of the unemployed.” Cutting Spending In early 1938 the president suggested that federal assistance to roads ought to revert to pre-Depression levels. That April, he reluctantly allowed that appropriating an extra $100 million for roads was all right, but “only for projects which can be definitely started this calendar year.” What was worse, the Hoover and Roosevelt road outlays didn’t make enough sense as infrastructure. A highway expert, Wilfred Owen , pointed out that New Deal construction had “denied congested metropolitan areas” and were instead “lavished upon local rural roads.” As the country emerged from World War II, it was clear the unprecedented 1930s spending hadn’t prepared the U.S. for exploding postwar road use. General Dwight Eisenhower , for his part, was put off by the heavy political element of New Deal outlays. Washington doesn’t shift gears easily. As the 1950s began, lawmakers therefore also presented construction as a tool to create jobs or manage the business cycle. The memory of the Depression was fresh. Recessions were still hitting with regularity — there were four between the end of World War II and 1959. Man of Action But Eisenhower, now president, was a man of action. He recalled the embarrassing number of days — 62 — it had taken a cross-country convoy to get from Washington to San Francisco in 1919. In his view, the one good thing that Adolf Hitler had done was to build the Autobahn . Where was the American Autobahn? In the end the bill that Eisenhower was able to push through Congress was straightforward. Under the Highway Act of 1956, the federal government spent billions to build new roads and piece together older ones and construct a national highway system. There were secondary goals, such as national defense and job creation, among them. But the most obvious goal, serving a country that wanted to move at 65 miles an hour, came first. Less Than Optimal The outcome of the interstate highway program wasn’t optimal. It favored truckers over cities. The roads cut off some downtowns from the commerce that had heretofore sustained them. Minorities pointed out that their communities often bore the brunt of construction. According to Rose, some black political and business leaders spoke of white men’s roads going through black men’s bedrooms. As for budgeting, the interstate so far outran its original cost estimates that Senator William Proxmire awarded it his so- called golden fleece prize for federal profligacy. But on balance, the highway achievement lasted in a way that stimulus or make-work projects did not. In the 1960s, one quarter of all productivity gains came from highway improvements. The interstate did its part to make the U.S. an economic superpower. By concentrating on one coherent infrastructure project, we helped to assure growth. There were other benefits. As early as 1959, the New York Times was publishing headlines that said things like “Pay Roads Save Time and Tempers as They Lead Tourists to Far Places.” Today the country can ill afford another trillion in stimulus. But if such an outlay is inevitable, then let that trillion go to a national Big Dig. As Eisenhower demonstrated, a growth project like a road can be superior to a new social program. A road, or a railway, or a plan to collect water in space, after all, reflects more hope. Obama will achieve the happiest outcome if he simply makes like Ike and plows forward. ( Amity Shlaes , senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

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World War Pope Sainthood Like Obama’s Nobel: Celestine Bohlen

December 28, 2009

Commentary by Celestine Bohlen Dec. 29 (Bloomberg) — It’s not at all clear that the world needs another Roman Catholic saint, let alone another canonized Catholic pope. By one count , there are already more than 10,000 saints and “beati” or blessed, accumulated since Roman times, with at least three saints already assigned for every day of the year. That’s just one good reason why Pope Benedict XVI’s decision to proceed toward the canonization of Pius XII , the church’s controversial World War II-era pope, was so surprising. Another two miracles to his name, and Pius will have cleared all the hurdles to sainthood, where he will be among the ranks of such beloved figures as Saint Francis of Assisi and Saint Joan of Arc. It’s hard to see the urgency or the necessity of an act that was sure to anger and upset large groups of people — most significantly, Jews who worry that Benedict has again delivered a setback to the difficult and delicate task of reconciling Catholicism and Judaism. There may be explanations for Pius XII’s studied silence about the Holocaust in the early 1940s: it is true that public criticism might have put more innocent people in danger, and it is also true that the Pope, like many Catholics, took risks to protect Jews. The question of Pius’ wartime record remains open, and will stay that way as long as the relevant archives are closed. Benedict himself had previously asked Vatican officials to hold off any decision on Pius until the opening of the 1939-1958 archives, now slated for 2014. This approach was endorsed by Jewish leaders, who are now left expressing puzzlement and dismay over Benedict’s decision to jump the gun and issue a decree proclaiming Pius’ “heroic virtues,” setting the stage first for beatification, and then canonization. Vatican Bureaucrat So what was the rush? The answer is politics — which does not make for an edifying religious spectacle. The common perception, disputed by the Vatican, is that by pairing Pius XII with John Paul II in the Dec. 20 decree, Benedict had hoped to satisfy both the conservative and the liberal wings of the Catholic Church. Let’s just leave aside the fact that there isn’t much of a public constituency clamoring for a Saint Pius XII (Pius IX is beatified and Pius I, V and X are already saints), as there is for a Saint John Paul II, a charismatic pope who played a key role in the collapse of Communism. At his funeral in 2005, crowds called for a quick beatification, with chants of “Beato subito.” In contrast, Pius XII — born Eugenio Pacelli, scion of Rome’s so-called black nobility, which has staffed the church’s upper ranks for centuries — was a lifelong Vatican bureaucrat- turned-diplomat, with a dour, ascetic manner. No Mother Theresa This isn’t Mother Teresa , the Albanian-born nun who spent her life caring for the poor of Calcutta and was beatified in 2002, or even Father Jerzy Popieluszko, the Polish priest who was beaten to death by the communist secret police in 1984 and who this month was put on the path to sainthood, together with Pius XII and John Paul II. Last week, the Vatican once again found itself trying to calm waters stirred by one of Benedict’s decisions. Last February, when the pope offered an olive branch to leading figures of a conservative schismatic movement who included a Holocaust-denying ex-bishop, the Vatican blamed “a management error.” This time, the Vatican press office issued a statement explaining that the pope’s decree on Pius’s “heroic virtues” wasn’t an assessment of “the historical impact of all his operative decisions,” but a confirmation that he had led a deeply Christian life. Surely, that was a requirement Pacelli met when he was chosen to be Pope in 1939. Modern Teachings Many experts think that Benedict is trying to reconcile the church with its own history, with teachings that prevailed before the Second Vatican Council, the historical gathering of church leaders convened by Pope John XXIII in the 1960s. That was when the Roman Catholic Church entered the modern age, adopting such principles as separation of church and state, freedom of religion, a more modern liturgy and a repudiation of anti-Semitism. “Benedict wants to emphasize the continuity of the church’s teachings, to make the point that the Second Vatican Council was not a break with the past,” said the Reverend Thomas Reese, a Jesuit scholar and senior fellow at the Woodstock Theological Center at Georgetown University. This isn’t a surprising line of thinking from a conservative pope who as a theologian, once kept watch over the church’s doctrine. But he didn’t need to add another pope to the roster of saints to make the point. Of the 265 popes in history, 76 are already saints: six are blessed. Perhaps now is the time to declare a halt to the practice, for liberals like John Paul II and John XXIII, as well as for conservatives like Pius XII. As Father Reese aptly noted, popes cannot be examples for ordinary Christians: Popes can only be examples for other popes. After President Barack Obama won the Nobel Peace Prize, a lot of people argued that heads of states should not be nominated for that kind of award until after they have left office. Maybe in the case of popes, sitting on the throne of St. Peter should be honor enough. ( Celestine Bohlen is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Celestine Bohlen in Paris at cbohlen1@bloomberg.net

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My Casualty List Shows Stocks Ready to Rebound: John Dorfman

December 28, 2009

Commentary by John Dorfman Dec. 28 (Bloomberg) – From 1999 through early 2007, I compiled a quarterly Casualty List of banged-up stocks that I believed had good rebound potential. I’m resurrecting this idea. Here is the Fourth Quarter 2009 Casualty List, focusing on stocks that are down 15 percent or more for the quarter as of Dec. 24, and that I think are likely to recover smartly in 2010. In the leadoff spot is Jacobs Engineering Group Inc. of Pasadena, California. Joseph Jacobs , a engineer from Brooklyn, New York, founded the company in 1947. It has grown to a corporation with more than 160 offices in 20 countries, and with revenue of more than $11 billion in a year, according to the company’s Web site. A series of acquisitions fueled the growth at Jacobs. Often, acquisitive companies borrow heavily to finance their conquests. Not so with Jacobs. It carries debt equal to less than 1 percent of stockholders’ equity. Jacobs doesn’t have a nice, smooth earnings growth curve. Earnings bounce up and down from year to year. But I hope that the adoration of smoothness went out with Bernie Madoff . In any case, Jacobs has turned a profit every year going back at least to 1987, which is as far as the Bloomberg database carries me. Jacobs shares fell as much as 15 percent in a single day on Nov. 17, when the company forecast that it would earn $2.00 to $2.60 a share in 2010. Analysts had been expecting about $2.80. For the quarter, it is down about 16 percent. Room for Buyers Fidelity Management & Research, the Boston mutual fund giant, was once the largest shareholder , but it has been selling in 2009. I believe that Fidelity has now unloaded the vast majority of its stake, so that the coast is clear for buyers to come in without worrying about being trampled by an oversize seller. I like Jacobs because it has expertise in many aspects of engineering, because it has large customers who can undertake big, complex projects, and because of its sterling balance sheet. Harte-Hanks Inc. , based in San Antonio, has fallen about 20 percent this quarter. It publishes direct-mail marketing publications, notably the Pennysaver and The Flyer in California and in Florida. In its three best years, Harte-Hanks earned $1.26 to $1.39 a share. Analysts are predicting only 82 cents a share in 2010 , but I suspect the company might earn a dollar a share as the economy revives more rapidly than people expect. The stock is trading a little below $11. If I’m right, it is selling for about 11 times 2010 earnings, a pretty multiple. If I’m wrong and the analysts’ consensus is right, it’s at 13 times earnings, still reasonably attractive. Time Horizon While I think Jacobs Engineering is a good three year-to- five year pick, Harte-Hanks is more of a one-year strategy. I think the Internet will continue stealing advertising market share from print products over time. But as a play on a reviving economy, I think Harte-Hanks is timely. If you achieve a gain, I’d sell the stock as soon as the gain qualifies for long-term capital-gains tax treatment. Frontier Oil Corp. , based in Houston, is having a terrible year. Analysts expect that when it closes the books on 2009 it will have earned 26 cents a share, the worst showing since 2003, and a mere shadow of peak earnings, which were $4.62 a share in 2007. That year, Frontier shares hit a high of about $48 a share. Today they languish at less than $12. Oil Prices It seems to me that earnings between $1 and $2 a share would suffice to lift the stock price substantially. I think Frontier will enter that earnings zone in 2011, as oil prices rise. I think oil will rise because of increased demand by reviving economies in the U.S. and Europe. The price might also be pushed higher — though I hope not — by political turmoil in the Middle East, Russia or Nigeria. Frontier’s specialty is refining heavy oil, which is thicker than so-called light, sweet crude. Many refineries are unable to cope with the more gunky grades of oil. At present, demand isn’t especially heavy. When demand intensifies, the ability to refine heavy crude becomes a desirable capability — especially if light, sweet crude is in short supply. I think Frontier’s competitive position is likely to improve in 2010 and 2011, and so is its pricing power. The stock trades for eight times earnings and just over book value (corporate net worth per share). I’ll round out the list with another niche energy stock, Cal Dive International Inc. of Houston. If you need divers to lay pipe or to repair an offshore rig under water, Cal Dive is one of the leading suppliers. Earnings Decline Since it went public in 2006, Cal Dive has struggled. Diluted earnings per share declined in 2007 and 2008, and seem likely to decline again in 2009. The consensus calls for earnings of 94 cents a share this year, down from $1.91 in 2006. Why on earth would I want a stock whose earnings are in their third straight year of decline? I like it because it provides a useful service, and because the stock is just plain cheap, trading at six times earnings and at very close to book value. Disclosure note: I currently have no long or short positions in any of the stocks discussed in this week’s column, personally or for clients. ( John Dorfman , chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com .

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Huff TV: Roy Sekoff Discusses Latest AIG Bonus Outrage On ‘The Ed Show’ (VIDEO)

December 23, 2009

HuffPost ‘s Editor, Roy Sekoff, was on The Ed Show Wednesday night to discuss the latest AIG outrage: the refusal of company executives to follow through on their promise to return $45 million in bonuses by the end of the year. While agreeing with Ed Schultz that this amounted to “business as usual on Wall Street,” Sekoff lamented the American public’s habit of “getting really mad about the little things, and then we lose sight of the big outrages.” Among the “major outrages” Sekoff cited: the sweetheart $38 billion tax break the IRS just gave Citibank, the fact that the nation’s four biggest banks have cut lending by $100 billion over the last six month, and the fact that banks and their lobbyists have “gutted all the financial reforms that would make sure that another AIG didn’t happen again.” WATCH:

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`New Normal’ Tops 2009 List of Overused Phrases: Caroline Baum

December 23, 2009

Commentary by Caroline Baum Dec. 23 (Bloomberg) — For journalists, pundits and comedians, the end of the year provides an opportunity to look back, fantasize forward and let the creative juices flow. We churn out 10 Best and 10 Worst lists. We reprise the year’s most memorable moments and worst embarrassments. We reflect on famous people and infamous scallywags , current events and eventful currents, the highest highs and lowest lows. When I started to think about 2009, it wasn’t events that came to mind but words and phrases: trite, overused words and phrases, such as “new normal,” “unprecedented,” and “exit strategy.” One picture may be worth a thousand words, but one word can unleash a year’s worth of memories. 1. “New normal” In May 2009, the folks at PIMCO emerged from their secular outlook forum to codify their forecast for slower growth, increased regulation and a decreased role for the U.S. in the global economy as the “new normal.” They weren’t the first. Back in 2001, Warren Buffett and John Bogle warned of a new normal of single-digit stock market returns. A book by that name was published in 2004, spawning a companion Web site ( http://www.thenewnormal.com ). As it turns out, the phrase has applications in almost every field: technology (its transformative power); science (American women are getting fatter); medicine (early puberty for girls); management (constant change is the new normal, according to the Harvard Business Review); and higher education (less financial support from state budgets and endowments). As a way of describing the U.S. economy, the new normal has merit. ObamaNation is looking at bigger government, more regulation and an aging population commanding more resources. Unfortunately, overuse has rendered new normal meaningless. 2. “Unprecedented” If the events of 2008 and policy response were unprecedented, the post-mortems in 2009 drove the point home — ad nauseam. From the collapse in home prices to the government’s co- option of mortgage finance; from the freezing up of financial markets to the failure of big and small firms; from the efforts by the Treasury and Federal Reserve to keep the ship of state afloat to the government’s ownership stake in the private sector: Everything, it seems, was unprecedented. The inauguration of the first black president was unprecedented. Barack Obama , hailed as an agent of change, pledged to change the way Washington operates. Eleven months into Obama’s presidency, Washington is probably the only entity to eschew the new normal (see No. 1 above) for more of the same. 3. “Exit Strategy” Everyone needs an exit strategy. Just ask Jenny Sanford, wife of the philandering South Carolina governor, and Mrs. Tiger Woods . The Fed needs an exit strategy following a period of unprecedented (see No. 2 above) accommodation. Policy makers have enunciated one without a timetable for implementation. The central bank plans to whittle down its balance sheet by natural attrition, terminating emergency lending facilities and selling assets or draining reserves on a temporary basis. It can raise the interest rate it pays on reserves to prevent excess credit expansion, an idea that may work better in theory than in practice. Unlike the Fed, the U.S. military has a date for leaving Afghanistan and no real exit strategy. President Barack Obama said the U.S. will start the transfer of authority to the Afghans in July 2011. His National Security Adviser, General James Jones , admitted the U.S. will be in the region “for a long time.” Or, in Fed parlance, “an extended period.” 4. “Green Shoots” “I do see green shoots,” Fed Chairman Ben Bernanke told CBS’s “ 60 Minutes ” last March, a forecast worthy of Chauncey Gardiner, the child-like sage in Jerzy Kosinski’s “Being There.” (“There will be growth in the spring,” Chance said.) Pretty soon everyone was going green. The media sent out reconnaissance teams. Economists incorporated green shoots into their forecasts. It was a veritable garden of foliage sightings. The shoots matured and produced blooms in the third quarter. The U.S. economy expanded at a 2.2 percent annualized rate following four consecutive quarterly declines. All this flora talk was starting to get to a friend of mine. “If the leaves would just stop falling, I could see the green shoots,” he said. 5. “Uncertainty” Uncertainty gained a new cachet in 2009 and in certain circles, especially those responsible for setting policy. The frequency with which the Fed and European Central Bank use uncertainty to qualify the forecast leads one to believe uncertainty is unique to bad times. It isn’t. A little more uncertainty about the degree to which the subprime crisis was “contained” and a little less “irrational exuberance” over condo-flipping, and we might not be in the shape we’re in. 6. “Historic Opportunity” Historic opportunities were a dime a dozen this year. Obama seized some of them (embracing Islam with a speech in Cairo), squandered others (refusing to meet with the Dalai Lama before his visit to Beijing) and had to settle for a photo-op in still others (the Copenhagen climate summit). The biggest historic opportunity still lies ahead: health- care reform. Obama has been exhorting Senate Democrats to “seize this historic opportunity” (and cement his legacy) by enacting sweeping legislation that expands health-care coverage, creates a new entitlement and does little to address misplaced incentives (third-party payers) or control costs. The Senate is expected to pass its health-care bill as soon as tomorrow on a 60-40 party line vote. The House and Senate must then reconcile their different versions. The more the American people know, the less they like the idea. This may be one historic opportunity Obama will wish he missed. ( Caroline Baum , author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .

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Pennsylvania’s Perfidy Never Happens in Singapore: Joe Mysak

December 22, 2009

Commentary by Joe Mysak Dec. 23 (Bloomberg) — State and local finances are in the worst shape since the Great Depression, according to the National Association of State Budget Officers , and you can’t blame it all on the economy. Irresponsible and negligent borrowing practices that wouldn’t be tolerated in Singapore are costing school districts and municipalities across the nation millions of dollars in extra financing costs and termination fees. Nobody wants to talk about it. This was illustrated in a report published in November by Auditor General Jack Wagner of Pennsylvania. The report shows how the Bethlehem Area School District used swaps . Since the state authorized school districts and local governments to use swaps and derivatives in 2003, Bethlehem has entered into 13 Qualified Interest Rate Management Agreements, the most of any school district in the state. Like so many municipalities across the nation, Bethlehem’s swaps have wound up costing it money. On the two swap agreements examined by the auditor (they have been terminated, the bonds refinanced), the district paid $10.2 million more than if it had sold a fixed-rate bond, $15.5 million more than variable-rate debt without a swap. That $15.5 million would buy a new Dell Studio 15 model laptop for each of the district’s approximately 15,000 students. People, even those who had nothing to do with the original transactions, don’t want to talk about it. Edit Out The auditor’s Office of Special Investigations interviewed the school district’s current financial adviser, Scott Shearer of Public Financial Management in Harrisburg, who had nothing to do with the deals in question. He called one transaction extremely complicated and risky. Upon reviewing a draft of the report, he asked that the words “and risky” be edited out. Shearer called some fees paid by Bethlehem “almost unheard of and not normal.” After reviewing a draft of the report, he asked that this be changed to “above average.” The auditor also interviewed Jens Damgaard of Rhoads & Sinon, Bethlehem’s current bond counsel. He said the district “crossed any and all normal lines” of debt structure. Upon reviewing a draft, he retreated, and asked that this sentence be cut. Auditor Wagner writes that he accepted most of the district’s requests on behalf of its professionals for changes, and footnoted other instances where to do so would result in a material change to their original statements, which is why we have this little collection of second thoughts. Why is everyone so afraid of offending everybody else? Thin-Skinned The municipal market is conflicted. Bankers don’t want to criticize other bankers, because they might work with them or for them some day. Lawyers and financial advisers don’t want to upset the bankers or their issuer clients. Analysts work for the banks selling stuff to the issuers, and the final product to bond buyers. They like to be agreeable: All is well! The same goes for the analysts who work for the rating companies, who are, after all, paid by the issuers. Even the institutional buyers, who used to be forthcoming, are afraid that if they say something untoward, they might not get allotments of bonds they can then flip out to the market at a tidy profit. The issuers are in thrall to the industry that pays to play, and offers the prospect of high-paying jobs, post- politics. It’s no wonder everybody declines to comment. Amateur Financiers The height of the swaps mania that is wreaking such damage in Muniland can be traced to Sept. 25, 2003. That’s when Governor Ed Rendell of Pennsylvania signed a bill amending the Local Government Debt Act to allow the state’s 501 school districts to engage in swaps. Can we all agree that this experiment of allowing the most amateurish issuers to use some of the municipal bond industry’s most complicated products was a bad idea for everyone except the financial services industry? Of course not. Even as swaps were blowing up in 2008, ex- treasurer of Pennsylvania Robin Wiessmann (also an ex-banker) said the problem wasn’t with swaps, but in how they were used. Auditor General Wagner is having none of it. He says the problem is with swaps themselves, and he asks that the General Assembly “clearly and unequivocally” prohibit municipalities from engaging in swaps, or as state law terms them, “Qualified Interest Rate Management Agreements.” ‘Immediate Profits’ The 73-page Wagner report concludes that small governments and school districts should never have been allowed to play the swaps and derivatives game. “We conclude that QIRMAs are highly risky and impenetrably complex transactions that, quite simply, amount to gambling with public money,” Wagner writes. “Moreover, they are susceptible of being marketed deceptively, and they principally benefit the investment banks and the multitude of intermediaries who sell them to relatively unsophisticated public officials.” Among the things that Wagner found in his study of the school district’s use of swaps were hidden fees, conflicts of interest, big profits. “Obviously, the huge fees and immediate profits generated by these agreements, in combination with their inherent complexity, present a powerful temptation to sell them in a fashion that over-emphasizes the financial benefits and minimizes the risks,” writes Wagner. No weasel words here! It would have been nice to hear and read more of them back in 2003, as Pennsylvania was considering “a statute written primarily for the benefit and protection of the financial services industry,” as Wagner puts it. “Where seldom is heard a discouraging word, and the skies are not cloudy all day,” as the old song has it, may be fine for the range, not for public finance. ( Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

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Greek Default Beats Bailout, Lehman Lesson Shows: Mark Gilbert

December 22, 2009

Commentary by Mark Gilbert Dec. 23 (Bloomberg) — There’s a theory making the rounds comparing Greece with Lehman Brothers Holdings Inc. Letting Lehman go broke , the story goes, was the worst policy error of the credit crisis; with that lesson learned, the global authorities will do anything to stop a European Union member from defaulting. I disagree. Letting Lehman collapse wasn’t the problem. The guardians of financial stability bungled because they had earlier backstopped Bear Stearns Cos. with a $29 billion dowry to engineer its shotgun marriage to JPMorgan Chase & Co. That created a false sense of security about the size of the safety net, an inconsistency that heightened the ensuing Lehman panic. Instead, the Federal Reserve should have stood aside and let Bear Stearns fall off the cliff. The splash, while lamentable, would have been smaller. Moral hazard would have been minimized. Lehman would probably have survived, albeit by sacrificing independence and finding a partner to cling to, as Merrill Lynch & Co. did by snuggling up to Bank of America Corp. Financial Darwinism would have been allowed to do its job of keeping the gene pool pure. A similar argument applies to Greece. Any intervention on behalf of the European Union or the European Central Bank to rescue the nation from its self-created economic travails would be a disaster for the common-currency project. It would risk paving the way for the similarly profligate to ignore their own fiscal responsibilities, safe in the knowledge that euro membership has its privileges. Truth and Consequences Greece owes its lenders about $361 billion, according to June figures compiled by the Bank for International Settlements in Basel, Switzerland. So, make no mistake — a default would be a terrible thing. The consequences of a bailout engineered by Greece’s European peers, though, would be far worse. There is no joint-and-several guarantee for euro adopters. Just because euro-region debt is all denominated in the same currency doesn’t mean it’s backed by a single lender of last resort. Not only would a bailout of a distressed lender be undesirable for moral reasons, it would also probably be illegal, something European officials seem to be telling bondholders. German Finance Minister Wolfgang Schaeuble said in the Dec. 21 edition of Bild-Zeitung newspaper that Greece has been living beyond its means for years, and can’t expect Germany to pay for Greece’s mistakes. Frank Schaeffler , a member of the German parliament’s finance committee, said on Dec. 18 that any attempt to accomplish a joint bond sale by both countries “would be the first nail in the coffin of the euro.” ‘No Mandate’ ECB Governing Council member Ewald Nowotny told Dow Jones Newswires that the central bank won’t bail out debt-burdened euro members. “The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances,” Dow Jones reported on Dec. 20, citing an interview. There’s no question that Greece is in an economic mess. Its budget deficit is 12.7 percent of gross domestic product, much worse than the 3 percent limit stipulated for euro members. Greek Finance Minister George Papaconstantinou , who says he’ll shrink that shortfall to 8.7 percent next year, says previous governments misled investors about how unfit the nation’s finances were. ‘Sleight of Hand’ “There’s been some sleight-of-hand,” he told BBC Radio 4 in an interview on Dec. 20. “Especially in 2009, there’s been a big difference between data reported and the underlying trends in the deficit.” The Greek banking system has borrowed about 47 billion euros ($67 billion) from the ECB, according to figures compiled by Royal Bank of Scotland Group Plc, based on the amount of collateral the nation has pledged. That’s out of the 700 billion euros lodged at the central bank by the region as a whole. Put another way, Greece has taken almost 7 percent of the emergency liquidity that the ECB has supplied to ease the credit crunch. Its economy, though, accounts for only about 2.7 percent of the euro area and its public debt is about 4 percent of the total outstanding among euro members, according to figures compiled by Bank of America Merrill Lynch. Greece has already been punished by the rating companies. Fitch cut its grade by one level to BBB+ on Dec. 8. Standard & Poor’s followed suit on Dec. 16, warning that a further downgrade is possible “if the government is unable to gain sufficient political support to implement a credible medium-term fiscal consolidation program.” Moody’s chopped its assessment this week, also leaving the door open to more downgrades. Bond Vigilantes The bond vigilantes are also penalizing Greece. The nation’s 10-year borrowing cost leaped to 6 percent this week, up more than a percentage point in the past month and up from a low for this year of 4.4 percent in October. Greek debt yields about 2.50 percentage points more than that of Germany, Europe’s benchmark borrower. The spread , a measure of how much riskier Greek debt is perceived to be, reached 276 basis points on Dec. 21, more than doubling in five weeks. At those prices, investors aren’t yet pricing in a default. What’s not clear, though, is whether their repayment expectations are based on optimism that Greece will mend its ways, or hopes that deeper pockets will be made available should the need arise. Anyone banking on the latter is probably making a costly mistake. ( Mark Gilbert is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

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Tiger Woods’s Affairs a Holiday Gift to Lawyers: Ann Woolner

December 21, 2009

Commentary by Ann Woolner Dec. 22 (Bloomberg) — Whether a one-night hook-up or a long-running romance, a relationship without marriage rarely requires lawyers. Why call in a legal expert unless there’s a pre-nup to negotiate, a will to write or a divorce to handle? Tiger Woods’s sex life, on the other hand, has been a holiday gift to lawyers from one U.S. coast to the other, and overseas, too. Of course he hired a criminal defense lawyer, Mark NeJame , after the car crash that broke open his secrets. He exercised his right to remain silent when police sought him out, most probably on advice of counsel. But when more than a dozen alleged paramours emerged, the legal issues grew more interesting. Woods’s London lawyers won a court order this month barring British news organizations from publishing what purported to be nude photos of Woods but which his legal team claimed didn’t exist. More lawyers no doubt were called in when companies that pay the formerly squeaky-clean Woods to endorse their products no longer wanted to associate with him. And you can bet whatever Woods says these days, which isn’t much, has been vetted by attorneys. But what about all those women? Some have enlisted counsel, too, and you have to wonder why. Hush Money Rumors of hush money float about in tabloids and on celebrity gossip Web sites . If you’re looking for that kind of payoff, you wouldn’t want just anybody negotiating it. And attempting it yourself might land you in the sort of trouble plaguing Robert “Joe” Halderman, accused of trying to blackmail David Letterman over the talk show host’s sexual peccadilloes. In Wood’s case, the first to be outed was Rachel Uchitel , who was reportedly the reason for an argument between Woods and his wife the night of the crash. She’s hired Hollywood lawyer Gloria Allred , who’s had lots of experience representing women with links to celebrity. Allred, whose Los Angeles firm specializes in discrimination cases, counts among her former clients Nicole Brown , who was O.J. Simpson’s sister-in-law; Kelly Fisher, a model who said she was engaged to the now-late Dodi Al-Fayed before doomed Princess Diana came along; Amber Frey, an ex-lover of Scott Peterson and a witness against him at his murder trial; Melanie “Scary Spice” Brown, who claimed actor Eddie Murphy fathered her daughter; and Brittany Ashland, whom actor Charlie Sheen pleaded no contest to battering, according to the Huffington Post. All Quiet Allred declined to discuss Uchitel’s situation or that involving another of Woods’s alleged girlfriends, Theresa Rogers, whom she reportedly also represents. “No comment. Sorry,” she e-mailed in response to my request to interview her or her clients. But we do know something about what Allred is doing for Uchitel, a New York nightclub hostess, party planner and a former Bloomberg television producer. Allred complained to ABC when a joke-cracking panel on “The View” implied that Uchitel was a prostitute. Earlier, Uchitel was the one accused of slander when she trashed the friends who had exposed her relationship with Woods. Media Un-Invited Then Uchitel dropped her denials of a Woods liaison, and Allred scheduled a press conference at her office in Los Angeles to reveal all about the relationship, only to abruptly cancel it. Speculation that Woods is agreeing to pay Uchitel millions of dollars to keep her mouth shut followed. The Daily Beast Web site says the sum could be as much as $5 million and reports that Woods has a team of lawyers trying to squelch these sorts of stories. Another woman reportedly an Allred client, Rogers, said Woods fathered her 5-year-old child. She acknowledges he isn’t the only candidate for paternity. There are other ways to profit from an affair with a celebrity, such as writing a book, as Monica Lewinsky did. Porn star Holly Sampson, who wants people to understand that Woods was single when she dated him, says she’s working on a film whose script is titled, “Holly Sampson Golf Project.” In addition to Rogers and Uchitel, at least two other women linked to Woods have reportedly lawyered up. Jamie Jungers and Julie Postle, both cocktail waitresses, have hired Michael O’Quinn of Orlando. My message to him wasn’t returned. Woods’s Pros Woods’s lawyers are pros at handling this sort of thing. The Daily Beast reports he’s represented by Lavely & Singer of Los Angeles, which boasts on its Web site that it specializes in going up against tabloids and other media for “the publication of articles which defame the clients or invade their privacy.” The firm persuaded the National Enquirer to spike an earlier story of a Woods affair, the Daily Beast says. Whether any of these women have tried to sell their stories, photos or text messages isn’t known. Reputable news organizations don’t pay people for information, but tabloids and Web sites do. The National Enquirer does, for example, “when it’s accurate,” as the paper’s editor-in-chief at the time, David Perel , told CNN last year. He’s since left the newspaper to run RadarOnline.com, one of the celebrity gossip Web sites that’s hot on Woods’s trail. And speaking of the Enquirer, which broke open Woods’s secret life with the first story on Uchitel, the newspaper also broke the news of former U.S. Senator John Edwards’ affair with Rielle Hunter. The Edwards-Hunter saga offers an unsavory example of the lawyer’s role in that sort of scandal. Hunter and an Edwards aide at first claimed through lawyers that the aide was her baby’s father. Now they admit all that was a lie. How do we know they changed their story? For one thing, it’s all in court papers written by, you guessed it, lawyers. ( Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net .

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Boring Beats DiCaprio in Central Banking World: William Pesek

December 21, 2009

Commentary by William Pesek Dec. 21 (Bloomberg) — Glenn Stevens has no misgivings about not being the life of the party. The Reserve Bank of Australia governor sometimes jokes about boring audiences with his comments and speeches. Looking at Australia’s contrarian experience during this global crisis, it’s hard not to conclude that boring is good. In fact, bankers and monetary authorities becoming ho-hum again is what’s needed to restore order. Stevens personifies the point. Never falling for Alan Greenspan’s we-can’t-recognize-bubbles shtick, he pulled away the proverbial punchbowl when the Federal Reserve kept the bar open too long. That determination to keep things from getting out of hand served the 14th-biggest economy well. It also offers a roadmap for China, India, Indonesia, South Korea, Taiwan and other economies that have been slow to raise rates. They need to act more Australian in the months ahead. Otherwise, today’s asset bubbles will feed into inflation and make 2010 a needlessly volatile year. Some activism is needed. There’s a view that tomorrow’s bubbles are the price we pay for recovering from the last ones. While politically expedient in the short run, there are big risks to what economists call “the bubble fix.” Growth powered by bubbles is more about quantity than quality. It’s hollow growth that forms a weak basis for any recovery. Houses of Cards It’s amusing now to rewatch films like “Trading Places,” or reread books like “Liar’s Poker” by my Bloomberg colleague Michael Lewis . Both deal with the excesses of the 1980s, all of which can look innocuous these days given how greed, innovation and opportunity fused together to fashion investment banks into houses of cards. Sherman McCoy, the central character in Tom Wolfe’s “Bonfire of the Vanities,” boiled the debt business down to one where you pass along a piece of cake, collecting the little crumbs that come off and pocketing them. The last decade saw real so-called masters of the universe looking to pocket whole cakes and the bakeries that make them, too. Wheeling and dealing flourished in the 80s, yet the last decade saw a Wall Street pay-scale arms race. The smartest and best educated opted for finance over science, engineering or running corporations. Risk and leverage became virtues all their own and the growth in financial systems became a bubble all its own. More people managing wealth than creating it led to dangerously lopsided economies. Avoiding Excesses Thankfully, Asia avoided much of that scenario. Bankers didn’t succumb to the toxic-debt and trading excesses that undid the U.S. economy. Conservatism served Asia well in the crisis. Central bankers can be just as much of a problem as the private sector. Asia’s monetary policy makers need to return to basics and take away their own punchbowls. Asset prices in the region, and by extension growth rates, are being driven more by unusually low interest rates than economic fundamentals. It’s time for policy makers to mop up that liquidity the way Stevens is in Australia. The concept of central-bank independence has become a quaint one these past 18 months. Look no further than the U.S., where Federal Reserve officials lowered rates toward zero and beyond. In today’s political environment, it seems all but impossible for Fed Chairman Ben Bernanke to begin ratcheting rates higher. Central Banking Stars Those efforts got Bernanke named Time magazine’s person of the year. Yet central bankers were never supposed to become celebrities. Here, I’m reminded of a conversation I had with economist Herbert Stein in 1997 about then-Fed Chairman Greenspan’s notoriety. The former Nixon administration official said that in his day, few Americans even knew who ran the Fed. Central bankers worked in anonymity doing a job that’s vital, but hardly sexy. In the mid-to-late 1990s, though, Greenspan was popping up in gossip columns and being pictured in People magazine alongside Leonardo DiCaprio and Cameron Diaz . One reason Greenspan got such billing was the outsized nature of the financial system. Central-bank policies were more important than ever, and investors began relying on them to make the world safe for their profits. The so-called moral hazard produced by those expectations is one of the lasting legacies of market booms over the past 15 years. The Australian Way Here’s where Stevens’s example is important. He avoided going too far with rate cuts. The RBA was the first major central bank to raise rates this year. Australia had a comparatively shallow downturn, and now Stevens is doing what peers in Asia have yet to: working to avoid a new housing bubble. Australian banks are helping, too. They are under attack from the government for raising home-loan rates by more than the central bank has increased its benchmark. In that way, banks are doing the RBA’s work for it. In a Dec. 8 speech, Stevens took solace in his belief that “2009 was less interesting than 2008, though still not quite boring enough in my view.” His efforts to make 2010 as uneventful a year as possible are an example for central banks. A dose of boredom is exactly what Asia needs. ( William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: William Pesek in New York at wpesek@bloomberg.net

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Tiger Woods’s Marital Mess Has Bliss Flip Side: Scott Soshnick

December 15, 2009

Commentary by Scott Soshnick Dec. 16 (Bloomberg) — They poked fun at Doug Christie . Oh, how they laughed. They whispered and snickered in the locker room, even his own, which is supposed to be a safe haven. They mocked. They mimicked. They called him names. Heck, Bryant Gumbel once labeled the former National Basketball Association player “whipped” on national television. Ignorant and mean. Much of the venom was directed at Christie’s wife, Jackie, who was deemed controlling. And that was the nice stuff. There were threats made by telephone and e- mail. “Pure evil,” Jackie said over the telephone the other day from Bellevue, Washington, where the Christies are settling into their new loft-style home. Christie was a professional athlete who dared to be different. He willingly brought his wife on road trips. He took his marriage vows seriously, especially the part about forsaking all others. Christie actually enjoyed having Jackie around, even if her presence meant no strip clubs or groupies at the hotel lobby bar. Even if teammates didn’t get it. Imagine that. Christie loved his wife. And, what’s more, he wanted her to know it, even while he worked. So the husband made up a signal , which he’d flash during games. On the court. On the bench. Didn’t matter. Christie would raise his left fist, and extend his index finger and pinkie. It was the husband’s way of reminding the wife that he was thinking about her. Only her. The single-game record was 72 gestures. Different, yes. But so what? Laughed, Lampooned Oh, they laughed and lampooned the Christies, even though former player Jeff Hornacek used to stroke his cheek three times on the foul line as a way of saying hello to his three kids. Even though Jason Kidd once blew kisses to his wife, Jumana, who in divorce papers accused him of being a serial adulterer. Speaking of affairs, and lots of them, Tiger Woods’s admitted infidelity has landed his mug on the front page of the New York Post for 17 straight days as of yesterday. Golf is on hold while Woods tries to save his family, which includes two kids. Get this: Some of the athletes who once snickered at the Christies are now seeking their advice. Neither of the Christies would name names, except to say that Woods isn’t among the athletes who asked for help. “I wish he would’ve reached out,” Jackie says. “I think we’ve stopped a lot of affairs.” Too Many Offers Take it from someone who has spent the past 16 years in clubhouses, locker rooms and team hotels. There’s no shortage of opportunity for an athlete — married or single — looking for, uh, companionship. “Women pretty much fight to get what they want,” Jackie says. The Christies, though, have been happily married for 15 years. They renew their vows each year on their anniversary, July 8. They’ll celebrate next year at Pepperdine University, where Doug recently was inducted into the university’s athletics hall of fame. The Christies share a nightly glass of wine. They’re both connoisseurs. They like cheese, too. They love to watch movies together. They’re both writers. The Christies are working on a book, called “Luv Pons,” which is a play on the words “love” and “coupons.” The book will contain what they call coupons that can be redeemed for things like foot massages. “Athletes love that,” says Jackie, who chuckles after letting slip that her husband fancies vanilla-scented massage oil. “There’s so much out there about infidelity. We wanted to make sure we offer something else.” Gentle Reminders Doug is fond of leaving notes for his wife in the sink or on the mirror. Jackie, knowing that her husband fancies classic sporting events, hunts for DVDs on the Web and puts them under his pillow as gifts. Just simple tokens of their affection, both said. Reminders, really. “Little steps,” Doug says. “You get busy, life happens, you just have to remember to make that time for each other.” The Christies have three children. The youngest is 9-year- old Doug, or, as his father says, Dougie, who has always wanted to be Tiger. The Christies have used the tempest surrounding Woods to illustrate to their son that it’s fine to idolize the golfer, whose preparation, drive and practice habits can be applied to anything, including schoolwork. Woods also makes tangible what mom and dad have always preached to their children — that choices have consequences. Woods, so far, has lost at least one endorsement. His image has gone from pristine to punch line. Saturday Night Live, Jay Leno and David Letterman have all used the Woods family as fodder. And to think they all laughed at the Christies. ( Scott Soshnick is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Scott Soshnick in New York at ssoshnick@bloomberg.net

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Will Bunch: While Dying, Editor & Publisher Showed Journalism How To Live

December 10, 2009

Editor & Publisher , the journalism magazine that was more recently a powerful force on the Web, died today at the ripe old age of 125. Its passing was not completely unexpected; this was a publication that has largely flourished in the now comatose format of magazines, writing about the terminally ill business of newspapers, dependent on dollars from the morally wounded world of traditional advertising, including the nearly extinct paid classified ads. Like any old coot that lives into its 100s and had a hell of a good time doing it, it’s kind of a miracle that the damn thing lasted this long. For much of today, “Editor & Publisher” was a top trending topic on Twitter — ironically, a symbol of both its impact and of the massive technological changes that conspired to kill it. While I greatly mourn E&P’s passing, I want to call attention to the splendor of its final years, when it died like a supernova, with a great burst of energy. It’s complicated to write about Editor & Publisher because there were essentially two E&Ps. The first one is fondly remembered by those in the newspaper business who remember when job openings were as plentiful as prairie buffalo used to be, or at least that’s how we remember things. Its classified ads were the place for young reporters seeking jobs in exotic, faraway locales , or at least daydreaming about them before the next school board meeting to cover. I remember this magazine from my early days in the business in the 1980s, well-done but a bit on the staid side, and more Publisher than Editor, especially when compared to the flashier mags aimed more at the Woodstein generation of young reporters, like Columbia Journalism Review. Then in 2002, something happened that changed everything. The Internet age was reaching full flower, and the newspaper business was accelerating, Thelma-and-Louise-like, toward the abyss, just not yet staring over the very edge. That year, Editor & Publisher turned its new editor, the man who would become its last editor, Greg Mitchell , and the seeds of a revolution were quietly planted. There was already talk of “journalism reform” in the air in the early 2000s, but most of it was just that — talk, daydreams of pony-tailed venture capitalists riding to the rescue and funding sleek Web sites with lots of multimedia bells and whistles, even as the real-life world of newspapers plodded along trying to figure out who was left to make the cop calls that night. No one ever dreamed that salvation of the real passionate art of journalism would be a then-55-year veteran, the former legendary editor of the legendary (redundancy intended) 1970s rock magazine Crawdaddy , or that he would be aided by a tiny staff of like-minded pros like Joe Strupp and Jennifer Saba or that his main vehicle would be a creaky Web page which, to be honest, at times seems as far removed in user friendliness from a slick 21st Century Internet site as your kid’s Xbox is removed from Atari’s Pong. The way that Greg Mitchell’s Editor & Publisher lit their flashlight to show a path for journalism out of that abyss was stunning in its simplicity. They didn’t spend hours at power lunches, fretting about making sure every piece was inoffensively 50-50 balanced or any other such distraction. They got up in the morning, went to their office in Manhattan, and they just…did…it. With a small staff and with so many problems in the world of journalism, E&P had a remarkable knack for honing in on, and reporting the heck out of, the few things that were most important, which were not pageviews and clickthroughs, but old-fashioned journalism that was both highly ethical and highly skeptical. They practiced it that way themselves, and they often went after the mainstream media charlatans who did not. Here’s how Mitchell explained his philosophy on journalism in 2004, that the goal was that: “all our coverage on all subjects–is not to be partisan or not to be left or right or anything like that. But we believe in the–what should be the main principle of journalism, besides being accurate and fair, is to be skeptical–to raise questions, to not take what officials say as the gospel truth–unless it’s really proven–if there’s documents.” That seems obvious enough, yet upon his 2002 arrival the world of journalism was turned upside down by the looming war in Iraq, by news orgs that put every presidential pronouncement on Page A1 but buried reality-based skeptics on Page A16 while ignoring both large-scale protests and the lethally wrong suggestion that Saddam Hussein somehow had something to do with 9/11. Almost alone at times, Mitchell and E&P reported critically on the rush to war and on U.S. journalism’s helplessness under that stampede On January 23, 2003, at the height of the media bandwagon, Mitchell wrote a column entitled “On the War Path.” In it, an array of well-known voices, like the Washington Post’s Howard Kurtz, the Boston Globe’s Mark Jurkowitz, Arianna Huffington and Richard Reeves voice a host of misgivings that were getting little play at the time: Why was there such little reporting both of the anti-war protests and the deep but quieter misgivings shared by millions of Americans, of why we were attacking Iraq but not North Korea or whether the president’s anger at Saddam was personal? Much of Mitchell’s critical and insightful writing can be found in his 2008 book on the war, called ” So Wrong for So Long: How the Press, the Pundits — and the President — Failed on Iraq .” When Colin Powell gave his infamous presentation to the United Nations that winter on Iraq’s supposed weapons of mass destruction — hailed at the time, largely discredited now — E&P wrote an article questioning both inconsistencies as well as the lack of media skepticism. Mitchell explained later . Now little Editor and Publisher — the next day and the days beyond that — published stories on our website raising those very questions. It didn’t take hindsight. It didn’t take a huge staff. It just took a few journalists who were acting on the principles of journalism — To be skeptical. And if we, little Editor and Publisher, could point out that the case had really not been made or needed to be proven, it made us wonder why some of the bigger outlets just sort of rolled over. And Mitchell and his staff didn’t let up, even — especially, in fact — after President Bush stood on an aircraft carrier with the sign, “Mission Accomplished.” They focused intensively on suicides and other unexplained deaths in Iraq, highlighting articles from small-town papers that would have never received national attention if not for the E&P crew. When an Associated Press photographer captured on film the combat death of an American soldier in Afghanistan, it was E&P alone that asked editors uncomfortable questions about running the photo or not running it. That was what Editor & Publisher was all about in its final years, asking tough questions. Journalism dying? Not as long as Mitchell and his crew had access to nothing more than a notebook and a keyboard. They just did it. And while skeptical coverage of Iraq — and of the coverage of Iraq — was arguably E&P’s mostly valuable contribution to the American dialogue, it was far from its only hallmark. The publication aggressively dealt with the ethical missteps of big media, the kind of things that many newsrooms would gladly sweep under a rug, and it routinely produced some of the best long take-out articles on real journalism reform, on what works and what doesn’t, and why. The main Web site was always low-tech, but in the final months they launched an outstanding blog, the E&P Pub , and Mitchell even became one of the top Twitter users in the media world . And they kept it up until the bitter end; today, after the pending shutdown of the magazine and its related Web sites was announced, there was Joe Strupp with a new article, grilling the Washington Post op-ed editor on why the newspaper published a fact-challenged piece on climate change by Sarah Palin . It’s a sad day, but in a strange way the death of Editor & Publisher gives me hope for the future of journalism. Because they showed us a blueprint, that size or technology is overrated, that a half-dozen people can make a difference just by asking the right questions and by not backing down. And if Greg Mitchell and the others could accomplish this at a small, shrinking trade publication, then I know that it can happen again and will happen again, somewhere else and in some other format — that no-holds-barred journalism is possible even on these weird little newfangled tablets or whatever . Because in the remarkable way that they died, Editor & Publisher showed the rest of journalism how to live.

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Cowboy Banks Get Big Bucks as Indians Get Little: Ann Woolner

December 10, 2009

Commentary by Ann Woolner Dec. 11 (Bloomberg) — Over here you have the bazillions of U.S. bucks doled out to Wall Street’s cowboys for reckless conduct that wrecked the world’s economy. Over there you have a $3.4 billion federal settlement with people from whom the U.S. had been essentially stealing for more than 100 years. To seek what was owed them, American Indians spent 13 years in court where judge after judge decried the government’s gross mismanagement of their funds and “mendacity” in litigation. And yet it took that long for the Justice Department to step up to the plate and agree to pay more than a pittance. If the Indians had been AIG, the $3.4 billion settlement announced this week would have been many times larger. The real AIG — insurance giant American International Group Inc. — sopped up $180 billion in government aid after helping to create the economic havoc felt around the world. The Indians sought no bailout, no handout when they filed suit in 1996 to claim royalties due them for oil, gas, timber, mining and grazing rights to lands allotted them under an 1887 agreement with the federal government. The Department of Interior would collect revenue the leases generated and give it to the U.S. treasury. Some of it went back through Interior for distribution to the Indians. Some of it didn’t. Sloppy Record-Keeping How much money each person was owed, no one really knows, so sloppy was the record-keeping. Thousands of critical documents were lost or destroyed. Josephine Wildgun had 7,000 acres of land the government leased out for oil drilling, Elouise Cobell, a banker friend of hers and the lead plaintiff in the case, told me a few years back. For that, Wildgun was getting roughly $1,000 a year, or about 14.3 cents an acre, a sum obviously short, said Cobell, a member of the Blackfeet Nation who lives in Montana. But how short? The leases covered some 56 million acres of land belonging to hundreds of thousands of people. Eventually the U.S. came up with a total of $455.6 million. The Indians claimed they were due 100 times that. With so many records missing, the correct figure is unknowable. Instead of seeking a reasonable settlement, the government fought the Indians in court through three presidential administrations. Little Ground The case grew convoluted, the accounting impossible, and the parties bitter. After 13 years, seven trials and almost two dozen published court opinions, the most recent ruling showed little ground has been gained. The trial judge should “enforce the best accounting that Interior can provide with the resources it receives,” an appeals court said. Oh. Why didn’t someone think of that sooner? The ruling in July by the U.S. Circuit Court of Appeals for the District of Columbia threw out the $455.6 million verdict the trial judge had awarded. So what was the trial judge to do? The stack of appellate rulings “do not clearly point to any exit from this complicated legal morass,” the appeals court conceded. It had to be resolved through settlement. And it should have been resolved that way long before now. Some two decades before the suit was filed, government investigators were issuing report after scathing report excoriating the government’s mishandling of funds, as the appeals court pointed out. The government officially acknowledged its books were a disgrace when Congress in 1994 passed the American Indian Trust Fund Management Reform Act . Fighting Indians Interior attempted to sort out the mess, cranking up computer programs and reorganizing staff. Still, the Indians saw little result and sued. And the government starting pouring money into a legal fight. True, it is one thing to say the U.S. owes a huge group of people a lot of money, and another thing to figure out how much it owes whom. Complicating the matter is the fact that so many generations have been born since the land was allotted that the number of owners of each parcel has multiplied, while the size of each interest has shrunk. Yes, it’s a hard thing to figure out. So what? The government didn’t need precision when it doled out $180 billion to AIG and did it in a matter of days. Whether it was wise or foolish is beside the point. The government had no obligation to do that. Or to bail out Chrysler or General Motors. It had no legal responsibility to rescue Wall Street’s hot-shot risk-takers. Fraction of Goldman The $3.4 billion the Indians got amounts to roughly a third of Goldman Sachs’s government bailout. It’s little more than one-tenth the loss the government expects to suffer from its AIG bailout. Executives balk at the idea of capping pay at $500,000 in firms that haven’t repaid the government. The Indian settlement will come to $1,500 to $2,500 for most of the beneficiaries. A few with larger tracts that generate lots of revenue will receive hundreds of thousands of dollars. The U.S. had a legal obligation to give hundreds of thousands of Indians money promised a long, long time ago, and a fiduciary duty to keep track of it. The government owed plenty to the Indians. Their problem was that they were too small to matter. ( Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net

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Bonus Bashers Shouldn’t Stop at Goldman Sachs: David Reilly

December 10, 2009

Commentary by David Reilly Dec. 11 (Bloomberg) — Bonuses are in the firing line again, with the U.K., U.S., France and even Goldman Sachs Group Inc. looking to trim banker pay. While the debate over excessive compensation started on Wall Street, it shouldn’t end there. Bonuses, lavish benefits and perks subsidized by taxpayers aren’t the sole preserve of bankers. You only need look in your own backyard for examples of excessive compensation that may contribute to future crises, just as skewed rewards on Wall Street fueled the current one. That’s what I discovered reading a New Jersey Commission of Investigation report issued this month on wasteful compensation in local governments. There were plenty of sweet deals that the vast majority of bank workers — who don’t get seven-figure compensation — might be happy to land. These range from $200,000-plus payouts for unused days to paid time-off to go Christmas shopping. As the report put it, “Startling amounts of taxpayer- funded booty continue to be dispensed across New Jersey without regard for the common good.” But, I hear you say, anything lavished on public workers can’t come close to Wall Street excess. True, no government workers land the kind of $67.9 million bonus that Goldman Chief Executive Officer Lloyd Blankfein got for 2007. Then again, most folks on Wall Street or in big banks will never see that kind of bonanza either. The vast majority toiling on Wall Street and in big banks are worker bees who receive good, but not astronomical, pay. $1 Million Club Consider that in 2008, eight of the country’s biggest financial institutions paid 4,311 individuals more than $1 million in bonuses, according to a report by New York State Attorney General Andrew Cuomo . Yet they represent just 0.3 percent of the 1.27 million workers at those firms. And even if they’re not in the ranks of top earners, many bank workers face the threat of getting swept up in the populist outrage over banker pay. The U.K. said earlier this week that it would impose a 50 percent tax on discretionary payments to bank workers of more than $40,000. (The tax will be paid by the institution, not the employee.) France may follow suit. That sets a pretty low bar for who gets caught up in the bonus dragnet. The U.S. isn’t likely to go that far, although the clampdown by pay czar Kenneth Feinberg has prodded banks such as Bank of America Corp. and Citigroup Inc. to try and pay back their Troubled Asset Relief Program funds as quickly as possible. Even Goldman said Thursday that 30 top executives won’t receive cash bonuses for 2009, although they will receive pay in restricted stock. Less Stress, Too Local government jobs with lucrative payouts don’t draw this kind of heat. They also don’t involve 70-hour weeks and the never-ending pressure of trying to churn out profit. There is also less chance of being downsized. This isn’t to say there aren’t plenty of examples of outrageous, and egregious, pay practices on Wall Street. Or that misguided banker incentives didn’t help foment the financial crisis. Still, bloated compensation among state and local government workers also poses an economic threat. You only have to look at California’s budget travails or at Illinois, whose bonds this week were downgraded by Moody’s Investors Service and Standard & Poor’s, to see that state and local government finances are in tatters. More Bailouts Excessive pay, along with massive pension and retiree health-care obligations, is a big reason. The danger is that the federal government eventually may be called to bail out shredded state-and local-government finances. While that possibility may seem remote, it was a real worry earlier this year when California was forced to start paying some bills with IOUs. If the federal government ever had to ride to the rescue, the dollar would get walloped, Treasuries would tumble and any incipient economic recovery may get nipped in the bud. The alternative is that struggling consumers will have to pay for deficit-ridden state and local governments through higher taxes, increased fees and service cutbacks. That doesn’t bode well for economic growth either. The New Jersey report on local government pay waste provides a window onto the wider problem. Some examples: Public Service — From 2004 to 2008, 160 retiring Atlantic City police officers and firefighters were paid more than $13.7 million for unused sick leave. One “walked away with a check for $222,910.” — Camden, one of New Jersey’s poorest cities, paid a retiring police chief and deputy police chief a combined $477,000 for accrued sick and vacation time and other benefits. The city also makes severance payments to any employee who leaves the city’s payroll — “essentially no-strings-attached departure bonuses.” — In 2006 and 2008, five employees of Englewood Cliffs received a combined $1.2 million in lump-sum cash benefits at retirement. — In Union City, municipal employees get a paid day off for Christmas shopping. Hoboken police officers can get as many as five days off a year for donating blood. And in Parsippany- Troy Hills, police officers get eight days for their wedding and civilian employees get three. While the commission examined only 75 municipal agencies, it found “more than $39 million worth of excessive cash benefit payouts.” Looked at in terms of all of New Jersey, “action to curtail such extravagance would result in enormous savings — especially given the fact that, in addition to state aid, nearly $40 billion is spent by local taxpayers every year” on government agencies. Multiply that across 50 states and you see why taxpayers shouldn’t be worried about compensation just on Wall Street. ( David Reilly is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

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Obama Surrenders to General’s Political Surge: Margaret Carlson

December 9, 2009

Commentary by Margaret Carlson Dec. 10 (Bloomberg) — No more calls. We have a winner. All hail General Stanley McChrystal , who has won his war for 30,000 more troops to be deployed to a country whose government is so rotten and corrupt many of its citizens prefer the Taliban. Marching triumphantly to Capitol Hill on Tuesday, then giving network interviews and long sit-downs with Charlie Rose and Christiane Amanpour , McChrystal showed himself, as much as anyone, to be the decider of our foreign policy. The U.S. war on terror will now be centered in Afghanistan. Don’t mistake this for a surge. It’s an escalation. In a blizzard of clarifying statements from Obama administration officials, the purported July 2011 drawdown date for the reinforcements was rendered inoperable almost as soon as it was uttered. Common sense says the deadline was a feint to calm Democrats. You don’t win the hearts and minds of Afghanis, as McChrystal wants to do, in a lifetime, much less 18 months, or train an army of mostly illiterate, tribal men in a country that exhausted the superior army of the Soviet Union before the U.S. gave it a go. Of all the issues Obama didn’t want on his desk, Afghanistan was the hardest, even without the military hemming him in. McChrystal fought in memos, fought through leaks, fought in the trenches, as much with political arts as martial ones. For a while it looked like McChrystal was being outmaneuvered by Vice President Joe Biden . Biden argued that Afghanistan had changed from a just war to a senseless one because al-Qaeda has mostly moved elsewhere, that the citizenry rightfully hated the corrupt and dysfunctional government, and that drones and special forces on the Afghan border with Pakistan could do the job. Fighting Back McChrystal and anonymous “military officials” fought back. Dramatic excerpts from a classified memo to the president appeared. “Inadequate resources,” the memo from McChrystal warned, “will likely result in failure.” His warning echoed the frequent predictions of doom from former Vice President Dick Cheney , who insisted that Obama’s failure to grasp that we are “at war” and his “dithering” invited renewed terrorist activity. When General Douglas MacArthur disagreed with stopping at the 38th parallel in North Korea, President Harry Truman fired him . If MacArthur had had McChrystal’s savvy, he might have gotten his way. Generals used to be unsuited for prime time: too gruff, too candid, too unpolished. Now most are tanned, rested and ready for their closeup, with P.R. as good as Tiger Woods before the recent troubles. Flatter Me In October, McChrystal let a reporter accompany him to Helmand province and got a long, flattering profile in the New York Times magazine out of it. On the cover, a Patton-like photo. Inside, the story of a man who “pushes himself mercilessly, sleeping four or five hours a night” and subsists on one meal a day. Jumping from a whirring Black Hawk helicopter, he paraded through an outpost in the south without helmet or flak jacket to show how more troops on the ground can calm the populace. That’s a lot of ramrod-straight bravado to match. Democratic presidents are fearful of reviving the charge that they are soft on national security and defer to the military brass. As Representative John Conyers , a Democrat highly critical of Obama’s build-up, put it, “Calling in generals and admirals to discuss troop strength is like me taking my youngest to McDonald’s to ask if he likes French fries.” Obama’s Ambivalence Obama’s nationally televised speech revealed his ambivalence by granting McChrystal what he wanted — 30,000 U.S. troops, plus maybe 10,000 from a coalition of the willing — but only for a little while. Testifying in Congress, McChrystal hedged that double message. He placated restive Democrats with the suggestion that the deployment would end on a date certain, while signaling to Republicans that Obama’s commitment was more open-ended. Meantime, Afghanistan President Hamid Karzai was telling reporters that it would be at least five years before Afghan security forces would be capable of standing up so we could stand down. Defense Secretary Robert Gates , in a surprise trip to the region, said it could be as long as four years before any of the surge troops come home. In a blunder, Gates said what not even the most hawkish say: “We are in this thing to win.” Send Gates — never tan, rarely quotable — to the same media training that’s made generals the envy of Britney Spears . Civilian Leadership Generals should have their say, but not necessarily their way, in the Oval Office. It’s all too easy to lose sight of the constitutional principle that military commanders are subordinate to civilian leadership when a confident general with good press says we will all be dead if we don’t listen to him. During his deliberations, Obama was cast as indecisive and overly sensitive to politics, while McChrystal was seen as resolute, concerned not about his popularity but about his country. Less prominent were the facts that during McCrystal’s command, Osama bin Laden has remained at large and the lie was perpetrated that Corporal Pat Tillman was killed by enemy fire, not accidental friendly fire. It would be heartening to think Obama did the hard thing on Afghanistan not because his hand-picked general intimidated him, but because he became convinced that catastrophe would ensue if he failed to send more American troops. ( Margaret Carlson , author of “Anyone Can Grow Up: How George Bush and I Made It to the White House” and former White House correspondent for Time magazine, is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Margaret Carlson in Washington at mcarlson3@bloomberg.net

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Tiger Woods Lays Low as Derek Jeter Loves Life: Scott Soshnick

December 9, 2009

Commentary by Scott Soshnick Dec. 10 (Bloomberg) — In a promotional video hawking The Cliffs at High Carolina, the first American golf course designed by Tiger Woods , The Man himself gets personal on matters that, according to him, should remain private. “With a wife and two kids, your perspective in life changes,” says Woods, whose personal life has become tabloid fodder. “I want to have my kids experience something like this. I want to be able to bring them up here and feel safe, feel secure, and enjoy running the trails and being a part of nature. Your priorities start changing and evolving once you have a family.” Listening to Woods prattle on about changing perspectives and priorities illuminates why Derek Jeter , who at age 35 is closer to retirement than rookie, is single. Still. Baseball is Jeter’s priority. Pinstripes are his perspective. He’s aware of the changes that come with commitment and he isn’t prepared to make them. Not yet, anyway. The very best athletes are different from their teammates and opponents. More is expected. More is required. Anyone who has ever worn a wedding ring knows that things do, indeed, change. Add kids and they change even more. That’s true for everyone, including iconic athletes like Woods and his fellow Nike Inc. endorser Roger Federer , who said as much after the birth of his twin girls. Some thought that getting married and having kids might derail Woods, the golfer. It didn’t. True Values Woods, the family man, however, has apologized for transgressions and for letting his family down. Says he hasn’t been true to his values. Woods in a statement on his Web site admitted to being far short of perfect, even if his golf game is pretty darn close. Before the Woods imbroglio broke, Jeter, who also covets his privacy, found himself on the cover of the New York Post . Someone snapped a picture of the New York Yankees captain and his latest gal pal, the actress Minka Kelly, frolicking in the sun, sand and surf of some exotic locale. Kelly is the latest in a long line of famous faces with romantic ties to Jeter, who recently led the Yankees to their 27th World Series championship. Jeter’s girlfriends have included a former Miss Universe, Lara Dutta , Mariah Carey , Jordana Brewster , Adriana Lima, Vanessa Minnillo and the Jessicas — Alba and Biel. Just to name a few. And yet, the adjective most often attached to Jeter isn’t womanizer, but winner. Women want to be with Jeter. Men want to be him. Adored, Respected Jeter is adored and respected by all, teammates and opponents alike. Never a disparaging word is heard about the baseball star who guards his personal life with a Tiger-like ferocity. As of now, Woods’s endorsers are sticking by their main man. They’re counting on a familiar refrain in sports: winning as cure-all. But it will be a while before Woods returns to golf and every day, it seems, there’s a new twist to this tale. His standing with consumers is plummeting. Woods’s ranking on a list of celebrity endorsers fell to 24th from sixth, according to the David Brown Index, which marketers and advertising agencies use to gauge the ability of personalities to influence consumer behavior. There hasn’t been a prime-time commercial featuring Woods since Nov. 29. While you haven’t seen Woods pitching products, you’ve probably seen the widely circulated e-mail that purports to show the Woods family Christmas card. There’s Woods, battered and bruised , wife Elin by his side and smiling, with a golf club in her hand. Punch Line Woods, the ultimate pitchman, is now Woods, the punch line. Saturday Night Live. Jay Leno . Even late-night TV host David Letterman , who knows something about becoming tabloid fodder, is taking shots at the world’s most recognizable athlete. Back in February I wrote a column titled “Tiger Woods, Sports Needs You like Never Before,” in which I took issue with Alex Rodriguez’s argument that pressure made him use performance-enhancing drugs. Laughable, is the word I used, especially when you consider that Woods carries more of a burden each time out than any baseball player. A-Rod has teammates like Jeter who can pick him up, help him out, I noted. Tiger Woods stood alone. Woods, at his best, had the power to inspire and awe. Some of those casual sports fans who tuned in each Sunday afternoon to see Woods win might never return. They believed in the golfer. They believed in the man. History shows it’s a risky proposition. Surely we can believe and trust in Jeter, who less than two weeks ago was named Sportsman of the Year by Sports Illustrated. Then again, Woods is the only person to have won the award twice. As Woods knows, perspectives change. ( Scott Soshnick is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Scott Soshnick in New York at ssoshnick@bloomberg.net

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Zombies in Hiding Threaten to Trash 2010 Returns: Mark Gilbert

December 9, 2009

Commentary by Mark Gilbert Dec. 10 (Bloomberg) — The journey to global recovery from credit crisis looks to be well under way. Economies from Hong Kong to Germany to the U.S. have popped out of recession. Consumers everywhere seem a bit more confident. Central banks are starting to hint at ways to unhook the financial community from the life support of liquidity and quantitative easing. All that remains, dear investor, is to get through the shopping mall. Unfortunately, the basement is still crawling with zombies, and the chances are that they will find their way out in 2010 while you’re trying to navigate your way to the fields of prosperity. Here are some of the risks you’ll be running next year: Bond Vigilantes Neutered, Rating Companies Search for a Spine Government bailouts mean risk has flowed to public finances from private banks. Increased risk typically means lower ratings and higher borrowing costs — except debt markets are distorted. Central banks are buying their own government’s securities and commercial banks are repairing their balance sheets, to the point where even the most watchful bond vigilante will struggle to punish miscreant borrowers. If the bond market can’t send a message, the rating companies should. Greece got downgraded this week; Standard & Poor’s revised the outlook on Spain’s debt to negative. Bigger, higher-rated countries might be next. Investors may learn the hard way that it isn’t just collateralized debt obligations and structured finance products that can have top AAA credit ratings one day and something lower the next. This week’s statement by Moody’s Investors Service that deteriorating finances in the U.S. and U.K. may “test the Aaa boundaries” should be a reminder that lending to the U.S. government for 10 years at an interest rate of 3.4 percent and to the U.K. for 3.7 percent might not be your smartest trade. All Quasi, No Sovereign The word “quasi” means “kind of; resembling or simulating, but not really the same as, that properly so termed,” according to the Oxford English Dictionary. So in many cases — perhaps all — using the designation “quasi- sovereign” to describe borrowers perceived to be a smidgeon more risky than a country, is about as helpful for assessing creditworthiness as a chocolate teapot is for brewing a hot beverage. That’s the lesson from the Dubai debacle, where lenders are learning that just because a company is state-owned doesn’t mean its bondholders can access the state’s coffers when it’s time for debts to be repaid. “Queasy Non-Sovereigns” might prove to be a better classification for some of that higher-yielding debt you were tempted to buy. The New Normal May Prove Neither New Nor Normal The phrase coined by Pacific Investment Management Co. to describe how it sees the post credit-crunch economy is catching on; even Bank of America Merrill Lynch adopted “The New Normal” as part of the title for its 2010 outlook research report. Conditions, though, are still far from normal, especially with central banks in the U.S., Europe and elsewhere keeping interest rates at record lows in an effort to stimulate borrowing and stoke their economies. The new normal might turn out to be the old business-as-usual: boom-bust economies, bubbles everywhere and a reawakening of the inflation monster. You Can’t Stand Under My Umbrella Anyone hanging on to Greek government debt in the belief that the euro region wouldn’t allow a member state to get into trouble on its debt payments doesn’t understand the Bundesbank. Buy Greece because you think its bonds are cheap, or its stock market has fallen too far, too fast, or because you trust the government to get its finances in order. Do not, though, depend on the euro umbrella to protect your investments; there is no joint and several guarantee among the common currency members and, however destructive a default might be, the precedent of a bailout for fiscal indiscipline would be worse. Securitization’s Snake-Oil Salesmen are Back The financial authorities appear to have missed a golden opportunity to force transparency on the securitization market, where different kinds of debt are bundled together in packages that can be sliced, diced and resold. Central banks have been the only buyers of such debt for months, after the subprime crisis revealed the toxicity of what lay beneath the misguided AAA ratings slapped on many asset- backed securities. As lenders of last resort, the Federal Reserve, the European Central Bank and the Bank of England could have forced the banks they funded to start giving granular detail on every individual loan being securitized. Such strictures would have bathed the market in the antiseptic of sunlight. Instead, yield-hungry investors are again willing to buy bonds without proper access to details about the underlying assets. It’s not too late. Central bankers, though, will have to move swiftly if they want to change the securitization game before it’s too late. Bad Losers The banking fraternity needs to stop moaning about how unfair it is that it can’t award gargantuan bonuses now that the taxpayer has underwritten the global financial system. Such protests only fuel the anger directed against the world of finance. Bankers need to shut up and swallow their medicine, otherwise the nurse is likely to spank them even harder — witness yesterday’s announcement that the U.K. will impose a one-time 50 percent tax on bonuses above about $40,000. Dismissing such measures as populist doesn’t change the basic truth that governments are itching to extract revenge and banks are soft targets. When you’re in a hole, stop digging. ( Mark Gilbert is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

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Jobs Lost in Great Recession May Be Gone Forever: Caroline Baum

December 9, 2009

Commentary by Caroline Baum Dec. 9 (Bloomberg) — All last week I was frantic waiting for my invitation to the White House Jobs Summit to arrive. I thought about crashing, but recent events persuaded me that was neither prudent nor proper. Besides, my red kimono was at the dry cleaners. Something tells me my views wouldn’t have been well received. I would have told President Barack Obama he faces significant obstacles in his effort to create jobs before the voters go to the polls in November 2010. I’m not talking about the legality of “mobilizing” unused funds from the Treasury’s Troubled Asset Relief Program, as Obama put it in a speech yesterday at Washington’s Brookings Institution; or the inherent contradiction in “government job creation,” as if government can create jobs without commanding resources the private sector could have used to provide something the public wants. The real question facing the nation, and one that Obama’s summits and speeches aren’t addressing, is this: What if the job losses this time around aren’t temporary, the “ebb” part of the ebb and flow of the business cycle? What if employers are hacking away at their permanent workforce? There is support in the data for the idea that many of the lost jobs aren’t coming back. In November, a record 55.1 percent of job losses were categorized as permanent , according to the Bureau of Labor Statistics. The average duration of unemployment reached a post-World War II high of 28.5 weeks. And 38.3 percent of the unemployed have been out of work for 27 weeks or more, also a record. Retooling Required While the labor market may be witnessing the beginning of a cyclical improvement, “the structural outlook is daunting,” said Neal Soss , chief economist at Credit Suisse. The economy shed 11,000 jobs last month, the smallest decline since the recession began in December 2007. The net revision to previous months was positive, a sign that labor market conditions are improving. (The direction of the revisions, based on additional survey data, is generally suggestive of the trend.) The extent of the improvement may be similar to the jobless recoveries following the 1990-1991 and 2001 recessions . In the second case, it took three years after the end of the recession for the level of employment to exceed its previous business cycle peak. Before that — the recessions of 1971-1973 and 1982, for example — a rapid pace of temporary layoffs was followed by an equally rapid pace of rehiring early in the recovery. Today’s labor market may have become less flexible, Soss said. Employee skills aren’t readily transferable. An assembly line auto worker may not have the skill set suited to software programming or sales. Ma Bell Meets iPhone That doesn’t mean the U.S. economy won’t create new jobs in unimagined new industries some day. When Alexander Graham Bell invented the telephone in 1876, none of his contemporaries could have envisioned wireless technology allowing mobile-phone users instant access to the sounds and quotes of Beavis and Butthead. In another version of his we-inherited-this-mess speech, Obama laid out some pre-existing ideas for job creation — infrastructure spending, small-business tax credits for hiring and enough green investment to make the average unemployed person red in the face — and some new ones. For example, the elimination of the capital gains tax on small business and new credit lines will facilitate access to credit and make investment more lucrative. Legacy of Debt The president paid lip service to “fiscal responsibility,” reiterating his pledge to halve the deficit by the end of his first term. How his grand vision for health-care expansion, billed as reform, will achieve that is anybody’s guess. The deficit isn’t as benign as some economists claim. Debt, the cumulative result of deficits, is closely allied with job growth. In their book , “This Time is Different: Eight Centuries of Financial Folly,” economists Carmen Reinhart and Ken Rogoff document the protracted aftermath of financial crises in terms of their depth, duration and diffusion across the economy and industries. “The true legacy of financial crises is more government debt,” Reinhart said in a presentation at the Federal Reserve Bank of Philadelphia’s Policy Forum on Dec. 4. High government debt is associated with slower growth, she said. So “if we are concerned about growth, we should be concerned about debt.” The same could be said about jobs. Economic growth is the best source of job growth. If growth is curtailed by soaring government debt, job creation will be sub-par as well. The government can’t keep shoveling out money to “create jobs,” concoct some fictitious number of jobs that were created or saved and expect the public to buy it. Like the $787 billion stimulus, spending money to save money is not a winning strategy. ( Caroline Baum , author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in sidebar display to send a letter to the editor. To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .

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Gross, Roubini Weigh Dueling Chinese Bubbles: William Pesek

December 7, 2009

Commentary by William Pesek Dec. 7 (Bloomberg) — That loud hissing noise you hear is coming from Dubai, where reality is catching up with an economy built on sand — literally and figuratively. Just don’t let it drown out another one that’s slowly, but steadily increasing in volume: China . The reference is to an imbalance of global significance: not the bubble in Chinese asset prices , which the world obsessed about in 2009, but the belief that the world’s third-largest economy can grow close to 10 percent indefinitely, no matter what. That’s feeding a dangerous sense of complacency in Asia. The focus has been on China’s stimulus efforts and low interest rates adding froth to stock and real-estate markets. The real bubble is the expectations China is creating — ones that will be devilishly hard to meet in 2010. China’s plan was to tide the economy over until U.S. consumers begin spending again. Yet a stark reality awaits central planners in Beijing: the global demand its all-important export markets need to thrive won’t turn up as planned. Here, think more Bill Gross than Nouriel Roubini . Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., has been doing the media rounds warning about the absence of demand from China’s trading partners. “It’s gearing up for export that doesn’t find an end consumer — that’s the real problem in China,” Gross told Bloomberg Television recently. China Bubble The China bubble of which New York University Professor Roubini speaks has more to do with easy money in Beijing, Tokyo and Washington. His worry is about “money chasing commodities” like gold, which is trading above $1,200 per ounce, and, of course, Chinese assets. Gross isn’t ignoring this market exuberance. He says China “may abandon its dollar peg within six months’ time and with it, its own easy monetary policy that has fostered more significant mini-bubbles of lending and asset appreciation on the Chinese mainland.” The bust in Dubai is another sign the global credit crisis is far from over. Anyone who said even one year ago that Dubai’s designs on regional economic supremacy were too grand or that it was overleveraged was shouted down as a village idiot. The place was said to be unstoppable. Well, Dubai World’s debt troubles put an end to that silliness. Wake-Up Call Let that be a wake-up call for China. It too must clamp down on speculation-driven property markets. All too often, officials in Beijing see rising real-estate values as a prerequisite for rapid growth. It’s a worrisome mindset. Yet it’s the expectations bubble that may prove more damaging. In Hanoi last week, officials I met seemed convinced Chinese growth would save the day. For all the worries about the unvalued yuan hurting Vietnam’s exports, there’s confidence that strong growth in a $4.3 trillion economy will buoy Asia. Asia’s growth is feeding complacency. Take South Korea’s Min Euoo Sung , who laments KDB Financial Group Inc. ’s failed effort to buy Lehman Brothers Holdings Inc. in September 2008. “We missed a very good opportunity,” Chairman Min told Bomi Lim of Bloomberg News on Nov. 16. “I think we could have avoided a situation where Lehman collapsed so rapidly.” Yeah, sure — and taken Korea down with you. Min’s comments smack of a hubris Asia can’t afford. Korea is doing well today, and can take pride in proving wrong those who said it might become the next Iceland. Some perspective is in order, though. Much to Do Asia has indeed fared better than the U.S. and Europe. That’s no reason to declare victory and move on. The region still needs to rebalance its growth model, deepen financial markets, improve the quality of government and cooperate more. Min’s if-only-we’d-grabbed-Lehman musings are highly unwelcome. KDB is state-owned and Min was publicly scolded by lawmakers for even attempting the deal. Lehman’s radioactive portfolio would’ve dented confidence in South Korea at the worst possible time. Free-market folks abhor governments interfering in business. In this case, Korea’s leaders served their people well. Asia’s confidence reflects its status as the only region still growing solidly. It also avoided the excesses that did in the U.S. financial system — not to mention the global one. Sandy Ground On Friday, a senior Chinese official, Li Wei , condemned Western investment banks for “fraudulent practices” that partly caused more than 11.4 billion yuan ($1.67 billion) of derivatives losses at state-owned companies last year. Expect more such charges from Asia. Just because Asia deserves a pat on the back doesn’t mean 2010 will be an easy year. And that speaks to Gross’s point. The stimulus efforts rolled out in China and the rest of Asia are keeping growth aloft. The sustainability of that growth is becoming less certain with the other major economies limping along. Friday’s news that U.S. employers in November cut the fewest jobs since the recession began, and the unemployment rate fell, offered a ray of hope. It hardly means the kind of robust U.S. recovery Asia needs is afoot. Just as Dubai suddenly finds the ground below its economy shifting, Asia’s export-driven economies may lose their footing amid shaky global demand. ( William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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Minaret Threat Eclipsed by Swiss Intolerance: Celestine Bohlen

December 7, 2009

Commentary by Celestine Bohlen Dec. 8 (Bloomberg) — If it did nothing else (and it may end up getting knocked down in a European Court of Human Rights), Switzerland’s vote to ban the building of minarets drew attention to Europe’s identity crisis. The Swiss — like the French, or the Germans, or the British for that matter — are clearly worried about the Muslims living among them. Worry is one thing. It can be irrational, yet understandable. When people stoke those worries and turn them into fear, intolerance follows, and that is unacceptable. The Swiss vote has succeeded in shifting focus away from the social and economic problems of immigration, and toward religion. Putting the full weight of Europe’s cultural identity crisis on a slender piece of traditional architecture was both disingenuous and dangerous. Worse, it seems to be catching. Previous debates about the role of Islam in Europe involved issues other than religion. The 2004 French ban on head scarves in schools was about the submission of women; the 2005 publication of Danish cartoons lampooning the Prophet Muhammad was about free speech. A minaret, by contrast, is no more and no less than a symbol. Other religious symbols draw protest — a nativity scene in front of City Hall, say, or a cross on a mountaintop — but they, unlike the minaret, are not part of a house of worship. Yet the minaret is being outlawed in the heart of Europe — to scattered applause in neighboring countries. Four Minarets Somehow, an obscure referendum about Islamic architecture in a country of 7.8 million with just four minarets and 400,000 Muslims struck a nerve across Europe. That’s especially true in France, where politicians had been trying to manage a debate over “national identity,” and keep religion out of it. Now the cat is out of the bag. “It is a completely irrational issue, because a minaret can’t harm anyone, but it’s very rational politically, because it sells well for a certain electorate,” said Francois Heisbourg , director of the Foundation of Strategic Studies, a Paris-based research institute. Suddenly, people are expressing views that they once would have considered racist or intolerant. In a survey taken the day after the Swiss vote by Paris-based polling agency Ifop, 41 percent of French people questioned said they opposed the construction of mosques, up from 22 percent in 2001. On the question of building minarets, 46 percent were opposed. Zero-Sum Game There are an estimated 20 million Muslims among the European Union’s 500 million people, some of them native (mainly in the Balkans), many of them already second- or even third- generation in France, the U.K., and Germany. Denmark, Sweden and the Netherlands, among others, have accepted more recent arrivals. Islam is now Europe’s second-biggest religion. One source of the fear of Muslims — a theme that keeps coming up in print and in conversation — is Europeans’ deep and complicated resentment of an unfamiliar, historically hostile religion that is perceived as a direct challenge to Christianity, Europe’s dominant faith. In this view, disputed by church leaders, the contest becomes a kind of atavistic zero-sum game. Why else would leaders from Italy’s xenophobic Northern League party propose to put a crucifix on the Italian flag? There are other explanations for the widespread unease with Islam: its association with jihad and terrorism; the demands by Muslims for special treatment, such as segregation by gender at public swimming pools; persistent illegal practices like polygamy; and a sense that some Muslims ignore, even repudiate, values that are at the core of European civilization, such as free speech and the separation of church and state. Moderate Imams None of these issues has anything to do with minarets, which are generally built alongside Europe’s large urban mosques, where the imams are usually moderate establishment figures. Those imams who preach jihad don’t do it from minarets; they are laying low in store-front mosques, often on the run from the police. There are reasons to be concerned about Europe’s ability to integrate its Muslim citizens. But the subject is too important to be guided by religious stereotypes. The riots in France’s suburban ghettoes in 2005 were a testament to the failure of social policies, not to a resurgent Islam. Issues like minarets or the burqa — the ominous-looking head-to-toe garment, worn by a small number of Muslim women, that is being targeted by French President Nicolas Sarkozy — are beside the point. As an editorial in Le Monde said last week, the burqa, however offensive it may be to a woman’s dignity, is hardly a threat to secularism, the keystone of the French republic. According to a weirdly precise report by a French domestic intelligence agency, it is worn today by exactly 367 French women. Fear-Fueled Vote It is worth noting that the Swiss referendum against minarets was supported mostly by rural voters, whose fear of Islamic aggression comes more from ignorance than experience: it’s a safe bet that many have never seen a minaret, except on alarmist campaign posters where they are depicted as comic-book missiles. There is no excuse for stigmatizing any religion. That goes against the very values of tolerance Europe claims to stand for. It also marks a discouraging setback for the further integration of Muslim citizens, which has to be the goal of every European country. There is no other choice. ( Celestine Bohlen is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Celestine Bohlen in Paris at cbohlen1@bloomberg.net

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Congress Is the Drunk at the Fed’s Punch Bowl: Roger Lowenstein

December 7, 2009

Commentary by Roger Lowenstein Dec. 7 (Bloomberg) — The U.S. Congress wants to ride herd over the Federal Reserve. It wants the power to scrutinize the Fed’s interest-rate decisions. It wants to look into how the Fed decides to lend to individual banks. Like a lot of their constituents, legislators are angry at the Fed’s handling of the financial crisis. They want to know why the Fed permitted such a huge financial bubble to develop — and why, when it burst, it bailed out so many banks. Many of the criticisms of the Fed are valid. Former Fed chief Alan Greenspan , who oversaw the economy during the boom years, has admitted he placed too much faith in the ability of bankers to monitor their risks. Ben Bernanke , the current chairman, has been overhauling regulatory policy in the hope of preventing a repeat. But here’s the thing. The changes that Congress is urging would make things worse. If anything, the Fed has been too sensitive to public opinion. And in the recent past, it was too eager to satisfy the public with an easy- interest-rate and easy- mortgage policy. Last week, when Bernanke testified before the Senate Banking Committee, which is deliberating whether to confirm him for a second term, senators let him have it. Jim Bunning of Kentucky, more famous for throwing a perfect game in his baseball career than for his central banking expertise, called Bernanke “the definition of a moral hazard.” Bernard Sanders of Vermont, a state with fewer bankers than cows, is vowing to block Bernanke’s reconfirmation. Serious Threat Bernanke will surely be approved. But the threat to rein in the Fed’s power is serious. The Fed was created as an independent agency precisely so it could make politically unpopular decisions. A Bernie Sanders is unlikely to push for higher interest rates when they are needed. And history shows that political meddling in the Fed has led to serious problems for the nation’s economy. William McChesney Martin Jr. , who headed the Fed longer than anyone else, famously declared that the role of the chairman is “to take away the punch bowl just as the party gets going.” Appointed by President Harry Truman , Martin served from 1951 to 1970. Even he succumbed to pressure. Toward the end of his tenure, he knuckled under to Lyndon B. Johnson and failed to raise interest rates as inflation was heating up. Johnson wanted cheap money to finance his domestic agenda as well as the war in Vietnam. Cheap at a Price And cheap money is what the country got. In the ‘70s, the U.S. experienced runaway inflation. Martin’s successors at the Fed were even weaker than he was. It wasn’t until Paul Volcker took over, in 1979, that the Fed showed the necessary toughness. By 1980 — an election year — Volcker had jacked the fed funds rate up to 20 percent. The U.S. suffered a terrible recession. Volcker held firm even when congressional leaders demanded relief. Inflation was licked and hasn’t been a serious problem since. Greenspan, Volcker’s successor, was just as independent. But he made major mistakes. His first big error was in tolerating the dot-com bubble. Then, in the 2000s, he kept interest rates very low, even as the housing market was soaring. In 2003, the fed funds rate was only 1 percent, and as late as 2005, the housing bubble’s peak, the rate was only 2.5 percent. Even worse, the Fed failed to crack down on speculative mortgages, including subprimes, no-docs and full-purchase loans. Congress is now proposing various changes. The House Financial Services Committee has approved a measure to direct Congress to, for the first time, audit the Fed’s interest-rate and lending decisions. That would increase pressure on the Fed to keep rates low and perhaps fuel the next bubble. Feeling Pressure Bernanke has already felt a hint of such pressure. Early in his tenure, he proposed that the Fed announce its inflation target publicly. Representative Barney Frank opposed him. Frank feared that if the Fed was committed to a specific inflation target, it would result in higher interest rates. The Fed backed off. Meanwhile, the Senate Banking Committee is debating legislation that would transfer much of the Fed’s regulatory authority to a new consumer financial protection agency. This, too, would be counter-productive. Consumers naturally want all the credit they can get, and Congress and agencies under its control tend to think they are protecting consumers by pushing for maximum credit availability. This is what occurred during the ‘00s. Congress repeatedly leaned on Fannie Mae and Freddie Mac to provide more mortgage financing and to loosen restrictions on people with poor credit. But policies that expose millions of people to foreclosure don’t truly “protect” either borrowers or society. The Fed, along with other regulators, let the housing bubble go on too long because it was wary of denying people mortgages. More Latitude Removing the punch bowl is never easy. Imagine how much more difficult the task would be if the Fed, or some new agency, were making its decisions under the hot breath of Congress. In the future, the Fed will need more — not less — supervisory latitude. Preventing inflation won’t be enough. It will also have to monitor asset bubbles, as it failed to do with housing, and as may be required with the price of gold now. Bernanke testified that the Fed has been “actively engaged in identifying and implementing improvements” in supervising financial firms, as well as in consumer regulation. He also said that the Fed, and others, made mistakes. It could do better next time. But putting elected representatives in charge of monetary policy isn’t the way to do it. ( Roger Lowenstein , author of “When Genius Failed,” is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the author of this column: Roger Lowenstein at elrogl@hotmail.com

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Cheney’s Sniping Only Masks Bush Era Failures: Celestine Bohlen

December 1, 2009

By Celestine Bohlen Dec. 2 (Bloomberg) — President Barack Obama’s foreign policy is getting slapped around from all sides these days. Leslie Gelb , president emeritus of the New York-based Council on Foreign Relations, took down Obama’s Asia trip with an article headlined, “Amateur Hour at the White House.” This week’s cover story in the Economist magazine asks whether his diplomacy is “weak and naïve.” Luckily for Obama, the harshest attacks have come from his former Republican opponent, Senator John McCain , and ex-Vice President Dick Cheney . From critics like these, he should be able to take the hits and move on. Both men start from the premise that in trying to be the world’s Mr. Nice Guy, Obama comes off looking soft. Cheney lashed out at Obama’s deep bow before Japanese Emperor Akihito , which he said was “fundamentally harmful” and a “ sign of weakness ” — as if America’s reputation could be damaged by an excess of courtesy. McCain, in a series of interviews published around Europe, said Obama’s policy of engagement has failed to nail down an agreement with Iran or halt Russia’s slide toward autocracy. On that point, at least, he’s right. After nine months in office, Obama has yet to score a major diplomatic success. But surely the Republicans should be the last ones to throw stones, after an eight-year run that produced two long-running wars, an escalation of Iran’s nuclear threat and a Russia that, by the end of 2008, was more aggressive and less repentant than ever about its undemocratic ways. Tough Guys It’s hard to see how they can argue that their Tough Guy approach got them better results. Let’s look at the list of particulars, starting with Iran. The mullahs have now royally dissed the U.S., its five partner nations and their high hopes for a deal to take most of Iran’s low-enriched uranium in return for reactor-grade fuel. The United Nation’s atomic agency last week censured Iran for concealing a uranium enrichment plant, a sign that international patience with Tehran is running out. Iran’s refusal to cooperate is a setback for Obama, yes, but not necessarily for his strategy to join international negotiations over its nuclear program. President George W. Bush’s administration, which had opposed contact with Iran until the end of its second term, didn’t succeed in making the mullahs back down. On the contrary: Iran ignored a UN resolution to halt uranium enrichment in 2006. It still is today. Pressure on Iran If anything, by engaging directly with Iran, Obama has raised the stakes for its failure to comply with international demands. Iran is arguably more isolated today than it was at the end of 2008. The U.K. and France joined ranks with the U.S. in denouncing the concealed uranium plant at Fordo. Russia and China last week voted for the International Atomic Energy Agency’s resolution to censure the regime in Tehran. Cheney argued, in a hard-hitting speech in October, that Obama’s policy of engagement has become “an objective rather than a tactic.” Ayatollah Ali Khamenei — Iran’s supreme leader — clearly isn’t convinced that Obama is a pushover. “Whenever they smile at the officials of the Islamic revolution, when we carefully look at the situation, we notice that they are hiding a dagger behind their back,” he said in a speech last month. In his October remarks, Cheney also had a go at Obama for his efforts to “reset” relations with Russia. Those efforts, Cheney said, have so far produced “another deeply flawed election and continued Russian opposition to sanctioning Iran for its pursuit of nuclear weapons.” Eight Years Again, that raises the question of exactly where eight years of the Bush-Cheney Russia policy got us. The answer is Russian aggression in Georgia in August 2008, reluctant support for sanctions against Iran and an ever-tightening grip by Prime Minister Vladimir Putin’s United Russia party. That steady drift to autocracy, which has continued unchecked since 2000, is what produced this year’s election charade that Cheney somehow wants to blame on Obama. McCain, too, takes Obama to task for not confronting Russia on its human-rights record, which is fair enough. Others have chided the U.S. president for not meeting with the Dalai Lama before going to China, and for muting his condemnation of the Iranian regime’s crackdown on political opposition and free speech. While it’s true that Obama should speak out more forcefully on these issues, McCain is wrong to suggest that tough talk on human rights will have any effect on the behavior of leaders like Putin or Iranian President Mahmoud Ahmadinejad . Wall’s Fall Contrary to McCain’s suggestion in an interview last week with the French newspaper Le Figaro, the fall of the Berlin Wall wasn’t a result of former President Ronald Reagan’s famous speech before the Brandenburg Gate in 1987 — “Mr. Gorbachev, tear down this wall.” Among the many reasons for the human tide that crashed through the wall on Nov. 9, 1989, was the high-stakes diplomatic engagement by both the U.S. and Soviet leaders at a series of historic summits — in Geneva, in Reykjavik, in Moscow — that provided the background for Gorbachev’s policy of change at home. At a press conference in the Soviet capital, Reagan said Gorbachev deserved “most of the credit” for the easing of East-West tensions. That was in 1988, a year before the wall fell. Nobody ever called Reagan’s comment “a sign of weakness.” ( Celestine Bohlen is a Bloomberg News columnist. The opinions expressed are her own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Celestine Bohlen in Paris at cbohlen1@bloomberg.net

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American Peso Leaves Yen Nowhere to Go But Up: William Pesek

November 30, 2009

Commentary by William Pesek Nov. 30 (Bloomberg) — It’s hard to keep a straight face as economists in Tokyo gush over a bit of growth. Japan expanded an annualized 4.8 percent from July to September. Never mind that growth is still down 4.5 percent year-over-year. Or that exports plunged 23.2 percent in October. Or that Tokyo is awash in high-rise construction projects it doesn’t need. Recovery is said to be afoot. Not quite, and three inconvenient facts buttress this skepticism. One, the strong yen. Two, deflation’s return . Three, the new government’s solution to both challenges is as futile as the last one’s. No wonder some analysts see the Nikkei 225 Stock Average soon sliding to 8,000. Why shouldn’t stocks fall when politicians blame the Bank of Japan for deflation and the central bank points the finger right back at them? The yen’s surge greatly complicates things. It means the government and the BOJ need to work together to stop prices from falling, and they’re not. It’s bad news for investors. The BOJ does have a point. For 15 years now, politicians have called on the central bank to do more. Zero interest rates? Not enough, politicians screamed. Quantitative easing? Not impressed. Channeling funds to businesses as global growth plunges? Yawn. All government officials have done is pour untold trillions of yen into public works projects that produced an army of white elephants. Other than unneeded dams, bridges and a public debt nearly twice the size of its $4.9 trillion economy, Japan has little to show for it. Going Further It’s time for the government to meet the BOJ halfway. The key isn’t just being bold, but trying something different. Yukio Hatoyama’s Democratic Party of Japan, in power since September, is tweaking policies to give more financial support to households. Yet Prime Minister Hatoyama’s economic team is already leaning on the BOJ to do more. Finance Minister Hirohisa Fujii called on the central bank to respond to the deflation threat. So did Financial Services Minister Shizuka Kamei . A look in the mirror would help. It’s bizarre, for example, that Japanese officialdom is focused on raising consumption taxes to pay off debt. The reason for all that debt is a lack of consumer demand. In what alternative universe do they think higher taxes will reverse things? Let’s try lower taxes instead. Supply-side economics is a dubious thing, but it’s time Japan encouraged small businesses to create new jobs, boost productivity and raise incomes. Something Different Why do the same things over and over again when they aren’t working? Here, Richard Jerram , chief economist at Macquarie Securities Ltd. in Tokyo, suggests a money-funded tax cut. The government would send households a check, issue debt to fund it and ask the BOJ to buy it and hold it in perpetuity. That might be too radical for some in Tokyo. Yet we need a clean break with the discredited policies of the past. All the concrete Japan pours into rural areas is merely a Band Aid at a time when competitiveness is hemorrhaging amid China’s rise. There’s no time to waste as many fear renewed credit-market turmoil. A proposal last week by property developer Dubai World, with $59 billion of liabilities, to delay debt payments shook global markets. Dubai may be the latest example of the uncanny correlation between efforts to build the world’s tallest building and financial crises. Rickety Model The world has another bubble in the strong yen. On Friday, Fujii said he may contact the U.S. and Europe to act as the yen trades at 14-year highs. Yet intervention would do little. With the dollar trading like an American peso, it’s not clear what authorities can really do here. While the Ministry of Finance is obsessing over exchange rates, it’s not rethinking a rickety economic model. And even if the yen falls, the global demand isn’t there for Japan to export its way to stability. You can bet ugly deflation numbers in the months ahead will preoccupy Fujii and Kamei, just as price data have with previous governments. Sadly, policy makers here see deflation as THE problem as opposed to a symptom of a bigger one. Those “animal spirits” of which John Maynard Keynes spoke can be cagey. Many Japanese don’t spend more because they lack confidence in the future. The rise of developing Asia complicates the extent to which human emotion and behavior confounds policy makers. Yen Bears Beware Next year, China’s economy may surpass Japan’s to become Asia’s biggest. It’s a disorienting time, and it doesn’t help that Japan’s leaders are merely rearranging the deck chairs on a ship that’s lost power. That sinking feeling among households is a key cause of deflation. So is a financial system that still hasn’t fully recovered from the collapse of the 1980s bubble economy. The BOJ can print all the yen it wants. It’s just going to end up in government bonds, not fueling fresh lending and job growth. The same old cycle is churning away as we speak. Breaking it requires a new playbook — a different way of looking at old and ingrained problems. In the case of deflation, there’s no evidence one is emerging. That bodes poorly for Nikkei bulls and yen bears in the months ahead. ( William Pesek is a Bloomberg News columnist. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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