Sunday, February 17, 2008

U.S. energy independence? Don't bet on it

By Chris Baltimore - Analysis

WASHINGTON (Reuters) - President George W. Bush shocked world energy producers in 2006 when he pledged to slash America's reliance on Middle East oil.

But today one of every two barrels of oil consumed in the United States still comes from foreign suppliers like Saudi Arabia, and that picture is not likely to change much through 2030.

With Bush entering the final months of his presidency, the challenge of loosening the vise of U.S. import reliance will fall to his successors.

Bush entered the White House in 2001 as a Texas oil man with several energy experts on his Cabinet -- Vice President Dick Cheney was chief executive of oilfield services company Halliburton Co (HAL.N: Quote, Profile, Research) and Secretary of State Condoleezza Rice served on Chevron Corp's (CVX.N: Quote, Profile, Research) board of directors until early 2001.

As oil prices rose ever higher, Bush sought to distance himself from the industry, insisting that oil companies did not need tax breaks from Uncle Sam with crude oil prices soaring.

But he has been unable to silence attacks from Democrats and others that his administration is cozy with Texas oil giants like Exxon Mobil Corp (XOM.N: Quote, Profile, Research), which reported the highest-ever profit for a U.S. company in the fourth quarter of 2007.


One of Bush's first acts as president was to convene a secret panel of industry executives to help draft an energy policy blueprint.

But by many metrics, the security of U.S. energy supplies has gone from bad to worse during Bush's administration.

A major power outage hit the Northeast in 2003, leaky pipelines shut down the biggest U.S. oil field in Alaska in 2006, and Venezuela President Hugo Chavez stopped oil exports to Exxon this week in a nasty contract dispute over seized assets.

"On Bush's watch, Big Oil drilled a gusher of profits, while promises to address energy security and costs were as empty as a dry hole," said Daniel Weiss, a senior fellow at the Center for American Progress, a Washington think tank.

When Bush took office in 2001, average U.S. retail gasoline prices were around $1.70 a gallon. Seven years later they average near $3 a gallon, offering U.S. consumers a constant reminder of the pain in their pocketbooks.

Oil prices more than doubled to above $90 a barrel -- adding more stress to a faltering U.S. economy - and profits for the biggest five oil companies doubled, setting off new calls in Congress for punitive tax measures on the industry.

To be fair, U.S. crude oil imports soared 33 percent during former President Bill Clinton's administration, as Americans took advantage of an unprecedented drop in crude oil prices. As well, the Asian economic boom led by China and India also has a lot to do with soaring crude.

Though "energy independence" is a catchphrase for 2008 presidential candidates on both sides of the party divide, the real numbers paint a darker picture than, say, a television commercial for General Motors touting the virtues of ethanol-burning automobiles.

"The story is that we're still going to remain heavily dependent -- over 50 percent certainly -- on oil imports to meet our consumption," said Doug MacIntyre, senior analyst for the U.S. government's Energy Information Administration.

In his annual address to Congress in 2006, Bush said the United States should "make our dependence on Middle Eastern oil a thing of the past." In 2007 he followed through with a plan to boost fuel-efficiency of cars and require more ethanol use, to cut U.S. gasoline use by 20 percent in a decade.

Later that year, Congress passed a modified version of Bush's plan that required a five-fold boost in ethanol use by 2022 and the first increase in vehicle fuel-efficiency standards since 1975.

Those actions, if successful, will have some effect on U.S. oil use, MacIntyre said.

But about two-thirds of the 20 million barrels of oil used in the United States every day go to fuel cars, trucks and airplanes.

"I don't think even in the grandest schemes will ethanol replace gasoline," he said.

Current EIA data shows the share of imported crude oil and refined products holding fairly steady at about 60 percent through 2030 -- dropping briefly to about 55 percent in 2015 as new U.S. fields in Alaska and the Gulf of Mexico give some temporary respite.

To be sure, U.S. oil supply could see a boost if Congress decides to speed up action on automobile efficiency rules, or find other ways to cut U.S. transport demand -- which accounts for about half of total oil usage. But for now, the picture is decidedly bleak.


With oil production in the United States, Mexico and the North Sea set to decline, the fate of world crude oil supply will be increasingly in the hands of OPEC suppliers like Saudi Arabia, Iran and Venezuela.

World oil demand will rise to 118 million barrels per day in 2030 from 83 million bpd in 2004, and new OPEC production is expected to fill about 60 percent of the extra demand, according to EIA data.

Expenditures for crude oil and refined product imports are set to soar to $316.77 billion in 2030 from $264.68 billion in 2006, according to the EIA.

With oil prices near $100 a barrel and the U.S. economy teetering on the edge of recession, oil executives have joined the list of doomsayers, and even Bush's fellow Republicans are wary about the country's precarious energy future.

"We are being sucked dry by the amount of money we have to pay to other countries to buy their oil," Sen. Pete Domenici, a New Mexico Republican, told Energy Secretary Sam Bodman at a recent hearing. "We are becoming a weaker nation by the day."

At a high-profile oil conference in Houston hosted by Cambridge Energy Research Associates, Hess Corp (HES.N: Quote, Profile, Research) Chief Executive John Hess predicted this week that "an oil crisis is coming, and sooner than people think."

(Editing by Russell Blinch and Matthew Lewis)

Original here

The best investment advice you'll never get

For 35 years, Bay Area finance revolutionaries have been pushing a personal investing strategy that brokers despise and hope you ignore. The story of a rebellion that's slowly but surely putting money into the pockets of millions of Americans, winning powerful converts, and making money managers from California Street to Wall Street squirm.
By Mark Dowie

As Google’s historic August 2004 IPO approached, the company’s senior vice president, Jonathan Rosenberg, realized he was about to spawn hundreds of impetuous young multimillionaires. They would, he feared, become the prey of Wall Street brokers, financial advisers, and wealth managers, all offering their own get-even-richer investment schemes. Scores of them from firms like J.P. Morgan Chase, UBS, Morgan Stanley, and Presidio Financial Partners were already circling company headquarters in Mountain View with hopes of presenting their wares to some soon-to-be-very-wealthy new clients.

Rosenberg didn’t turn the suitors away; he simply placed them in a holding pattern. Then, to protect Google’s staff, he proposed a series of in-house investment teach-ins, to be held before the investment counselors were given a green light to land. Company founders Sergey Brin and Larry Page and CEO Eric Schmidt were excited by the idea and gave it the go-ahead.

One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about. First to arrive was Stanford University’s William (Bill) Sharpe, 1990 Nobel Laureate economist and professor emeritus of finance at the Graduate School of Business. Sharpe drew a large and enthusiastic audience, which he could have wowed with a PowerPoint presentation on his “gradient method for asset allocation optimization” or his “returns-based style analysis for evaluating the performance of investment funds.” But he spared the young geniuses all that complexity and offered a simple formula instead. “Don’t try to beat the market,” he said. Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market’s natural ebb and flow, and get on with building Google.

The following week it was Burton Malkiel,
formerly dean of the Yale School of Management and now a professor of economics at Princeton and author of the classic A Random Walk Down Wall Street. The book, which you’d be unlikely to find on any broker’s bookshelf, suggests that a “blindfolded monkey” will, in the long run, have as much luck picking a winning investment portfolio as a professional money manager. Malkiel’s advice to the Google folks was in lockstep with Sharpe’s. Don’t try to beat the market, he said, and don’t believe anyone who tells you they can—not a stock broker, a friend with a hot stock tip, or a financial magazine article touting the latest mutual fund. Seasoned investment professionals have been hearing this anti-industry advice, and the praises of indexing, for years. But to a class of 20-something quants who’d grown up listening to stories of tech stocks going through the roof and were eager to test their own ability to outpace the averages, the discouraging message came as a surprise. Still, they listened and pondered as they waited for the following week’s lesson from John Bogle.

“Saint Jack” is the living scourge of Wall Street. Though a self-described archcapitalist and lifelong Republican, on the subject of brokers and financial advisers he sounds more like a seasoned Marxist. “The modern American financial system,” Bogle says in his book The Battle for the Soul of Capitalism, “is undermining our highest social ideals, damaging investors’ trust in the markets, and robbing them of trillions.” But most of his animus in Mountain View was reserved for mutual funds, his own field of business, which he described as an industry organized around “salesmanship rather than stewardship,” which “places the interests of managers ahead of the interests of shareholders,” and is “the consummate example of capitalism gone awry.”

Bogle’s closing advice was as simple and direct as that of his predecessors: those brokers and financial advisers hovering at the door are there for one reason and one reason only—to take your money through exorbitant fees and transaction costs, many of which will be hidden from your view. They are, as New York attorney general Eliot Spitzer described them, nothing more than “a giant fleecing machine.” Ignore them all and invest in an index fund. And it doesn’t have to be the Vanguard 500 Index, the indexed mutual fund that Bogle himself built into the largest in the world. Any passively managed index fund will do, because they’re all basically the same.

When the industry sharks were finally allowed to enter the inner sanctum of Google, they were barraged with questions about their commissions, fees, and hidden costs, and about indexing, the almost cost-free investment strategy the Google employees had been told delivers higher net returns than all other mutual fund strategies. The assembled Wall Streeters were surprised by their reception—and a bit discouraged. Brokers and financial planners don’t like indexed mutual funds for two basic reasons. For one thing, the funds are an affront to their ego because they discount their ability to assemble a winning portfolio, the very talent they’re trained and paid to offer. Also, index funds don’t make brokers and planners much money. If you have your money in an account that’s following the natural movements of the market—also called passive investing—you don’t need fancy managers to watch it for you and charge big bucks to do so.

Brin and Page were proud of the decision to prepare their staff for the Wall Street predation. And they were glad to have launched their company where and when they did. What took place in Mountain View that spring might have never happened had Google been born in Boston, Chicago, or New York, where much of the financial community remains at war with insurgency forces that first started gathering in San Francisco 35 years ago.

It all started in the early 1970s
with a group of maverick investment professionals working at Wells Fargo bank. Using the vast new powers of quantitative analysis afforded by computer science, they gradually came to the conclusion that the traditional practices guiding institutional investing in America were, for the most part, not delivering on the promise of better-than-average returns. As a result, the fees that average Americans were paying brokers to engage in these practices were akin to highway robbery. Sure, some highly paid hotshot portfolio managers could occasionally put together a high-return fund. But generally speaking, trying to beat the market—also called active investing—was a fruitless venture.

The insurrection these mavericks would create eventually caught on and has spread beyond the Bay Area. But San Francisco remains ground zero of the democratizing challenge to America’s vast and lucrative investment industry. Under threat are the billions of dollars that mutual funds and brokers skim every year from often-unwary investors. And every person who has money to invest is affected, whether she’s patching together her own portfolio with a broker, saving for retirement or college, or just making small contributions each year to her 401K. If the movement succeeds, not only will more and more people have a lot more money in their pockets, but the personal investment industry will never look the same.

I was once a portfolio manager myself, and like the industry folks Google was protecting its employees from, I was certain I could outperform market averages and confident that I was worth the salary paid to do so. However, I left the investment business before this revolt began to brew. In the intervening years, I never stewarded my own investments as judiciously as I’d managed those of my former employers—Bank of America, Industrial Indemnity, and the Bechtel family. I was unhappy with the Wall Street firms I had been using, which had churned my account to make lots of money on the sales, and, despite instructions to the contrary, placed my money in their own funds and underwritings to make even more at my expense. So a couple of years ago, when it finally came time to get my own house in order, I knew I wanted help from an independent adviser, someone who was doing things differently from the big brokerage firms.

Eventually I found a small financial management firm in Sausalito called Aperio Group that, after only seven years in business, already had a stellar reputation. “Aperio” in Latin means “to make clear, to reveal the truth.” Indeed, truth-telling is key to Aperio’s mission, even if that means badmouthing its own industry in the process. One of the company’s founders, Patrick Geddes, aged 48, is a renegade from the top echelons of his field. For several years he served, first as director of quantitative research, then as CFO, at Morningstar, the nation’s leading company for researching and appraising mutual funds. But when he left, not only was he disenchanted with his own company’s corporate environment, he was also becoming uneasy with the moral underpinning of the entire industry. “Let’s be straight,” says Geddes in his soft-spoken but zealous way. “Being unethical is a good precondition for success in the financial business.”

His partner, a bright, high-energy Norwegian American named Paul Solli, 49, is another finance guy who didn’t have the gene for corporate culture. After graduating from Dartmouth’s business school, he tried investment banking but didn’t like it. He went out on his own, starting an investment advisory business, but says he flailed about, searching for a business model that would support his desire to “live deliberately” in the Thoreauvian manner.

Solli and Geddes consider themselves heirs to the Wells Fargo insurgency and, as such, part of a movement that includes academics, some institutional investors, a couple of large index fund companies, and a handful of small firms like their own that are dedicated to bringing the indexing philosophy to badly advised investors like myself. And unlike most mutual fund investment firms, which have $5 million and $10 million minimums, Aperio was willing to take on a messy six-figure portfolio.

Solli took one look at my unkempt collection of mut­ual funds and said, “You’re being robbed here.” He pointed to funds I had purchased from or through Putnam, Merrill Lynch, Dreyfus, and—yes—Charles Schwab (which referred me to Aperio) and asked, “Do you know that you’re paying these guys to do essentially nothing?” He carefully explained the many ingenious ways fund managers, brokers, and advisers had found to chip away at investors’ returns. Turns out that I, like more than 90 million other suckers who have put close to $9 trillion into mutual funds, was paying annual fees, commissions, and transaction costs well in excess of 2 percent a year on most of my mutual funds (see “What Are the Fees?” page 75). “Do you know what that adds up to?” Solli asked. “At the end of every 36 years, you will only have made half of what you could have, through no fault of your own. And these are fees you needn’t pay, and won’t, if you switch to index funds.”

All indexing calls for, Solli explains, is the selection of a particular stock market index—the Dow Jones Industrial Average, Standard and Poor’s (S&P) 500, the Russell 1000, or the broader Wilshire 5000—and the purchase of all its stocks and bonds in the exact proportions in which they exist in that index. In an actively managed fund, managers pick stocks they think will outperform a particular index. But the premise of indexing is that stock prices are generally an accurate reflection of a company’s worth at any given time, so there’s no point in trying to beat that price. The worth of a client’s investment goes up or down with the ebb and flow of the market, but the idea is that the market naturally tends to increase over time. Moreover, even if an index fund performed only as well as the expensively managed Merrill Lynch Large Cap mutual fund that was in my portfolio, I would earn more because of the lower fees. Stewarding this kind of investment does not require a staff of securities analysts working under a fund manager who makes $20 million a year. In fact, a desktop computer can do it while they sleep.

There are always exceptions, of course, Solli says, “a few funds that at any given moment outperform the indexes.” But over the years, he explains, their performances invariably decline, and their highly paid cover-boy managers slide into early obscurity, to be replaced by a new hotshot managing a different fund. If a mutual-fund investor is able to stay abreast of such changes, move their money around from fund to fund, and stay ahead of the averages (factoring in higher commissions and management fees) it will be by sheer luck, says Solli, who then offers me pretty much the same advice John Bogle and his colleagues offered Google. Sell the hyped but fee-laden funds in my portfolio and replace them with boring, low-cost funds like those offered by Bogle’s Vanguard.

It took Solli a couple more painful meetings and a few dozen trades to clean the parasites out of my account and reinvest the proceeds in index funds, the lifeblood of his business. Without exception, he moved me into funds that have outperformed the ones I was in, like the Vanguard REIT Index Fund, some Pimco bond and stock funds, and Artisan International. And he did it for an annual fee of .5 percent of money under management, saving me over a full percent in overall costs and a lot of taxes in the future. Then he did something I doubt any other financial manager would have done. He fired himself.

“You really don’t need me anymore,” he said, and closed my Aperio account that day, ending his fees, but not our relationship. I was curious. Who was this guy who was so open about the less-than-dignified ways of his own business? “You have to have lunch with my partner,” he said.

If Solli is an industry gadfly, Geddes, a modest, unassuming son of a United Church of Christ minister, is its chainsaw massacrer. “We work in the most overcompensated industry in the country,” Geddes admitted before the water was served, “and indexing threatens the revenue flow from managed funds to brokerage houses. That’s why you’ve been kept in the dark about it. This truly is the great secret shame of our business.

“The industry knows they are peddling bad products,” Geddes continued, “and a lot of people making the most money and getting the most prestige are doing so by gouging their customers.” And Geddes is quick to differentiate between “illegal theft”—the sort of industry scandals Spitzer has uncovered, such as illicit sales practices, undisclosed fees, kickbacks, and after-market trading—and “legal theft,” the stuff built into the cost of doing business that no attorney general can touch, but which in dollar amounts far exceeds investor losses to illegal activity.

Geddes wasn’t always full of such tough talk about the industry. Not that he had any qualms about speaking his mind; in fact, he was let go from Morningstar in 1996 for being openly critical of the company’s internal culture. “I still think of Morningstar as a potentially positive force in the industry,” he says. “But let’s just say they were weak at conflict management, especially at the senior levels.” It wasn’t until he took a freelance consulting job for Charles Schwab that he really saw the light about indexing.

“My job was to compile all the academic research on mutual funds, and that’s when it really became clear that active management doesn’t add any value,” he says. When he finished the project, Geddes started teaching a finance class through the University of California extension, where he started preaching his anti-industry gospel. “I had to be careful, because there were a lot of brokers in the class. I started noticing that some of them would get sort of irritated with me.”

Around this time is when he met Solli. Solli had a client, a doctor who was looking to learn about portfolio management and asked Solli what he thought of Geddes’s UC course. When Solli looked into it, he was bowled over. “Here was this guy who’d been CFO at Morningstar and had this incredible background, and I thought, what the hell is he doing at Berkeley teaching this course to guys like my client? This is too good to be true—I have to meet this guy.”

Slowly, inadvertently even, Aperio was born. But the fit was perfect. Geddes brought what he calls “the quant piece” to the table; Solli had the strategic vision. After a few months of brainstorming, they set out to see if a couple of guys who held themselves to high ethical standards could make it in the cutthroat financial industry.

And just how do these guys make money if they keep kicking out clients like me once they switch us into index funds, while alienating others with their irreverent critique of the entire mutual fund game? Geddes does take referrals from investment firms like Charles Schwab, which thrive on the sale of managed mutual funds. So why the rant? Isn’t he, too, in business to make a buck?

“Absolutely,” he admits. “I’m not Mother Teresa; I’m a capitalist who wants to succeed and make money. I just think the best way to do that is by building trust in a clientele by revealing to them honestly how this business works.”

Geddes also offers a customized version of indexing (on taxable returns) for wealthier clients, a service that requires an ongoing relationship and supplies Aperio a steadier source of income than my low-six-figure portfolio did. Aperio now has about $800 million under management. It’s a paltry sum compared with those of the big brokerage firms, which deal in the billions or even trillions, but Geddes is fine with that. “If I were making what I could be making in this business, I just wouldn’t like the person I’d have to be.”

“San Francisco was the only place
in the country where this could have happened,” says Bill Fouse, a jazz clarinetist in Marin County who was present when the first shots were fired in the investment rebellion. It was 1970, and revolution was in the air.

While hippies, dopesters, and antiwar radicals were filling the streets of America’s most tolerant city with rage, sweet smoke, and resistance, a quieter protest was brewing in the lofty, paneled offices of Wells Fargo. There, a young engineer named John Andrew “Mac” McQuown, Fouse (who like many musicians also happens to be a brilliant mathematician), and their self-described “skeptical, suspicious, careful, cautious, and slow-to-change” boss, James Vertin, were taking a hard look at the conventional wisdom that for a century had driven American portfolio management.

Bank trust departments across the country were staffed by portfolio managers who, as I did at the time, believed that they alone possessed the investment formula that would enrich and protect the security of their customers. “No one argued with that premise,” Fouse recalls.

But McQuown suspected they were pretty much all wrong. He had met Wells Fargo chairman Ransom Cook at an investment forum in San Jose, and at a later meeting at company headquarters, persuaded him that traditional portfolio management was merely an investment variation of the Great Man theory. “A great man picks stocks that go up. You keep him until his picks don’t work anymore and you search for another great man,” he told Cook. “The whole thing is a chance-driven process. It’s not systematic, and there’s lots we still don’t know about it and that needs study.” Cook offered McQuown a job at Wells and a generous budget to conduct research into the Great Man Theory and other schemes to beat the averages. McQuown accepted, and a few years later Fouse came on as well.

They couldn’t have been more different: Fouse, a diminutive, mild-mannered musician, and McQuown, a burly, boisterous Scot. The two were like oil and water—McQuown even tried to have Fouse fired at one point—but their boss, Vertin, was the one who really was in the hot seat.

“You have to understand, Vertin’s career was on the line,” Fouse recalls. “He was, after all, running a department full of portfolio managers and securities analysts whose mission was to outperform the market. Our thesis was that it couldn’t be done.” Proof of McQuown’s theory could lead to the end of an empire, in fact many empires. “The poor guy was under siege,” says Fouse. “It was a nerve-racking time.”

Vertin’s memory of those times is no less vivid. “Mac the knife was going to own this thing,” he once told a reporter. “I could just see the fin of the shark cutting through the water.” Eventually, the research McQuown and Fouse produced became so strong that Vertin could not ignore it. “In effect it said that almost everything that every trust department in America was doing was wrong,” says Fouse. “But Jim eventually accepted it, even knowing the consequences.”

In July 1971, the first index fund was created by McQuown and Fouse with a $6 million contribution from the Samsonite Luggage pension fund, which had been referred to Fouse by Bill Sharpe, who was already teaching at Stanford. It was Sharpe’s academic work in the 1960s that formed the theoretical underpinning of indexing and would later earn him the Nobel Prize. The small initial fund performed well, and institutional managers and their trustees took note.

By the end of the decade, Wells had completely renounced active management, had relieved most of its portfolio managers, and was offering only passive products to its trust department clients. And it had signed up the College Retirement Equities Fund (CREF), the largest pool of equity money in the world, and Harvard University, the largest educational endowment. By 1980 $10 billion had been invested nationwide in index funds; by 1990 that figure had risen to $270 billion, a third of which was held at Wells Fargo bank.

Eventually the department at Wells that handled index­ing merged with Nikko Securities and was later bought by Barclays Bank, which created the San Francisco subsidiary Barclays Global Investors. Its CEO, Patricia Dunn, the scandal-tinged former chairman of Hewlett-Packard who had worked for 20 years at Wells Fargo, had been heavily influenced by indexing. Running Barclays, she became the world’s largest manager of index funds.

Fouse, now retired in San Rafael, explains why all this could have happened only in San Francisco. “When we started our research, almost all the trust clients out here were individuals with small accounts. Anywhere else, particularly on the East Coast, trust departments handled very large institutions—pension funds, university endowments, that sort of thing. If Mellon, Chase, or Citibank had done this research and come to the same conclusion, they would have in effect been saying to their large, sophisticated, and very lucrative clientele: ‘We’ve been doing things wrong for a century or more.’ And thousands of very comfortable investment managers would have been out of work.”

But even in San Francisco, as in the country’s other financial centers, Fouse and McQuown’s findings were not a welcome development for brokers, portfolio managers, or anyone else who thrived on the industry’s high salaries and fees. As a result, the counterattack against indexing began to unfold. Fund managers denied that they had been gouging investors or that there was any conflict of interest in their profession. Workout gear appeared with the slogan “Beat the S&P 500,” and a Minneapolis-based firm, the Leuthold Group, distributed a large poster nationwide depicting the classic Uncle Sam character saying, “Index Funds Are UnAmerican,” implying that anyone who was not trying to beat the averages was nothing more than an unpatriotic wimp. (That poster still hangs on the office walls of many financial planners and fund managers.)

Savvy investment consumers, however, were apparently catching on. As they began to suspect that the famous fund managers they were reading about in Business Week and Money magazine were taking them for a ride, index funds grew in size and number. And actively managed funds shrank proportionately. Even some highly placed industry insiders started beating the drums for indexing. From her perch at Barclays, CEO Dunn gave a speech at a 2000 annual industry meeting in Chicago. As reported in Business Week at the time, she started out with some tongue-in-cheek comments about fund managers’ “rare gifts and genius,” and then shocked the crowd by going on to denounce the industry’s high fees. According to the article, she even included this zinger: “[Investment managers sell] for the price of a Picasso [what] routinely turns out to be paint-by-numbers sofa art.”

It’s not as if Merrill Lynch, Putnam, Dreyfus, et al, were being put out of business by this new consciousness, but like any industry threatened with bad ink, the financial community continued to strike back at every opportunity. In May 2003, Matthew Fink, president of the Investment Company Institute, a mutual funds trade association, told convening members that his industry was squeaky clean and has “succeeded because the interests of those who manage funds are well-aligned with the interests of those who invest in mutual funds.” At the same convention, Fink’s remarks were echoed by ICI vice chairman Paul Haaga Jr., who, in his keynote address, pronounced that “our strong tradition of integrity continues to unite us.” Indeed, integrity had been the theme of every ICI membership meeting in recent memory.

Haaga then attacked his industry’s critics, including former SEC chairmen, members of Congress, academics, journalists, even “a saint with his own statue” (John Bogle). “[They] have all weighed in about our perceived failing,” lamented Haaga. “It makes me wonder what life would be like if we’d actually done something wrong.”

He didn’t have long to wonder. Four months later, the nation’s first big mutual fund scandal broke when Eliot Spitzer brought civil actions against four major fund managers for allowing preferred investors to buy and sell shares on news or events that occurred after markets had closed. Spitzer compared the practice to “allowing betting on a horse race after the horses have crossed the finish line.” Multimillion dollar fines were issued against the firms, which were also required to compensate customers damaged by what were called market-timing practices.

The market-timing scandals alone are estimated to have cost fund investors about $4 billion, and other industry violations were uncovered after that. But now more experts are convinced that the amount pales in comparison to the tens of billions lost every year just to the fees and transaction costs by which mutual funds live and die. After the mutual fund scandals broke, Senator Peter Fitzgerald (R-Ill.) called a hearing before the Subcommittee on Financial Management, the Budget, and International Security, and said this in his opening statement: “The mutual fund industry is now the world’s largest skimming oper­ation—a $7 trillion trough from which fund managers, brokers, and other insiders are steadily siphoning off an excessive slice of the nation’s household, college, and retirement savings.”

No one running a university
endowment, independent foundation, or pension fund could match his numbers during his tenure: over the last 21 years, chief investment officer David Swensen has averaged a 16 percent annual return on Yale University’s investment portfolio, which he built with everything from venture capital funds to timber. He’s been called one of the most talented investors in the world. But lately he’s becoming perhaps even more famous for his advice to individual investors, which he first offered in his 2005 book Unconventional Success. “Invest in nonprofit index funds,” he says unequivocally. “Your odds of beating the market in an actively managed fund are less than 1 in 100.”

And there’s more. A recent entry on the Motley Fool, the popular investment advice website, made the following blanket statement: “Buy an index fund. This is the most actionable, most mathematically supported, short-form investment advice ever.” As long as 10 years ago, in his annual letter to his shareholders, Warren Buffett advised both institutional and individual investors “that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”

One would think, with that kind of advice floating about, that the whole country would by now be in index funds. But in the three decades since Wells Fargo kicked things off, only about 40 percent of institutional money and 15 percent of individuals’ money has been invested in index funds. So why is indexing catching on so slowly?

A big reason, according to Geddes, is that putting investors into index funds is simply not in the interest of the industry that sells securities. “They just won’t accept indexing’s minuscule fees,” he says. By now, most major brokerage firms offer index funds in addition to traditional mutual funds, but money managers typically don’t mention them at all. You usually have to ask about them yourself.

And it makes a certain kind of sense. If a naive investor calls a broker with $100,000 to invest, would the broker be likely to recommend the Vanguard 500 Index with its .19 percent annual fee, of which he receives nothing and collects but a small portion of his firm’s approximately $100 transaction fee? Or might he suggest the client buy Putnam’s Small Cap Growth Fund B Shares, which carry a 2.3 percent annual fee, 1 percent ($1,000) of which goes to him? And will he tell his client about the hidden transaction charges that further reduce the return on investment? It’s simply not to his advantage to do so.

It’s hard to find active fund managers who are willing to talk about these issues. I spoke to several, but no one was comfortable discussing the high cost of their practice, and few were willing to talk on the record. Ron Peyton, president and CEO of Callan Associates, a San Francisco–based institutional investment consulting firm, offered a list of advantages of active management, which essentially boiled down to the fact that it’s more fun. “They can raise and lower cash positions [read: buy and sell whatever stocks excite them at any given moment] and go into fixed-income or foreign securities [read: look for investments wherever they want].” I know from experience that he’s right, but it’s kind of beside the point.

The most forthright comments came from Baie Netzer, a research analyst in the Orinda office of Litman/Gregory Companies, a San Francisco–based investment management firm specializing in mutual funds. Netzer told me outright, “Eighty percent of active managers underperform the market. But we do believe that some managers add value, and those are the ones we look for.” Still, if you factor in fees and transaction costs, you have to wonder how much that remaining 20 percent would slip.

But even if the number of active managers who consistently beat the market is small, Stanford’s Bill Sharpe still sees a real need for their services. While he is a strong partisan of index funds, he is neither as surprised nor as concerned as Geddes that they don’t represent a higher proportion of overall investment. “If you’d told me 35 years ago that indexing would one day represent 40 and 15 percent of investments, I would have asked you what you were smoking,” says the personable Sharpe with his characteristic chuckle. If everyone invested in index funds, he points out, the market itself would die a natural death. “We need active managers,” he says. “It’s buyers and sellers who keep prices moving, which is what drives the market. Index funds simply reflect what the market is doing.” He believes we’d even start to see a decline in market efficiency if index funds rose to 50 percent of total investments.

Does this mean that, when we look at mutual funds, half our options would still be burdened with unconscionable fees and hidden costs? Hopefully not. With the call getting louder from financial experts and industry watchers to reform and regulate mutual funds, it’s hard to believe that the fee system can last much longer, particularly with strong Republican voices like Peter Fitzgerald’s in Congress.

But while Wall Street has considerable soul-searching to do, full blame for the gouging of naive investors does not lie with the investment management industry alone. There is an innate cultural imperative in this country to beat the odds, to do better than the Joneses. In some ways the Leuthold Group was right when it said that index funds are un-American. It’s simply difficult for most of us to accept average returns on our money, or on anything for that matter. The ultimate example of the nation’s attraction to the big score is, of course, right now under our noses. If on August 18, 2004, you had invested $100,000 in Google, that stock would now be worth $550,000. So while evidence mounts that it’s almost impossible to hit the jackpot with cost-burdened mutual funds—and that for every Google, there’s an Enron—we simply refuse to stop trying.

Perhaps Solli and Geddes had it right when they selected the name for their company. The real purpose of this whole revolution is “to make things clear, to reveal the truth.” As Solli puts it, “As long as people know what they’re dealing with, they can invest their money with full awareness. Whether it’s playing it safe with indexing or taking a flier on a hedge fund—at least they’re the ones in control.” 

What about hedge funds?

So, the bulk of your savings is safely tucked away in a sensible index fund or two. Why not set aside 5 or 10 percent and take a chance on the post-dot-com insider’s investment craze?

It’s certainly tempting. The most high-profile manager, Edward “Eddie” Lampert, has reportedly earned investors in his ESL Investments hedge fund an average return of 29 percent a year since 1988. After successfully buying Kmart with his investors’ money, Lampert turned the merged retailer around and in 2004 personally took home $1 billion.

Another of the world’s most successful funds is San Francisco’s Farallon Capital Management, which has amassed assets of $12.5 billion over two decades by delivering post-fee returns of 17 percent a year on its flagship fund, according to a 2005 article in Institutional Investor magazine. Forty-eight-year-old Tom Steyer’s investors include universities, pension funds, and individuals; at any one time, the magazine said, the managers there might be nursing 300 to 500 investments in everything from real estate—Farallon recently bought into the Mission Bay development—to international finance.

But the road from Wall Street is scattered with the bones of bitter hedge fund investors. Since 1995, more than 1,800 known hedge funds have folded completely. In the last few months alone, two large funds—MotherRock and Amaranth Advisors—have gone south.

The high failure rate should come as no surprise, given how hedge funds operate. There’s no working model, so they vary widely, but the basic idea is that they rely on risky, untraditional investment strategies—ranging from arbitrage to taking over floundering companies, as Lampert did—to make big money fast. The industry is largely unregulated, and most funds involve private partnerships that operate in strict confidence.

They’re also extremely expensive, which limits their user profile. Though fees average just 2 percent of the investment, the same as in a typical Silicon Valley venture fund, managers also withhold a sizable chunk (averaging 20 percent, but sometimes going as high as 50 percent) of whatever profit the funds produce. The typical minimum required to get into a fund is between $1 million and $5 million.

The SEC periodically considers applying minimal rules to hedge funds, such as prohibiting pension funds from investing in them. Last October, the call for reform came from Congress when Senator Charles Grassley, chairman of the Senate Finance Committee, asked administration officials and Congress members for their views on how to improve hedge fund transparency. But so far, the hedge fund lobby has managed to keep all regulators at bay. —Mark Dowie

What are the fees?

Every fee that a mutual fund charges should be outlined somewhere in its prospectus. But many people don’t even think to look for it, and you can’t necessarily trust your broker to bring it up. “The first step is simply getting people to pay attention to fees,” says Patrick Geddes, chief investment officer of Aperio Group, in Sausalito. Hang tough in asking your broker for the full breakdown of what those fees will cost you each year. If you need help, the National Association of Securities Dealers has a useful tool for computing fees, called the Mutual Fund Expense Analyzer, on its website ( You put in the name of the fund, the amount invested, the rate of return, and the length of time you’ve had the fund, and it tells you exactly how much you’ve been charged.

You can also compare past fees for different funds before you invest. For example, if you had put $100,000 into Putnam’s Small Cap Growth Fund Class B Shares and held it for the past five years, you would find that Putnam would have charged you $13,809 in fees during that time. Vanguard’s Total Stock Market Index Fund, on the other hand, would have charged only $1,165 for the exact same investment. —Byron Perry

Which index fund?

In some ways indexing is a no-brainer: invest your money and let it do its thing. Still, there are varieties. Aperio Group’s Patrick Geddes pushes two rules in choosing a fund: “The broader the better, and the cheaper the better.” When you invest in a broad domestic fund, you’re investing in the entire U.S. economy, or “owning capitalism,” as it were, Geddes says. The Vanguard Total Stock Market Index Fund, which represents about 99.5 percent of U.S. common stocks, is a great one to start with. If you choose a narrower fund, like a tech or energy index, you’re basically just speculating (though you’ll most likely still fare better than if you tried to pick the next Google). Narrow index funds also typically command higher fees. With indexing gaining in popularity, everyone’s trying to get into the game and sneak in unnecessarily high fees. Geddes says there’s no good reason to pay more than .19 percent. —Byron Perry

Mark Dowie
, who managed the municipal bond portfolio at Bank of America and all nonequity investments for Industrial Indemnity, and advised the Bechtel family on economic and investment strategy, now watches his modest portfolio of index funds grow from his home near Point Reyes Station.

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Bernanke: There's No Housing Bubble to Go Bust

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Bernanke's thinking on the housing market did not attract much attention before Bush tapped him for the Fed job Monday but will likely be among the key topics explored by members of the Senate Banking Committee during upcoming hearings on his nomination.

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump -- posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke's testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

"House prices are unlikely to continue rising at current rates," said Bernanke, who served on the Fed board from 2002 until June. However, he added, "a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year."

Greenspan has said recently that he sees no national bubble in home prices, but rather "froth" in some local markets. Prices may fall in some areas, he indicated. And he warned in a speech last month that some borrowers and lenders may suffer "significant losses" if cooling house prices make it difficult to repay new types of riskier home loans -- such as interest-only adjustable-rate mortgages.

Bernanke did not address the possibility of local housing bubbles or the risks faced by individual borrowers or lenders in a slowing market.

But if Bernanke is confirmed as Fed chief, and if the housing market slows more than he expects, he would be unlikely to use the central bank's power over short-term interest rates to prop up falling housing prices for the sake of individual homeowners, according to comments he has made in numerous speeches and statements in academic papers.

Rather, he has argued for many years that the Fed should respond to rising or falling prices for stocks, real estate or other assets only if they are affecting inflation or economic growth in an undesirable way. Thus, he would advocate cutting interest rates if a reversal in the housing market sharply dampened consumer spending, triggering job losses or a fall in inflation to very low levels.

Lower interest rates encourage consumers and businesses to borrow and spend, spurring economic growth and hiring. That would also make it less likely that very low inflation could turn into deflation, an economically harmful drop in the overall price level.

Bernanke believes "the Fed's job is to protect the economy, not to protect individual asset prices," said William Dudley, chief economist for Goldman Sachs U.S. Economics Research.

That view mirrors Greenspan's. He and Bernanke have both said it is unrealistic to expect the Fed to identify a bubble in stock or real estate prices as it is inflating, or to be able to pop it without hurting the economy. Instead, the Fed should stand ready to mop up the economic aftermath of a bubble.

Greenspan, for example, has rejected suggestions that the Fed should have raised interest rates in the late 1990s sooner or higher to slow soaring stock prices. He says the Fed got it right after that boom by cutting its benchmark rate deeply in 2001, in response to falling stock prices, the recession and the Sept. 11 terrorist attacks.

After Bernanke joined the Fed board in 2002, as the economic recovery remained sluggish and job cuts continued, he vocally supported Greenspan's strategy of lowering the benchmark rate further and holding it very low until mid-2004, when it was clear that both job growth and the economic expansion were solid.

Bernanke also warned in a November 2002 speech that the Fed would act aggressively to prevent deflation, which had devastated the economy during the Great Depression that followed the 1929 stock market crash.

A former chairman of Princeton University's economics department, Bernanke earned academic renown for his research on the Fed's role in causing the Depression.

After the 1929 crash, the Fed mistakenly raised interest rates to protect the value of the dollar, which was then pegged to the price of gold, Bernanke wrote in an October 2000 article in Foreign Policy. The higher rates contributed to surging unemployment and severe price deflation. The Fed then made things worse by not acting to counter the credit crunch that resulted from the collapse of the banking system in the early 1930s.

"Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity," Bernanke wrote.

In late 2000, looking ahead to the possibility of a sharp fall in then-lofty stock prices, Bernanke concluded, "history proves . . . that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse."

And in words that might come to mind if housing tanks, he said the economic effects of falling asset prices "depend less on the severity of the crash itself than on the response of economic policymakers, particularly central bankers."

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Back to Black

February 17, 2008: China has a plan for using industrial espionage to turn their country into the mightiest industrial and military power on the planet. For over two decades, China has been attempting to do what the Soviet Union never accomplished; steal Western technology, then use it to move ahead of the West. The Soviets lacked the many essential supporting industries found in the West (most founded and run by entrepreneurs), and was never able to get all the many pieces needed to match Western technical accomplishments. Soviet copies of American computers, for example, were crude, less reliable and less powerful. Same with their jet fighters, tanks and warships.

China believes they can avoid the Soviet error by making it profitable for Western firms to set up factories in China, where Chinese managers and workers can be taught how to make things right. At the same time. China allows thousands of their best students to go to the United States to study. While most of these students will stay in America, where there are better jobs and more opportunities, some will come back to China, and bring American business and technical skills with them. Finally, China energetically uses the "thousand grains of sand" approach to espionage. This involves China trying to get all Chinese going overseas, and those of Chinese ancestry living outside the motherland, to spy for China, if only a tiny bit.

This approach to espionage is nothing new. Other nations have used similar systems for centuries. What is unusual is the scale of the Chinese effort. Backing it all up is a Chinese intelligence bureaucracy back home that is huge, with nearly 100,000 people working just to keep track of the many Chinese overseas, and what they could, or should, be to trying to grab for the motherland. It begins when Chinese intelligence officials examining who is going overseas, and for what purpose. Chinese citizens cannot leave the country, legally, without the state security organizations being notified. The intel people are not being asked to give permission. They are being alerted in case they want to have a talk with students, tourists or business people before they leave the country. Interviews are often held when these people come back as well.

Those who might be coming in contact with useful information are asked to remember what they saw, or bring back souvenirs. Over 100,000 Chinese students go off to foreign universities each year. Even more go abroad as tourists or on business. Most of these people were not asked to actually act as spies, but simply to share, with Chinese government officials (who are not always identified as intelligence personnel) whatever information they obtained. The more ambitious of these people are getting caught and prosecuted. But the majority, who are quite casual, and, individually, bring back relatively little, are almost impossible to catch.

Like the Russians, the Chinese are also using the traditional methods, using people with diplomatic immunity to recruit spies, and offering cash, or whatever, to get people to sell them information. This is still effective, and when combined with the "thousand grains of sand" methods, brings in lots of secrets. The final ingredient is a shadowy venture capital operations, sometimes called Project 863, that offers money for Chinese entrepreneurs who will turn the stolen technology into something real. No questions asked. If you can get back to China with the secrets, you are home free and potentially very rich.

But there are some legal problems. When the Chinese steal some technology, and produce something that the Western victims can prove was stolen (via patents and prior use of the technology), legal action can make it impossible, or very difficult, to sell anything using the stolen tech, outside of China. For that reason, the Chinese like to steal military technology. This kind of stuff rarely leaves China. And in some cases, like manufacturing technology, there's an advantage to not selling it outside of China. Because China is still a communist dictatorship, the courts do as they are told, and they are rarely told to honor foreign patent claims.

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U.S. Headed For Fiscal Crisis?

Kosovo celebrates amid Serb protests

PRISTINA, Kosovo (CNN) -- Fireworks lit the skies and crowds filled the streets of Kosovo's capital Sunday after the territory's parliament declared independence from Serbia, a move backed by many Western governments, but which Serbia and Russia bitterly oppose.


Fireworks light up the night sky in Pristina, Kosovo, as thousands celebrate independence.

"The day has come," Prime Minister Hashim Thaci, a former separatist guerrilla leader, told his parliament. "From this day onwards, Kosovo is proud, independent and free."

The province has been under U.N. administration and patrolled by NATO troops since a 1999 bombing campaign that halted a Serb-led campaign against Kosovo's ethnic Albanian majority.

Thousands of people swarmed Pristina's streets ahead of Sunday's parliamentary declaration, singing, dancing and holding signs in freezing wind after the vote was announced. But Serbs consider the territory the cradle of their civilization, and protesters clashed with police outside the U.S. Embassy in Belgrade as the declaration was issued.

Serbia said it will not oppose independence with violence, but Prime Minister Vojislav Kostunica said his country will never accept the establishment of a "false country" on its territory.

"Anything and everything that we couldn't achieve today will be obtained by new generations of Serbian people in the future," Kostunica said Sunday in a televised address. "Citizens of Serbia, we have to come together and show the whole world that we do not acknowledge the creation of a false state in our territory. The violence that has been perpetrated upon Serbia is very obvious."

About 100,000 Serbs still live in Kosovo, making up about 5 percent of the population, and Kostunica said Serbs have been killed or lost their land in the eight-plus years the country has been under international rule. But Fatmir Sejdiu, the nascent republic's president, pledged to create a nation "where all citizens of all ethnicities feel appreciated."

"Today is probably a day of trepidation for some of you, but your property and your rights will be respected in the future," he said.

Former U.S. Army Gen. Wesley Clark, who led the NATO alliance during the 1999 conflict, said "There was no way beyond moving to this step." But he urged the international community to work with Serbia to keep the country moving toward integration with Europe and "to help them understand their situation."

"I'm very sad that the Serbs are unable to understand what's happened," Clark told CNN. "But the magnitude of Serb repression of the Albanian majority there and the violence that accompanied the ethnic cleansing in 1998 and 1999 was just so overwhelming that I think the Serb people have to understand that the Albanians themselves have to have this separation."

Thaci said Kosovo's declaration of independence "marks the end of the breakup of the former Yugoslavia," which triggered years of bloodshed across the Balkans.

Former Yugoslav President Slobodan Milosevic launched a crackdown against ethnic Albanian insurgents led by Thaci in 1998 and refused to yield to Western pressure to halt the campaign. When NATO responded by launching airstrikes against Serbia and Montenegro, the last remaining Yugoslav republics, Yugoslav troops drove hundreds of thousands of Kosovars out of the region and killed thousands more.

Milosevic died in 2005 while awaiting trial for war crimes before a U.N. tribunal in The Hague.

The United States and leading European nations, including France, Britain and Germany, have supported Kosovo's move toward independence. But Russia, the Serbs' historical ally, has opposed independence, fearing it would incite other separatist movements in its backyard.

The U.N. Security Council held emergency talks on the issue Sunday afternoon at Russia's request. Moscow's U.N. ambassador, Vitaly Churkin, told reporters that the declaration violates the U.N. resolution that placed Kosovo under international administration at the end of the conflict.

"Our position is that this declaration should be disregarded by the international community," as well as by the head of the U.N. mission in Kosovo, Churkin said. He said the council would meet again Monday, with Serbian President Boris Tadic expected to address the session.

But no country supported the Russian call for the U.N. to declare Sunday's declaration "null and void," said Sir John Sawers, the British ambassador to the world body.

Secretary-General Ban Ki-moon urged all parties "to refrain from any actions or statements that could endanger peace, incite violence or jeopardize security in Kosovo and the region."

The European Union decided Saturday to launch a mission of about 2,000 police and judicial officers to replace the U.N. mission that has controlled the province since 1999. And U.S. State Department Spokesman Sean McCormack said the United States had "noted" that Kosovo had declared its independence and was reviewing the issue.

Earlier Sunday, President Bush said Kosovo's status must be resolved before the Balkans can become stable.

"We are heartened by the fact that the Kosovo government has clearly proclaimed its willingness and its desire to support Serbian rights in Kosovo," Bush told reporters in Dar-es-Salaam, Tanzania.

The United States and many of its European allies support a plan negotiated by former Finnish President Maarti Ahtisaari that would give Kosovo limited statehood under international supervision.

But Russia, which has fought two wars against separatist rebels in its southwestern republic of Chechnya, said U.S. and European support for Kosovo's independence could lead to an "uncontrollable crisis" in the Balkans.

In a statement, European Union foreign policy chief Javier Solana urged "everybody to act calmly and in a responsible way. I am convinced that the Kosovar leaders will be up to their responsibilities in this crucial moment." Solana said EU foreign ministers would meet

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$14.3M License Plate: Auction Sets World Record

No. 1 License Plate Sells for Millions at Abu Dhabi Auction

The head of Emirates Auction, Abdulla al Mannaie, poses with the no. 1 license plate that sold for a record $14.3 million. (ABC)

No, it's not made of solid gold -- just ordinary materials, evidently. But it does come with the swagger of being labeled no. "1." And that's evidently worth a record $14.3 million.

Today, a businessman named Said Abdul Ghafour Khouri was willing to pay 52.2 dirham -- the equivalent of $14.3 million -- for the local license plate labeled "1" at an auction at the 7-star Emirates Palace Hotel here, making it the world's most expensive license plate.

The previous record was held by Abu Dhabi plate number 5, bought at auction for $6.8 million by stock broker Talal Khouri last year.

The oil-rich cities of the Persian Gulf are driven by car culture, with relatively few pedestrian areas or public transport options. Vanity plates are a matter of personal pride and indulgence.

The value of a plate depends on a a mix of math and emotional appeal. Normal license plates have 5 randomized numbers. From there, they get more expensive. Prices go up for fewer digits and cooler numbers. Number one is considered the most prestigious.

"From 1 to 10, these are the most expensive numbers," said Abdulla al Mannaie, managing director of Emirates Auctions. "Ten to 99 are the second category. On the other side, you look to numbers which is like 11, 22, 23 they are expensive because it carry [repeating digits].

"We are trying to link between car models and number plate, like a Ferrari 599 and the plate 599, as well as date of birth or anniversary," said al Mannaie. "They are looking to the number plate as if it is their identity, their personal identity."

Plates "5" and "7" sold for nearly 10 times the value of the luxury cars they adorn.

"Our job at Emirates Auction is to make an expensive car without a prestigious license plate worth nothing," al Mannaie told ABC News. "Owners will change their car, but they will keep using the same plate for life."

He has had the number "383" for more than 30 years. He has since bought a cell phone number to match.

Al Mannaie said vanity plates are good business -- an investment with more than a 20 percent annual return. Meanwhile, they're a status symbol on wheels.

"The value of the plate will increase while the value of the car will decrease," al Mannaie said. "So overall there will be zero percent depreciation."

Gulf Arab countries like the United Arab Emirates, home to Abu Dhabi, are swimming in cash after windfall profits from high oil prices. At this rate, the Gulf region will pull in $6.2 trillion in oil money before the year 2020, management consulting firm McKinsey & Company estimates.

The auctions take place monthly, organized by Al Mannaie's company on behalf of the Abu Dhabi Police Department. The past five auctions raised $56 million across 393 plates, with all proceeds going to charity. Money from today's record sell will go to victims of road accidents.

Maryam Shahabi contributed to this article.

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Dollar Has Biggest Weekly Loss in 2008 on Signs Growth Slowing

Feb. 16 (Bloomberg) -- The dollar had its biggest weekly loss this year against the euro after Federal Reserve Chairman Ben S. Bernanke signaled he may cut interest rates further amid mounting concern that the economy is headed for a recession.

The U.S. currency fell yesterday to the lowest level in more than a week against the euro after reports showed U.S. consumer confidence tumbled this month and New York manufacturing contracted. The Swedish krona gained against 15 of the 16 most- active currencies this week after the central bank unexpectedly raised interest rates.

``The market is reacting to bad data from the U.S. and pessimism'' from policy makers, said Geoffrey Yu, a currency strategist in Zurich at UBS AG. ``The dollar will struggle.''

The U.S. currency fell 1.2 percent this week to $1.4686 per euro, from $1.4504 on Feb. 8. It touched $1.4709 yesterday, the weakest level since Feb. 5. The euro gained 1.6 percent to 158.25 yen, from 155.71 a week earlier, its biggest gain since September.

The yen fell 0.5 percent this week to 107.82 per dollar. Japan's currency dropped this week as gains in stocks encouraged investors to buy higher-yielding assets funded by cheap loans in Japan. The Bank of Japan kept its main borrowing costs at 0.5 percent yesterday, the lowest among developed nations. The Standard & Poor's 500 Index rose 1.4 percent this week.

Bernanke's Testimony

The dollar fell about 0.5 percent against the euro on Feb. 14, the week's biggest decline, when Bernanke told the Senate Banking Committee the Fed ``will act in a timely manner as needed to support growth.'' The Reuters/University of Michigan index of consumer sentiment dropped to 69.6 in February, the lowest since 1992, from January's 78.4, the group said yesterday.

The Fed has slashed its target for overnight lending between banks by 2.25 percentage points since September to 3 percent as the housing slump deepened. Building permits probably fell to a 1.045 million annual rate last month, from 1.068 million in December, according to the median forecast in a Bloomberg survey. The Commerce Department is scheduled to release the data on Feb. 20.

Futures on the Chicago Board of Trade show a 68 percent chance the central bank will lower its target by 0.5 percentage point to 2.5 percent at its next scheduled meeting on March 18. The remaining bets are for a 0.75 percentage point reduction.

`More Cuts'

``There are more cuts down the road'' from the Fed, said Diane Hirschberg, a vice president of foreign exchange at Bank of Montreal, in New York. ``It is a weaker dollar scenario.''

The dollar has lost 5 percent against the euro since Sept. 18, when the Fed lowered its benchmark for the first time since 2003. Two-year U.S. Treasury notes yielded 119 basis points less than similar-maturity German government debt yesterday, compared with a difference of 117 basis points a week ago.

``Lower interest rates are hurting the dollar,'' said Axel Merk, who helps manage $285 million assets at Merk Hard Currency Fund in Palo Alto, California. ``Why put the money in the U.S. where all kinds of negative economic news are coming?''

Sweden's krona gained a third straight week against the euro, its longest rally since October, after the Swedish central bank unexpectedly lifted its main rate a quarter-point to 4.25 percent on Feb. 13 to curb inflation. All 24 economists surveyed by Bloomberg News had expected lending rates to be left unchanged.

The krona touched 9.2972 per euro yesterday, the strongest since November.

To contact the reporter on this story: Ye Xie in New York at ; Lukanyo Mnyanda in London at

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What $1 Million Buys In Homes Across The U.S.

Shopping for a seven-figure spread? You're in luck.

That's because nationwide, homeowners are slashing asking prices, often by significant margins, making this year's list of million-dollar properties much more palatable than those in years past. These homes are still beyond the means of the average American, but there's some comfort in a million-dollar home looking like a million-dollar home rather than a hastily built McMansion or a shoebox-sized studio apartment.

In Los Angeles, $1 million buys a four-bedroom, Craftsman-style Hollywood home with wood-beamed ceilings typical of turn-of-the-century California architecture. In Texas, seven figures nets a 5,522-square-foot, five-bedroom house in Dallas, or a 5,520-square-foot, six-bedroom home in Houston.

Photo Gallery: What $1 Million Buys In Homes Across The U.S.

In the Big Apple, $1 million buys much less.

Assuming you meet the approval of the co-op board, "for a million bucks you get a sweet one-bedroom apartment, or a humble two-bedroom apartment," says Harry DiOrio, a broker with Prudential Douglas Elliman in New York.

If "you're forced into the higher-priced world of condos, you can forget about the two-bedroom on a million-dollar budget, unless, of course, you're willing to cross the river into Brooklyn or Queens or head north into Harlem."

Stick to Manhattan, and your bucks will bag you a 611-square-foot one-bedroom apartment, close to the East River with views of the city, the bridges, Brooklyn and Queens, and access to a pool, garden and spa--but almost a mile from the nearest subway stop.

Luxury List studied the 15 largest U.S. metro areas and developed a list of real estate's most basic luxury unit, the million-dollar home. We included properties from New York to Seattle, and home styles ranging from city townhouses to suburban Victorians.

In places hit hardest by the subprime crisis, buying a million-dollar property might seem a silly notion. But there exists a market for such homes.

Those looking in the Detroit metro might head to Pleasant Ridge, an affluent community with around 2,000 residents just outside the city. Here, one can buy a fetching Tudor-style home of ivy-covered brick, with 4,000 square feet of space, for $1 million.

In spots largely unaffected by problematic lending or other economic conditions, such as California's Bay Area, a million dollars doesn't seem wildly excessive: The median home price in San Francisco is $846,800; it's $852,500 in San Jose.

These prices are the result of concentrated wealth in the local economy, high regulatory and business costs for builders that are passed along to buyers, and a very small, confined geographic space that allows for little new development.

"A million dollars won't get you very much," says Courtney Charney, a broker with Alain Pinel Realtors in Atherton, Calif. If you go for an area with good schools, she says, "You're probably only getting a thousand square feet."

What does $1 million buy in your community? Weigh in. Add your thoughts in the Reader Comments section below.

In San Francisco proper, prospects are a bit more grim, as a million bucks won't buy a house without shared walls. That's right--even in cheaper areas, like the Sunset, houses are so tightly packed that they bump up against one another.

Still, there are suburbs, like Burlingame, Calif., between San Francisco and San Jose, where $1 million translates into a modest 1,650-square-foot house with three bedrooms and a good-sized yard.

But if you move into a desirable suburb, a million will only land a "second-tier location," says Charney.

Best Bets
Prime California markets have always been off-kilter, but in cities such as Minneapolis and Boston, $1 million buys a good-sized house in a desirable neighborhood. In the Fremont section of Seattle, residents have views of the city skyline as well as Mount Ranier. Here, seven figures buys a three-bedroom, two-bath home on a terraced ridge, with large windows to take advantage of the sunlight and bird's-eye view.

No plans to settle in Seattle? Take comfort in this: While home sales nationwide are at a historic low, those at or above the $1 million mark can be yours for less.

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In Kosovo, It's 'Independence Eve'

Kosovo Risks Russia's Wrath As It Prepares for Historic Declaration of Independence

Ethnic Albanians walk on a bridge lined with Albanian flags, outside the village of Kacanik, in the south of the province of Kosovo, Serbia, Saturday, Feb. 16, 2008. Earlier Saturday, a day before the province is expected to declare independence, EU nations gave final approval to dispatch a 1,800-member policing and administration mission to Kosovo. (AP Photo/Dimitri Messinis)

Tiny Kosovo poor, mostly Muslim but feverishly pro-Western braced itself Saturday for a historic declaration of independence from Serbia, a decade after a war that killed 10,000 people and years of limbo under U.N. rule.

The province's bold bid for statehood, expected Sunday, and its quest for international recognition set up an ominous showdown with Serbia and Russia. Moscow contends the move will set a dangerous precedent for secessionist groups worldwide.

Revelers took to the streets in giddy anticipation. Prime Minister Hashim Thaci a former leader of the guerrilla Kosovo Liberation Army marked the eve of the new nation's birth by visiting a village where Serbian troops massacred ethnic Albanians in 1998.

"Tomorrow is a historic day in our effort to create a state," Thaci said in Prekaze, about 25 miles southeast of the capital, Pristina.

Thaci, a former leader of the now-disbanded Kosovo Liberation Army, was expected to call a special session of parliament Sunday afternoon to declare an independent Republic of Kosovo and unveil a new flag and national crest.

In a televised address later Saturday, Thaci said "everything is a done deal."

"We are getting our independence," he said. "The world's map is changing."

In the provincial capital Pristina, the icing was on celebratory cakes and bottles of "Independence" wine chilled as the new reality sank in.

"Independence is a dream for all the people of Kosovo, and I am very happy, like everybody," said Lumturije Bytyqi, 20.

But Kosovo's small Serb population greeted the secession as though it were an amputation. Many vowed never to accept the loss of a region they consider the heart of their ancestral homeland.

"I'm asking all the Serbs to reject the monster state of Kosovo, and to do everything to prevent its birth," said Marko Jaksic, a Kosovo Serb hard-line leader.

The dancing and drum-beating that pulsed through Pristina awash in red and black Albanian flags with the distinctive double-headed eagle contrasted sharply with the gloom gripping the ethnically divided northern town of Kosovska Mitrovica, a Serb stronghold and a flashpoint for violence.

Although it is formally part of Serbia, Kosovo has been administered by the U.N. since 1999, when NATO airstrikes ended the late Yugoslav leader Slobodan Milosevic's brutal crackdown on ethnic Albanian separatists.

Ninety percent of Kosovo's 2 million people are ethnic Albanian most moderate or non-practicing Muslims, the rest Roman Catholics and they see no reason to stay joined to the rest of Christian Orthodox Serbia.

With Russia, a staunch Serbian ally, determined to block the bid, Kosovo looked to the U.S. and key European powers for swift recognition as the continent's newest nation. That recognition was likely to come Monday at a meeting of EU foreign ministers in Brussels, Belgium.

The EU gave its final go-ahead Saturday to send an 1,800-member mission to replace the current U.N. administration. The mission is designed to help build a police, justice and customs system for Kosovo.

Thaci announced the creation of a new Cabinet ministry to focus on minority rights.

But the imminent independence of the territory, roughly the size of Connecticut, threatened to touch off a diplomatic crisis and possible unrest.

Russian President Vladimir Putin, arguing that independence without U.N. approval would set a dangerous precedent for "frozen conflicts" across the former Soviet Union and around the world, pressured the Security Council to intervene.

In the Serbian capital Belgrade, about 1,000 protesters waved Serbian flags and chanted "Kosovo is the heart of Serbia." Officials ruled out any military response, but warned that Serbia would downgrade relations with any foreign government that recognizes Kosovo's independence.

NATO, which still has 16,000 peacekeepers in Kosovo, boosted patrols in the tense north and in scattered isolated enclaves where most of the Serbs live in hopes of easing the chances of violence, and international police deployed Saturday to back up local forces.

Some Serbs have suffered reprisal attacks carried out by ethnic Albanians seeking to avenge the bloodshed of the 1998-99 war. There were concerns that edgy Serbs might pack up and leave, but the head of the influential Serbian Orthodox Church appealed to them Saturday to "stay in their homes and guard this holy Serbian land."

Many ethnic Albanian Kosovars, their long-awaited nationhood almost upon them, expressed disbelief that it would actually happen. For others, the joy was tempered by the what lies ahead: Building a multiethnic society and lifting themselves out of poverty and 50 percent unemployment.

But new posters implored people ethnic Albanians, at least to relax and enjoy the moment.

"Celebrate with dignity," read the posters, illustrated with bright red hearts.

Associated Press writers Dusan Stojanovic in Kosovska Mitrovica, Nebi Qena in Pristina and Slobodan Lekic in Belgrade contributed to this report.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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Regulators now spooked by ghost stories

BEIJING (Reuters) - China has added ghosts, monsters and other things that go bump in the night to its list of banned video and audio content in an intensified crackdown ahead of the Beijing Olympics.

Producers have around three weeks to look through their tapes for "horror" and report it to authorities, the General Administration of Press and Publications said in a statement posted on the government Web site.

Offending content included "wronged spirits and violent ghosts, monsters, demons, and other inhuman portrayals, strange and supernatural storytelling for the sole purpose of seeking terror and horror," the administration said.

The new guidelines aim to "control and cleanse the negative effect these items have on society, and to prevent horror, violent, cruel publications from entering the market through official channels and to protect adolescents' psychological health."

The regulations suggest China, where graphic, pirated sex and horror movies are available on most street corners, is keen to step up its control of the cultural arena ahead of the Beijing Olympics in August, which are widely seen as a coming-out party for the rising political and economic power.

They come just weeks after Beijing clamped down on "vulgar" video and audio content, slapped restrictions on Internet sites and handed down a two-year film-making ban to the team behind the steamy "Lost in Beijing."

(Reporting by Beijing Newsroom; Editing by Nick Macfie and Alex Richardson)

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Insight: The next crisis will be over food

used to think that the fastest way to become worried about markets was to stare into the bowels of a monoline. No longer. A few days ago, I happened to hear Goldman Sachs discuss the state of the global financial system with European clients.

And what struck me most forcefully from this analysis – aside from the usual, horrific litany of bank woes – was just how much trouble is quietly brewing in corners of the commodities world.

Never mind that oil prices are high; that problem is already well known and gallons of ink have been spilt debating that, along with the pressures in metals and mineral spheres.

Instead, what is really catching the attention of Goldman Sachs now is the outlook for agricultural prices. Or as Jeff Currie, head of commodities research at the US bank, says with disarming cheer: “We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.”

Now, to some readers of the Financial Times, that observation might seem odd. After all, inhabitants of the western world typically spend far more time worrying about the price of petrol for their car, rather than the price of wheat or corn. And when western investors do think about “commodity shock”, their reference point typically tends to be the 1970s oil crisis.

However, as Mr Currie observes, this is a dangerously blinkered view. Back in the 1970s, famine touched a much bigger proportion of the world’s population than the energy crisis, he says. And even today, rising food prices pack a powerful political punch in the developing (or partly-developed) world, to a degree that is sometimes underappreciated by the pampered west.

Indeed, there is already ample evidence that political tensions are building: the World Food Programme, for example, now thinks a third of the world’s population lives in countries with food price controls or export bans.

However, Goldman Sachs thinks this is just part of a much bigger problem of capital and resource misallocation. After all, Mr Currie argues, if the world today was a rational economic place, then regions such as the Gulf which are food-constrained ought to be investing heavily in agriculture. And since the US is the world’s biggest agricultural supplier, this implies that the Saudi Arabians, say, should be snapping up farms in Wisconsin – as America secures oil in the most efficient manner by sending teams of Texans to Riyadh.

But in practice numerous investment controls prevent Saudi Arabians from buying Wisconsin farms and Americans owning Saudi oil wells. And these controls are not being dismantled now. On the contrary, mutual mistrust is now rising. Hence the fact that Gulf leaders are currently considering desalinating sea water to plant wheat in the desert – while the US and Europe are trying to turn corn into fuel.

Such exercises might make sense in domestic political terms; but they are apt to be fiendishly expensive. Thus the upshot of this misallocation, Mr Currie would argue, is even more inflation – even if the world does experience some form of growth slowdown.

Now, for any investor who is long on commodities right now (and I would guess that club includes Goldman Sachs), such trends might seem to smack of good news. For anybody who is dirt poor in the developing world, however, the picture is disastrous.

A WFP official, for example, recently showed me the red plastic cup that is used to dole out daily rations to starving Africans – and then explained, in graphically moving terms, that this vessel is typically now only being filled by two-thirds each day, because food prices are rising faster than the WFP budget.

But leaving aside this very real human tragedy, what should also be crystal clear for investors is that this is not a picture that points to 21st-century capital markets progress; nor is it likely to breed stability in the medium term. Anyone who thinks this decade’s problems start and end with credit, in other words, may yet receive a rude shock; sadly, we live in a world where soyabeans may yet pack as painful a punch as subprime.

Daredevil Steve Fossett, whose millions helped him break aviation barriers, declared dead

Millionaire adventurer Steve Fossett, who risked his life seeking to set records in high-tech balloons, gliders and jets, has been declared dead, five months after he vanished while flying in a small plane.

The self-made business tycoon, who in 2002 became the first person to circle the world solo in a balloon, was last seen Sept. 3 after taking off in a single-engine plane from an airstrip near Yerington, Nevada, heading toward Bishop, California. He was 63.

His wife, Peggy V. Fossett, had him declared legally dead in Cook County Circuit Court as a step toward resolving the legal status of his estate. Judge Jeffrey Malak heard testimony Friday from Peggy Fossett, a family friend and a search-and-rescue expert before deciding there was sufficient evidence to declare him dead.

While flight records brought him his greatest fame, Fossett, who was paunchy for most of his life, also climbed some of the world's best-known peaks, including the Matterhorn in Switzerland and Mount Kilimanjaro in Tanzania. (Everest did elude him.) With top notch endurance and concentration, he swam the English Channel and completed the Boston Marathon, the Ironman Triathlon, the Iditarod dog sled race, and, as part of a team, the 24 Hours of Le Mans car race.

"Steve's lived his life to the full, and he hasn't wasted a minute of his life," Fossett's rival-turned-comrade, British billionaire Sir Richard Branson, had said as the search went on. "Everything he's done, he's taken a calculated risk with."

But Fossett was on a pleasure flight when he vanished and not looking for a dry lake bed to use as a surface on which to set the world land speed record, as was initially reported, according to his wife's petition.

Dozens of planes and helicopters spent more than a month searching the rugged western Nevada mountains before the effort was called off as winter approached.

The search area covered 20,000 square miles (52,000 square kilometers), and according to the Reno Gazette-Journal, about 15 to 20 private planes have vanished in the area since 1950. In 2005, wreckage was found in Kings Canyon National Park from a plane that went down during World War II.

A Stanford University graduate with a master's degree from Washington University in St. Louis, Fossett went to Chicago to work in investments and founded his own firm, Marathon Securities. The fortune he amassed allowed him to take his childhood fascination with exploration to extremes _ he once said he drew up a list of feats he wanted to accomplish and started checking them off.

"Business is much easier for me," he told The Washington Post in a 1987 interview. "Sports is often very humiliating, because there are so many better athletes in these events. I would like to be the best in everything, but that's not possible. I risk humiliation because I have a genuine interest in participating."

In 2004, Fossett and his crew broke the round-the-world sailing record by six days. He even set world records for cross-country skis, according to his Web site.

But he was best known for his aerial exploits, first in ballooning, more recently in airplanes.

Beginning in the 1980s, teams led by Fossett, Branson and others used steadily improving technology to try to best each other and their predecessors in a series of ever-longer balloon flights. In January 1997 alone, there were three failed attempts, including a solo attempt by Fossett and a try by a crew led by Branson, the flashy founder of Virgin Atlantic Airways.

In 2002, after years of trying, Fossett became the first person to fly nonstop around the world alone in a balloon, setting the record on his sixth attempt. It took him two weeks to float 19,428.6 miles (31,266 kilometers) around the Southern Hemisphere.

Three years later, in March 2005, he was first to fly a plane solo around the world without stopping or refueling, covering 23,000 miles (37,000 kilometers) in 67 hours in the Virgin Atlantic GlobalFlyer jet.

Solo flights represent the ultimate challenge, he told The Associated Press when the GlobalFlyer was introduced in 2004.

"They become more of an endurance endeavor, and become focused on the ability and the performance of a single person," he said.

Fossett made nearly as many headlines for his narrow escapes as he did for his successes. In 1998, during one of his solo around-the-world attempts, his balloon ripped during a storm, sending him plunging 29,000 feet (8,800 meters) into the Coral Sea. Falling at about 2,500 feet (760 meters) per minute, Fossett blacked out.

He said his next memory was "waking up with the capsule upside down, half full of water and on fire."

He was fished out by the crew of a schooner and was still on the ship when Branson called to invite him on another round-the-world attempt later that year, this time as part of a team. It ended in another dramatic rescue.

Branson, Fossett and Swedish balloonist Per Lindstrand made it more than halfway before poor wind conditions forced them to ditch in the shark-infested waters off Honolulu on Christmas Day 1998. The U.S. Coast Guard spent about $130,000 sending planes, helicopters and a boat to rescue the trio.

Fossett pressed on because of his thirst for accomplishments, and for all his close calls, those who knew him well said he wasn't reckless. Fossett once said the most dangerous thing he ever did was fall off his bicycle in Chicago without a helmet on.

"I'm doing these things for personal accomplishment, not the thrills," he told Stanford's alumni magazine in 1997, after his second around-the-world balloon attempt ended in India. "I don't do these things because I have a death wish."

Many of Fossett's recent adventures were financed with help from Branson, who is now teaming with renowned aerospace designer Burt Rutan to begin sending paying civilians into space within a few years.

As high as he flew, Fossett had no desire to take a ride into space.

"I really wouldn't want to go unless I get to be the pilot," Fossett told the AP in 2007. "I'm not a passenger type of person."

Born in Jackson, Tennessee, in 1944, Fossett grew up in Garden Grove, California, and climbed his first mountain as a 12-year-old Boy Scout and got his pilot's license in college.

On a fraternity dare in 1965, his final year at Stanford, he swam to Alcatraz and tried to hang a "Beat Cal" banner _ referring to a rival college _ on the wall of the island prison, which had closed two years earlier.

"I got it up there, briefly," he told the alumni magazine. "Then a security guard pushed me offshore. Luckily, my frat brothers were following behind me in a fishing boat with a keg of beer."

Fossett was inducted into the National Aviation Hall of Fame in July. He told a crowd gathered at the Dayton Convention Center in Ohio that he would continue flying and planned to go to Argentina later in the year in an effort to break a glider record.

"I imagine that when I'm 80 years old and sitting in a wheelchair that I might do something like take a remote control airplane and try and flight it around the world," he told CNN last year. "I plan to be setting and breaking records indefinitely."


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