THE NEW NUCLEAR RACE

Georgia Power vying for tax credits on nuclear reactors

By MARGARET NEWKIRK
The Atlanta Journal-Constitution
Published on: 07/31/08

Georgia Power is expected to file for Georgia Public Service Commission approval of two new nuclear reactors Friday, beginning an eight-month approval process.

The company and its parent, Southern Co., are among nine utilities with construction and operation licenses for 15 reactors pending at the U.S. Nuclear Regulatory Commission. That number will likely grow.

The companies are competing for a limited number of tax credits that could net – in Southern's case – up to $125 million per year for eight years.

The credits will be divvied among companies that meet several requirements: file a license application by the Dec. 31 deadline, pour concrete by 2014 and begin operating by 2021.

Also, the first two new reactors will each get $500 million of insurance against regulatory delay.

Pro

Georgia Power says new reactors will help diversify power supply options at a time when others – like coal-fired and gas-fired plants – are being battered by soaring fuel costs. They also point out reactors do not emit carbon. Growth in Georgia will demand new plants that can run 24-7, year-round, the company says. Nuclear fits the bill.

Con

Environmental groups and others say new reactors are a bad idea, especially since there's no permanent place to store nuclear waste. The first generation of U.S. reactors came with a staggering price tag and huge cost overruns, they say. Conservation and renewable energy should be Georgia's first priority.

Foreclosure filings up 120%

There were 220,000 homes lost to bank repossessions in the second quarter, and the annual forecast for 2008 will have to be revised upward.

By Les Christie, CNNMoney.com staff writer

July 25, 2008: 5:09 AM EDT

NEW YORK (CNNMoney.com) -- Foreclosures continue to soar, with 220,000 homes lost to bank repossessions in the second quarter of this year, according to the latest statistics from RealtyTrac, an online marketer of foreclosed homes. That's nearly triple the number from the same period in 2007.

There were a total of 739,714 foreclosure filings recorded during that three month period, up 14% from the first quarter, and up a whopping 121% from the same period in 2007. That means that out of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

"Most areas of the country are seeing at least some increase in foreclosure activity," said RealtyTrac CEO James Saccadic. "Forty-eight of 50 states and 95 out of the nation's 100 largest metro areas experienced year-over-year increases in foreclosure activity."

Because foreclosure filings are growing so quickly, RealtyTrac will have to reevaluate its foreclosure forecast for the year, according to spokesman Rick Sharga.

"We've been saying foreclosures will total 1.9 million to 2 million this year," he said. "But midway through the year, we're already at 1.4 million so we're going to be raising our projections."

And there is more bad news: Bank repossessions are up as a proportion of total filings, representing 30% of the notices issued during the quarter, up from 24% a year ago.

"I don't think that's a surprise if you look at the general conditions out there," said Brian Bethune, chief financial economist for Global Insight. "There have been six straight moves of weaker employment this year. The ongoing problems in the housing market are compounded by a generally weaker economy. Foreclosures won't go down until we start to see employment move up again."

Sun Belt front and center

California's Central Valley remains ground zero for foreclosure filings. Stockton, which is just east of San Francisco, had the highest rate of foreclosure filings of any metro area, one for every 25 homes. That's seven times the national average.

Riverside/San Bernardino, which is east of Los Angeles, had the second highest rate in the nation with one filing for every 32 households. Las Vegas, Bakersfield and Sacramento rounded out the top five.

Detroit continued to suffer more than any other non-Sun Belt area, with one filing for every 66 households. And several Ohio cities were also hard hit, led by Toledo (one in 92 households), Akron (one in 93) and Cleveland (one in 108).

On the other hand, there were a handful of metro areas that remained relatively unscathed. Honolulu, at one filing for every 1,331 households had the lowest rate of all, followed by Allentown, Penn. (one for every 972) and Syracuse, NY (one for every 880).

At the state level, Nevada had the highest rate with one filing for every 43 households, while California had the highest total number of filings - 202,599.

The report came as more negative news for the housing market this week. On Thursday, a report form the National Association of Realtors revealed that existing home sales had declined again as the number of homes for sale continued to rise. On Tuesday, a government agency reported home prices registered another drop in May.

All this is happening as Congress struggles to pass a housing rescue bill that will make FHA-insured loans available to many at-risk borrowers. That bill, even if signed this week, will not take effect until October.

One of the sponsors of the bill, Barney Frank (D -- Mass.), released a statement on Thursday in which he encourages lenders and mortgage servicers to delay taking action against delinquent borrowers before the new law takes effect.

"I am urging the mortgage servicers to hold off on foreclosures in applicable cases," he said, "so borrowers can take advantage of the program."

Bank Run, USA

LOS ANGELES -

Like dozens of others waiting in line with her, Joan Rubin said she was drawn to IndyMac Bank by the high interest rates it paid and the friendly service her local branch provided.

All that was a memory on Tuesday, however, as Rubin and about 200 other anxious, embittered and sometimes angry customers swarmed an IndyMac bank branch in the San Fernando Valley, creating a Depression Era-like scene as they demanded their money just four days after the failing bank was seized by federal regulators.

"I've already lost three nights of sleep and three days of eating; now I'm done," Rubin, 52, said as she sat in a beach chair on the sidewalk in stifling heat. She planned to empty her account following the failure of the Pasadena-based bank, which has 33 branches, all in Southern California.

"It's a very sad day in America," Rubin said.

At one point police had to be called to the branch in the city's normally quiet Encino neighborhood. Tempers grew short when customers who had arrived before dawn accused others of cutting in line.

Some of the line jumpers had been turned away the day before but were given vouchers granting priority by bank employees.

Police quickly restored order without arrests, and as the day progressed people were divided into two lines that each stretched for an entire block. People wanting to close accounts were let in, in groups of five.

Customer Ann Collier, 67, a retired secretary, also chose IndyMac as her bank because of its high interest rates.

Initially, she was careful to deposit less than $100,000 in her account so it would be fully insured by the Federal Deposit Insurance Corp. But over time, her money grew beyond the limit.

She declined to say how much she now might lose.

"I have to live off this money for a long time," she said while waiting in line late Monday outside the Pasadena office.

Lillian Krasn said she had a strange feeling something was wrong when she arrived at the Encino branch a week ago to renew her certificate of deposit, but she went ahead anyway. She came back Tuesday to cash it in and take the money elsewhere - although exactly where, she hadn't decided.

"Where do you go from here?" the 78-year-old retiree asked. "Under your mattress?"

Shortly before noon, two employees of rival Comerica (nyse: CMA - news - people ) bank arrived to hand out water bottles with their business cards taped to them. They said they hoped to scoop up some former IndyMac customers like Krasn.

"One man's loss is another man's treasure - or something like that," said Comerica banker Danny Sobrino.

Meanwhile, as the wait stretched into hours, people donned baseball caps or carried umbrellas to shield themselves from the sun. Some fanned themselves with their bank documents as they sweated in temperatures that were already in the 80s by midmorning.

The Office of Thrift Supervision transferred control of the bank to the FDIC on Friday because it didn't think IndyMac could meet depositor demand. Over the weekend, it became IndyMac Federal Bank, FSB, and by Monday morning the scramble by bank customers to recover their money was on.

Shortly before noon Tuesday, the bank provided folding chairs for those who hadn't brought their own, and the line decreased to about 100 as some people were persuaded to schedule appointments and return later.

A few people, such as Aliki Deffam, visited the bank to make deposits. For them, there was no waiting to get inside.

Deffam, a real estate agent, said she believed the FDIC, which is now operating the bank, when it announced that all IndyMac deposits were fully insured up to $100,000.

"I feel very safe," said Deffam, 42. "I don't think that my money is going to disappear."

Many others, however, weren't willing to take that chance - or to leave until they had their money in hand.

"I just can't take their word for it," said Ismelda Quintos, an accountant. "I want to get my money out so I can sleep at night. It's hard-earned money, and I'm not rich, so it's a big deal for me."

Bad Move, says Jim Rogers

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an ``unmitigated disaster'' and the largest U.S. mortgage lenders are ``basically insolvent,'' according to investor Jim Rogers.

Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

Goldman Sachs Group Inc. analyst Daniel Zimmerman said the mortgage finance companies' shares may fall another 35 percent and lowered his share-price estimate for Fannie Mae to $7 from $18 and for Freddie Mac to $5 from $17. Freddie Mac fell 64 cents, or 8.3 percent, to $7.11 in New York Stock Exchange trading, while Fannie Mae fell 52 cents, or 5.1 percent, to $9.73.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a ``long way to go'' and advised buying agricultural commodities.

`Solvency Crisis'

Billionaire investor Soros said today that Fannie Mae and Freddie Mac face a ``solvency crisis,'' not a liquidity one, and that their troubles won't be the last financial disruption, Reuters reported.

``This is a very serious financial crisis and it is the most serious financial crisis of our lifetime,'' Soros told Reuters in a telephone interview. ``It is an idle dream to think that you could have this kind of crisis without the real economy being affected.''

`Going Bankrupt'

Fannie Mae's market value is now about $10 billion, down from $38.9 billion at the end of 2007. Freddie Mac's market value has shrunk to about $5 billion from $22 billion at the end of last year.

``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. ``What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''

Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

The Federal Reserve separately authorized the firms to borrow directly from the central bank.

Washington-based Fannie Mae slid 45 percent last week, while McLean, Virginia-based Freddie Mac sank 47 percent on concern they may require a bailout that would wipe out shareholders.

Former St. Louis Federal Reserve President William Poole last week said in an interview that Freddie Mac is technically insolvent under fair value accounting, which measure a company's net worth if it had to liquidate all its assets to repay liabilities. Poole said Fannie Mae may also become insolvent this quarter.

Rogers said he had not covered his so-called short positions in Fannie Mae and would increase his bet if it were to rally.

The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.

``They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson ``are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''

Fannie and Freddie, R.I.P.

July 14, 2008

Bush Offers Plan to Save Fannie, Freddie

By STEPHEN LABATON

WASHINGTON — Alarmed about the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs, people briefed about the plan said on Sunday.

Separately, the Federal Reserve voted on Sunday to also open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The two companies would be able to post their own securities as collateral.

The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion.

Today the two companies also hold or guarantee mortgages valued at more than $5 trillion.

As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold. Giving the Fed a consulting role in the companies’ oversight is seen as yet another way to reassure nervous markets.

Treasury officials declined to comment on the plan but indicated that a statement would be issued later on Sunday. It was described by lawmakers and officials at other agencies that have been briefed on it.

They said that the Bush administration was hoping that Congress would adopt it quickly as part of a measure intended to help the housing markets and overhaul the regulation of Fannie and Freddie. Last Friday, the Senate approved the measure, and the House is hoping to take it up this week.

Announcement of the plan on Sunday evening was intended to send a sharp signal to both stock markets and debt markets that the government was standing behind the beleaguered companies.

Throughout the weekend, senior officials from the Treasury and the Federal Reserve closely monitored preparations by Freddie Mac to raise money help meet its short-term funding needs. Top officials spent Saturday and Sunday being briefed on Wall Street’s appetite for a $3 billion debt offering by Freddie Mac that was set for Monday. Officials said they were watching to see if the steep declines last week of Freddie and Fannie stock would spill into the debt market and undermine the confidence of lenders.

Fannie and Freddie have grown to become central to the nation’s housing markets. They buy mortgages from banks and other lenders, hold some of them, and sell others in the form of mortgage backed securities. Together, they own or guarantee nearly half the nation’s mortgages. In recent months, the stocks of the two companies have plunged as a wave of foreclosures has eroded confidence in the companies.

The credit line provided by the Treasury to the companies has always been seen by the market place as evidence that the two companies would be rescued by the government if they ever encountered severe financial problems. Yet for many years, a steady of stream of leaders from the Federal Reserve and to officials from Republican and Democratic administrations has denied the existence of a so-called “implicit guarantee.” Those who denied the existence of the guarantee included Treasury secretaries Robert Rubin, Lawrence Summers and Henry M. Paulson Jr., and Federal Reserve Chairmen Alan Greenspan and Ben S. Bernanke.

The implicit guarantee was a useful device both for the companies and the federal government. It has enabled the companies to get money in the debt markets at rates far lower than other companies and close to the same as treasury securities. At the same time, the Federal government did not have to record on its budget any significant liabilities for the large subsidy it was, in effecting, providing to the companies. Yet it also raised concerns among critics, who said it was unfair to rival companies and that it promoted a management laxity since executives knew that the companies could always count on a hand from the government if they began to falter.

Now, in the face of market turmoil in recent days, a quiet yet dramatic policy shift has occurred. Government officials no longer deny the existence of a guarantee. Instead, senior officials at both the Fed and the Treasury have been talking in recent days of possibly taking steps to “harden the guarantee.”

Motivating the change was the central role of the two institutions and the depth of ownership in the paper they have issued. Every major bank, and many mutual funds and pension funds and foreign governments, hold significant amounts of securities issued by Fannie and Freddie, which have been viewed over the years as being almost as safe as treasury securities. A default by either one of the companies could be catastrophic for the financial system.

Thanks a lot

July 11, 2008

U.S. Weighs Takeover of Two Mortgage Giants

By STEPHEN LABATON and STEVEN R. WEISMAN

WASHINGTON — Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

The officials also said that such a step would be ineffective because the markets already widely accept that the government stands behind the companies.

The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation. But in recent days, enough concern has built among senior government officials over the health of the giant mortgage finance companies for them to hold a series of meetings and conference calls to discuss contingency plans.

A conservatorship or other rescue operation would be the second time in four months that the Bush administration has stepped in to engineer a rescue to prevent the financial system from collapsing. Last March, it forced the sale of Bear Stearns to JPMorgan Chase to avert a bankruptcy of that venerable investment house.

Officials have also been concerned that the difficulties of the two companies, if not fixed, could damage economies worldwide. The securities of Fannie and Freddie are held by numerous overseas financial institutions, central banks and investors.

Under a 1992 law, Fannie or Freddie could be put into conservatorship if their top regulator found that either one is “critically undercapitalized.” A conservator would have sweeping powers to overhaul them, but would not have the authority to close them.

The markets showed fresh signs on Thursday of being nervous about the future of the companies. Their stock prices continued a weeklong slide, hitting their lowest level in 17 years. The debt markets, meanwhile, pushed up the two companies’ cost of borrowing — their lifeblood for buying mortgages.

The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books.

Together the two companies touch more than half of the nation’s $12 trillion in mortgages by either owning them or backing them. They hold more than $1.5 trillion of the mortgages as securities. Others are sold to investors in the form of mortgage-backed bonds.

In recent weeks, the companies have spiraled downward, undermined by declining confidence in their future and shaken by sharp declines in their assets as the housing markets have continued to slide and foreclosures have risen.

In the last week alone, Freddie has lost 45 percent of its value, and Fannie is off 30 percent. Expectations of default at the companies have also risen; it costs three times as much today to buy insurance on a two-year Fannie bond as it did three years ago.

Analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional shares, which would dilute their value for current shareholders.

Despite repeated assurances from regulators about the financial soundness of the two institutions, financial markets have concluded that by some measures they are deeply troubled.

Freddie, for instance, is technically insolvent under fair value accounting rules, in which the company puts a market value on assets as if it had to sell them now.

Although Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the chairman of the Federal Reserve, passed up invitations by lawmakers on Thursday to seek legislation to deal with the crisis, officials said that the administration had been privately considering a government takeover should the markets continue to turn against the companies.

At a hearing of the House Financial Services Committee on Thursday, both Mr. Paulson and Mr. Bernanke were guarded, carefully trying not to say anything that could further erode confidence in Fannie and Freddie. They both said that the regulator of Fannie and Freddie had found that they were, in the words of Mr. Paulson, “adequately capitalized,” meaning that they had sufficient cash and other assets to withstand the turbulence in the markets.

“Fannie Mae and Freddie Mac are also working through this challenging period,” Mr. Paulson said.

Neither official would address a question posed by Representative Dennis Moore, Democrat of Kansas, who asked whether the failure of either institution would pose a risk to the financial system.

“In today’s world I don’t think it is helpful to speculate about any financial institution and systemic risk,” Mr. Paulson said. “I’m dealing with the here and now, and the important role that they’re playing and other financial institutions are playing.”

Mr. Bernanke said that Fannie and Freddie “are well-capitalized in the regulatory sense” but added that they, and other major financial institutions, needed to raise their capital levels further.

Despite repeated denials by officials in the Bush and prior administrations, financial markets have long assumed the government would stand behind Fannie Mae and Freddie Mac in times of difficulty, both because they are integral to the housing and financial markets and because the companies have a line of credit to the Treasury.

But Congress set that credit more than 38 years ago, long before the companies rose to such size and prominence, and its limit, $2.25 billion for each, has become a tiny fraction of the companies’ overall debt.

Some analysts have begun to propose that the Fed also permit the two companies to borrow from it, as Wall Street investment banks began doing after the rescue of Bear Stearns. But there is no indication that the Fed is contemplating such a move.

On Thursday, the rapid sell-off of shares of Fannie Mae and Freddie Mac came after a former central banker made comments that the companies might not be solvent, and an analyst at UBS issued a report critical of Freddie Mac.

The turmoil also shook the debt of the companies, with one main measure indicating that their cost of borrowing has risen to the highest level since mid-March, when the government rescued Bear Stearns. Throughout the day, senior officials sought to reassure the markets about the financial health of Fannie and Freddie.

Later in the afternoon, James B. Lockhart, the regulator who oversees the two companies, issued a statement that his agency was carefully watching the companies’ “credit and capital positions” and said that they were adequate to get through the current turmoil.

Fannie Mae issued a statement saying that it remained financially strong.

“Our company has raised more than $14 billion in capital since November 2007, including $7.4 billion most recently in May,” the company said. “As our regulator has stated, and has reiterated in public statements this week, we are adequately capitalized.”

Sharon McHale, vice president for public relations at Freddie Mac, said: “Our regulator has emphasized that we have continued to maintain the highest capital rating, and we are in the market every day. We’ll continue to do so.”

Shares of Freddie Mac plunged more than 30 percent and Fannie Mae’s more than 20 percent in the first hour of trading on Thursday. By the close of trading, Fannie shares had fallen nearly 14 percent, and Freddie shares had dropped 22 percent. It was the second straight day of declines for the companies.

While their stocks trade on the New York Stock Exchange, Congress created the two companies to promote housing, and the marketplace has long come to believe that they would be bailed out should they become insolvent. They hold a far lower level of capital than banks do. In recent years, they have both suffered from accounting scandals and management shake-ups.

Neither Mr. Paulson nor Mr. Bernanke, at the hearing on Thursday, would answer a question about whether Congress needs to give the regulators more tools to deal with the possible insolvency at either company.

“I don’t think we should be speculating or talking about what-if’s with any particular institutions, and so with Fannie or Freddie, what I’m emphasizing is that the tool that I want is the reform and the reform legislation that would inject confidence into the marketplace,” Mr. Paulson said, referring to a measure that would revamp the oversight of the companies.

The problems of the two companies spilled onto the campaign trail on Thursday when Senator John McCain, the presumptive Republican nominee for president, said he supported federal intervention to save Fannie or Freddie from collapsing.

“Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail,” Mr. McCain said during a stop at the Senate Coney Island Restaurant in Livonia, Mich. “They are vital to Americans’ ability to own their own homes. And we will do what’s necessary to make sure that they continue that function.”

Jason Furman, the economic policy director for the Democratic presidential campaign of Senator Barack Obama of Illinois, said that Mr. Obama “believes the Bush administration’s willful neglect of warning signs in housing, in financial markets and in the job market, have compromised the nation’s housing finance system.”

“The challenges facing Fannie and Freddie are part of the broader weakness in our economy,” Mr. Furman said.

Senator Charles E. Schumer, Democrat of New York and chairman of the Joint Economic Committee, said that the markets should rest assured that the mortgage giants have a “federal lifeline” and would not be allowed to fail — though he said he thought a government rescue would not be needed and should be a last resort.

The Fat Lady is warming up

July 10 (Bloomberg) -- U.S. foreclosure filings rose 53 percent in June from a year earlier and bank repossessions almost tripled as deteriorating property values and higher payments on adjustable mortgages forced more people to give up their homes.

More than 252,000 properties, or one in every 501 U.S. households, were in some stage of foreclosure, RealtyTrac Inc., an Irvine, California-based seller of default data, said today in a statement. Nevada, California and Arizona had the highest foreclosure rates.

``The foreclosure problem is getting worse and will stay with us well into the next decade,'' Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, said in an interview. ``The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you've got negative equity, and you're more likely to give up your house if you're deeply underwater.''

About $3.5 trillion in homeowner equity has been wiped out since the spring of 2006, when housing prices were at their peak, Zandi said. Home prices fell the most on record in April, according to the S&P/Case-Shiller index of 20 U.S. metropolitan areas. June was the second straight month in which more than a quarter million properties received foreclosure filings, RealtyTrac said. Filings fell 3 percent from May.

`Faster Pace'

``The year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle,'' James Saccacio, chief executive officer of RealtyTrac, said in the statement. Bank repossessions, which increased 171 percent in June, are rising at a ``much faster pace'' than default notices and auction notices, he said.

About 53 percent of borrowers with subprime loans, those with poor or incomplete credit histories, will have negative equity in their homes at the end of the year, and the number will rise to 63 percent in 2009, New York-based analysts at Credit Suisse led by Rod Dubitsky said in an April 23 report.

Rising mortgage defaults and auctions of foreclosed properties are adding to a glut of unsold homes and prolonging the deepest housing slump since the 1930s. Efforts by the U.S. Congress to insure as much as $300 billion in refinanced mortgages and save up to 2 million borrowers from foreclosure can work only by ``slowing down or reversing home price declines and equity deterioration,'' Credit Suisse said.

Nevada had the highest foreclosure rate for the 18th consecutive month. One in every 122 households was in some stage of foreclosure, more than four times the national average, and 3,133 properties in the state were seized by lenders, said RealtyTrac. The company has a database of more than 1.5 million properties and monitors foreclosure filings including default notices, auction notices and bank seizures.

California, Arizona

California ranked second, with one filing for every 192 households, 2.6 times the national average, and had 20,624 properties seized by banks. Arizona ranked third at one in 201 households, almost 2.5 times the national average, and had 4,297 bank seizures.

Florida, Michigan, Ohio, Colorado, Georgia, Indiana and Utah also ranked among the 10 states with the highest foreclosure rates.

California had seven of the 10 U.S. metro areas with the highest rates, including the top three. Stockton, in the state's central valley, was first with one in every 72 households in a stage of foreclosure, followed by Merced, about 110 miles east of San Francisco, with one in 77 households, and Modesto, near the Sierra Nevada mountains, with one in 86 households. Riverside-San Bernardino ranked fifth, Vallejo-Fairfield was seventh, Bakersfield was eighth and Salinas-Monterey was tenth.

`Beyond the Sprawl'

``The housing beyond the sprawl is going to suffer another serious leg down because of high oil prices,'' Peter Navarro, professor of economics and public policy at the University of California at Irvine, said in an interview. ``A lot of people went out there to get cheaper homes, but this is going to take a big bite out of their mortgage.''

Cape Coral-Fort Myers and Fort Lauderdale, Florida, ranked fourth and ninth, respectively, and Las Vegas was sixth among metro areas with the 10 highest foreclosure rates.

California had the most total filings for the 18th consecutive month, increasing 77 percent in June from a year earlier to 68,666. Florida was second at 40,351 filings, an increase of 92 percent, and Ohio was third at 13,194, an increase of 11 percent.

New York filings increased 22 percent from a year earlier to 5,367, with one in every 1,473 households in a stage of foreclosure, the 32nd highest rate.

New Jersey filings rose 5 percent. The state had one in every 695 households in a stage of foreclosure, the 14th highest rate.

Starbucks closing 600 stores in the US

Tuesday July 1, 10:44 pm ET
By Jessica Mintz, AP Business Writer Starbucks closing 600 US stores, most opened in the last 2 years SEATTLE (AP) -- For a decade it appeared there was no such thing as too many Starbucks for U.S. coffee drinkers, whose willingness to buy its $4 lattes and dark drip brews rationalized a second green-and-white mermaid awning just down the street -- and sometimes even a third.

But in a sign that those days are over, Starbucks Corp. announced Tuesday it will close 600 company-operated stores in the next year as the faltering U.S. economy hastened the pain caused by the company's own rapid expansion.

Starbucks did not say which stores will be closed, only that they are spread throughout the country. But it did say 70 percent of those slated for closure had opened after the start of 2006.

To put it another way, Starbucks is closing 19 percent of all U.S. company-operated stores that opened in the last two years, Chief Financial Officer Pete Bocian said during a conference call.

About 12,000 workers, or 7 percent of Starbucks' global work force, will be affected by the closings, which are expected to take place between late July and the middle of 2009, spokeswoman Valerie O'Neil said.

O'Neil said most employees will be moved to nearby stores, but she did not know exactly how many jobs will be lost. Starbucks estimated $8 million in severance costs.

In total, the company forecast up to $348 million in charges related to the closures, $200 million to be booked in the fiscal third quarter ended June 30. Starbucks reports third-quarter results at the end of July.

The company had previously planned to shut 100 stores. The 500 more that will be closed had been on an internal watch list for some time. They were not profitable, not expected to be profitable in the foreseeable future, and the "vast majority" had been opened near an existing company-operated Starbucks, Bocian said.

Some analysts had wondered whether Starbucks' explosive growth in the U.S. would come back to haunt it as the market became saturated.

But before Tuesday, the company avoided acknowledging that saturation was an issue and pinned weak financial results and adjustments to new store openings on the economy.

During the call, Bocian said that between 25 and 30 percent of a Starbucks shop's revenue is cannibalized when a new store opens nearby, and that the closures should help return some of that revenue to the remaining stores.

Bocian said there aren't a material number of stores left on the watch list, but that the company will hold remaining stores to the same standards.

Starbucks still plans to open new stores in fiscal 2009, but on Tuesday it cut that number in half to fewer than 200. The company did not adjust its plan to open fewer than 400 stores in 2010 and 2011.

"We believe we still have opportunities to open new locations with strong returns on capital," Bocian said.

During the conference call, the CFO echoed concerns about the economy expressed by Chief Executive Howard Schultz in May, when the company attributed a 28 percent drop in profit to less traffic from U.S. consumers who were feeling the pinch of higher food and gas prices.

At the end of March, there were 16,226 Starbucks stores around the world. The company operates 7,257 of those stores in the U.S. and 1,867 abroad; the remaining 7,102 locations are run by partners who license the Starbucks brand.

Shares of Seattle-based Starbucks jumped 72 cents, or 4.6 percent, to $16.34 in after-hours trading after losing 12 cents to close at $15.62.

Anatomy of a bank failure: When the liquidators come calling

Damian Paletta

Wall Street Journal

Sunday, June 8, 2008

STAPLES, Minn. — At 7 p.m. on Friday, Mayor Chris Etzler walked through the back door of First Integrity Bank. The lobby should have been closed for the weekend, but dozens of strangers in dark suits were bustling about with laptops and file boxes. Someone had just delivered 32 pizzas.

Dan Walker, a top official with the Federal Deposit Insurance Corp., a Washington, D.C., bank regulator, had summoned Etzler to explain what was going on: The FDIC had just taken over First Integrity.

“All the deposits are safe,” Walker tried to reassure the mayor. “Nobody is going to have any problems.”

It isn’t easy for 75 federal officials and contractors to slip into a small town undetected and liquidate an 89-year-old bank without anyone knowing. But that’s what just happened in this old railroad town, population 3,200. It’s a scene that’s likely to repeat itself across the country as banks struggle through a painful credit cycle, overwhelmed by troubled mortgages and soured construction loans.

First Integrity, which had two branches and $55 million in assets, was the fourth FDIC-insured bank to fail this year. That’s one more than during the entire three-year stretch leading up to 2008. Some analysts predict that as many as 150 banks, mostly small and medium-size, could fail over the next three years.

In its role as receiver for failed banks, the FDIC acts as a SWAT team, playing equal parts secret agent, medical examiner, salesman and grief counselor. The first 48 hours are typically the most frantic, as the agency must turn a failed bank inside out and oversee its sale — or its orderly burial.

Secrecy is paramount to prevent a panic among the locals and a run on the bank. That could sink a bank and lead to runs on neighboring institutions. Banks only retain a percentage of their deposits in cash, and use the rest for things like loans, which means they don’t have enough money on hand if everyone demands their deposits back at once. Created after the Great Depression to prevent such scares, the FDIC insures deposits at more than 8,000 banks, covering up to $100,000 per depositor in most cases.

To keep a low profile, FDIC officials often use personal credit cards while in town. Many will tell curious strangers they work in insurance. In the case of First Integrity, Mr. Walker rented a conference room in a town 30 minutes away for a meeting of “Robinson & Associates,” and a sign near his hotel’s front door welcomed the fictitious company.

The FDIC allowed a Wall Street Journal reporter to go along with its team in Staples this past weekend, offering a rare window into a little-known government task force.

Despite the military-style planning that goes into taking over a bank, things can go wrong. Once, a local motel guessed the feds were coming and put up a welcome banner on the marquee. Another time, FDIC officials hired a hypnotist to get a confused bank employee to remember the vault code. Sometimes, locals pull up lawn chairs and watch from across the street.

Walker, 61 years old, has been a part of 10 bank closings, but First Integrity was his first time in charge. Before becoming a regulator, he spent four years in the Army and 12 in the Texas National Guard.

In late April, Walker flew to Minneapolis to plot a strategy in case the bank failed. The FDIC knew First Integrity was in trouble because its capital reserves had evaporated, and the delinquent loans on its books more than doubled in 12 months. Many of the bad loans were tied to Florida real estate. The FDIC is still sorting through the bank’s records and wouldn’t elaborate. David Duhn, the former president of First Integrity, didn’t return calls for comment.

On that first trip, Walker visited the bank’s headquarters in Staples. He then drove seven miles east to First Integrity’s other branch in the tiny town of Motley, to get a feel for its layout and size. He strolled in and asked to exchange a couple of dollar bills for commemorative state quarters. The teller obliged. He took a look around. And then he left.

As First Integrity’s health worsened, the bank was unable to find a buyer. Regulators picked a date to swoop in. Ken Jarzombek is an FDIC official in charge of all the groundwork for a takeover team, from acquiring printers to ordering pizzas. He called the Todd County sheriff’s office and notified them that a “government agency” could be coming to town and would pay deputies overtime to assist it. Jarzombek has worked on about 60 bank failures and says law-enforcement officials often try to push him for specifics. “I try to beat around the bush,” he says.

On Wednesday, Walker and other top FDIC officials flew in. They set up a base in a hotel in Baxter, not far from Staples. They recorded the estimated drive time to Staples and scouted for a place to park 50 rental cars.

A onetime railroad and lumber town in central Minnesota, Staples is now a shadow of its vibrant days. The old opera house closed decades ago, and the town is working to refurbish its main landmark, a train depot across the street from the bank. Todd County is one of Minnesota’s poorest areas, and some residents say First Integrity’s failure will be another tough chapter in their history.

On Thursday, a local newspaper, the Staples World, printed an article about the troubled bank and raised the possibility it could be liquidated. Walker was alarmed; this could cause a panic. An FDIC official stationed inside the bank monitored the lobby. Only when it was clear customers weren’t swarming the place did regulators relax.

Friday morning, minutes after First Integrity opened for the last time, Walker sat in his hotel’s conference room and watched the other FDIC officials file in. He waited for someone to close the door before he spoke. “Is anybody in here not supposed to be at a meeting of Robinson & Associates?” he asked. No one said a word.

There was little room for error. A Watford City, N.D., bank, First International Bank & Trust, had tentatively agreed to acquire roughly 75 percent of First Integrity’s assets, worth about $36 million, and all of its deposits, for a premium of $2 million. The FDIC would retain the loans and assets First International didn’t want, and try to collect as much of the loans outstanding as possible. First International planned to open the lobby Saturday morning to assuage the community.

Late in the afternoon on Friday, Walker and a few others began the 30-minute drive to Staples. They walked into the bank and began the formal proceedings. Officials from the Office of the Comptroller of the Currency, a division of the Treasury Department, revoked First Integrity’s charter and appointed the FDIC as receiver.

Walker went into the lobby and introduced himself to the shaken staff. “We understand what you are going through,” he recalls telling them. No one asked questions, and Walker offered one warning: “It’s going to be crowded,” he said.

The rest of the FDIC officials then swarmed in. Armed sheriff’s deputies moved to the doors to stand guard. FDIC officials put tape on some interior doors to prevent them from automatically locking.

By the time the mayor arrived, the agency had already restored access to the automated-teller machine for depositors and changed the bank’s Web site. The vaults were secure.

A crowd of people stood on the sidewalk across the street at a bar called Gary’s Place — a rumor was spreading about a bank robbery. Once they learned deposits were safe, most went back inside.

“We’re going to be out of here as fast as we can,” Mr. Walker told the mayor, Etzler, who had rushed over from his daughter’s high-school graduation. “It will just be a brief blip in history — that’s it.”

Etzler looked relieved. “Just the uncertainty and the questions that have been floating around, to get some finalization to it,” he said.

Some FDIC officials stayed at the bank until 1 a.m. Saturday morning, and many returned seven hours later. By Sunday, almost all of the bank’s files were in boxes and the vaults were being cataloged.

Local residents said the FDIC officials seemed to come out of nowhere. “I didn’t know they were coming, but we knew when they were here,” said Becky Hasselberg, 58, who has lived in Staples her whole life. “People in suits and ties walked into the coffee shop. They weren’t too casual.”

Monday morning the bank reopened. A temporary sign out front read “First International Bank & Trust — Member FDIC.”

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New Nuclear Plants Get More Expensive

By Dave Flessner, Chattanooga Times/Free Press, Tenn.

Jun. 11--At a cost of more than $6.2 billion when it was completed in 1996, TVA's Watts Bar Nuclear Plant is both the newest and most expensive nuclear reactor ever built in the United States.

But rising costs for everything from cement to steel are threatening to shatter that cost record for the next generation of nuclear power plants.

Despite streamlined licensing requirements and more advanced engineering and design, the latest projected costs for some of the next generation of nuclear reactors are double some initial estimates made five years ago.

TVA President Tom Kilgore said the rising costs of materials for nuclear reactors is causing the agency to re-examine its pursuit of new reactors. But the Tennessee Valley Authority, at this point, appears to still be committed to building more nuclear units.

"The cost of new plants are higher because concrete has gone up, steel has gone up, and other commodity prices have gone up," Mr. Kilgore said. "That causes us to pause and rethink, but frankly it's still the best option."

Critics of nuclear power wonder if the industry is still beset with the cost overruns that stalled any new U.S. nuclear reactors from being started in the past three decades.

"Once again, we're seeing the sticker shock from nuclear power," said Stephen Smith, executive director for the Southern Alliance for Clean Energy, a Knoxville group opposed to nuclear power. "What we continue to see from this industry are overly rosy estimates about construction costs to lure utilities into building nuclear. By the time they recognize what it is actually going to cost, they already have so much money sunk in a plant that they want to finish it."

The TVA, the nation's biggest government utility, in the 1970s and '80s sunk nearly $10 billion into nuclear plants that it ultimately decided to scrap when plant costs escalated and the growth in power demand slowed. But TVA officials insist they are using a different, more cost-competitive approach today toward building more nuclear units.

Unlike the 17 different reactors TVA began designing in the 1960s, the authority now is taking its power additions one reactor at a time to better align new power generation and power demand and to focus management attention on each reactor.

The next generation of reactors also will be built in cooperation with other utilities and with standardized designs to help speed construction and allow workers to successfully move from one plant to another, TVA Vice President Jack Bailey said.

"TVA is already leading the industry in additional nuclear generation," Mr. Bailey said.

After restarting TVA's oldest reactor last year through a five-year, $1.8 billion upgrade at the Browns Ferry plant near Athens, Ala., TVA is spending $2.5 billion to finish a second reactor at its Watts Bar plant by 2012.

Even more ambitious are TVA's preliminary plans for two of the next-generation nuclear reactors at its Bellefonte nuclear site in Hollywood, Ala. The reactors, to be built by Westinghouse, are expected to cost about $3 billion to $5 billion each, Mr. Bailey said.

A study three years ago jointly conducted by Toshiba Power Systems, Bechtel Corp. and TVA initially estimated the cost of each of the new AP-1000 reactors at Bellefonte at around $1,600 a kilowatt, or about $2 billion for each of the planned units.

"That is now probably bouncing around $3,500 a kilowatt, and even higher in some circumstances," said Adrian Heymer, senior director for new plant deployment at the Nuclear Energy Institute, an industry-backed trade group in Washington D.C.

Other utilities are projecting even higher costs to develop and finance similar reactors. Moody's Investors Service estimated last year that the cost of a new 1,000-megawatt reactor even smaller than what TVA wants to build at Bellefonte will cost between $5 billion and $6 billion.

Progress Energy Florida estimated that building reactors at a new 3,000-acre site in Levy County near Tampa, Fla., would cost about $7 billion per unit. Farther south near Miami, Florida Power & Light estimates the cost of adding new units at Turkey Point nuclear plant could range from $6.5 billion up to $12 billion per reactor, according to a March filing with Florida regulators.

David A. Kraft, director of the Nuclear Energy Information Service, an anti-nuclear group in Chicago, said cost estimates for new nuclear reactors continue to rise and the new designs of reactors add extra uncertainty to utility estimates.

"The upward trend in costs is unmistakable and also exists internationally," he said.

Mr. Kraft and Mr. Smith urged TVA and other utilities to take the billions of dollars they are planning to invest in new nuclear units and put it instead into aggressive efficiency measures and renewable energy generation from solar, wind and biomass.

"Nuclear plants take decades to pay off and, by that time, we can develop other sources of power like wind and solar that don't have any fuel costs and don't produce radioactive wastes," Mr. Smith said.

Mr. Bailey said higher cost estimates from other utilities reflect, in part, their desire to gain approval from state regulators to cover any unanticipated costs for the new reactors. The TVA executive noted that the Bellefonte site where TVA is proposing to build its new reactors already is developed with site security, transmission and cooling towers built for earlier reactors TVA scrapped in the 1990s.

Buying equipment in advance also could lock in costs to prevent costly increases later, he said.

Mr. Heymer said the costs of all types of generation will be higher in the future and nuclear power isn't as subject to rising fuel costs as is power generation from either coal or natural gas.

"No matter what you use to generate power, the consumer is going to see an increase in the cost of electricity," Mr. Heymer said. "Nuclear power is still competitive with other forms of generation and, if you put in the environmental concerns and new limits on carbon emissions, nuclear turns out to be the best buy."

FBI Announces Mortgage Probe

Posted By: Michael King

Reported By: Kevin Rowson

ATLANTA -- Federal agents are calling Metro Atlanta, but for all the wrong reasons. When it comes to mortgage fraud, you have a good chance of becoming a victim in Georgia.

In Washington, the FBI announced Operation Malicious Mortgage -- which has already made several hundred arrests.

Atlanta was the number one area in the country for mortgage fraud a few years ago. Today it is number six, but that is still not good enough as local FBI officials announced on Thursday.

The FBI in Atlanta has arrested more than 60 people in the past four years -- over 100 have been prosecuted in Atlanta's federal courts.

You've seen the sketches, you've seen the neighborhoods torn apart by over-inflated homes.

"We've had whole neighborhoods of all kinds from inner city low income neighborhoods to the nicest golf course gated communities just be devastated by mortgage fraud," said US Attorney David Nahmias.

On Wednesday, seven arrests were made in a mortgage fraud scheme that gutted a $3 million condo complex in DeKalb County.

The people who rent there and the people who live in any neighborhood racked by fraud are the immediate victims. The FBI says the problem is growing, and so are their efforts to stop it.

"Efforts are underway to redirect investigative resources within the FBI to the named cities most dramatically impacted by this and to secure additional resources in the upcoming budgets," said FBI Special Agent In Charge Greg Jones.

The people involved in mortgage fraud range from straw buyers to closing attorneys to brokers to appraisers to loan officers and real estate agents. What they are slowly learning is that the penalties can be a deterrant -- as much as 30 years in federal prison.

"That's more time than Bernie Evers got for Worldcom or Jeff Skilling got for Enron," Jones said. "And that word got out in the legal community and we think it has some effect that deter people in these schemes."

JPMorgan, 11 Others Sued Over Jefferson County Crisis

By William Selway and Martin Z. Braun

June 17 (Bloomberg) -- JPMorgan Chase & Co., Morgan Keegan & Co. and 10 other banks, advisers and insurers were sued by a Jefferson County, Alabama, man who claims their work on county bond transactions saddled residents with soaring sewer bills.

The complaint, filed in Alabama court in Birmingham today by Charles Wilson, also alleges that seven current and former county commissioners breached their fiduciary duty. The suit seeks damages for the 146,000 sewer customers in Jefferson County, the most-populous county in Alabama, as well as the return of fees.

The ``commissioners, various investment banks, insurers and advisers have continuously failed to act in the best interests of the citizens of Jefferson County,'' according to the lawsuit.

Sewer bills for residents of Jefferson County, with a population of 659,000, have risen more than fourfold over the last 11 years as the county amassed $3.2 billion of debt to build a new sewer system. Almost all of the bonds carry adjustable interest rates and are tied to derivatives intended to protect the county from higher borrowing costs, a strategy that backfired this year and pushed the county to the brink of bankruptcy.

Morgan Keegan spokeswoman Gail Rimer had no immediate response, while JPMorgan spokesman Brian Marchiony said the bank hasn't seen the suit and declined to comment. Jeff Lloyd, a spokesman for Financial Guaranty Insurance Co., which is also named the lawsuit, said the company had yet to review the suit and declined to comment. Michael Gormley, a spokesman for XL Capital Assurance Inc., didn't immediately respond to a request for comment.

Officials Named

Commission President Bettye Fine Collins, one of the politicians named in the lawsuit along with Birmingham Mayor Larry Langford and former finance director Steve Sayler, said she had no opinion about the suit. ``It'll just have to be dealt with,'' she said.

Today's lawsuit is only the latest litigation surrounding Jefferson County's financings.

In April, the Securities and Exchange Commission sued Langford, the former commission president, for allegedly accepting undisclosed payments from the head of a regional underwriting firm that worked on some sewer deals. And bankers who worked for New York-based Bear Stearns Cos. and JPMorgan when the county bought its swaps have been told they might face criminal charges under an antitrust investigation of the municipal derivatives industry.

Gleaning Information

Kathryn Harrington, the Birmingham attorney with Hollis Wright & Harrington who filed the suit, said the lawsuit may allow her to glean new information about how much the deals have contributed to rising sewer rates.

``There's a lot that hasn't come to light,'' she said. ``The citizens feel that they haven't gotten the full story.''

The county's financial crisis began in February after FGIC and XL, which guarantee $2.8 billion of the county's sewer debt, suffered credit rating cuts because of losses on securities tied to subprime mortgages. That caused the investors to sell back the county's $850 million variable-rate bonds to banks that agreed to be buyers of last resort, and to shun about $2 billion of debt whose interest is determined by auctions. Rates on some of the county's debt increased to as high as 10 percent.

At the same time, interest-rate swaps the county bought from JPMorgan, Bear Stearns Cos., Bank of America and Lehman Brothers Holdings Inc. to shield it against rising borrowing costs stopped working. The floating rates it pays on its bonds have climbed while the variable rates banks pay the county under the agreements have declined, pushing expenses higher.

Downgrades to Junk

The surging debt costs led the credit-rating companies to cut the county's sewer bonds to below investment grade. That, in turn, triggered clauses in bond and derivative contracts that gave banks the right to force the county to terminate the swaps at a cost of $277 million and buy back $850 million of the floating-rate debt over four years.

Without restructuring its bonds, interest costs on Jefferson County's sewer debt may reach $250 million, nearly twice the $138 million the system produces in revenue, Jefferson County Commission President Collins estimated in March. Since April, the county has obtained agreements to postpone making payments to banks holding its unwanted bonds as it looks for a way to restructure its debts.

Insurers' Proposal

The insurance companies have suggested that the county levy a fee on those who use septic tanks instead of the sewer, which commissioners have rejected. The commission this month hired Merrill Lynch & Co. to advise it on how to revamp the bonds and avoid bankruptcy.

The lawsuit filed today alleges that Jefferson County's bond transactions have left customers responsible for a massive debt load.

``Through a long series of ill-conceived financial transactions, the sewer ratepayers of Jefferson County have been saddled with a debt of roughly $11,491 per residential sewer customer, which is the highest in the nation,'' the complaint says.

The case is Charles E. Wilson, v. JPMorgan Chase & Co., et. al Jefferson County Circuit Court (Alabama). The case number is 01-cv-2008-901907.00

To contact the reporters on this story: William Selway in San Francisco at wselway@bloomberg.net; Martin Z. Braun in New York at mbraun6@bloomberg.net.

How Sweet It Is! (If you're KBR)

June 17, 2008

Lost Army Job Tied to Doubts on Contractor

By JAMES RISEN

WASHINGTON — The Army official who managed the Pentagon’s largest contract in Iraq says he was ousted from his job when he refused to approve paying more than $1 billion in questionable charges to KBR, the Houston-based company that has provided food, housing and other services to American troops.

The official, Charles M. Smith, was the senior civilian overseeing the multibillion-dollar contract with KBR during the first two years of the war. Speaking out for the first time, Mr. Smith said that he was forced from his job in 2004 after informing KBR officials that the Army would impose escalating financial penalties if they failed to improve their chaotic Iraqi operations.

Army auditors had determined that KBR lacked credible data or records for more than $1 billion in spending, so Mr. Smith refused to sign off on the payments to the company. “They had a gigantic amount of costs they couldn’t justify,” he said in an interview. “Ultimately, the money that was going to KBR was money being taken away from the troops, and I wasn’t going to do that.”

But he was suddenly replaced, he said, and his successors — after taking the unusual step of hiring an outside contractor to consider KBR’s claims — approved most of the payments he had tried to block.

Army officials denied that Mr. Smith had been removed because of the dispute, but confirmed that they had reversed his decision, arguing that blocking the payments to KBR would have eroded basic services to troops. They said that KBR had warned that if it was not paid, it would reduce payments to subcontractors, which in turn would cut back on services.

“You have to understand the circumstances at the time,” said Jeffrey P. Parsons, executive director of the Army Contracting Command. “We could not let operational support suffer because of some other things.”

Mr. Smith’s account fills in important gaps about the Pentagon’s handling of the KBR contract, which has cost more than $20 billion so far and has come under fierce criticism from lawmakers.

While it was previously reported that the Army had held up large payments to the company and then switched course, Mr. Smith has provided a glimpse of what happened inside the Army during the biggest showdown between the government and KBR. He is giving his account just as the Pentagon has recently awarded KBR part of a 10-year, $150 billion contract in Iraq.

Heather Browne, a spokeswoman for KBR, said in a statement that the company “conducts its operations in a manner that is compliant with the terms of the contract.” She added that it had not engaged in any improper behavior.

Ever since KBR emerged as the dominant contractor in Iraq, critics have questioned whether the company has benefited from its political connections to the Bush administration. Until last year, KBR was known as Kellogg, Brown and Root and was a subsidiary of Halliburton, the Texas oil services giant, where Vice President Dick Cheney previously served as chief executive.

When told of Mr. Smith’s account, Representative Henry A. Waxman, the California Democrat who is chairman of the House Oversight and Government Reform Committee, said it “is startling, and it confirms the committee’s worst fears. KBR has repeatedly gouged the taxpayer, and the Bush administration has looked the other way every time.”

Mr. Smith, a civilian employee of the Army for 31 years, spent his entire career at the Rock Island Arsenal, the Army’s headquarters for much of its contracting work, near Davenport, Iowa. He said he had waited to speak out until after he retired in February.

As chief of the Field Support Contracting Division of the Army Field Support Command, he was in charge of the KBR contract from the start. Mr. Smith soon came to believe that KBR’s business operations in Iraq were a mess. By the end of 2003, the Defense Contract Audit Agency told him that about $1 billion in cost estimates were not credible and should not be used as the basis for Army payments to the contractor.

“KBR didn’t move proper business systems into Iraq,” Mr. Smith said.

Along with the auditors, he said, he pushed for months to get KBR to provide data to justify the spending, including approximately $200 million for food services. Mr. Smith soon felt under pressure to ease up on KBR, he said. He and his boss, Maj. Gen. Wade H. McManus Jr., then the commander of the Army Field Support Command, were called to Pentagon meetings with Tina Ballard, then the deputy assistant secretary of the Army for policy and procurement.

Ms. Ballard urged them to clear up KBR’s contract problems quickly, but General McManus ignored the request, Mr. Smith said. Ms. Ballard declined to comment for this article, as did General McManus.

Eventually, Mr. Smith began warning KBR that he would withhold payments and performance bonuses until the company provided the Army with adequate data to justify the expenses. The bonuses — worth up to 2 percent of the value of the work — had to be approved by special boards of Army officials, and Mr. Smith made it clear that he would not set up the boards without the information.

Mr. Smith also told KBR that, until the information was received, he would withhold 15 percent of all payments on its future work in Iraq.

“KBR really did not like that, and they told me they were going to fight it,” Mr. Smith recalled.

In August 2004, he told one of his deputies, Mary Beth Watkins, to hand deliver a letter about the threatened penalties to a KBR official visiting Rock Island. That official, whose name Mr. Smith said he could not recall, responded by saying, “This is going to get turned around,” Mr. Smith said.

Two officials familiar with the episode confirmed that account, but would speak only on the condition of anonymity out of concern for their jobs.

The next morning, Mr. Smith said he got a call from Brig. Gen. Jerome Johnson, who succeeded General McManus when he retired the month before. “He told me, “You’ve got to pull back that letter,”’ Mr. Smith recalled. General Johnson declined to comment for this article.

A day later, Mr. Smith discovered that he had been replaced when he went to a meeting with KBR officials and found a colleague there in his place. Mr. Smith was moved into a job planning for future contracts with Iraq. Ms. Watkins, who also declined to comment, was reassigned as well.

Mr. Parsons, the contracting director, confirmed the personnel changes. But he denied that pressure from KBR was a factor in the Army’s decision making about the payments. “This issue was not decided overnight, and had been discussed all the way up to the office of the secretary of defense,” he said.

Soon after Mr. Smith was replaced, the Army hired a contractor, RCI Holding Corporation, to review KBR’s costs. “They came up with estimates, using very weak data from KBR,” Mr. Smith said. “They ignored D.C.A.A.’s auditors,” he said, referring to the Defense Contract Audit Agency.

Lt. Col. Brian Maka, a Pentagon spokesman, disputed that. He said in a statement that the Army auditing agency “does not believe that RCI was used to circumvent” the Army audits.

Paul Heagen, a spokesman for RCI’s parent company, the Serco Group, said his firm had insisted on working with the Army auditors. While KBR did not provide all of the data Mr. Smith had been seeking, Mr. Heagen said his company had used “best practices” and sound methodology to determine KBR’s costs.

Bob Bauman, a former Pentagon fraud investigator and contracting expert, said that was unusual. “I have never seen a contractor given that position, of estimating costs and scrubbing D.C.A.A.’s numbers,” he said. “I believe they are treading on dangerous ground.”

The Army also convened boards that awarded KBR high performance bonuses, according to Mr. Smith.

High grades on its work in Iraq also allowed KBR to win more work from the Pentagon, and this spring, KBR was awarded a share in the new 10-year contract. The Army also announced that Serco, RCI’s parent, will help oversee the Army’s new contract with KBR.

“In the end,” Mr. Smith said, “KBR got what it wanted.”

Gas hits national average of $4 for first time

Sunday June 8, 9:13 am ET Gasoline prices hit national average of $4 for first time, expected to go higher NEW YORK (AP) -- Drivers are paying an average of $4 for a gallon of gasoline for the first time. AAA and the Oil Price Information Service say the national average price for a gallon of regular gas rose to $4.005 overnight from $3.988. But consumers in many parts of the country have already been paying well above that price for some time.

Gas is expected to keep climbing, putting greater pressure on consumers and businesses, because the price of oil is soaring in futures markets. Light, sweet crude shot up nearly $11 a barrel Friday and approached $140 for the first time.

Along with higher fuel costs, consumers are also contending with higher prices for food and other goods because of rising transportation costs.

Biggest jobless jump since '86 -- Wall Street sinks

Friday June 6, 4:17 pm ET
By Jeannine Aversa, AP Economics Writer Jobless rate zooms to biggest increase in decades; stocks plunge nearly 400 points WASHINGTON (AP) -- Pink slips piled up and jobs disappeared into thin air in May as the nation's unemployment rate zoomed to 5.5 percent in the biggest one-month jump in decades. Wall Street swooned, and the White House said President Bush was considering new proposals to revive the economy.

Help-wanted signs are vanishing along with jobs, so the unemployment rate is likely to keep climbing, a government report indicated, underscoring the toll the housing and credit crises are taking on jobseekers, employers and the economy as a whole.

Adding to the pain, oil prices soared to a new record high, while the value of the dollar fell.

The Dow Jones industrials tumbled almost 400 points.

Oil Prices Skyrocket, Taking Biggest Jump Ever

June 7, 2008

By JAD MOUAWAD

Oil prices had their biggest-ever jump on Friday, after a senior Israeli politician raised the specter of an attack on Iran and the dollar fell against the euro.

The gains on Friday capped a second day of strong gains on energy markets, and fueled suspicions that commodities might be caught in a speculative bubble.

Oil futures surged more than $10, or almost 8 percent, to $138 a barrel, in afternoon trading on the New York Mercantile Exchange. Friday’s rise followed a 5.5 percent jump on Thursday.

Even as uncertainties abound about the fundamentals of the market, geopolitical tensions in the Middle East regained center stage after Israel’s transportation minister, Shaul Mofaz, said Friday that an attack on Iran’s nuclear sites looked “unavoidable.” Iran is the second-largest oil producer within the OPEC cartel and any interruptions in its exports could push prices higher levels.

“The return of the Iranian risk premium calls for a careful assessment of the potential oil supply impact of military strikes on Iran,” said Antoine Halff, an analyst at Newedge, an energy broker.

The strong volatility in energy markets in recent weeks have continued to puzzle investors and traders. Prices keep rising despite a lack of shortages in the market, and strong evidence of lower consumption in industrialized countries. But investors seem to be caught in a bullish mood, focusing instead on perceived risks to future oil supplies and continued growth in oil demand from emerging economies that subsidize fuels.

The latest jump in oil prices also came as the dollar lost almost 1 percent against the euro amid bleak economic news that fanned recession fears on Friday. The unemployment rate surged to 5.5 percent last month, the government said, the biggest increase in more than two decades.

Investors reacted to the latest forecast by a large Wall Street bank that oil prices would spike to $150 a barrel in the next month because of strong demand from Asian economies. Morgan Stanley said “an unprecedented share” of Middle East oil exports are headed to Asia.

Some analysts also said that the threat of a strike by Chevron’s workers in Nigeria could lead to “considerable” shutdowns of Nigerian production. A similar strike by Exxon Mobil workers last April, which lasted a week, reduced Nigerian output by 800,000 barrels a day, or nearly a third of the country’s daily exports.

A strike might delay the start of Chevron’s 250,000 barrels-a-day Agbami project, the country’s largest offshore venture, which is slated for June 15.

One view that has been gaining ground in recent months is that the commodity market is caught in a speculative bubble akin to the housing or technology bubble of the late 1990s. The notion is buffered by the fact the oil prices have doubled in 12 months despite a slowing economy.

That theory was raised by politicians in Washington and a slew of OPEC producers, who blame speculators for the staggering rally in oil prices. Speaking before Congress recently, George Soros, a prominent hedge fund investor, said the current oil markets presented some characteristics of a bubble.

“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance, which led to the stock market crash of 1987,” Mr. Soros said earlier this week. But he cautioned that an oil market crash was not imminent. “The danger currently comes from the other direction. The rise in oil prices aggravates the prospects for a recession.”

Jeffrey Harris, the chief economist at the Commodity Futures Trading Commission, who was speaking before another Senate committee last month, said he saw no evidence of a speculative bubble in the commodity market. Instead, Mr. Harris pointed out to a confluence of trends that have contributed to the oil price rally, including a weak dollar, strong energy demand from emerging-market economies, and political tensions in oil-producing countries.

“Simply put, the economic data shows that overall commodity price levels, including agricultural commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand,” Mr. Harris said. “Together these fundamental economic factors have formed a ‘perfect storm’ that is causing significant upward pressures on futures prices across the board.”

Oil prices had been weakening in recent days but reversed dramatically after the president of the European Central Bank, Jean-Claude Trichet, suggested on Thursday that the bank might raise interest rates. That pushed up the euro against the dollar and prompted investors to buy into commodities to hedge against the weaker American currency.

Gasoline prices have also been rising steadily. American drivers are now paying an average of $3.99 for a gallon of gasoline nationwide, according to AAA, the automobile group. In many parts of the country, like California, Connecticut and New York, consumers are already paying well over $4. Diesel costs $4.76 a gallon on average.

“I don’t know how else to say it, this is not a bubble,” Jan Stuart, global oil economist at UBS, said. “I think this is real. There is a whole bunch of commercial buyers out there who are spooked and are buying. You are an airline, right now, you’re scared. But I don’t see who would buy at these prices unless they need to.”

Not-So-Safe-Deposit Boxes: States Seize Citizens' Property to Balance Their Budgets

Resources to Search for Unclaimed Property in Your Name

By ELISABETH LEAMY

May 12, 2008 —

The 50 U.S. states are holding more than $32 billion worth of unclaimed property that they're supposed to safeguard for their citizens. But a "Good Morning America" investigation found some states aggressively seize property that isn't really unclaimed and then use the money -- your money -- to balance their budgets.

Unclaimed property consists of things like forgotten apartment security deposits, uncashed dividend checks and safe-deposit boxes abandoned when an elderly relative dies.

Banks and other businesses are required to turn that property over to the state for safekeeping. The problem is that the states return less than a quarter of unclaimed property to the rightful owners.

Not-So-Safe-Deposit Boxes

San Francisco resident Carla Ruff's safe-deposit box was drilled, seized, and turned over to the state of California, marked "owner unknown."

"I was appalled," Ruff said. "I felt violated."

Unknown? Carla's name was right on documents in the box at the Noe Valley Bank of America location. So was her address -- a house about six blocks from the bank. Carla had a checking account at the bank, too -- still does -- and receives regular statements. Plus, she has receipts showing she's the kind of person who paid her box rental fee. And yet, she says nobody ever notified her.

"They are zealously uncovering accounts that are not unclaimed," Ruff said.

To make matters worse, Ruff discovered the loss when she went to her box to retrieve important paperwork she needed because her husband was dying. Those papers had been shredded.

And that's not all. Her great-grandmother's precious natural pearls and other jewelry had been auctioned off. They were sold for just $1,800, even though they were appraised for $82,500.

"These things were things that she gave to me," Ruff said. "I valued them because I loved her."

Bank of America told ABC News it deeply regrets the situation and appreciates the difficulty of what Mrs. Ruff was going through. The bank has reached a settlement with Ruff and continues to update its unclaimed property procedures as laws change.

California's Class Action Lawsuit

Ruff is not alone. Attorney Bill Palmer represents her and countless other citizens in a class action lawsuit against the state of California.

"They figured the safety-deposit box was safer than keeping it under the mattress," Palmer said. "In the case of a lot of citizens, they were wrong, weren't they?"

California law used to say property was unclaimed if the rightful owner had had no contact with the business for 15 years. But during various state budget crises, the waiting period was reduced to seven years, and then five, and then three. Legislators even tried for one year. Why? Because the state wanted to use that free money.

"That's absolutely correct," said California State Controller John Chiang, who inherited the situation when he came into office. "What we've done here over the last two decades has been dead wrong. We've kept the property and not provided owners with the opportunities -- the best opportunities -- to get their property back."

Chiang now faces the daunting task of returning $5.1 billion worth of unclaimed property to people. Some states keep their unclaimed property in a special trust fund and only tap into the interest they earn on it. But California dumps the money into the general fund -- and spends it.

"It's supposed to be segregated and protected," Palmer said. "California has taken all of that $5.1 billion and has used it as a massive loan."

California became so addicted to spending people's money, that, for years, it simply stopped sending notices to the rightful owners. ABC News obtained a 1996 internal memo in which the lawyer for the Bureau of Unclaimed Property argued against expanding programs to notify rightful owners. He wrote, "It could well result in additional claims of monies that would otherwise flow into the general fund."

Seizing More Than Safe-Deposit Boxes

It's not just safe-deposit boxes. A British man went to retire and discovered the $4 million in U.S. stock he had been counting on had been seized and sold for $200,000 years earlier -- even though he was in touch with the company about other matters.

A Sacramento family lost out on railroad land rights their ancestors had owned for generations -- also sold off as unclaimed property.

"If I had hung onto it, I would be a millionaire, multimillionaire," said John Whitley. "But that didn't happen because we didn't get to hold it."

State Reforms

California's unclaimed property program was so out of control that, last year, the courts issued injunctions barring the state from seizing any more property until it made reforms. Since then, Chiang has taken several steps to try to clean up the program.

For example, the state now sends notices alerting citizens about unclaimed property before it is handed over to the state -- the only state to do so. Once unclaimed property is delivered to the state, it is now held for several months while the state tries to contact the owners, rather than it being immediately sold off or destroyed.

Which raises the question, in the Internet era, is anybody really lost anymore? California and other states are just beginning to make use of modern databases that can find most anyone in minutes. Unfortunately, California only uses those databases to search after it has already seized a citizen's property.

If California does get better at locating people, that could present another challenge. Remember, right now, the state spends the money.

"It's like the last guy in line at a pizza parlor," Palmer criticized. "There is only so much pizza. At the end, when I get up to the counter to claim my pizza, there may be no pizza for me."

California's fiscal problems are legendary and once again in the news, so it's reasonable to question whether the state can afford to repay its citizens if a bunch of them surface at once.

"There is always going to be money to give the owners when they make their claim, " Chiang insisted. "I don't want my legacy to say I continued a broken program. I want my legacy to be 'this guy was the guy who truly cared about the people and returned their money.'"

California is not the only state to come under fire for its handling of unclaimed property. In Delaware, unclaimed property is the third largest source of state revenue. Idaho recently passed an unprecedented law that says the state gets to keep unclaimed property permanently if the rightful owners don't claim it within 10 short years. And all 50 states pay private contractors 10 to 12 percent commissions to locate and seize accounts for them. It's an inherent conflict of interest: the more rightful owners are found, the less money the contractors make.

Of course, there are some states who handle their people's property with respect. Oregon never takes title to unclaimed property. Instead, it holds it in a perpetual trust fund.

Colorado uses the interest on its unclaimed property fund to pay for some state programs, but leaves the principal untouched.

Missouri, Iowa and Kansas make extra efforts to reunite people with their property even setting up booths at state fairs to get the word out. The State of Maryland actively compares the names on unclaimed accounts with state income tax records. If it finds a match, the state simply cuts a check and sends it to the citizen.

Protecting Your Property

So, the question for citizens is, how do you protect yourself?

Make contact with your bank, your brokerage firm, etc. at least once a year, in a way that creates a paper trail. Make sure they have your current address.

If you own stock, occasionally vote your proxies or take other steps to keep your stock ownership active. Stay in touch with your broker.

Write a list of all your accounts and keep it with your will, so your heirs will know where to look.

Consider insuring valuables even if you keep them in your safe-deposit box. That way, you're covered financially if the bank or state makes a mistake and empties your box. Plus, safe-deposit contents have been known to be destroyed by fire or flooding.

If you want to search for unclaimed property in your name, you do not need to pay other people to do it for you. Check out the following links for more information:

National Association of Unclaimed Property Administrators

www.missingmoney.com

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