Vinyl Gets Its Groove Back

Thursday, Jan. 10, 2008

By Kristina Dell

From college dorm rooms to high school sleepovers, an all-but-extinct music medium has been showing up lately. And we don't mean CDs. Vinyl records, especially the full-length LPs that helped define the golden era of rock in the 1960s and '70s, are suddenly cool again. Some of the new fans are baby boomers nostalgic for their youth. But to the surprise and delight of music executives, increasing numbers of the iPod generation are also purchasing turntables (or dusting off Dad's), buying long-playing vinyl records and giving them a spin.

Like the comeback of Puma sneakers or vintage T shirts, vinyl's resurgence has benefited from its retro-rock aura. Many young listeners discovered LPs after they rifled through their parents' collections looking for oldies and found that they liked the warmer sound quality of records, the more elaborate album covers and liner notes that come with them, and the experience of putting one on and sharing it with friends, as opposed to plugging in some earbuds and listening alone. "Bad sound on an iPod has had an impact on a lot of people going back to vinyl," says David MacRunnel, a 15-year-old high school sophomore from Creve Coeur, Mo., who owns more than 1,000 records.

The music industry, hoping to find another revenue source that doesn't easily lend itself to illegal downloads, has happily jumped on the bandwagon. Contemporary artists like the Killers and Ryan Adams have begun issuing their new releases on vinyl in addition to the CD and MP3 formats. As an extra lure, many labels are including coupons for free audio downloads with their vinyl albums so that Generation Y music fans can get the best of both worlds: high-quality sound at home and iPod portability for the road. Also, vinyl's different shapes (hearts, triangles) and eye-catching designs (bright colors, sparkles) are created to appeal to a younger audience. While new records sell for about $14, used LPs go for as little as a penny--perfect for a teenager's budget--or as much as $2,400 for a collectible, autographed copy of Beck's Steve Threw Up.

Vinyl records are just a small scratch on the surface when it comes to total album sales--only about 0.2%, compared to 10% for digital downloads and 89.7% for CDs, according to Nielsen SoundScan--but these numbers may underrepresent the vinyl trend since they don't always include sales at smaller indie shops where vinyl does best. Still, 990,000 vinyl albums were sold in 2007, up 15.4% from the 858,000 units bought in 2006. Mike Dreese, CEO of Newbury Comics, a New England chain of independent music retailers that sells LPs and CDs, says his vinyl sales were up 37% last year, and Patrick Amory, general manager of indie label Matador Records, whose artists include Cat Power and the New Pornographers, claims, "We can't keep up with the demand."

Big players are starting to take notice too. "It's not a significant part of our business, but there is enough there for me to take someone and have half their time devoted to making vinyl a real business," says John Esposito, president and CEO of WEA Corp., the U.S. distribution company of Warner Music Group, which posted a 30% increase in LP sales last year. In October, Amazon.com introduced a vinyl-only store and increased its selection to 150,000 titles across 20 genres. Its biggest sellers? Alternative rock, followed by classic rock albums. "I'm not saying vinyl will become a mainstream format, just like gourmet eating is not going to take over from McDonald's," says Michael Fremer, senior contributing editor at Stereophile. "But there is a growing group of people who are going back to a high-resolution format." Here are some of the reasons they're doing it and why you might want to consider it:

Sound quality LPs generally exhibit a warmer, more nuanced sound than CDs and digital downloads. MP3 files tend to produce tinnier notes, especially if compressed into a lower-resolution format that pares down the sonic information. "Most things sound better on vinyl, even with the crackles and pops and hisses," says MacRunnel, the young Missouri record collector.

Album extras Large album covers with imaginative graphics, pullout photos (some even have full-size posters tucked in the sleeve) and liner notes are a big draw for young fans. "Alternative rock used to have 16-page booklets and album sleeves, but with iTunes there isn't anything collectible to show I own a piece of this artist," says Dreese of Newbury Comics. In a nod to modern technology, albums known as picture discs come with an image of the band or artist printed on the vinyl. "People who are used to CDs see the artwork and the colored vinyl, and they think it's really cool," says Jordan Yates, 15, a Nashville-based vinyl enthusiast. Some LP releases even come with bonus tracks not on the CD version, giving customers added value.

Social experience Crowding around a record player to listen to a new album with friends, discussing the foldout photos, even getting up to flip over a record makes vinyl a more socially interactive way to enjoy music. "As far as a communal experience, like with family and friends, it feels better to listen to vinyl," says Jason Bini, 24, a recent graduate of Fordham University. "It's definitely more social."

Iran threat was phony....duh.

Last Monday, Pentagon officials issued disturbing information to journalists in Washington about a provocative Iranian threat against U.S. ships in the Gulf. The information made big news, reported by all the major U.S. and international newspapers and television networks. The story was front-page headlines just as President Bush was departing for a 10-day tour of the Middle East, where one of his top priorities would be convincing Arab states to help the Bush administration confront Iran.

According to U.S. officials, who initially provided some of the information off-the-record and not for attribution to an identifiable spokesperson, five Iranian speedboats approached three U.S. navy vessels in the Strait of Hormuz and acted aggressively. Senior U.S. military officials as well as Bush himself variously called Iran's behavior reckless, provocative and dangerous. But the detail that spiced up the story and really grabbed the headlines was at first provided off-the-record to reporters. Officials said that as the speedboats maneuvered, a warning was issued by ship-to-ship radio that the U.S. ships would explode momentarily. "I am coming at you, and you will explode in a few minutes," is the quote the NY Times used, provided by an anonymous American official. A similar version made it into the first paragraph of the Washington Post's account. Soon afterwards, the Pentagon released a video of the incident along with the verbal threat. The Pentagon was effectively accusing Iran of planning, carrying out or at least feigning suicide attacks on U.S. ships, reminiscent of the Al Qaeda attack on the USS Cole in Yemen in 2000. The Post's Robin Wright wrote that "the Pentagon had consistently given the impression that the [radio] threat was linked to the Iranian boats."

Now, the Navy Times newspaper is casting serious doubt on the claim that it was the Iranians who issued the kamikaze warning. It seems that the threat might have been uttered by a local heckler known in Gulf shipping lanes as "Filipino Monkey," who's been famous in the region for 25 years for interrupting Gulf radio communications with insults and epithets. The Navy Times article, by Andrew Scutro and David Brown, quoted several current and former Navy seamen saying the verbal threat may well have been a prank. "It's been a joke out there for years," said a civilian seaman quoted by paper.

Along with other news media over the last few days, Navy Times quotes Navy brass effectively back peddling from the version put out by the Pentagon last week. "We don’t know for sure where they came from,” said Commander Lydia Robertson, spokeswoman for 5th Fleet in Bahrain, according to Navy Times. "It could have been a shore station." Chief of Naval Operations Admiral Gary Roughead told the paper: "Based on my experience operating in that part of the world, where there is a lot of maritime activity, trying to discern [who is speaking on the radio channel] is very hard to do."

There may be a serious problem here. Has the Bush administration's demonization of Iran so pervaded the U.S. government that the judgement of vital decision-makers is becoming dangerously clouded? So when a possible practical joker issues a threat to a warship, you have a Strangelovian military chain of command from Bahrain to Washington racing to insist that the crazy, murderous mullahs in Tehran are at it again. By the Pentagon's own account, one of the warships very nearly took out at least one of the Iranian vessels but the order to fire was prevented at the last minute when the speedboats turned away. It goes without saying that an armed clash like that between two long-time adversaries could have ignited a much larger confrontation. Bush recently warned that Iran's nuclear ambitions have raised the specter of World War III and he has not ruled out a U.S. military strike on Iran to degrade its uranium-enrichment facility.

In due course, I hope that we establish who issued the verbal threat to blow up the U.S. ships. Was it "Filipino Monkey"? An imitator? If the Pentagon had better proof that it was an Iranian, we would have seen it by now. Incidentally, the Iranians always denied making the threat, and accused the U.S. of hyping a routine ship-to-ship interaction in international waters into a fabricated confrontation. “This is an ordinary occurrence, which happens every now and then for both sides,” Iranian Foreign Minister spokesman Mohammed Ali Hosseini said immediately afterwards.

But I'm more interested in knowing if there was any monkey business involved in how the Pentagon originally spun the sensational kamikaze angle to the press and the global public. How seriously did the officers on the three ships take the suicide-attack threat? Were they certain that it had been issued by the Iranians? Did they consider or believe that it could have come from a prankster? How carefully did the Pentagon analyze the verbal threat once it was relayed back to Washington? Were officials there completely convinced that the threat came from Iran? Or did they have doubts yet went ahead anyway and indicated to reporters that Iran did it? Were officers on the scene and Pentagon officials in Washington aware that pranksters are prevalent on the Gulf radio networks? Did they factor that into their risk assessment and into their decision to point a quick finger at Iran?

If "Filipino Monkey" or somebody of that ilk turns out to be the culprit, it means that the Pentagon either can't tell the difference between a prank and a threat, or that it's too busy confronting Iran to bother trying to do so. Either way, it's another reason to worry.

Merrill Lynch Gets $6.6 Billion From Kuwait, Mizuho (Update2)

Back last year when a middle eastern country attempted to purchase an American port howls went up in opposition. So where are those folks now when foreign nations are purchasing large swaths of American banks?

By Edward Evans

Jan. 15 (Bloomberg) -- Merrill Lynch & Co. raised $6.6 billion by selling preferred shares to a group including the Kuwait Investment Authority and Japan's Mizuho Financial Group Inc. after being battered by losses from subprime mortgages.

The investors also include the Korea Investment Corp. and clients of U.S. money managers TPG-Axon Capital and T. Rowe Price Associates Inc., Merrill said in a statement today. The group won't have a say in how the firm is run, it said.

Merrill, the third-biggest U.S. brokerage, is raising money after $8.4 billion of writedowns on U.S. mortgage investments led to the biggest loss in its 93-year history in the third quarter. Today's investment comes a month after the New York- based firm raised $6.2 billion from Singapore's Temasek Holdings Pte and Davis Selected Advisors LP.

Investors ``are putting in capital but it's at a cost,'' said Peter Plaut, a senior credit analyst at New York-based Sanno Point Capital Management. ``Now it's up to the CEOs to be able to generate returns that exceed that cost of capital.''

Merrill fell 2.3 percent to $54.70 in New York pre-market trading today. The stock dropped 42 percent in the 12 months through yesterday, making it the third worst performer in the 12-member Amex Broker-Dealer Index.

Overseas Funding

Merrill will pay a 9 percent annual dividend on the securities until they automatically convert into shares in 2 3/4 years' time. The group will get fewer shares if Merrill's stock price climbs above $61.31 and more if it drops below $52.40.

The agreement with Kuwait will give Merrill ``additional opportunities to grow its presence there,'' Merrill Chief Executive Officer John Thain said in today's statement. ``Because of their extensive corporate client base in Japan and their deep network in China, the Pacific Rim and globally, we expect future collaboration with Mizuho to be very productive.''

Merrill spokeswoman Jessica Oppenheim in New York said Thain was unavailable to comment further.

Thain, who took over Dec. 1, joined Citigroup Inc., Morgan Stanley and UBS AG in tapping overseas investors to shore up capital. Before today, U.S. and European banks and securities firms had turned to Asian and Middle Eastern governments and investors for about $34 billion of fresh funds.

The world's biggest financial institutions have announced more than $100 billion in writedowns and loan losses sparked by the U.S. subprime mortgage slump, eroding their balance sheets and sending shares plunging.

Citigroup Loss

Citigroup, the biggest U.S. bank, said today it had a $9.83 billion loss in the fourth quarter and that it will raise $12.5 billion through selling securities to investors including Singapore and Kuwait.

Merrill probably will post a loss of $3.23 billion on Jan. 17, topping the record $2.24 billion shortfall reported in the third quarter, Stan O'Neal's last as CEO, analysts estimate.

The firm may write down $15 billion related to U.S. mortgage losses, almost twice its original forecast, the New York Times reported Jan. 11, citing unidentified people briefed on the plan.

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Tokyo-based Mizuho becomes the first Japanese company in more than two decades to make a major investment in a Wall Street firm. Sumitomo Bank Ltd. a predecessor of Tokyo-based Sumitomo Mitsui Financial Group Inc., paid $500 million for a 12.5 percent stake in Goldman Sachs Group Inc. in 1986, later selling out.

`Restore Confidence'

``The financing could help Merrill restore some of the confidence it has lost,'' said Shinichi Tamura, a banking analyst at UBS Securities Japan Ltd. ``Mizuho would likely be a silent, passive investor and wouldn't make too much noise.''

Kuwait, the Middle East's fourth-biggest oil producer, formed the KIA in the 1980s to manage the nation's wealth.

The KIA is the biggest shareholder in Daimler AG with a 7 percent holding. Other assets include 1.7 percent of BP Plc and a stake in Industrial & Commercial Bank of China Ltd. it bought for $720 million in 2006, data compiled by Bloomberg show. KIA Managing Director Bader al-Saad was in a meeting and couldn't be reached for comment when Bloomberg called today.

A Hand the Clintons Aren't Showing

This issue is comical. For anyone who's been living the United States for any length of time knows that everything here is about race. Every word is parsed, every actioned scrutinized, this country isn't even close to having normalized race relations. Anyone who doubted for an instant that blacks wouldn't vote for the first viable black presidential candidate is a fool. Of course blacks are going to vote for Obama....are you kidding?!

By Eugene Robinson
Tuesday, January 15, 2008; A13

It turns out that Toni Morrison's famous line about Bill Clinton as "our first black president" was just a bon mot. If the Clintons took it as a sign of African Americans' unconditional fealty, they were mistaken.

A new Post-ABC News poll shows that black Democrats nationwide support Barack Obama over Hillary Clinton for the presidential nomination by nearly 2 to 1. This striking reversal -- a month ago, Clinton held a big lead among African Americans -- is perhaps why race has suddenly become such a hot issue in a campaign that previously had dodged the subject.

It was never realistic to think that race -- or gender, for that matter -- would stay out of a contest starring the first woman and the first African American with realistic hopes of becoming president. From the Democrats' perspective, it's probably better to hash all this out now rather than wait until the general election campaign, when the Republican Swift-boat machine would set the parameters and tone for the discussion.

Still, it's surprising that the Clinton campaign has been so aggressive in keeping the race issue alive. On "Meet the Press," Clinton didn't just seek to explain her remarks about the Rev. Martin Luther King Jr.'s role in landmark civil rights legislation (she said it took a president to bring about real action) or Bill's "fairy tale" crack about Obama's record on the Iraq war (which some African Americans took as a dismissal of Obama's candidacy as mere fantasy). Instead, she went on the attack, accusing the Obama campaign of "deliberately distorting" her words in a way that was "unfair and unwarranted."

That seemed a curious tactic to employ just two weeks before the South Carolina Democratic primary, in which African Americans are expected to cast about half the total votes. It seemed especially curious after the most powerful black politician in the state, U.S. House Majority Whip James Clyburn, indicated he was so "bothered" by the Clintons' remarks that he might rethink his decision not to endorse any candidate before the primary.

With most polls showing Clinton well behind in South Carolina, it was unclear how this approach would do anything but put her further behind.

The charitable explanation would be that the Clintons are, in their political position, simply disoriented. They are accustomed to Bill Clinton's campaigns, in which African American support was pretty much assumed. Backing for Hillary Clinton from prominent friends and allies such as Andrew Young, Rep. John Lewis (D-Ga.), Vernon Jordan, Magic Johnson, Quincy Jones and others didn't manage to keep Obama out of the race -- and, according to the polls, won't keep black voters from supporting him. It would be understandable if the Clintons were frustrated at seeing such an important Democratic constituency lured away, and if they were doubly frustrated at the difficulty of finding a way to criticize Obama without further alienating African Americans.

This is politics, however, which means that less charitable explanations have to be considered as well.

Race is just one of the fights that the Clinton campaign is pressing with Obama; the other is an attempt to discredit Obama's opposition to the war. It could be that the idea is to engage Obama in so much tit-for-tat combat that his image as a new, post-partisan kind of politician is tarnished.

Or the strategy could be more subtle. I can't help but recall a certain piece of history.

In 1992, when Bill Clinton was running for president, a controversial hip-hop artist named Sister Souljah made an ugly comment about the Los Angeles riots: "If black people kill black people every day, why not have a week and kill white people?" Candidate Clinton highlighted the remark in a speech to the Rev. Jesse Jackson's Rainbow Coalition, comparing Souljah to Ku Klux Klan member David Duke. The episode demonstrated that Clinton was not only tough on lawlessness but also willing to challenge "special interests" -- in this case, black activists.

The Clintons are reading the polls, too; they might well be resigned to the possibility that most black Democrats will vote for Obama. This would mean that South Carolina is probably already lost and that the campaign's focus now has to be on Florida and the many states whose delegates are up for grabs on "Tsunami Tuesday."

Is it possible that accusing Obama and his campaign of playing the race card might create doubt in the minds of the moderate, independent white voters who now seem so enamored of the young, black senator? Might that be the idea?

Yes, that's a cynical view. But history is history.

Big Payday Awaits Chairman After Countrywide Sale

By Frank Ahrens

Washington Post Staff Writer
Saturday, January 12, 2008; D01

Angelo R. Mozilo has pocketed $410 million in salary, bonuses and stock-option gains since he became executive chairman of mortgage lender Countrywide Financial in 1999, according to the executive compensation company Equilar.

Now, the man at the center of the national mortgage crisis stands to collect an additional $112 million in severance when Bank of America buys the company he helped found.

Equilar's numbers are based on Countrywide's most recent proxy statement, which is a year old. According to the statement, if Countrywide is acquired and Mozilo leaves, he is entitled to a cash severance of $88 million. He would also receive a retirement package worth $24 million.

Equilar said that most of Mozilo's compensation since becoming chairman -- $285 million -- has come from stock options. Mozilo has been criticized for selling pieces of his stake in Countrywide, cashing in tens of millions of dollars in options as the housing market dropped.

BofA's awesome Countrywide tax break

January 11 2008: 3:41 PM EST

Brace yourselves, taxpayers of America. You're going to help Bank of America finance its $4 billion buyout of Countrywide.

By Allan Sloan, senior editor at large

NEW YORK (Fortune) -- Guess who's helping Bank of America pay for its $4.1 billion purchase of Countrywide Financial? Answer: The taxpayers of the United States.

That's because Bank of America (BAC, Fortune 500), which is solidly profitable, will be able to use some of Countrywide's losses to offset its own taxable income. The tax break could total about half a billion dollars over the first five years, according to an estimate by tax guru Robert Willens, who left Lehman Brothers Friday after a 20-year run and will be in business as Robert Willens LLC starting next week. The losses could be worth considerably more to Bank of America starting in the sixth year, depending on how big Countrywide's losses are when Bank of America formally acquires it.

At this point, of course, no one knows how much in losses Countrywide has run up since the junk mortgage market began souring and defaults accelerated. Countrywide (CFC, Fortune 500) itself probably doesn't know. But it seems almost certain to ultimately be in the billions.

In tax circles, Bank of America is famous for its 1988 purchase of the failed FirstRepublic Bank of Dallas, which was being auctioned off by federal regulators. Bank of America, then known as NCNB Corp., the parent of North Carolina National Bank, discovered a way to structure the deal to save $1 billion of taxes, using a convoluted strategy that none of the other bidders knew about. That allowed NCNB to outbid its rivals for the bank, and still come out way ahead.

The Countrywide tax break isn't in that league, but it would still be worth a lot of money. Willens estimates that Bank of America will be able to deduct $270 million of Countrywide's losses annually for the first five years it owns the firm.

That's based on a $6 billion purchase price - $4 billion to Countrywide's common stockholders, plus the $2 billion of preferred stock that Countrywide sold to Bank of America in August. Willens says that you multiply that $6 billion by 4.49 percent - the so-called "long-term tax-exempt rate" - to calculate how much of Countrywide's losses Bank of America can deduct annually for five years after the purchase.

A $270 million annual deduction would save Bank of America something more than $100 million a year in federal and state income taxes. The long-term tax-exempt rate, which is based on Treasury rates and other things so complicated that they make my teeth hurt. The rate changes each year, Willens says, but not by much. When I asked how it's calculated, Willens, a master of tax arcana, threw up his hands. (Metaphorically, of course.) "It's like the formula for Coca-Cola," he said, "no one outside the circle knows it" and it's so complicated that, "no one else wants to find out."

So over the first five years, Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year.

Isn't life fun?

Judge Sentences Jones to 6 Months in Prison

I know that I will be resting a lot easier tonight knowing that the menace Marion Jones will not be sprinting by my house at a high rate of speed. Thankfully the ever vigilant federal government is on the case making sure there will not be any enhanced performances within our borders. What a relief!


January 12, 2008

By LYNN ZINSER

WHITE PLAINS — The former track star Marion Jones’s tearful courtroom plea to avoid jail was denied Friday by a federal judge who said her sentence should serve as a deterrent for others who may lie to federal agents, and Jones was sentenced to six months in prison for pleading guilty to two counts of perjury.

Judge Kenneth M. Karas of the United States District Court said he took into account Jones’s wish not to be separated from her two small sons, but he said he did not fully believe Jones’s limited admission that she used performance-enhancing drugs and wanted to send the message that lying to government investigators carries a stiff penalty.

“I want people to think twice before lying,” Karas said. “I want to make them realize no one is above the law.”

Jones pleaded guilty in October to lying to federal agents in two separate investigations, a bank-fraud case being prosecuted out of New York and the Bay Area Laboratory Co-operative case in Northern California involving performance-enhancing drugs. Prosecutors recommended a sentence of zero to six months. Jones’s lawyers asked Karas to limit the sentence to probation.

Jones asked Karas for leniency before he announced his decision. “I pray that you will be as merciful as a human being can be,” she said.

She was given six months for the first count of perjury, stemming from the Balco case, and two months for the second, to be served concurrently. That will be followed by two years of probation, and she was ordered to perform 800 hours of community service working with young athletes to spread an anti-drug message. She is to report to a facility near her home in Austin, Tex., on March 11.

After the sentence, Jones hugged her husband, the former sprinter Obadele Thompson, and cried as she buried her face in his shoulder.

Jones, whose sons are 4 years old and 7 months old, huddled with a dozen or so friends and family members in the courtroom. She then ventured outside to say a few words.

“As I’m sure everyone can imagine, I’m extremely disappointed today,” Jones, 32, said, with Thompson standing next to her with an arm around her waist. “I will respect the judge’s orders. I truly hope that people will learn from my mistakes.”

Later Friday, Karas sentenced one of Jones’s former coaches, Steve Riddick, to five years and three months in jail for his involvement in the bank-fraud scheme that ensnared Jones. Riddick also received three years’ probation and must pay back $375,000.

Jones’s lawyers tried to persuade Karas that Jones had already suffered from her guilty plea and that her acceptance of responsibility warranted a more lenient sentence.

A few days after admitting to using performance-enhancing drugs in her guilty plea, Jones returned the five Olympic medals she won in 2000. The International Olympic Committee and track and field’s federation have wiped her results from the books starting from the summer of 2000, when she said she started using steroids.

“We were very disappointed in the sentence,” George Hulse, Jones’s cousin, said outside the courtroom. “No consideration was taken for the fact that she has been shamed, that she has lost her medals, that she has been brought to financial ruin. She has paid a terrible human price already.”

But Karas said those consequences had followed from Jones’s decision to break the rules of international competition, not the law, and would not affect his sentence. He said he did not believe Jones had been completely forthcoming in her admission that she used drugs.

In her guilty plea, Jones said she had been given a substance by her coach, Trevor Graham, starting in the summer of 2000, but he told her it was flaxseed oil. She said she did not realize it had been the steroid THG, known as the clear, until she left Graham and stopped taking it. Karas said he doubted a high-level athlete would be unaware of a drug’s effects on performance.

“I am troubled, quite frankly, by the statement,” he said.

In a pre-sentencing memo, the lead Balco investigator, Jeff Novitzky, provided Karas with evidence that Jones’s drug use went further than THG. The evidence included doping calendars and testimony from a doctor that indicated Jones had used the blood-boosting drug EPO and human growth hormone.

Karas did not specifically mention that evidence, but he said he took the matter of performance-enhancing drugs seriously. He said he wanted Jones to use her experiences to help young athletes avoid the choices she made.

“Athletes in society have an elevated status,” he said. “They entertain, they inspire and perhaps most importantly, they serve as role models for kids around the world. When there is this widespread level of cheating, it sends all the wrong messages to those who follow these athletes’ every move.”

He suggested that Jones contact the United States Olympic Committee, the United States Anti-Doping Agency and the United States Track and Field Association after her release from prison as part of her community service.

The prosecutors in the Balco case have not yet indicated to what extent Jones may be used in Graham’s trial for perjury charges, which is scheduled to begin in March. Jones’s statements in October about Graham’s providing her with drugs will certainly be evidence, but Jones could also be called as a witness. With her guilty plea, she forfeited her Fifth Amendment right not to testify.

Cleveland Sues Big Banks

Cleveland Mayor Frank Jackson took aim at Wall Street on Thursday with a lawsuit against 21 major investment banks that he said have enabled the subprime lending and foreclosure crisis here.

The one-of-a-kind suit, filed in Cuyahoga County Common Pleas Court, accuses venerable institutions such as Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo of creating a public nuisance.

Jackson contends the companies irresponsibly bought and sold high-interest home loans. The result: widespread defaults that depleted the city's tax base and left entire neighborhoods in ruins.

City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.

"To me, this is no different than organized crime or drugs," Jackson said in an interview with Plain Dealer reporters and editors. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."

A city spokeswoman said the companies, which are based across the country, were not given advance notice of the suit, which was submitted late Thursday and assigned to Judge Peter Corrigan.

Cleveland is the second major U.S. city this week to sue over the ills of subprime loans.

On Tuesday, Baltimore sued Wells Fargo, alleging the bank intentionally sold high-interest mortgages more to blacks than to whites - a violation of federal law.

The Baltimore and Cleveland efforts are believed to be the first attempts by large cities to recover losses blamed on the foreclosure epidemic, which has particularly plagued Ohio.

But Cleveland's suit is even more unique because the city has based its complaints on a state law that relates to public nuisances. The suit also is far more wide-reaching than Baltimore's in that it targets the investment banking side of the industry, which feeds off the mortgage market.

Investment bankers at these companies buy subprime mortgages from lenders, then sell mortgage-backed securities to investors. It is a legal practice, known as securitization, that became increasingly popular during the housing boom earlier this decade.

Jackson and city Law Director Robert Triozzi said Cleveland should have been excluded from the frenzy. They pointed to housing prices that remained relatively flat as real estate values jumped elsewhere, as well as a manufacturing downturn and widespread poverty.

The suit claims that even though these issues were well documented, investment bankers continued to feed loans to hungry investors at the expense of borrowers buried in interest.

"Ultimately, they're responsible," Triozzi said of the investment banks. "They knew the economic conditions in which they were operating here. They decided that didn't matter."

Joshua Cohen, a partner with Cohen Rosenthal & Kramer LLP, will lead a team of outside lawyers assisting the city.

Cohen is perhaps known best for representing Cleveland Browns season ticketholders in a class-action lawsuit that brought a $3 million settlement after Art Modell moved the football team to Baltimore. His Cleveland law firm has five attorneys, setting the stage for a David-versus-Goliath court battle.

"There is no doubt, in terms of the resources, there is going to be somewhat of a disparity - a big disparity," Cohen said. "We're confident in our theory and what we have alleged. We knew exactly what we were taking on."

Maureen Harper, a spokeswoman for the mayor, said the city won't pay outside attorney fees unless a settlement or favorable verdict is reached.

Triozzi acknowledged the lawsuit, with its unique nature and 21 large defendants, could move slowly. He also expects the banks will request the case be moved to federal court.

"I understand fully what we are up against here," the law director said. "We would not be doing this if we did not believe we had a sound legal argument to stand on."

Jackson, asked if long litigation would be worth the city's time and money, replied: "We're in this for the long haul. I trust Director Triozzi will tell me when to hold them or fold them."

Judge Corrigan will have to decide "how far up the food chain" to go in determining responsibility, said Cleveland State University Law professor Kathleen Engel, an expert on mortgage-backed securities. She believes the city can make a case against the investment bankers.

"These loans were defective products," said Engel, co-author of "Turning a Blind Eye: Wall Street Finance of Predatory Lending," an article that appeared last year in the Fordham Law Review. "They were continuing to finance products that they knew were defective and could have devastating consequences for the city of Cleveland."

The suit accuses some companies without pinning them specifically to Cleveland loans. Engel said making the link will be easy because most, if not all, investment banks had some stake in the market.

The suit may draw the interest of national law firms willing to help Cohen, Engel said.

Ohio Attorney General Marc[hgo: cq: ] Dann also is considering a state lawsuit against investment banks. Dann said he is investigating "some of the very same people" identified in the city's suit.

Dann said a state filing is months away and probably wouldn't be submitted as a public-nuisance case. But he commended Jackson and Triozzi's "creative" approach.

"There's clearly been a wrong done, and the source is Wall Street," Dann said in a phone interview. "I'm glad to have some company on my hunt."

Chuck Schumer circa 1987

August 26, 1987

Don't Let Banks Become Casinos

By CHARLES E. SCHUMER; CHARLES E. SCHUMER, DEMOCRAT OF NEW YORK, IS A MEMBER OF THE HOUSE BANKING, FINANCE AND URBAN AFFAIRS COMMITTEE.

Citing the pressures of rigorous worldwide competition in financial services, large American banks are pleading for the repeal of the Glass-Steagall Act, a law that keeps banks out of the more volatile and risky world of securities transactions. Their entreaties should be resisted. The reasons the act was passed are still valid, and it has not interfered with our ability to compete internationally.

The Glass-Steagall Act of 1933 evolved from the bitter experience of the Depression, when American banking was in shambles. Left free to speculate in the 1920's, banks naturally looked where profits seemed highest, and were inevitably drawn into risky propositions. When a few banks failed, depositors nationwide panicked. Runs on banks pushed this country over the brink of financial disaster.

Stability was restored only years later, after the Federal Government insured depositors' money and imposed tough limits on the kind of risks a bank can undertake.

Today's bankers promise they will be more careful. But to accept their assurances runs counter to the simple principles of fairness and common sense. Banks want to keep the Federal insurance that attracts depositors and then use that capital to compete against traditional, unsubsidized securities firms.

No one could complain if banks renounced their Federal insurance and then competed evenly against securities firms. But the banks simply should not be allowed to gamble with taxpayer insured dollars.

The banks' proposals also defy common sense. Given the chance to speculate, some institutions are going to gamble poorly. This in turn will undermine confidence in the whole banking system. The recent experience of the thrift industry reinforces this lesson. Congress stepped in with $10.8 billion to bail out the thrift industry. A bailout of the much larger commercial banking sector, if it got into a similar problem, would make the recapitalization for thrifts seem insignificant.

Critics of the Glass-Steagall Act prefer to downplay the risks to the Federal Government and instead focus on the internationalization of the marketplace. They argue that they are unable to compete because foreign banks are free to violate the principles of Glass-Steagall. It is true that seven of the 10 largest banks are Japanese, but this has nothing to do with the Glass-Steagall Act.

Indeed, the Japanese operate under a law imposed after World War II by Gen. Douglas MacArthur that is, if anything, more restrictive than Glass-Steagall. Japanese banks are bigger because of the decline of the dollar, the healthy rate of Japanese savings and the absence of full-throttled competition within Japan.

The Japanese version of the Glass-Steagall law has not inhibited Japanese banks from successful competition abroad. Very few American consumers or businesses refuse to patronize a Japanese bank with more competitive interest rates simply because a type of Glass-Steagall law exists in Japan.

Moreover, the tremendous size of the Japanese banks is misleading. American banks complain that Glass-Steagall inhibits profitability, yet from 1983 through 1986 American banks enjoyed greater profitability than their Japanese competitors. While American banks have emphasized profits at the expense of growth, the Japanese have pursued a policy that has favored size over profits.

Japanese banks have been able to grow so large not because of a freedom to speculate but because of barriers that protect them from foreign competition. With a protected profit base at home, Japanese banks can engage in sharp competition abroad.

To help our banking and financial system, we should insist that the Japanese open their banking markets to foreigners, just as we have done in the United States. A level playing field is the best assistance we can give our banks in the world of international competition.

To understand what our financial industry would be like without the Glass-Steagall Act, we need only look to West Germany, where no such restrictions exist. The West German financial system is dominated by a few large banks. Like most large corporations, they are risk-averse. Capital for any risky venture is scarce.

As a result, West German banks are superb at lending to established institutions. But entrepreneurs with new ideas often have to come to the United States to find financing. The Glass-Steagall legislation is therefore a competitive advantage in a world where entrepreneurs require ready access to capital.

The solution to the problem of internationalization is not the abolition of the Glass-Steagall Act but an approach that would protect the integrity of the federally insured program, continue to guarantee and separate stable pools of both high- and low-risk capital and open foreign markets to American banks. How do banks respond when the need for these important protections are cited? They suggest that walls be built within their organizations that would keep their risky activities separate from traditional banking activities. Numerous experts have noted the difficulty of separating such operations, particularly when decisions about whether to buy a subsidiary's securities - decisions that are theoretically objective -can mean a profit of millions of dollars.

Even if these decisions are made objectively, one must wonder why it is the duty of the Federal Government to insure banks that provide capital to risk-takers when that can already be handled by an increasingly competitive worldwide securities industry.

The answer, of course, is that banks see big profits in securities. But if a bank thinks it can make more money as a securities firm, let it become one. Let's not destroy a stable structure that, since the Depression, has provided capital for entrepreneurs, confidence for depositors and healthy profits for America's financial service companies.

Oil hits record $100 a barrel

• Wednesday January 2 2008

(Updates prices, adds details, paragraphs 2, 5-7)

By Richard Valdmanis

NEW YORK, Jan 2 (Reuters) - Oil vaulted to a record $100 a barrel on Wednesday as geopolitical turmoil, tight energy stockpiles in consumer countries and a weak dollar triggered a surge of speculative buying, dealers said.

Oil's climb to the psychological triple-digit price sent stocks tumbling on Wall Street and darkened an already gloomy economic outlook in the United States, battered by a housing crisis and credit crunch.

"Oil hitting $100 a barrel has sparked some concerns about the consumer and inflation," said Todd Salamone, vice president of research at Schaeffer's Investment Research.

U.S. crude traded once at $100 a barrel, up $4.02, then eased back to $99.32 by 1:52 EST (1830 GMT). London Brent crude rose $3.78 to $97.63.

"Oil could rise further from here. It's simple supply and demand fundamentals," said Kris Voorspools, energy analyst at Fortis in Brussels.

The White House said it would not open up the emergency crude oil reserve to lower prices, while an OPEC member said the cartel was powerless to bring the market down from its lofty height.

Crude oil prices jumped 58 percent in 2007, the biggest annual gain this decade, driven by rising demand in China and other developing countries, tight stockpile levels and increased economic turmoil.

Weakness in the dollar has added to gains across the commodity sector as investors supported the underlying value of products denominated in the softening currency.

Tuesday's more than 4 percent climb came after suspected militant attacks in Nigeria's oil city Port Harcourt heightened concern over the potential for further disruptions in shipments from the eighth largest world oil exporter.

"With the military and the militant warlords engaged in a violent tit-for-tat, the risk for oil disruptions in Nigeria remains higher than in the past few months," said Olivier Jakob of Petromatrix.

Frequent attacks by militant groups since February 2006 have driven thousands of foreign oil workers from the oil-rich Niger Delta and cut oil exports by about 20 percent.

Investors are also particularly sensitive to signs of further fund investment in commodities at the start of the year. The broad Reuters/Jefferies CRB Index rose nearly 17 percent in 2007 as the sector rebounded from a loss in 2006.

A further decline in U.S. crude stockpiles -- already running at a three-year low -- was also expected. Weekly government data will be released Thursday, a day later than usual due to the New Year holiday.

Stocks of crude in the United States were expected to have fallen 1.8 million barrels last week, the seventh straight week of decline, as refiners processed more crude, according to a Reuters poll.

Distillate stocks, which include heating oil and diesel, were forecast to have increased by 300,000 barrels after three weeks of decline, the survey showed. (Additional reporting by Peg Mackey in London and Fayen Wong in Sydney; Editing by David Gregorio)

Gold Prices Hit 28-Year High

Wednesday, Jan. 2 2008

NEW YORK -- Gold prices topped $860 an ounce Wednesday as a weak U.S. dollar coupled with a record-setting push to $100 oil spurred demand for the precious metal.

Other commodities also climbed, further boosted by an influx of money into the market at the start of the new year.

An ounce of gold for February delivery jumped $23.50 to $861.50 an ounce on the New York Mercantile Exchange after hitting $864.90 earlier in the session. The spike surpassed gold's recent high of $850, but still fell short of its all-time high of $875 an ounce set in 1980.

The surge in oil prices helped boost the price of gold as investors shifted resources to the precious metal, often seen as a safe haven against inflation and political uncertainty.

"I think there's a chance it could hit $890 in the next two weeks," said Tom Pawlicki, a precious metal analyst and energy analyst at Man Financial Inc. "Oil's definitely playing a part."

Before Wednesday's jump, gold ended the year up almost 32 percent.

March silver rose 40 cents to $15.320 an ounce, while copper gained 2.2 cents to $3.0630 a pound.

Oil prices hit $100 a barrel Wednesday for the first time amid perceptions that worldwide demand for oil and petroleum products will outstrip supplies.

The booming economies of China and India have sent energy prices soaring over the past year, while tensions in oil-producing nations such as Nigeria and Iran have worried investors and encouraged speculators to drive prices even higher.

Violence in Nigeria helped nudge crude over the $100 level Wednesday.

Light, sweet crude for January delivery rose $4.02 to $100 a barrel on the New York Mercantile Exchange before retreating to $99.15.

A major driver behind gold's advance from less than $650 an ounce in January has been the dollar's steep drop against the euro. A cheap dollar can make commodities more attractive as an alternative investment, and can also raise demand from foreign buyers as their currencies gain strength.

The U.S. currency fell against the euro Wednesday after a key measure of the U.S. economy's manufacturing strength showed the sector contracted last month after 10 straight months of growth.

The Institute for Supply Management, a private research group, said its manufacturing index registered 47.7 last month, down nearly 3 percentage points from 50.8 in November. A reading above 50 indicates growth; below that indicates contraction.

The euro rose to $1.4730 against the dollar in afternoon New York trading.

Coupled with a weak dollar, new-year index buying further boosted oil and agricultural futures, according to Thomas Willis of Mesirow Financial.

"I would suggest that there has been anticipatory buying prior to today," he said.

Wheat for March delivery on the Chicago Board of Trade rose 29 cents to $9.14 a bushel, while March corn gained 7.75 cents to $4.6325. Oats for March delivery rose 8 cents to $3.1475 a bushel, and March soybeans climbed 34.75 cents to $12.49 a bushel.

Traders were awaiting the afternoon release of minutes from the Federal Reserve's Dec. 11 meeting, when the central bank lowered key interest rates by a quarter point. The minutes could upset investors if they signal the Fed is struggling to balance worries about inflation and slowing growth.

Dawgs crush Hawaii

Dawgs' impressive finish won't deliver BCS title, but wait 'til next year

Jan. 2, 2008 By Dennis Dodd CBSSports.com Senior Writer Tell Dennis your opinion!

NEW ORLEANS -- UGA or just ugh? Depends on which side of the gutter you were stumbling down late Tuesday night. Will Knowshon Moreno and Georgia do to the rest of the nation in 2008 what it did to Hawaii on Tuesday? (AP) Those plucky Hawaiians who took out second mortgages just to get within puke-smelling distance of Bourbon Street were probably cursing their travel agents. Georgia fans hoping they just saw a kickoff to a 2008 BCS championship in the Superdome had every right to be screaming up at the Bourbon balconies something that rhymes with, "Show us your grits." All those things you thought, read and predicted about No. 4 Georgia? True, after a 41-10 victory in the Sugar Bowl that foreshadows '08 more than wraps up '07. A seven-game, season-ending winning streak sets up the Dawgs for a top-five debut next season. Freshman tailback Knowshon Moreno set himself as an early 2008 Heisman candidate with two rushing touchdowns. The defense had more sacks of Colt Brennan (a school-record eight) than the Georgia offense had touchdowns (five). The Bulldogs treated the Warriors like the wide-eyed out-of-towners they were trying not to be. Georgia mugged 'em, thugged 'em, lei'd 'em out, sent them back to that rock in the South Pacific with enough stories about cajun food and voodoo to last until their next BCS bowl. For the non-BCS Warriors, that could be a loooong time. "For me," said Brennan, leader of the nation's most statistically potent offense, "it's a gigantic disappointment." "We felt like we were the best team in the country," Georgia corner Asher Allen said. "If we would have played anybody today, we would have won." In the end, the season of the upset did not extend to the Superdome. If you haven't noticed, we're two-fifths of the way through the BCS matchups and the games stink. Georgia and USC have won by a combined 63 points against opponents who were -- how to say it delicately? -- sub-standard. Georgia and USC squaring off in Pasadena would have been better than the slop we were subjected to on Tuesday. But the Sugar Bowl never would have released the Bulldogs, so we were subjected to BCS jail. This is just a bad year for matchups in the questionable system. Questionable and overwrought. Those worried about getting back to their hotel rooms before sunup after the four-hour, five-minute Sugar Bowl had commercial-happy Fox more to blame than the pass-happy Warriors. The hype factor had better pick up quick, then, in Glendale and South Florida before the title game Monday back here. Hawaii's loyal fans spent thousands of dollars to find out that not only weren't their Warriors a match for Georgia, they didn't even resemble Boise State. The heart-warming story of an undefeated WAC champion cracking the BCS code and upsetting a traditional power lasted exactly one game. The 2007 Fiesta Bowl, to be exact, when Boise State seemingly was at the front of a revolution. The 2007 regular season carried on the revolution, except that Hawaii wasn't doing any of the upsetting. Playing the weakest schedule in the country, Hawaii largely took advantage of those other upsets (and BCS fuzzy math) to get here. That's what beating Northern Colorado and Charleston Southern will get you. "You know what, I took one right in the mouth today," Brennan said after being knocked out in the fourth quarter of the final game of his career. "The SEC is probably the fastest conference in all of college football, and we got a first-hand taste of that tonight." Brennan got extremely familiar with MVP Marcus Howard, a senior defensive end, who had a Sugar Bowl hat trick (three sacks, one that produced a fumble that he recovered for a touchdown). "I don't think they were ready for our speed, our size, our emotion," freshman linebacker Rennie Curran said. "We just came out full blast. It sends a message that Georgia is not any joke. We're not to be played around with. It shows everybody we can hang with anybody, no matter what conference." Hawaii brought an incredibly loud and loyal contingent of about 15,000 in the otherwise red and black Superdome. Their beloved Warriors did their pregame ha'a dance to get fired up. It was great theater until the ball was kicked. Clash of cultures? More like an attack of vultures. The nation's lone unbeaten team was out of it by halftime. The nation-leading 13-game winning streak was ended, too. BYU is now at the top with a 10-game streak, followed by -- guess who? -- Georgia with seven. The SEC's sack leaders (42 total for the season) were so unrelenting they finally succeeded in revealing a closely guarded secret. His name is Tyler Graunke, Hawaii's backup quarterback who replaced an injured and battered Brennan. What was worse for Hawaii, Georgia coach Mark Richt had been playing his second-team defense since midway through the third quarter. Hey, there were those valuable young bodies and a ranking to protect. Based on this result, if Georgia doesn't start next season in the top five with 18 returning starters, they ought to shut down the polls. The Dawgs (11-2) can't wait around a week and play the winner of LSU-Ohio State, so toned-down redemption will have to do. Two years ago, West Virginia beat favored Georgia in this same game. The Bulldogs hadn't been the same until Tuesday night. "Everybody in the media wanted me to say we talked about (Boise State)," Richt said. "We really didn't talk about that. We talked about West Virginia because it happened to us. We started out 3-2, we had barely a pulse when we played Tennessee (an Oct. 6 loss). We didn't show a lot of spirit. We had to change the course of the season." After sneaking past Vanderbilt in mid-October, Georgia beat Florida to set it on that course. Moreno ran for 188 yards and scored three touchdowns against the Gators. Richt quickly found he had something special: the first Georgia freshman to run for 1,000 yards since Herschel Walker. Perhaps the only reason Moreno wasn't more spectacular (nine carries, 61 yards) was a tweaked ankle he suffered last month against Georgia Tech. Does any of it matter with kickoff only nine months away? "In the SEC, it doesn't matter how good you are," Richt said. "There are going to be six, seven teams that are as good as you are. We are going to have a more veteran team than we've had in awhile. I think we'll have a chance to make a run at it, but so do six or seven others."

Home Sales Plunge, Feed Recession Fears

Friday December 28, 2:22 pm ET
By Jeannine Aversa, AP Economics Writer New-Home Sales Plunge to Lowest Level in More Than 12 Years, Heighten Recession Fears WASHINGTON (AP) -- The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.

The slump worsened even more than most analysts expected, heightening fears that the country might be thrust into a recession.

New-home sales tumbled 9 percent in November from October to a seasonally adjusted annual sales pace of 647,000, the Commerce Department reported Friday. That was the worst sales pace since April 1995.

"It was ugly," declared Richard Yamarone, economist at Argus Research. "It is the one sector of the economy that doesn't show any signs of life. It doesn't look like there is any resuscitation in store for housing over the next year," he said.

The housing picture turned out to be more grim than most anticipated. Many economists were predicting sales to decline by 1.8 percent to a pace of 715,000.

By region, sales fell in all parts of the country, except for the West.

In the Midwest, new-home sales plunged 27.6 percent in November from October. Sales dropped 19.3 percent in the Northeast and fell 6.4 percent in the South. In the West, however, sales rose 4 percent.

Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.

"I think you can classify what we are seeing in the housing market as a crash," said Mark Zandi, chief economist at Moody's Economy.com. "Sales and home prices are in a free fall. The downturn is intensifying."

The median sales price of a new home dipped to $239,100 in November. That is 0.4 percent lower than a year ago. The median price is where half sell for more and half for less.

On Wall Street, the grim home sales report added to investor angst. The Dow Jones industrials were off 40 points in afternoon trading.

Would-be home buyers have found it more difficult to secure financing, especially for "jumbo" mortgages -- those exceeding $417,000. The tighter credit situation is deepening the housing slump. Unsold homes have piled up, which will force builders to cut back even more on construction and look for ways to sweeten the pot to lure prospective buyers.

"A lot of borrowers are being disqualified for loans. If you can't qualify for a mortgage the game is over. For those who do qualify, it takes longer to get loans," said Brian Bethune, economist at Global Insight.

The housing market has been suffering through a severe slump following five years of record-breaking activity from 2001 through 2005. Sales turned weak as did home prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn't afford.

Problems in housing are expected to persist well into 2008 -- a major election year.

The housing and mortgage meltdowns have raised the odds that the country will fall into a recession. And, the situation has given Democrat and Republican politicians-- including those who want to be the next president -- plenty of opportunities to spread blame around.

The economy's growth is expected to have slowed sharply to a pace of just 1.5 percent or less in the final three months of this year. Former Federal Reserve Chairman Alan Greenspan recently warned that the economy is "getting close to stall speed." The big worry is that the housing and credit troubles will force individuals to cut back on spending and businesses to cut back on hiring and capital investment, throwing the economy into a tailspin.

To help bolster the economy, the Federal Reserve has sliced a key interest rate three times this year. Its latest rate cut, on Dec. 11, dropped the Fed's key rate to 4.25 percent, a two-year low. Many economists are predicting the Fed will lower rates again when they meet in late January.

"The risks are as high as they've ever been during this expansion that started in late 2001 that the economy will fall into a recession," said Bethune. "The odds are now nudging up close to the 50 percent mark."

New-home sales report: https://www.esa.doc.gov/ei.cfm

Fed lends another $20B to ease crunch

Federal Reserve, in round 2 of new effort to help banks, says it received bids for $58 billion and pledges more.

December 21 2007: 11:25 AM EST

WASHINGTON (AP) -- The Federal Reserve, working to combat the effects of a severe credit crunch, announced Friday it had auctioned another $20 billion in funds to commercial banks at an interest rate of 4.67 percent.

Fed officials pledged to continue with the auctions "for as long as necessary."

The central bank said it had received bids for $57.7 billion worth of loans, nearly three times the amount being offered, indicating continued strong interest in the Fed's new approach to providing money to cash-strapped banks.

It was the second of four scheduled auctions. The first auction, on Monday, of $20 billion resulted in loans being awarded at an interest rate of 4.65 percent. There were 93 bidders seeking $63.6 billion at the first auction and 73 at the second.

Two more auctions will occur in early January. In a statement Friday, the central bank said it would continue with further auctions "for as long as necessary to address elevated pressures in short-term funding markets."

The new auction process was announced by the Fed last week in a coordinated action with central banks around the world trying to address a global credit crunch.

Federal Reserve Chairman Ben Bernanke and his colleagues decided to try the new process because their efforts to inject funds into the banking system through the Fed's discount window, which makes direct loans to banks, had proven less successful than Fed officials had hoped.

Many banks had avoided using the Fed's discount window out of concern that investors would see the move as an indication of underlying problems at their financial institutions.

The auction process was developed as a second way to get money into the banking system with the hopes that it would not carry the stigma of the discount window.

The Fed said Friday that it would announce on Jan. 4 the sizes of the next two auctions which will be held Jan. 14 and Jan. 28. Officials have said the Fed will evaluate the interest in the auctions after the initial four and determine whether more auctions will be scheduled.

The new auction results cover short-term loans for 35 days.

The global credit crisis has made banks reluctant to lend to each other even as the Fed has been lowering its federal funds rate, the interest that banks charge each other for overnight loans.

The rate currently stands at 4.25 percent, a full percentage point lower than it was in September when the Fed began slashing rates in the wake of a severe credit squeeze that had roiled global markets in August.

The 4.67 percent rate for the second $20 billion in funds and the 4.65 percent rate for the first auction means that banks who are using the auction process to get needed reserves are getting them at a rate slightly below the 4.75 percent rate they could get in direct loans through the discount window.

The Fed cut the federal funds rate and the discount rate by a quarter-point at its last meeting on Dec. 11, disappointing investors who had hoped for a bigger half-point reduction in the funds rate.

Many economists believe the Fed will keep cutting rates with three more quarter-point reductions expected in the funds rate at the Fed's first three meetings of the new year.

Analysts believe that a serious slowdown in overall economic growth will force the Fed to continue cutting rates even though some Fed officials have expressed worries that the rate cuts could exacerbate inflation pressures, which have flared up again, reflecting a renewed surge in oil prices.

The Bear Flu: How It Spread

A novel financing scheme used by Bear Stearns' hedge funds became a template for subprime disaster

by David Henry and Matthew Goldstein

When the subprime mortgage market began to unravel late in 2006, global bond markets barely flinched. But when two Bear Stearns (BSC) hedge funds collapsed in June, the event sparked a global credit crisis that has yet to ease. New evidence sheds light on how those hedge funds—and their managers—became star players in the subprime bust, the biggest financial disaster in decades. The revelations also show how other players in the mortgage market adopted the Bear funds' tactics, collectively building a financing structure with many of the hallmarks of a pyramid scheme.

The legal consequences are still unfolding. In recent weeks securities regulators and federal prosecutors have stepped up their investigations into the two funds, probing the fuzzy math used to value the underlying assets, the aggressive sales pitches that portrayed the funds as safe, and frequent trades with other Bear-managed portfolios. On Dec. 19, Barclays (BCS), which lent one Bear fund hundreds of millions, filed a lawsuit alleging fraud over misleading statements about the portfolio's health. Says a Bear spokesman: "We believe that any such lawsuit is unjustified and without merit."

Investigators also are asking why Ralph R. Cioffi, the funds' top manager, moved $2 million of his own $6 million investment in the hedge funds into another fund in early 2007 while simultaneously raising cash for the funds, trying to sell them to Cerberus Capital Management, and telling investors they couldn't redeem their shares until the end of June. People familiar with the situation at Bear stress that Cioffi, who left the firm the week of Dec. 10, was simply investing in a different Bear fund with which he was involved. Cioffi's lawyers did not return e-mails or calls seeking comment.

A CDO Called Klio

It's too soon to tell whether authorities will find any wrongdoing. But a BusinessWeek analysis of confidential hedge fund reports and interviews with lawyers, investors, and securities experts reveals just how pivotal a role Cioffi's funds played in the mortgage market's dramatic rise, dizzying peak, and disastrous fall.

The analysis shows Cioffi and his team developed a novel investment product to attract money-market funds—a new class of investor—to the mortgage market. Their innovation, a particularly aggressive form of collateralized debt obligation, or CDO, became the building blocks of the industry's push to keep growing for longer than it otherwise would have. After the market turned, it became clear the Cioffi money machine contributed to much of the $10 billion-plus in writedowns that Citigroup (C) and Bank of America (BAC) revealed in November. Fresh evidence also suggests Cioffi's team may have engaged in self-dealing by using the new CDOs to buy assets from the funds, artificially boosting returns. Citi and Bank of America declined to comment.

At the center of it all was the new breed of CDO pioneered by Cioffi and his team to tap into the $2 trillion universe of money-market accounts in which individuals and corporations stash their spare cash. Cioffi's CDOs, initially branded "Klio Funding," were entities that sold commercial paper and other short-term debt to buy higher-yielding, longer-term securities. The Klios were a win-win proposition for money-market funds. They paid a higher interest rate than the usual short-term debt. And investors didn't need to worry about the risky assets the Klios owned because Citigroup had agreed to refund their initial stake plus interest, through what's known as a "liquidity put," if the market soured. Cioffi engineered three such deals in 2004 and 2005, raising $10 billion in all.

What did Citigroup get for guaranteeing the Klios? For one thing, fees. The Klios were also a ready buyer of Citi's own stash of mortgage-backed securities and other debt. Citi probably never imagined it would have to make good on those guarantees because the underlying assets had the highest credit ratings.

Cioffi used the money from each deal to purchase billions in mortgage-backed securities and pieces of other CDOs for his three Klios. He bought many of the assets directly from the two Bear hedge funds he managed. The move also supplied the hedge funds with cash.

A Pyramid Structure

The Klios had another powerful feature: They allowed the Bear funds to lock in longer-term financing. Typically, hedge funds borrow for short periods of time, usually just days or weeks. Under the terms of the Klio deals, Cioffi could use the money for at least a year without having to worry that it would disappear overnight if the market got volatile. He discussed that advantage in an Apr. 25 call with hedge fund investors, boasting that the funding wasn't subject to market fluctuations.

The Klio structure spread rapidly as other hedge funds, CDO managers, and banks, including Barclays, Bank of America, and Société Générale, followed Cioffi's lead. From 2004 through 2007, Wall Street raised some $100 billion through these innovative CDOs, essentially creating a whole new way for the industry to finance risky subprime loans. That success, in turn, inspired copycat products such as structured investment vehicles, which also sold short-term debt. At their peak, in February, 2007, SIV assets hit $300 billion. Barclays declined to comment, but the company announced on Nov. 15 losses from CDO investments that it had been forced to take on its books. A Société Générale spokesman said it has transferred all of its risk to a large, global financial institution.

In hindsight, CDOs and SIVs served as a foundation for a pyramid-like structure that Yale University economist Robert J. Shiller says occasionally arises from bull markets. As new investors arrive to the party, they bid up prices, boosting returns for those who got in earlier. The big gains attract more investors, and the cycle continues—as long as the players don't try to take out their money en masse.

The mortgage-market system played out much the same way. The new type of CDO lured a different tier of investors: money-market funds. The flood of fresh money made it even cheaper and easier for buyers to get mortgages. That, in turn, drove up home prices, holding off defaults and foreclosures. The process enriched the people who bought earlier in the boom and triggered more speculation.

"An Incestuous Relationship"

The complexity of the Klios and their ilk only encouraged lax lending practices by putting too much distance between the borrowers and the ultimate holders of their debt. Since the Klios offered a refund policy, money-market managers didn't have to worry about whether home buyers would pay back their loans. Their investments were protected even if the owners eventually defaulted on their mortgages.

Indeed, as the bubble inflated, there was little incentive for the array of middlemen collecting fees—mortgage brokers, real estate appraisers, bankers, money managers, and others—to do the proper checks. The lack of oversight likely contributed to the rampant fraud on some underlying loans, says S. Kenneth Leech, chief investment officer of bond-investing firm Western Asset Management. "Nobody wanted to take the punch bowl away from the party," adds Charles Calomiris, a professor at Columbia Business School. "They were all making fees."

Now investigators are trying to determine whether Cioffi and his team crossed legal lines. The Klios provided the Bear hedge funds with a ready, in-house trading partner. Their financial reports, which were reviewed by BusinessWeek, show many months in which the Cioffi-managed Klios traded only with the Cioffi-managed Bear funds. For example, in April, 2006, one Klio CDO bought $114 million worth of securities from one of the Bear funds. Such trades, says Steven B. Caruso, an attorney who represents several Bear hedge fund investors, may be "indicative of an incestuous, self-serving relationship that appears to have been designed to establish a false marketplace."

If that's why the trades were made, the maneuvers could have falsely boosted the hedge funds' returns—and the fees Cioffi and his team collected. In an e-mail to Cioffi and co-manager Matthew Tannin cited in a legal filing, Raymond McGarrigal, another executive at the Bear funds, gushed about the Klio setup, writing that "one of the great things we've done is allow the Klio to buy assets from the hedge fund." Lawyers for Tannin and McGarrigal declined to comment.

The End of an Era?

Amid the market turmoil earlier this spring, Cioffi hoped the Klios would work their magic once again. In April, as losses at the funds began mounting, Cioffi set up another CDO, High Grade Structured Credit CDO 2007-1, which issued short-term paper and offered investors a money-back guarantee from Bank of America. Cioffi had raised nearly $4 billion by late May, making it the biggest CDO of the year, according to Thomson Financial (TOC).

Just as before, Cioffi used the money to buy assets from the hedge funds, perhaps to prop up the portfolios, which by then were on the brink of collapse. In an April conference call with the hedge funds' investors, Cioffi said the new CDO was part of his plan "to get the funds back on track to generate positive returns." It didn't work. Just weeks after the deal for the CDO closed, the Bear funds imploded, wiping out $1.6 billion of investors' money. (The fund into which Cioffi moved $2 million, Bear Stearns Structured Risk Partners, was up 6.5% as of Nov. 30.)

By autumn the practice of using CDOs to raise cash was dead. Money-market funds had stopped buying the short-term debt, and the credit markets were frozen. That forced Citigroup and Bank of America to make good on their guarantees to investors in Cioffi's CDOs, triggering big losses at the two banks.

The global markets are dealing with the consequences: The tab from the mortgage mess could run up to $500 billion, and central bankers are struggling to stave off recession. As investigators sort through the wreckage, the records of Bear Stearns' doomed hedge funds are turning out to be some of the most revealing in an era of financial folly.

Henry is a senior writer at BusinessWeek. Goldstein is an associate editor at BusinessWeek, covering hedge funds and finance.

Food prices soar in America

Higher food prices, led by milk, are hitting consumers where it hurts - in the stomach.

By Aaron Smith, CNNMoney.com staff writer

December 20 2007: 12:21 PM EST

NEW YORK (CNNMoney.com) -- John Norris' family is drinking a lot less milk these days. He said he considers the higher prices and has cut back on his kids' milk consumption. But between work and family obligations, he still drives almost as much as he used to.

"That's the reason I cut down on milk consumption - so I can drive my car," said Norris.

And Norris should know. He's the director of wealth management for Oakworth Capital Bank and a food price expert.

The Norrises aren't the only family getting pinched at the grocery store. Prices of food and non-alcoholic beverages rose 4.7 percent since the beginning of the year through November, outpacing the 4.3 percent increase in the overall cost-of-living, according to the federal government's Consumer Price Index.

Everyday foods like fruits and vegetables, beef, poultry and cereals are on the rise. The price of milk is the biggest culprit, with a staggering increase of 23.2 percent through November. And with basic foods like dairy and wheat driving up the cost of other groceries, almost everyone is feeling the squeeze.

Families with children, who typically go through a couple gallons of milk per week and spend hundreds of dollars on other groceries, are especially vulnerable.

"Kids need a lot more food than we do," said John Mulhern, a grandfather and one of several shoppers who spoke to CNNMoney.com outside a Key Food grocery in Brooklyn. "So your hearts go out to young families, especially [those who] have multiple children. They're the ones who are hurting the most with the rising prices."

Marie Thompson, a mother from Brooklyn with a couple of kids in tow at the grocery store, said she spends hundreds of dollars a week on groceries, including two gallons of milk.

"It seems to me that I spend more and more every week on food," said Thompson. "It's hard, because I have three children at home so there are five of us to feed. Beef is very expensive. The milk is very expensive. Even the butter has gone up."

Even with gasoline prices soaring, milk still tops gas prices. The nationwide average for a gallon of whole milk is $3.80, according to the U.S. Department of Agriculture. That dwarfs the nationwide average of $2.99 for a gallon of unleaded, according to AAA.

"A lot of basic foodstuffs seem to be going up and dairy products are going through the roof," said Norris of Oakworth Capital.

It's not just milk-drinking kids - coffee drinkers are taking a hit from higher dairy prices as well. Back in August, Starbucks Corp. (SBUX, Fortune 500) chief executive Jim Donald blamed "rising expenses, particularly higher dairy costs" for a 9-cent rise in the price of coffee drinks. For the first time in three years, Starbucks reported a 1 percent drop in customer visits to their stores, even as the value per transaction increased 5 percent.

Many retailers, including industry leaders like Wal-Mart (WMT, Fortune 500), absorb the initial cost increases for basic food items to stay competitive, said Charles Cerankosky, food marketing analyst for FTN Midwest Securities Corp.

"For things that are purchased day after day like milk, retailers take a more judicious view about passing it on," said Cerankosky. "You don't want to be looked at as the guy who started raising prices."

At first, retailers keep down prices for "high visibility" items like milk and make up for it by increasing the price of other items, like apples, said Cerankosky. But this is just a temporary measure, and eventually the price of milk will go up anyway, he said.

Of the Brooklyn shoppers interviewed for this story, none of them said that they were eating less, but a couple of them said there will be fewer Christmas presents under the tree this year. Santa's tightening his belt, so the kids don't have to.

But if price increases continue into 2008, families will have an even harder time stocking their pantries.

"I do expect food prices to keep going up," said Norris of Oakworth Capital Bank. "Let's just keep our fingers crossed that we're not going to have another year like this year."

Food and beverage stocks

Schilling sticks it to Clemens

He says pitcher should lose the last four of his seven Cy Young Awards.

By Bill Shaikin, Los Angeles Times Staff Writer
December 20, 2007

Curt Schilling challenged Roger Clemens to come out from behind his prepared statement, calling on Clemens to surrender the final four Cy Young Awards he has won unless he obtains a retraction for his citation in the Mitchell Report as a user of steroids and human growth hormone.

In a scathing indictment of several of the biggest names in the game, the outspoken Boston Red Sox pitcher Wednesday urged baseball to strip Clemens of his statistics and records over the past decade unless he can refute the Mitchell Report, called the career of Jose Canseco a drug-aided "sham" and "hoax" and expressed concern for the sport that Clemens and Barry Bonds each has yet to clear himself amid evidence each used performance-enhancing substances.

"What does that say about this game, us as athletes and the future of the sport and our place in it?" Schilling wrote on his blog, 38pitches.com. "The greatest pitcher and greatest hitter of all time are currently both being implicated, one is being prosecuted, for events surrounding and involving the use of performance-enhancing drugs."

The Mitchell Report cites Clemens for using steroids and human growth hormone from 1998 to 2001, starting after he joined the Toronto Blue Jays in 1997. Clemens has won the Cy Young Award a record seven times, including in 1997, 1998, 2001 and 2004.

On Tuesday, Clemens issued a statement denying he had used performance-enhancing drugs "at any time in my baseball career or, in fact, my entire life." On Wednesday, Schilling said Clemens must back his denial by retaining lawyers to obtain a retraction and public apology so his name can be "completely cleared."

"If he doesn't do that," Schilling said, "then there aren't many options as a fan for me other than to believe his career 192 wins and three Cy Youngs he won prior to 1997 were the end. From that point on the numbers were attained through using [performance-enhancing drugs]. . . .

"The four Cy Youngs should go to the rightful winners and the numbers should go away if he cannot refute the accusations."

The Baseball Writers Assn. of America administers the Cy Young Award -- and baseball's other major awards -- and BBWAA President Bob Dutton said he was unaware of any such precedent.

"We didn't take anything away from [Pete] Rose when he was banned from baseball," Dutton said. "If Roger said he didn't want them, I don't know what we'd do."

Clemens is far from the only award winner named in the Mitchell Report. Eric Gagne won a Cy Young Award, and the most-valuable-player winners include Canseco, Miguel Tejada, Jason Giambi, Mo Vaughn and Ken Caminiti.

The runners-up would not necessarily be free of suspicion. Canseco edged Wally Joyner for the 1986 American League rookie of the year award; Joyner admitted in the Mitchell Report that he used steroids later in his career.

Schilling saluted Canseco for shattering the code of silence on steroids in baseball but rebuked him for building his career upon them.

"He never belonged in the big leagues and anything he ever did in the major leagues is a hoax," Schilling said. "He made it clear that he would not have been the player he was had he not cheated. His statistics should be erased, his MVP given to the runner up and he should go down as the guy who broke the silence on a horrible period of the game, period."

Schilling credited the players who had admitted to drug use cited in the report, including backup catcher Gary Bennett, signed by the Dodgers on Monday.

"Gary Bennett is a guy who I always respected because I never figured him as a guy that would be able to play as long as he has," Schilling said. "He was always a hard worker and a nice guy and I always enjoyed throwing to him because he cared about his game calling skills.

"He's made a nice career for himself and my hope is that it was more through his hard work and effort than through cheating, either way he's a friend of mine and always will be."

bill.shaikin@latimes.com

Doug Casey on Gold

As you have probably heard, Federal Reserve Chairman Ben Bernanke has gone on record stating that, if the need arose, the Fed would print dollars by the helicopter load to smooth over a collapse in the 25-year borrow-and-spend bubble, a collapse that is now underway.

Putting Bernanke's words into action, since early August of 2007, the Fed has stepped up to the plate with tens of billions of dollars. On November 15 alone, the Fed injected almost $50 billion into the banking system, the largest single-day cash infusion since 9/11.

Then, on December 12, the Fed announced that it would open the spigots by providing lending $28 billion created out of nowhere to the nation's banks in exchange for a "wide variety of collateral."

In other words, the Fed will accept as collateral even the very same toxic waste paper now bedeviling the financial system.

And that's just one of many ways that the government is scrambling to keep the house of cards from falling. For instance, there are 12 Federal Home Loan Banks (FHLBs) whose job it is to serve as "lenders of last resort" by making cash available to banks and other financial institutions.

In the third quarter of 2007 alone, FHLB loans skyrocketed to a record $746.2 billion, nearly 18 times the yearly average between 2003-2006.

That alone should tip you off to how serious the government considers the current credit crisis to be. And no wonder. The following chart shows the steeply worsening increase in non-performing bank loans and outright charge-offs.

Faced with the very real threat of a deep recession caused by a freeze-up in credit, falling home values and soaring loan defaults, the Fed is left with a rock-and-a-hard-place decision. Hold tight and let the economy fall... hard. Or, open the money spigots wide in an attempt to maintain liquidity in the markets, sacrificing the dollar in the process.

Given two untenable choices, it is our view that the government will continue on the path of a loose monetary policy, the implications of which are not hard to figure out.

Sticking with the helicopter metaphor for a moment longer, creating billions of new dollars out of thin air to smooth over a litany of problems caused by decades of irresponsible debt creation is analogous to a helicopter trying to put out a raging forest fire by dropping tank loads of gasoline.

In other words, the "solution" is more of the same. It is only making the situation worse.

The result is simply this: as more and more dollars are created and injected into the economy, the purchasing power of all the dollars in circulation comes under pressure. It's called inflation. The last time we saw anything like what we are seeing today was in the 1970s. Here's a snapshot of the dollar against foreign currencies, then and now. The parallels are eye-opening.

You don't need me to tell you that, regardless of what the Fed would like you to think, inflation is already a problem. Yesterday I paid $3.10 for a gallon of gas, $7.50 each for movie tickets, and just shy of $30 for two cheese Stromboli's following the show.

Since March 2002, the U.S. Dollar Index, which measures the value of the dollar against a basket of six major currencies, has fallen 35.3%. The downtrend in the U.S. dollar is far from over.

Balancing Risk

Once you've identified the problem, identifying how to balance the risk to your portfolio is easy. In times of inflation, people turn to tangible "stuff." Viewed in that context, it is perfectly understandable why oil, gold and other commodities have been moving higher.

And, just as the U.S. dollar has farther to fall, so do the commodities have farther to rise. On that point, JPMorgan went on record a few days ago with their forecast that of all the commodities, they expect precious metals to be the strongest in 2008... followed by agricultural products, base metals and energy.

We think JPMorgan has it right, and that of all the possible portfolio diversifications you can make today in an attempt to protect your overall portfolio and to profit over the coming year, few will serve you better than gold.