Tuesday, December 30, 2008

Euro currency turns 10; seen fulfilling promise

By MATT MOORE and GEORGE FREY, AP Business Writers

FRANKFURT, Germany – Ten years ago, Europe launched its grand experiment with a shared currency — and watched it plunge in value before recovering.

But as the anniversary approaches of the Jan. 1, 1999, arrival of the euro, economists say the new currency is finally fulfilling its promise as a way to lower borrowing costs, ease trade and tourism, boost growth and strengthen the European community.

And doing it amid a global financial crisis that, for the moment, underlines the safety in numbers that comes from joining one, big currency.

"After 10 years it has truly created a zone of security and stability," French Finance Minister Christine Lagarde said in mid-December. "From all these points of view, the euro has in fact proven wrong the forecasts some made against the euro 10 years ago."

When it was launched for non-cash purposes in 1999, just 11 countries were on board — Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Notes and coins were added on Jan. 1, 2002, and the original 11 have been joined by Cyprus, Greece, Malta and Slovenia, with Slovakia slated to join on Jan. 1, bringing the total to 16. Now, some people in longtime holdouts such as Sweden and even strongly euro-skeptic Britain are beginning to reconsider the question.

Smaller countries have seen their currencies collapse in value and been forced to ask the International Monetary Fund for bailouts.

Otmar Issing, a former board member of the European Central Bank, said the euro's appeal has been its ability to provide a sense of stability and shelter from the storm of global crises. The bank, created specifically to oversee the euro, has taken a strong anti-inflationary stance that mirrors that of its chief predecessor, Germany's Bundesbank central bank.

"The euro is a stable currency, inflation expectations were under control right from the start," Issing told The Associated Press.

"Not surprisingly, quite a few observers — with probably the majority of economists to the fore — were more than skeptical as to the outcome of this experiment," he said.

The chief complaints from governments during the euro's first 10 years have arisen from the bank's one-size-fits-all interest rate policy — which can't give rate cuts to individual countries if their economy dips while others rise. But the credit crisis has swept over the global economy due to heavy bank losses on securities backed by U.S. mortgages to people with shaky credit has hit everyone at pretty much same time.

That has helped people forget the euro's early plunge, from around $1.18 at launch to only 82 cents by October 2000. The European Central Bank and the Federal Reserve had to intervene in currency markets to prop it up.

Howard Archer, an economist with IHS Global Insight in London, said "Obviously in the early days, the euro was weaker and there was some worry about its values."

But since then, the euro has soared in strength and value, rising to as high as US$1.6038 against the dollar this year. It's down to around $1.40, but has risen strongly against the British pound.

Randall Filer, a visiting professor of economics at Charles University in Prague and Hunter College in New York, said the requirement to cut government debt before joining gave political leaders the backbone to make economic reforms but place the blame on EU requirements.

"It has enabled governments to embark on the labor market and fiscal reforms that were absolutely necessary," said Filer. "The euro became "a convenient scapegoat" that enabled reforms that were needed but Europe "did not have the political will to do."

The euro spread the ECB's tough anti-inflationary stance to countries that didn't previously have it, said Bocconi economist Franco Bruni at Italy's Bocconi University. "It gave us a monetary policy that we wouldn't have been capable of doing." Bruni said, adding that when Italy had the lira, the country had a greater tendency toward inflation and interests rates were higher.

"We entered in the euro area, we had integrated finances with other foreign countries, which made it easier to invest abroad," he said. "Italian banks can operate on a wider scale, and we could buy shares abroad more easily."

Some 15 million new jobs in the last six years have been created by making trade and travel easier through a single market. That has also invited more foreign investment, too. With the inclusion of Slovakia, the euro will be used by about 330 million people with a gross domestic product of more than euro4 trillion ($5.5 trillion).

Euro countries now enjoy a bigger and more efficient bond market with less risk of currency devaluations and inflation.

Newer EU members such as Poland, the Czech Republic and the Baltic countries Latvia, Lithuania and Estonia are in the process of meeting the conditions of joining the euro zone, but the crisis has put their hopes off for now.

Pro-euro sentiment has risen in euro holdout Sweden, whose weaker krona has helped supporters in their arguments, said economist Lars Calmfors.

He also said EU-leaders' swift response in agreeing to pour billions of new capital and loan guarantees in their financial systems boosted confidence in the euro. "It demonstrates that if you stay outside, you are not present at the table when the decisions are taken," he said.

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Gas prices: Five-year low and falling

New York (CNNMoney.com) -- Gas prices fell for the ninth consecutive day, according to a survey of credit card swipes at service stations across the nation released on Sunday.

The national average price dropped for its ninth consecutive day to $1.627 a gallon, down 0.3 cents from the previous day, according to the motorist group AAA.

The national average last hit close to the current price on February 5, 2004, when it averaged at $1.627.

Prices are down 60% from the record high of $4.114 a gallon touched on July 17.

Gas is below $2 in all 48 contiguous sates and the District of Columbia, according to AAA. The highest average gas price was in Alaska ($2.52), while the cheapest was found in Missouri ($1.44).

The AAA figures, compiled by Oil Price Information Services, are state-wide averages based on credit card swipes at up to 100,000 service stations across the nation.

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Student loans turn into crushing burden for unwary borrowers

Kathy M. Kristof
Heavy debt
Michael Robinson Chavez / Los Angeles Times
HEAVY DEBT: Natalie Hickey, who graduated from Brooks Institute in Santa Barbara, picked up $140,000 in student loans, some of it at rates as high as 18%. Monthly payments of $1,700 are more than her rent and car payment combined.

One in a series of occasional stories

Natalie Hickey left her small hometown in Ohio six years ago and aimed her beat-up Dodge Intrepid for the West Coast. Four years later, she realized a long-held dream and graduated with a bachelor's degree in photography from Brooks Institute in Santa Barbara.
She also picked up $140,000 in student debt, some of it at interest rates as high as 18%. Her monthly payments are roughly $1,700, more than her rent and car payment combined.

"I don't have all this debt because I was buying stuff," said Hickey, who now lives in Texas. "I was just trying to pay tuition, living on ramen noodles and doing everything as cheaply as I could."

Hickey got caught in an increasingly common trap in the nation's $85-billion student loan market. She borrowed heavily, presuming that all her debt was part of the federal student loan program.

But most of the money she borrowed was actually in private loans, the fastest-growing segment of the student loan market. Private loans have no relation to the federal loan program, with one exception: In many cases, they are offered by the same for-profit companies that provide federally funded student loans.

As a result, some students who think they are getting a federal loan find out later that they hold a private loan. The difference can be costly.

Whereas federally guaranteed loans have fixed interest rates, currently either 6% or 6.8%, private loans are more like credit card debt. Interest rates aren't fixed and often run 15% or more, not counting fees.

Most students have little experience in taking out loans, yet the federal government doesn't require lenders to disclose the total cost of a student loan and other terms upfront -- before signing -- as it does for car loans and mortgages.

"Students are in the cross hairs, being bombarded by very sophisticated and, to some extent, ethically marginal lenders," said Rep. George Miller (D-Martinez), who sponsored legislation passed this year that will require lenders to provide more disclosures on fees. "My fear is that we are developing a predatory market, just like we have had in mortgages."

About $15 billion in private student loans are expected to be funded this year, a 900% increase from a decade ago, according to the nonprofit College Board. Private loans are growing faster than federally guaranteed loans, which rose 59% over the same period, in part because of limits on how much students can borrow with the government's backing.

Four years at a public university, including room and board, costs an average of $57,332, according to the College Board. The average tab for a private university is $136,528. Yet the maximum that can be borrowed under the federal loan program is $31,000.

High-cost private loans fill that gap. One result is that students now average nearly $20,000 in debt by the time they graduate, twice as much as a decade ago.

"There is an alignment of interests that lead students to take out larger and larger amounts of debt," said Luke Swarthout, a former higher education advocate at the U.S. Public Interest Research Group in Washington.

"The students think it's an investment in their future, and the colleges are willing to let them borrow heavily because it helps them fill in their enrollment."

In the dark

Hickey knew she would need loans to complete her degree, so she went to the campus financial aid office as a freshman. After she filled out paperwork, Brooks Institute set her up in a loan program administered by Sallie Mae, the nation's biggest student lender.

Sallie Mae was chartered by the federal government in 1972, and most of its business is in issuing federally insured student loans. But while it may appear to be a quasi-government agency, it is in fact a for-profit company whose stock trades on the New York Stock Exchange.

Hickey ended up with $20,000 in low-interest federally guaranteed loans issued by Sallie Mae, and $120,000 in higher-interest private loans issued by Sallie Mae.

Hickey said no one explained the difference to her.

"The financial aid officer just said that my federal loans weren't enough to pay the tuition, but that was OK because they had these great alternative loans," Hickey said. "They made it sound so good that I didn't ask that many questions."

Tim Halsey, vice president of finance for Brooks Institute, declined to discuss Hickey's case directly, citing federal privacy laws. But he said the school's financial aid officers take great pains to explain the differences between loans and to guide students to the best deals.

"It is really to our advantage to get the loans and interest rates as low as possible," Halsey said.

"My motivation is to get that person to come to the school, if that's what they want to do. If I can get those costs as low as possible, it benefits us both."

Spotty disclosure

But some lenders market directly to students, and consumer advocates say they often fail to clearly detail loan costs and may even seek to present themselves as part of a school's financial aid office.

For a glimpse into how lenders operate, The Times filled out online loan applications with JPMorgan Chase & Co., Sallie Mae and MyRichUncle. An 18-year-old student who began college this fall agreed to provide personal information, including her Social Security number, so that lenders would provide detailed loan terms.

JPMorgan Chase, the giant New York bank, did not disclose its interest rates or fees in the online application.

Sallie Mae, which is based in Reston, Va., disclosed an interest rate and fee, but an attached disclaimer in capital letters said the numbers were preliminary "and may change."

The third, MyRichUncle, a New York-based student loan firm formed in 2005, disclosed a variable rate that starts at 9.6% and said there would be an unspecified origination fee.

The loan companies provided a bit more information over the phone. A MyRichUncle representative said its origination fee would be 2%. A Chase agent said the variable rate would start at 7.5% with no origination fee, and Sallie Mae said its variable rate would be 8%, also with no fee.

After initially resisting, agents for Sallie Mae and Chase both agreed to provide summaries of the loan costs in writing. But the one-page letters they mailed did not include the total cost of the loan over time.

The Times then called all three lenders to discuss their practices. MyRichUncle co-founder Raza Khan said that the failure to state the amount of the origination fee in the online application was a mistake and that the information was now included.

Sallie Mae spokeswoman Martha Holler maintained that the company's disclosures were adequate.

JPMorgan Chase spokeswoman Mary Kay Bean said the loan terms would be sent after the loan had been approved, pointing out that the company was not required to do so beforehand.

"We send borrowers a letter with the rate," Bean said. "We comply with the law. That's it."

Lenders in disguise

When Shianily Torres took out $38,000 in student loans at Florida's International Academy of Design and Technology, she thought she was dealing with the college financial aid office.

She now thinks it may actually have been a representative of Sallie Mae -- in part because that was the only company that offered her a loan.

"My father asked if there was somewhere else we could get the loan and they said no. The school didn't accept money from just any bank," Torres said.
Torres said she didn't learn the rate on her loan until after graduation, when she got the bill. The variable rate rose as high as 18.5%, which requires a monthly payment of $650 -- more than twice what she makes in her part-time job.

She said that she couldn't make the payments, and that Sallie Mae had not responded to her efforts to renegotiate terms.
An investigation last year by New York Atty. Gen. Andrew Cuomo found an "unholy alliance" between lenders and hundreds of schools across the country.

Charging more than a dozen lenders with wrongdoing, Cuomo cited a pattern of bribes to financial aid officers making decisions about which lenders would appear on school-preferred lender lists and "revenue-sharing" kickbacks -- in cash or products -- to schools that led their students to specific companies.

Hundreds of colleges agreed to abide by new ethics rules and not to accept gifts, and half a dozen even refunded money to students. The U.S. Department of Education tightened its guidelines to discourage quid pro quo arrangements.

More than a dozen student lenders, including Sallie Mae, Bank of America, Citibank and JPMorganChase, paid a combined $13.7 million to settle Cuomo's charges, without admitting or denying the allegations.

Private litigation continues, however. Torres is one of dozens of students who are suing Sallie Mae, alleging deception and discriminatory practices that left low-income and minority students saddled with the highest-cost loans.

Andrew Meyer, the Tampa, Fla., attorney handling the case, said his law firm gained insight into Sallie Mae's practices from people who formerly worked there as loan officers.

A key strategy was to make students believe the loan officers worked directly for the college, he said. Meyer said Sallie Mae purposely sent disclosure forms a month or more after classes had begun so that students would be less likely to protest onerous terms.

Sallie Mae's Holler said she could not comment on litigation, but she defended the company's lending practices.

"It's risk-based pricing," she said. "Students can take advantage of an interest rate decline, like we've seen in the past several months, but the loan rates also have the potential to rise when there is a rising rate environment."

Direct marketing

In addition to working with schools, lenders try to reach students directly. Although some companies have failed in the credit crunch, dozens remain in business, sending e-mails to students and advertising on sites such as YouTube.

Loan-shopping websites also lure young people into private loans, said Nancy Coolidge, a financial aid executive with the UC Board of Regents.

She noted that one site -- TuitionBids.com -- encouraged students to seek federal loans first but also had a "let the bidding begin" button that directed users to an application for a private loan.

"The way the site is set up encourages misunderstanding," Coolidge said. "They do what we ask by saying that private loans should be a last resort, but then ask, 'Are you interested?' When the kid clicks yes, they're catapulted to a private loan."

Keith Alliotts, chief executive of TuitionBids.com, counters that customers are able to choose either a private or a federally guaranteed loan.

"We don't advocate just private loans, we tell borrowers to get federal money first," he said. "But a lot of people need private loans."

But Alliotts acknowledged that TuitionBids.com receives a loan fee when a customer secures a private loan. The website makes nothing when consumers get a federally guaranteed loan.

Federal loan limits

Marja Lopees of Burbank is a few years out of school and makes about $70,000 a year as a lawyer. But she racked up $196,253 in debt and says her student loan payments swallow 40% of her earnings.

Lopees turned to private loans when she hit borrowing limits imposed by the federal student loan program. Now she has $88,303 in private loans that charge an interest rate of 8.84%. The payment on that loan is her second-largest monthly expense, after rent.

"I'm making interest-only payments on one of the loans, and still the payments keep going up," she said. "It's just overwhelming."

When she just makes minimum payments, her debt and rent consume 60% of her after-tax income. That's before she pays for food, clothing, utilities, and gasoline or saves for long-term goals.

"No one tells you to be careful of taking on too much debt when you're in school," she said. "It's just the opposite. They just keep giving you loans and saying, 'Don't worry about it. You're going to be a lawyer. It's no big deal.' "

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For stores, a very un-merry holiday

By Parija B. Kavilanz, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- The 2008 holiday sales season is one of the worst for retailers in decades, as consumers' concerns about the economy and job losses crushed the typical year-end shopping exuberance.

'I don't see any reason for retailers to be rejoicing at all," said Britt Beemer, chairman and founder of America's Research Group.

Among the early sales tallies, new estimates from MasterCard Inc.'s SpendingPulse Data service indicated that total store sales fell about 3% in November and December combined.

That would be significantly worse than the original forecast from the National Retail Federation (NRF), which anticipated a 2.2% gain for the period.

The NRF's projection would still be the weakest holiday sales gain in six years. That is, if it makes it to that level - NRF spokesman Scott Krugman said Friday that "it is going to be very difficult to hit that number."

"It's really three things that hammered retailers," he said. "There were fewer holiday shopping days versus last year. We had bad winter weather in the final week before Christmas."

The third thing that hurt retailers, according to Krugman, was deep discounting. Even though the big sales were designed to boost store traffic and sales, and "minimize the damage," he said that level of discounting will ultimately hurt merchants' bottom line.

The trade group will release its final holiday sales number in mid-January. Beemer of America's Research Group expects a 2.8% sales decline for the season.

The fourth-quarter shopping period is critical for merchants since it can account for as much as 50% of their annual profit and sales.

And since consumer spending also fuels two-thirds of economic activity, any signals of a severe pullback in discretionary buying also doesn't bode well for the overall economy.

"A difficult economic environment combined with unfavorable weather during the last week of shopping made 2008 one of the most challenging holiday shopping seasons in decades," Michael McNamara, vice president of research and analysis for SpendingPulse, said in the report.

SpendingPulse's estimates are based on aggregate sales activity in the MasterCard payments network, combined with estimates for all other payment options, including cash and check.

Based on those numbers, the firm said total clothing purchases in November and December dropped by as much as 21% over last year while purchases of electronics tumbled by 26% over last year.

"Sales above $1,000 have been a consistent drag on this sector throughout the season," McNamara said.

The report said luxury sales showed the largest year-over-year decline, down by more than 34% over last year.

Even online purchases, which had shown year-over-year sales growth since the advent of the Internet in the 1990s, took a hit this year as consumers curtailed their spending in all retail channels.

SpendingPulse numbers showed overall Web-based holiday sales fell 2.3% versus a year ago. Separately, a report last week from sales tracker ComScore said Web-based holiday shopping fell for the first time in seven years.

One retail analyst fears that although the holiday shopping season is winding down, the worst isn't yet over for merchants .

"January [sales] will just collapse," said Richard Hastings, consumer strategist with Global Hunter Securities.

Hastings had forecast a 6% to 8% sales decline for the three months of November through January.

He said January has become an important sales month over the past few years because retailers look to clear leftover merchandise and redeem the gift cards given over the holiday season.

But not this year, according to Hastings. The NRF forecasted a 6% drop in holiday gift card sales as a shaky retail environment, accented by a rising number of bankruptcies, made consumers nervous about whether a merchant would still be around in 2009 to make good on the cards. .

What's more, Hastings said there's no enthusiasm to shop if you really don't need anything.

"The layoffs will continue into 2009. People realize that and it's making them nervous about spending money," he said.

All news is bad news in real estate right now. Have you recently bought a house anyway? Send your story and photos to realstories@cnnmoney.com and you could be featured in an upcoming article.

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Glassdoor.com Lists Naughtiest and Nicest C.E.O.’s of 2008

Glassdoor.com, a site that lets employees anonymously review their employers and share salary information, is out with a list of the naughtiest and nicest chief executives of 2008, based on those reviews.

Arthur Levinson, chief of Genentech. (Credit: Kimberly White/Reuters)

The nicest boss of all was Arthur D. Levinson, chief of Genentech, who got a 93 percent approval rating. He leads the Silicon Valley biotech company with a “decision-making structure that intrinsically forces authority downward to the lowest possible level providing many opportunities to exercise and test one’s judgment,” a strategic planner at Genentech wrote.

Overall, 6 of the top 10 bosses on the “nice” list were from Silicon Valley, including Steve Jobs of Apple, with a 90 percent approval rating; Eric E. Schmidt of Google, with 88 percent; Jen-Hsun Huang of Nvidia, with 80 percent; Shantanu Narayen of Adobe, with 79 percent; and Dan Warmenhoven of NetApp, with 78 percent.

Despite a lousy year for financial firms, two Wall Street bosses made the “nice” list, including Lloyd C. Blankfein of Goldman Sachs, with an 88 percent approval rating, and Kenneth Chenault of American Express, with 80 percent approval. A.G. Lafley of Procter & Gamble and Ian Davis of McKinsey rounded out the top 10.

The worst chief executive of the year was Steve Odland of Office Depot, according to Glassdoor.com’s reviewers. He had an 80 percent disapproval rating. “Fire Odland,” wrote a department manager. “The corporate office in Delray Beach, FL is asleep at the wheel and frankly incompetent. Maybe if some of them would listen to or maybe even spend a few hours in a store they would understand their own business a little better.”

Anthony LaFetra, chief of Rain Bird, an irrigation company, was second-worst, with a 75 percent disapproval rating. “Your employees, both short and long term, are voting with their feet and exiting in a steady stream,” wrote one employee in an open memo to management. “In what delusional alternate universe do you exist where this level of turnover and loss of legacy knowledge is good for any company?”

But tech companies dominated the bad-boss list, taking seven of the remaining spots in the top 10 — hardly a badge of honor for an industry that likes to boast about its great workplace culture.

Randy Falco of AOL received a 68 percent disapproval rating, and Greg Brown of Motorola and Ron Rittenmeyer of EDS (now part of Hewlett-Packard) were close behind. Kevin W. Sharer of Amgen, Lynn R. Blodgett of Affiliated Computer Services, Jonathan Schwartz of Sun Microsystems and John Donahoe, who replaced Meg Whitman this year as the head of eBay, also made the list.

Rounding out the hall of shame was James R. Pouliot of CSAA Inter-Insurance Bureau.

Glassdoor.com went live in June 2008. It was founded and initially financed by Robert Hohman, Tim Besse and Rich Barton, all of whom came from Expedia, which Mr. Barton started. Since then, Benchmark Capital, where Mr. Barton is a venture partner, led a $3 million round of financing and Sutter Hill Ventures led a $6.5 million round.

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GM sues bankrupt supplier for access to parts

By DEBORAH YAO, AP Business Writer

General Motors Corp. is suing a bankrupt automotive supplier for immediate access to specialized parts and equipment, arguing that a delay would hamper the launch of its new Chevrolet Camaro, disrupt assembly operations and cause millions of dollars in damages it can ill afford.

In a filing with the U.S. Bankruptcy Court in Delaware on Christmas Eve, GM accused Cadence Innovation LLC of Troy, Mich. of "holding hostage" the parts and tooling equipment it needs and breaching the terms of an agreement it signed with the automaker in August.

Cadence, which GM once hailed as its 2006 supplier of the year, filed for Chapter 11 bankruptcy in August, which became a liquidation proceeding earlier this month. The automotive supplier makes door panels, airbag covers, consoles and other parts.

GM said it employs "just-in-time" manufacturing where parts are placed into vehicles within hours of delivery. The automaker has on hand parts that can support assembly operations only for several days to a week.

GM wants immediate access to the parts and equipment so it can have a new supplier in place and making parts by Jan. 12 to avoid a major disruption to its assembly operations.

"Even one day's disruption in supply of certain component parts could cause a shutdown of GM assembly operations, disrupting not only GM's business, but the operations of countless suppliers, dealers, customers and other stakeholders," the lawsuit said.

GM said such a shutdown would cost the company millions of dollars in damages daily at each affected plant. The automaker accused Cadence of refusing to adhere to their August agreement and hampering its efforts to take possession of parts and equipment.

Cadence did not immediately return a call for comment on Friday.

Shares of GM rose 41 cents, or nearly 12.6 percent, to close at $3.66 Friday. Late Wednesday the U.S. Federal Reserve granted bank holding status to its financing arm, GMAC Financial Services, which made GMAC eligible for funds earmarked for the government's $700 billion bank rescue plan and saved it from possible bankruptcy. The move came just days after the White House threw GM and fellow Detroit automaker Chrysler LLC a $17.4 billion emergency lifeline.

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California Owns 8 of 10 Worst Real Estate Markets

10 Worst Real Estate Markets for 2009

The housing market hasn't bottomed out yet. For the third quarter, the closely-watched S&P Case-Shiller national home-price index fell 16.6%, and experts are predicting further declines. Of the top 100 markets, here are 10 with the worst forecasts.

1. Los Angeles

2008 median house price:

2009 projected change:

2010 projected change:

The median home price in the L.A.-Long Beach-Glendale metro area is projected to fall nearly 25% in 2009 - the biggest drop in the country.

2. Stockton, Calif.

2008 median house price: $248,050

2009 projected change:

2010 projected change:

3. Riverside, Calif.

2008 median house price:

2009 projected change:

2010 projected change:

4. Miami-Miami Beach

2008 median house price: $293,590

2009 projected change:

2010 projected change:

Miami will be nursing the hangover from its epic building boom for years to come. After falling 22% in 2008, prices are predicted to plunge another 23% next year.

5. Sacramento

2008 median house price:

2009 projected change:

2010 projected change:

6. Santa Ana-Anaheim

2008 median house price: $532,810

2009 projected change:

2010 projected change:

7. Fresno

2008 median house price:

2009 projected change:

2010 projected change:


8. San Diego

2008 median house price: $412,490

2009 projected change:

2010 projected change:

9. Bakersfield, Calif.

2008 median house price:

2009 projected change:

2010 projected change:

10. Washington, D.C.

2008 median house price: $343,160

2009 projected change:

2010 projected change:

Copyright Associated Press

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Cash-strapped states weigh selling roads, parks

By MARTIGA LOHN, Associated Press Writer

ST. PAUL, Minn. – Minnesota is deep in the hole financially, but the state still owns a premier golf resort, a sprawling amateur sports complex, a big airport, a major zoo and land holdings the size of the Central American country of Belize.

Valuables like these are in for a closer look as 44 states cope with deficits.

Like families pawning the silver to get through a tight spot, states such as Minnesota, New York, Massachusetts and Illinois are thinking of selling or leasing toll roads, parks, lotteries and other assets to raise desperately needed cash.

Minnesota Gov. Tim Pawlenty has hinted that his January budget proposal will include proposals to privatize some of what the state owns or does. The Republican is looking for cash to help close a $5.27 billion deficit without raising taxes.

GOP lawmakers are pushing to privatize the Minneapolis-St. Paul International Airport and the state lottery. Both steps require a higher authority — federal legislation in the case of the airport, a voter-approved constitutional amendment for the lottery. But one lawmaker estimated an airport deal could bring in at least $2.5 billion, and the lottery $500 million.

Massachusetts lawmakers are considering putting the Massachusetts Turnpike in private hands. That could bring in upfront money to help with a $1.4 billion deficit, while also saving on highway operating costs.

In New York, Democratic Gov. David Paterson appointed a commission to look into leasing state assets, including the Tappan Zee Bridge north of New York City, the lottery, golf courses, toll roads, parks and beaches. Recommendations are expected next month.

Such projects could be attractive to private investors and public pension funds looking for safe places to put their money in this scary economy, said Leonard Gilroy, a privatization expert with the market-oriented Reason Foundation in Los Angeles.

"Infrastructure is more attractive today than ever," Gilroy said. "It's tangible. It's a road. It's water. It's an airport. It's something that is — you know, you hear the term recession-proof."

Unions don't like privatization deals out of fear that worker wages and benefits will be squeezed as private operators try to boost their profit by streamlining services.

Taxpayers, too, can lose out if the arrangements don't work — and sometimes even if they do, said Mark Price, a labor economist with the Keystone Research Center in Harrisburg, Pa. Higher tolls on privatized roads can push drivers onto state-operated roads, wearing them down faster and raising public costs over time.

"You're privatizing some profits in this process and socializing some losses," Price said.

Selling or leasing public assets can produce an immediate infusion of cash for the state, while foisting the tough decisions, such as raising tolls, onto private operators instead of the politicians.

"The downsides are often after they leave office," said Phineas Baxandall, a researcher with the consumer-oriented U.S. Public Interest Research Group in Boston.

Some states struck major privatization deals well before the economic crisis hit.

Indiana, for example, brought in $3.8 billion in 2006 by leasing the Indiana Toll Road for 75 years. Chicago stands to collect $2.5 billion by leasing Midway Airport, if the federal government approves, and has raised an additional $3.5 billion since 2005 through deals for the Chicago Skyway toll road, parking ramps and parking meters.

But in September, investors walked away from a $12.8 billion bid to lease the Pennsylvania Turnpike for 75 years after legislators failed to act on the deal. And Texas lawmakers uneasy over a proposed private toll road system approved a two-year moratorium on such contracts last year.

David Fisher, who managed Minnesota's state-owned properties a few years ago under former Gov. Jesse Ventura, warned that the state has a hard time finding buyers for properties such as old mental institutions.

Fisher said some public properties belong in private hands, such as Giants Ridge Golf & Ski Resort, a top-rated getaway in Biwabik, and Ironworld, a museum and library in Chisholm. Both are owned and subsidized by Iron Range Resources, a state agency.

"Certainly those things could be privatized, I think without harm to the state, but I don't know that you could find the right buyer," Fisher said.

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The Evil Solution

By Rod Nordland

Somali pirates last September captured a Ukrainian cargo ship, the MV Faina, loaded to the gunnels with heavy weaponry, including 33 Russian-designed T-72 battle tanks. Since then, American and Russian naval vessels have been shadowing the ship at its anchorage off the fishing village of Hindawao, 300 miles north of Mogadishu. This month there were reports that the ship's owners had agreed on ransom terms, but the Faina and its crew are still being held. NEWSWEEK's Rod Nordland interviewed Shamun Indhabur, who is thought to be the leader of the pirates who took the Faina, and the Sirius Star, a Saudi supertanker with $100 million worth of oil aboard. The interview was conducted by satellite telephone to the bridge of the Faina, through Somali translator Abukar al-Badri. Excerpts:

NEWSWEEK: What is your background, and how did you capture the MV Faina?
Shamun Indhabur:
I was a fisherman before I turned to piracy, a crewmember of a small fishing boat. We used to capture lobsters and sharks.

When we hijacked MV Faina it was early morning 24 September 2008, in Somali waters. We took it after 60 minutes of fighting between the crewmembers and our gunmen and eventually the captain decided to surrender after we fired some rockets to warn them that we were close to destroying the ship if they didn't surrender. The captain tried to escape, but he didn't succeed. He had a pistol and he refused to surrender until we were close to killing him. When we intercepted the ship and saw the shipment [of arms], then we thought it was going to Somalia and belonged to the Ethiopians [whose army is supporting the transitional government in Somalia], but the captain told us that it was going to South Africa. Then later we saw that it was going to southern Sudan, after we forced the captain to show us the manifests.

What's the situation on board the Faina now?
The middlemen tried to steal some of the money we agreed on [estimated at more than $3 million]. And now we can't trust them. They're trying to take the money, and we are the criminals. We can't accept that.

How are your ransoms paid?
We get the money two ways. A boat takes the money from Djibouti, then a helicopter takes the money from the boat, then it drops the money in waterproof cartons on assigned [small] boats. Then we collect it, check if it is false or not, then we release the ship. The other way we get the money is a boat from Mombasa.

Isn't it dangerous for middlemen to be carrying so much money into a lawless place like Somalia? I've heard some of them have been killed doing it, is that true?
The pirates are different groups. Those in Puntland may have problems with the middlemen and sometimes kill them.

Why has there been such an increase Somali piracy? In Somalia all the young men are desperate. There is wide unemployment in the country, there are no sources of income. One of the only sources we have had is fishing, and the superpowers and Asian countries sidelined us in our own sea. So at first we started out just to counter illegal fishing, but international forces started to protect them.

Now the European Union is sending an additional naval force. Are you worried about the increased naval presence?
We know the EU and NATO forces are coming, but that is not the solution. The solution is to restore peace in Somalia so that we can have a better life and more job opportunities. I can tell you that sending forces will not stop us going into piracy. They can arrest us if they find us out at sea, they've arrested our friends several times, but that will never deter us from this business. The only thing that can stop piracy is a strong government in Somalia.

The most friendly forces in Somali waters are the U.S. forces. They arrest us and release us, because they know we are not going to hurt them. But the French and the Indians treat us badly and sometimes they don't know what they're doing. The Indians sunk that Thai boat [a fishing vessel reportedly taken over by pirates this month] and said it was pirates, but I tell you there was not a single pirate on that boat.

Are you worried about another attack ashore, such as the one the French conducted, now that the U.N. has approved such attacks?
The French forces made two attacks. They arrested our friends, but French nationals will pay for that. If we get a ship with French nationals, we will punish the crew and they will pay double ransom. We're not worried about another attack [against pirates on land], because now we are on very high alert and they will never succeed with another raid.

You justify piracy against all shipping even though your only complaint was against foreign fishing boats operating in your waters. Does that really make sense?
I justify it as a dirty business encouraged by the foreign forces that were escorting illegal fishing boats and toxic waste dumpers. And if they are escorting fishing boats, they can't escort all commercial shipping, and if we are forced to avoid fishing our waters, then those [commercial] ships are all our fish.

How do you justify attacking pleasure yachts hundreds of miles offshore, or cruise liners, or even any vessel so far from Somalia?
Luxury yachts are what we are looking for, because what we need is money, and if we get a luxury yacht, we make a fortune.

Some ships have started putting armed guards on their vessels. Others have used weapons such as sonic guns, which use beams of loud noise to deter pirates. Does any of that worry you?
It will not protect them. We also have rocket-propelled grenades and we can destroy them. For those with the sonic guns, we hijacked some of them even after they fired the sonic guns. Truly speaking, when we go to sea we are drunk, and we are like hungry wolves running after meat. We don't even know what we are doing until we have boarded.

Some of the leaders of the Islamists now fighting the Somali government have criticized pirates for giving the country a bad name, and for attacking Muslim-owned ships like the Sirius Star.
The Islamists have a memorandum of understanding with us. What they are saying to the media is not their real position. They just want to send a message to their Arab friends who sometimes fund them.

What if the Islamists come back to power?
The Islamists are not homogenous groups, they are heterogeneous. I can guess they'll never come back to power as in 2006, but they can fight one another and create a huge mess. If they did take power, they must restore law and order and create job opportunities for us. If they don't, then piracy will never stop.

How are the Somali pirates organized? Do you all coordinate your actions?
The pirates belong to different groups, but we have umbrella groups. There are two main groups, one in Puntland and the other in south and central Somalia, which is my group. I am a member of the seven top committee members in south and central. We are a group of men with norms and terms, and we respect them.

The pirates holding the Sirius Star have threatened to dump its oil if their demands are not met. Is that a serious threat, and do they realize how much damage that could do not only to Somalia but other countries as well?
Those holding the Sirius Star and the MV Faina I'm aboard now, we are the same group. And we know the risk of spilling the oil shipment. But when evil is the only solution, you do evil. That is why we are doing piracy. I know it is evil, but it is a solution.

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Israel expands Gaza campaign as militants fire rockets

By Nidal al-Mughrabi

GAZA (Reuters) - Israel Monday expanded its fiercest air offensive in the Hamas-ruled Gaza Strip in decades and prepared for a possible ground assault, after a three-day bombardment which has killed more than 300 Palestinians.

Rockets fired by Islamist militants in Gaza killed three Israelis, two after nightfall in less than an hour, increasing pressure on the government as the army amassed infantry and armored forces along the border.

The Palestinian toll from the onslaught rose to 335 dead and 800 wounded, medical officials in Gaza said. A United Nations agency said at least 62 of the dead were civilians.

"We have an all-out war against Hamas and its kind," Israeli Defense Minister Ehud Barak told parliament, using a term he has employed in the past to describe a long-term struggle against Israel's Islamist enemies.

Broadening their targets to include the Hamas government in the Gaza Strip, Israeli warplanes bombed the Interior Ministry, which supervises 13,000 members of the group's security forces. The building had been evacuated and there were no casualties.

The planes also attacked the homes of two top commanders in Hamas's armed wing. They were not home, but several family members were among the seven dead.

Hamas, an Islamist movement that took over the Gaza Strip in 2007, defied the Israeli assaults, the fiercest in the coastal territory since the 1967 Middle East war.

Rocket fire from Gaza at Israel intensified immediately after Hamas declared the end of a truce on December 19.

With six weeks to go to an election that polls suggest the more hawkish right-wing Likud party will win, Israel's centrist government says the offensive aims to put a stop to the rockets.

Four Israelis have been killed by rockets since the offensive began Saturday.


Israel declared areas around the Gaza Strip a "closed military zone," citing the risk from Palestinian rockets, and ordered out journalists observing a build-up of armored forces.

Excluding the press could help Israel conceal preparations for a ground incursion following air strikes that have turned buildings to rubble and left hospitals struggling to cope.

Wounded Gazans trickled one by one into Egypt and 10 trucks carrying medical supplies were allowed to cross into the blockaded territory. Border officials said about 30 Palestinians were expected to leave for treatment.

Israeli markets largely shrugged off the conflict, and stock indices rose 0.7 to 0.9 percent Monday, after losing 1.5 percent Sunday, the day after the attacks on Gaza began.

Oil prices rose above $40 a barrel Monday, boosted by the weak dollar and the Gaza violence, which served as a reminder of tensions that could threaten crude supplies from the region.

Most Gazans in the territory of 1.5 million people, one of the most densely populated areas on earth, stayed at home, in rooms away from windows that could shatter in blasts from air strikes on Hamas facilities. Residents of southern Israel ran for shelter at the sound of alarms heralding incoming rockets.

In Khan Younis in the southern Gaza Strip, an air strike killed a local commander of Islamic Jihad, three other members of the militant group and a child as they stood in the street.

Israeli aircraft also destroyed a laboratory building at the Islamic University, a significant cultural symbol in Gaza.


Mark Regev, a spokesman for Israeli Prime Minister Ehud Olmert, said the offensive would go on until the population in southern Israel "no longer live in terror and in fear of constant rocket barrages."

"(The operation could) take many days," said military spokesman Avi Benayahu.

Hamas spokesman Fawzi Barhoum has urged Palestinian groups to use "all available means" against Israel, including martyrdom operations" -- meaning suicide bombings.

The Gaza operation and civilian casualties have enraged Arabs across the Middle East. Protesters burned Israeli and U.S. flags to press for a stronger response from their leaders.

Palestinian President Mahmoud Abbas, whose writ runs only in the West Bank since his Fatah faction was ousted from Gaza by Hamas last year, had urged Hamas not to end its truce and has effectively accused it of bringing the onslaught on itself.

Nevertheless, Ahmed Qurie, Abbas's chief negotiator, said on Monday that the Palestinians had put on hold U.S.-backed peace talks with Israel, which have anyway made little progress.

U.N. Secretary-General Ban Ki-moon demanded world leaders "use all possible means to end the violence" and "act swiftly and decisively to bring an early end to this impasse."

But U.S. President George W. Bush's administration, in its final weeks in office, demanded Hamas agree to a ceasefire. White House spokesman Gordon Johndroe said the U.S. "understands that Israel needs to take actions to defend itself."

Original here

How one family's mortgage is linked to meltdown

By Daniel Trotta

HAMPTON BAYS, New York (Reuters) - Cynthia Goldrick's daughter is in and out of the hospital for brain surgery, her mother has Stage 4 lung cancer and her father has moved into a home for the elderly.

So when the Goldrick family's adjustable rate mortgage reset while husband Patrick was off work for a job-related injury, it eliminated the thin margin between their income and the mortgage payment and put them on the road to foreclosure.

While these circumstances may seem extreme -- a perfect storm of bad luck -- the basic economics of a hike in mortgage rates and a bank's inability or unwillingness to modify terms have been shared by many Americans over the past year.

The Goldricks took out a $375,000 mortgage in 2005, when they refinanced a previous mortgage on their 1,800-square-foot (167-square-meter) house in semirural Hampton Bays, some 90 miles east of New York city.

At first, the interest rate was 6.5 percent and the monthly payment was $2,370. After two years, it rose to 9.5 percent and suddenly the payment of $3,850 was beyond the means of a family living off Patrick Goldrick's salary as a cable guy.

Appraised at $605,000 in 2005, the house today is surrounded by others with "For Sale" signs out front and is probably worth less than the outstanding loan.

It is also the only home the Goldrick children have known. "It's just walls. But this is where my daughter comes home after surgery, so they're comfortable walls," Cynthia Goldrick said.

The loan was granted by Rose Mortgage Inc. of New Jersey and is being serviced by Saxon Mortgage Services, a unit of Morgan Stanley.

But the mortgage is in the hands of neither because it was securitized, pooled with $700 million worth of mortgages into an investment vehicle created by Morgan Stanley known as IXIS 2005-HE4, and sold to investors.

Such pools constitute much of the so-called toxic assets at the heart of the worst financial crisis in the United States since the 1930s.

Today's investors in IXIS 2005-HE4 include Prudential Insurance, Pimco Advisors, Western Asset Management and Legg Mason -- institutions that manage money for the wealthy and the population at large.


"We didn't jump on the refinancing bandwagon to take a cruise or buy a Mercedes," Cynthia Goldrick said. "We refinanced to give my child a life, not a lifestyle, but a life."

The Goldricks' 10-year-old daughter, Erin, has had 10 operations for hydrocephalus, a Chiari malformation and spina bifida. Most of the medical bills are paid by insurance and a fund established from the settlement of a malpractice suit over Erin's treatment as a baby.

Erin is an honor student who would have made high honors but for a score of 83 in dance. She bears little outward sign of her medical history, unless she pulls up her hair to show scars on her neck and an open wound on her scalp. She looks after her little sister, Emily, 6, and their room is decorated by dozens of stuffed animals.

But her constant medical needs prevent Cynthia from going back to work. "How can you go to work when your daughter's on the operating table?" Cynthia said.

At one point, the Goldricks considered selling their home and moving to a larger and cheaper one in North Carolina, but that would separate Erin from the doctors who have been treating her since she was 2.

So they enlisted the services of Sal Pane Jr., president of AmeriMod, a company specializing in modifying mortgages, a process in which banks agree to lower mortgage payments and interest rates to avoid the cost of foreclosures.

"Modifications can save this economy," Pane said. "My company could do 60,000 loan modifications a month with our current staffing. Give us government assistance and I can modify the entire country in a year."

But modification efforts have encountered difficulties. Increasingly, people are falling behind on loans that have already been modified and regulators warn the trend may worsen. Of all the modifications made in the first quarter, 55 percent were at least 30 days delinquent after six months, according to a government report.

Then there are the rights of bondholders -- the financial institutions that invest in mortgage-backed securities like the pool that contains the Goldrick mortgage.

While modification advocates say it is better for investors to accept a lower rate of return rather than nothing, bondholders don't see much benefit if modifications just delay an inevitable foreclosure.

Moreover, some securitizations prohibit modifications, as is the case with the pool containing the Goldrick mortgage. Such clauses are meant to protect bondholders -- sometimes a hedge fund, sometimes a pension fund -- who have been guaranteed a certain return.

So even though the Goldricks could afford to stay in their home if the interest rate was 6.5 percent, and the bondholders would benefit by continuing to receive income on the loan rather than have it stuck in foreclosure, the servicer of the loan -- Saxon -- cannot budge.

"Your loan modification request has been denied because the investor does not allow modifications for this loan. We apologize for any inconvenience," a Saxon customer service representative wrote to AmeriMod on December 19.

Saxon referred inquiries on the Goldrick mortgage to its parent, Morgan Stanley, which declined to comment.

Despite the notice, Pane vowed to continue fighting to modify the loan, citing the extraordinary circumstances of the Goldrick family and a clerical error that put the Goldricks further into arrears when a payment to cover property taxes was credited to the wrong account.


Back in 2005, the securitization pool containing the Goldrick mortgage looked like a safe bet for fixed-income investors. Fitch Ratings gave the senior debt in that pool a grade of AAA -- a rating it maintains to this day -- and Fitch said 80 percent of the AAA bonds have been repaid in full.

The lower-rated debt in the pool has not fared as well, resulting in multiple downgrades.

Three years after the deal closed, 24.3 percent of what is left in the fund is in foreclosure and another 13.1 percent delinquent by at least 30 days, according to November data on Morgan Stanley's website.

And 2005 was still a pretty good year. Mortgage bonds from 2006 and 2007 are even more "distressed."

Until the credit crisis blew up in 2007, Wall Street institutions were piling into mortgage-backed securities. It was dominated by Lehman Brothers, which has since collapsed, and Bear Stearns, which was sold to JPMorgan Chase & Co in an emergency deal.

Investment banks were making 1.25 to 1.35 percent on securitizations, which would mean a profit of $8.75 million to $9.45 million on a $700 million pool.

"That doesn't sound like a lot, but mortgage markets are so big there's a lot of profitability," said Brad Hintz, a securities industry analyst for Sanford C. Bernstein & Co.

Firms were in frenzied competition for market share at a time when mortgage companies were handing out easy credit.

Now, that bubble has burst and new issues of securitized mortgages have come to a halt. Investors are buying mortgage bonds at a steep discount on the secondary market.

"Distressed yields are on the order of 15 to 20 percent, so people are kind of responding to that," said JPMorgan analyst Chris Flanagan.

For example, Whitney Tilson, founder of the hedge fund T2 Partners LLC, said he was betting that losses on underlying loans won't be as bad as the market expects. In other words, enough people will continue to make their mortgage payments.

"For the first time in our 10-year history we are buying distressed debt, and we are selling equities to do it," Tilson told the Reuters Investment Outlook Summit earlier this month.

But that won't help the Goldricks, who like many other families are in danger of losing their house and not likely to benefit from the $700 billion that Congress has allocated to Wall Street for bailing out financial institutions.

"I am absolutely bitter," said Patrick Goldrick, who sees the scandal surrounding investment advisor Bernard Madoff as further evidence of Wall Street wrongdoing. "I am bitter toward Congress and bitter toward the big banks and the creepy billionaires who get away with stealing pensions."

"I just don't even listen anymore. I turn it off. It's all bad news."

Original here

White House Puts Onus on Hamas to End Violence


CRAWFORD, Tex. — As world leaders called on Saturday for an end to the Middle East violence, the Bush administration issued blistering criticism of Hamas, saying the group had provoked Israel’s airstrikes on Gaza by firing rockets into southern Israel.

Gordon D. Johndroe, a White House spokesman, said that Hamas, the group that controls Gaza, was responsible for the outbreak of violence and called its rocket attacks ”completely unacceptable. These people are nothing but thugs,” he said. “Israel is going to defend its people against terrorists like Hamas.”

In Washington, Secretary of State Condoleezza Rice issued a statement that said: “The United States strongly condemns the repeated rocket and mortar attacks against Israel and holds Hamas responsible for breaking the cease-fire and for the renewal of violence in Gaza. The cease-fire should be restored immediately. The United States calls on all concerned to address the urgent humanitarian needs of the innocent people of Gaza.”

An aide to President-elect Barack Obama, who is on vacation in Hawaii, said he had discussed events in Gaza with Ms. Rice in an eight-minute telephone call initiated by Mr. Obama.

Brooke Anderson, a spokeswoman for Mr. Obama, said that while Mr. Obama was monitoring global events, “There is one president at a time.”

In the campaign, Mr. Obama made statements that sounded similar to those issued by the Bush administration on Saturday.

“If somebody was sending rockets into my house where my two daughters sleep at night, I’m going to do everything in my power to stop that,” Mr. Obama said in July. “And I would expect Israelis to do the same thing.”

Mr. Johndroe said that King Abdullah of Saudi Arabia called Mr. Bush at his ranch in Crawford, Tex., on Saturday, and they discussed the situation.

Asked whether the United States had given any green light for the airstrikes by Israel, Mr. Johndroe said: “The Israeli cabinet authorized this a few days ago, as you’re all aware. So we were aware of that authorization by the Israeli cabinet.” He added: “Hamas has done nothing for the people of Gaza. They need to stop. They have a choice to make. You can’t have one foot in politics and one foot in terror.”

President Nicolas Sarkozy of France was one of many world leaders calling for an immediate halt to the rocket attacks on Israel and to the Israeli airstrikes.

He condemned “the irresponsible provocations that led to this situation, as well as the disproportionate use of force.”

Original here

Child maid trafficking spreads from Africa to US

Shyima Hall, 19, discusses her domestic enslavement Tuesday, Sept. 16, 2008, in Beaumont, Calif. Shyima was 10 when a wealthy Egyptian couple brought her from a poor village in Northern Egypt to work in their California home. She awoke before dawn and often worked past midnight to iron their clothes, mop the marble floors and dust the family's crystal. She earned $45 a month working up to 20 hours a day. The trafficking of children for domestic labor in the United States is an extension of an illegal but common practice among the upper class in Africa. (AP Photo/Ric Francis)

IRVINE, Calif. — Late at night, the neighbors saw a little girl at the kitchen sink of the house next door. They watched through their window as the child rinsed plates under the open faucet. She wasn't much taller than the counter and the soapy water swallowed her slender arms.

To put the dishes away, she climbed on a chair.

But she was not the daughter of the couple next door doing chores. She was their maid.

Shyima was 10 when a wealthy Egyptian couple brought her from a poor village in northern Egypt to work in their California home. She awoke before dawn and often worked past midnight to iron their clothes, mop the marble floors and dust the family's crystal. She earned $45 a month working up to 20 hours a day. She had no breaks during the day and no days off.

The trafficking of children for domestic labor in the U.S. is an extension of an illegal but common practice in Africa. Families in remote villages send their daughters to work in cities for extra money and the opportunity to escape a dead-end life. Some girls work for free on the understanding that they will at least be better fed in the home of their employer.

The custom has led to the spread of trafficking, as well-to-do Africans accustomed to employing children immigrate to the U.S. Around one-third of the estimated 10,000 forced laborers in the United States are servants trapped behind the curtains of suburban homes, according to a study by the National Human Rights Center at the University of California at Berkeley and Free the Slaves, a nonprofit group. No one can say how many are children, especially since their work can so easily be masked as chores.

Once behind the walls of gated communities like this one, these children never go to school. Unbeknownst to their neighbors, they live as modern-day slaves, just like Shyima, whose story is pieced together through court records, police transcripts and interviews.

"I'd look down and see her at 10, 11 _ even 12 _ at night," said Shyima's neighbor at the time, Tina Font. "She'd be doing the dishes. We didn't put two and two together."

Shyima cried when she found out she was going to America in 2000. Her father, a bricklayer, had fallen ill a few years earlier, so her mother found a maid recruiter, signed a contract effectively leasing her daughter to the couple for 10 years and told Shyima to be strong.

For a year, Shyima, 9, worked in the Cairo apartment owned by Amal Motelib and Nasser Ibrahim. Every month, Shyima's mother came to pick up her salary.

Tens of thousands of children in Africa, some as young as 3, are recruited every year to work as domestic servants. They are on call 24 hours a day and are often beaten if they make a mistake. Children are in demand because they earn less than adults and are less likely to complain. In just one city _ Casablanca _ a 2001 survey by the Moroccan government found more than 15,000 girls under 15 working as maids.

The U.S. State Department found that over the past year, children have been trafficked to work as servants in at least 33 of Africa's 53 countries. Children from at least 10 African countries were sent as maids to the U.S. and Europe. But the problem is so well hidden that authorities _ including the U.N., Interpol and the State Department _ have no idea how many child maids now work in the West.

"In most homes, these girls are not allowed to use so much as the same spoon as the rest of the family," said Hany Helal, the Cairo-based director of the Egyptian Organization for Child Rights.

By the time the Ibrahims decided to leave, Shyima's family had taken several loans from them for medical bills. The Ibrahims said they could only be repaid by sending Shyima to work for them in the U.S. A friend posed as her father, and the U.S. embassy in Cairo issued her a six-month tourist visa.

She arrived at Los Angeles International Airport on Aug. 3, 2000, according to court documents. The family brought her back to their spacious five-bedroom, two-story home, decorated in the style of a Tuscan villa with a fountain of two angels spouting water through a conch. She was told to sleep in the garage.

It had no windows and was neither heated nor air-conditioned. Soon after she arrived, the garage's only light bulb went out. The Ibrahims didn't replace it. From then on, Shyima lived in the dark.

She was told to call them Madame Amal and Hajj Nasser, terms of respect. They called her "shaghala," or servant. Their five children called her "stupid."

While the family slept, she ironed the school outfits of the Ibrahims' 5-year-old twin sons. She woke them, combed their hair, dressed them and made them breakfast. Then she ironed clothes and fixed breakfast for the three girls, including Heba, who at 10 was the same age as the family's servant.

Neither Ibrahim nor his wife worked, and they slept late. When they awoke, they yelled for her to make tea.

While they ate breakfast watching TV, she cleaned the palatial house. She vacuumed each bedroom, made the beds, dusted the shelves, wiped the windows, washed the dishes and did the laundry.

Her employers were not satisfied, she said. "Nothing was ever clean enough for her. She would come in and say, 'This is dirty,' or 'You didn't do this right,' or 'You ruined the food,'" said Shyima.

She started wetting her bed. Her sheets stank. So did her oversized T-shirt and the other hand-me-downs she wore.

While doing the family's laundry, she slipped her own clothes into the load. Madame slapped her. "She told me my clothes were dirtier than theirs. That I wasn't allowed to clean mine there," she said.

She washed her clothes in a bucket in the garage. She hung them to dry outside, next to the trash cans.

When the couple went out, she waited until she heard the car pull away and then she sat down. She sat with her back straight because she was afraid her clothes would dirty the upholstery.

It never occurred to her to run away.

"I thought this was normal," she said.

If you could fly the garage where Shyima slept 7,000 miles to the sandy alleyway where her Egyptian family now lives, it would pass for the best home in the neighborhood.

The garage's walls are made of concrete instead of hand-patted bricks. Its roof doesn't leak. Its door shuts all the way. Shyima's mother and her 10 brothers and sisters live in a two-bedroom house with uneven walls and a flaking ceiling. None of them have ever had a bed to themselves, much less a whole room. At night, bodies cover the sagging couches.

Shown a snapshot of the windowless garage, Shyima's mother in the coastal town of Agami made a clucking sound of approval.

"It's much cleaner than where many people here sleep," said Helal, the child rights advocate. He explains that Shyima's treatment in the Ibrahim home is considered normal _ even good _ by Egyptian standards.

Even though many child maids are physically abused, child labor is rarely prosecuted because the work isn't considered strenuous. Many employers even see themselves as benefactors.

"There is a sense that children should work to help their family, but also that they are being given an opportunity," said Mark Lagon, the director of the U.S. State Department's Office to Monitor and Combat Trafficking in Persons.

That's especially the case for well-off families who transport their child servants to Western countries.

In 2006, a U.S. district court in Michigan sentenced a Cameroonian man to 17 years in prison for bringing a 14-year-old girl from his country to work as his unpaid maid. That same year, a Moroccan couple was sentenced to home confinement for forcing their 12-year-old Moroccan niece to work grueling hours caring for their baby.

In Germantown, Md., a Nigerian couple used their daughter's passport to bring in a 14-year-old Nigerian girl as their maid. She worked for them for five years before escaping in 2001. In Germany, France, the Netherlands and England, African immigrants have been arrested for forcing children from their home countries to work as their servants.

In several of these cases, the employers argued that they took the children with the parents' permission. The Cameroonian girl's mother flew to Detroit to testify in court against her daughter, saying the girl was ungrateful for the good life her employers had provided her.

Shyima's mother, Salwa Mahmoud, said her father believed she would have better opportunities in America.

"I didn't want her to travel but our family's condition dictated that she had to go," explained Mahmoud, a squat, round-faced woman with calloused hands and feet. She is missing two front teeth because she couldn't afford a dentist.

"If she had stayed here in Egypt, she would have been ordinary," said Awatef, Shyima's older sister. "Just like us."


On April 3, 2002, an anonymous caller phoned the California Department of Social Services to report that a young girl was living inside the garage of 28 Pacific Grove.

A few days later, Nasser Ibrahim opened the door to a detective from the Irvine Police Department. Asked if any children lived there beside his own, he first said no, then yes _ "a distant relative." He said he had "not yet" enrolled her in school. She did "chores _ just like the other kids," according to the police transcript.

Shyima was upstairs cleaning when Ibrahim came to get her. "He told me that I was not allowed to say anything," said Shyima. "That if I said anything I would never see my parents again."

When police searched the house, they turned up several home videos showing Shyima at work. They seized the contract signed by Shyima's illiterate parents.

Asked by police if anyone other than his immediate family lived in the house, Eid, one of the twins, said: "Hummm ... Yeah ... Her name is Shyima," according to the transcript. "She uh ... She works _ she works for us at the house, like, she cleans up the dishes and stuff like that."

Twelve-year-old Heba got flustered: "Yeah. She's uh _ my _ uh _ How do I say this? Uh ... My dad's ... Oh, wait, like ... She's like my cousin, but _ She's my dad's daughter's friend. Oops! The other way. Okay, I'm confused."

Heba eventually admitted that Shyima had lived with the family for three years in Egypt and in California.

The police put Shyima in a squad car. They noted her hands were red and caked with dead, hard-looking skin.


For months Shyima lied to investigators, saying what the Ibrahims had told her to say.

She went without sleep for days at a stretch. She was put on four different types of medication. She moved from foster home to foster home. Her mood swings alarmed her guardians. In school for the first time, she struggled to learn to read.

Investigators arranged for her to speak to her parents. She told them she felt like a "nobody" working for the Ibrahims and wanted to come home. Her father yelled at her.

"They kept telling me that they're good people," Shyima recounted in a recent interview. "That it's my fault. That because of what I did my mom was going to have a heart attack."

Three years ago, she broke off contact with her family. Since then she has refused to speak Arabic. She can no longer communicate in her mother tongue.

During the 2006 trial, the Ibrahims described Shyima as part of their family. They included proof of a trip she took with the family to Disneyland. Shyima's lawyer pointed out that the 10-year-old wasn't allowed on the rides _ she was there to carry the bags.

The couple's lawyers collected photographs of the home where Shyima grew up, including close-ups of the feces-stained squat toilet and of Shyima's sisters washing clothes in a bucket.

In her final plea, Madame Amal told the judge it would be unfair to separate her from her children. Enraged, Shyima, then 17, told the court she hadn't seen her family in years.

"Where was their loving when it came to me? Wasn't I a human being too? I felt like I was nothing when I was with them," she sobbed.

The couple pleaded guilty to all charges, including forced labor and slavery. They were ordered to pay $76,000, the amount Shyima would have earned at the minimum wage. The sentence: Three years in federal prison for Ibrahim, 22 months for his wife, and then deportation for both. Their lawyers declined to comment for this story.

"I don't think that there is any other term you could use than modern-day slavery," said Bob Schoch, the special agent in charge for Immigration and Customs Enforcement in Los Angeles, in describing Shyima's situation.

Shyima was adopted last year by Chuck and Jenny Hall of Beaumont, Calif. The family lives near Disneyland, where they have taken her a half-dozen times. She graduated from high school this summer after retaking her exit exam and hopes to become a police officer.

Shyima, now 19, has a list of assigned chores. She wears purple eyeshadow, has a boyfriend and frequently updates her profile on MySpace. Her hands are neatly manicured.

But in her closet, she keeps a box of pictures of her parents and her brothers and sisters. "I don't look at them because it makes me cry," she said. "How could they? They're my parents."

When her father died last year, her family had no way of reaching her.


EPILOGUE: On a recent afternoon in Cairo, Madame Amal walked into the lobby of her apartment complex wearing designer sunglasses and a chic scarf.

After nearly two years in a U.S. prison cell, she's living once more in the spacious apartment where Shyima first worked as her maid. The apartment is adorned in the style of a Louis XIV palace, with ornately carved settees, gold-leaf vases and life-sized portraits of her and her husband.

She did not agree to be interviewed for this story.

Before the door closed behind her, a little girl slipped in carrying grocery bags. She wore a shabby T-shirt. Her small feet slapped the floor in loose flip-flops. Her eyes were trained on the ground.

She looked to be around 9 years old.


EDITOR'S NOTE _ This story is based on interviews in Los Angeles, Irvine and Beaumont, Calif., and in Cairo and Agami, Egypt, in September and October. In addition to interviews with Shyima, her mother and nine of her brothers and sisters, the AP also interviewed her neighbors in Irvine, law enforcement officials and the lawyer who prosecuted her case. Quotes and scenes were observed by the reporter or described by Shyima and confirmed in police transcripts and court records.

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