Sunday, February 1, 2009

WEF 2009: Global crisis 'has destroyed 40pc of world wealth'

By Edmund Conway in Davos

Steve Schwarzman, chairman of private equity giant Blackstone, said an
Steve Schwarzman, chairman of private equity giant Blackstone, said an "almost incomprehensible" amount of cash had evaporated since the financial crisis took hold. Photo: Bloomberg

Steve Schwarzman, chairman of private equity giant Blackstone, said an "almost incomprehensible" amount of cash had evaporated since the financial crisis took hold.

"Business will be very different," he added.

His comments came on a day of the World Economic Forum characterised by the gloom of its participants and warnings that the crisis will endure for some time. News Corp chief executive Rupert Murdoch kicked off the meetings by warning that the atmosphere was worsening – despite global economic confidence plumbing the lowest depths on record.

"The crisis is getting worse," he said. "It's going to take drastic action to turn it around, if it can be turned around, quickly. I believe it will take a long time."

Executives participating in an economic brainstorming session said that despite the trauma caused by the economic and financial problems, another crisis at some point in the future was inevitable.

Sir Howard Davies, director of the London School of Economics and a former Bank of England policymaker said: "The outlook is pretty grim. Things are not good and business surveys are coming out showing they're getting even worse."

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Bloomberg Will Seek Increase in Sales Taxes


A month after imposing a property tax increase, Mayor Michael R. Bloomberg is expected to call for a $900 million increase in the city’s sales tax on Friday, as the city confronts a loss of revenue due to the economic downturn.

New York City already has one of the highest sales taxes in the nation, at 8.375 percent, and retailers are likely to fight the increase.

City officials declined to offer specifics. But according to a budget plan discussed late last year by administration officials, the city could generate almost $900 million by increasing the sales tax to 8.75 percent. Under that plan, the city would also do away with the current exemption on some clothing purchases.

Mr. Bloomberg’s proposal, which will be unveiled in his annual budget address on Friday, requires approval from the City Council and the State Legislature, which is now considering whether to raise a range of taxes to close its own $15 billion gap.

Mr. Bloomberg’s budget address will be the last one before November, when he will ask voters to return him to office for a third term. As such, every decision will be viewed through a political prism, and raising taxes is hardly the standard recipe for election victory.

Still, Mr. Bloomberg has never been shy about such moves, whether it is raising property taxes or banning smoking in restaurants and bars. And the notion of raising the sales tax does not come as a complete surprise, since Mr. Bloomberg took the unusual step in November of offering a midyear budget update, spelling out potential measures to generate revenue, the sales tax increase among them.

At first blush, some city officials briefed on the plan did not reject Mr. Bloomberg’s suggestion out of hand. City Councilman David I. Weprin, chairman of the finance committee, took some solace in the fact that the mayor did not plan to propose an increase in the personal income tax — as he had suggested in November — or another increase in property taxes.

“It’s certainly not a good-news budget, but it’s seems to be a responsible approach to closing the budget gap, and it’s a reality that we on the Council have to deal with,” he said.

Mr. Weprin warned that much could change between now and the July 1 start of the fiscal year and that the budget deal must be agreed on by the mayor, the Council and the Legislature.

Indeed, city officials said that it was unclear, as of Thursday night, just how Mr. Bloomberg planned to generate the extra revenue in sales taxes: Would he repeal the sales tax clothing exemption? And would he increase the sales tax permanently? Or would he do what has been done before, and increase a portion of it temporarily?

The menu of budget options Mr. Bloomberg and his aides released in November called for a sales tax increase to 8.75 percent, generating almost $900 million. If that approach is approved, this is how the increase would affect New Yorkers, according to a consumer spending analysis by the city’s Independent Budget Office: An individual who makes $35,000 a year would pay an extra $55. Someone making $125,000 would pay $140 more a year. And someone making $500,000 a year would pay an additional $247.

In addition to the sales tax increase, Mr. Bloomberg would eliminate the $400 property tax rebate, for an approximate savings of $250 million. He also planned to renew his call for Albany to approve legislation that would charge customers a nickel for each new plastic bag they use at most stores.

So far that measure has not gained great traction with the public, despite supporters’ claims that it is both environmentally friendly and good for the city’s bottom line. There may be other taxes or fees as well.

The tax increases are part of a broader package of tough-love measures that Mr. Bloomberg intends to outline on Friday.

He plans to slice another $1 billion in spending and will also unveil various proposals to overhaul the city’s pension system, reduce capital spending and require city employees to contribute toward their health care.

That might be a tough sell with labor unions, but the mayor plans to warn that if unions do not cooperate, the work force could shrink by as much as 23,000 through attrition and layoffs.

One of the criticisms of Mr. Bloomberg’s stewardship of city finances has been his lack of progress in taking on the more difficult structural issues that keep city spending high, like pension costs. He has also been generous in extending pay raises to city employees.

The budget also relies on an expected $1 billion in federal Medicaid assistance, which was included as part of Washington’s stimulus package.

Officials said on Thursday that the proposed budget would probably be smaller than this year’s because revenues have decreased.

The taxes and cuts underscore the approach Mr. Bloomberg has taken to deal with something he was all too familiar with shortly after taking office in 2002, but was not during the boom years of Wall Street: enormous budget deficits.

This year, Mr. Bloomberg cut spending by $1.5 billion, and the increase in property taxes approved last month was expected to generate $600 million.

In December, Mr. Bloomberg and the Council also approved an increase in the hotel tax, to 5.875 percent from 5 percent per room, or about $3 a night.

Edward Skyler, the city’s deputy mayor for operations, said on Thursday that the mayor will be looking for help in solving the budget deficit from unions and legislators from Albany to Washington.

“We all will have to do our part to get through these tough times,” Mr. Skyler said.

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Exxon Mobil sets record with $45.2 billion profit

By JOHN PORRETTO, AP Energy Writer

HOUSTON – Exxon Mobil Corp. on Friday reported a profit of $45.2 billion for 2008, breaking its own record for a U.S. company, even as its fourth-quarter earnings fell 33 percent from a year ago.

The previous record for annual profit was $40.6 billion, which the world's largest publicly traded oil company set in 2007.

The extraordinary full-year profit wasn't a surprise given crude's triple-digit price for much of 2008, peaking near an unheard of $150 a barrel in July. Since then, however, prices have fallen roughly 70 percent amid a deepening global economic crisis.

In the fourth quarter alone crude tumbled 60 percent, prompting spending and job cuts in an industry that was reporting robust, often record, profits as recently as last summer.

With piles of cash and diversified operations, the majors like Exxon Mobil have fared better than many smaller oil and gas companies, but Friday's results show no one is completely insulated from the ongoing malaise.

Irving, Texas-based Exxon said net income slid sharply to $7.8 billion, or $1.55 a share, in the October-December period. That compared with $11.7 billion, or $2.13 a share, in the same period a year ago, when Exxon set a U.S. record for quarterly profit. It has since topped that mark twice, first in last year's second quarter and then with earnings of $14.83 billion in the third quarter.

Revenue in the most-recent quarter fell 27 percent to $84.7 billion.

Both the per-share and revenue results topped Wall Street forecasts. On average, analysts expected the company to earn $1.45 a share in the latest quarter on revenue of $69.1 billion, according to Thomson Reuters.

Shares rose $1.52, or 2 percent, to $78.52 in early trading.

The nation's second largest oil company, Chevron Corp., reported profits of $4.9 billion for the fourth quarter, though revenues slid 26 percent with oil prices in sharp decline.

It earned $2.44 per share in the three months ended Dec. 31. Like Exxon, Chevron easily beat expectations of analysts, who were looking for profits of $1.81 per share.

The industry went into retrenchment toward the end of the year with demand falling.

As expected, Exxon Mobil's bottom line took a beating from its exploration and production, or upstream, arm, where net income fell 31 percent to $5.6 billion. The culprit: lower crude prices, which the company said decreased earnings by $3.2 billion in the fourth quarter alone.

The company, which produces about 3 percent of the world's oil, said overall output fell 3 percent in the most-recent period, a troubling trend in previous quarters. Exxon, which generates more than two-thirds of its earnings from oil and gas production, said production-sharing contracts and OPEC quotas contributed to its lower output.

Results were better at its refining and marketing unit, where earnings rose 6 percent to $2.4 billion as higher margins overcame costs related to last summer's hurricanes and other factors.

The company's chemical division also took a hit, posting net income of $155 million versus $1.1 billion a year ago. Results were hurt by lower volumes and margins and hurricane-repair costs.

Exxon Mobil said it bought 119 million shares of its common stock in the quarter at a cost of $8.8 billion. Roughly $8 billion of that amount was dedicated to reducing the number of shares outstanding; the balance was used to offset shares issued as part of the company's benefit plans.

Exxon said it spent $26.1 billion on capital and exploration projects last year, up 25 percent from 2007. Its earnings release provided no information about its planned spending for 2009.

For the full year, Exxon Mobil's massive profit amounted to $8.69 a share, versus $7.28 a share a year ago.

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The Economy According To Mint

by Guest Author

Aaron Patzer is the CEO and founder of, a personal finance site that helps 900,000 consumers keep track of their spending. Mint’s data is a snapshot of the consumer economy. In the guest post below, Aaron parses the data to tell us what the economy looks like from consumer’s eyes.

Consumers are hurting, but if Mint’s data is indicative of the economy as a whole, it is not as bad as you might think.

(Mint was the the winner of our first TechCrunch40 conference, an experience Aaron wrote about in another guest post ).

At the World Economic Forum in Davos Switzerland this week, it’s a somber environment. Nearly every session – at least every session that’s full – is about the global economic crisis. While there is much rhetoric and shifting of blame, there is little mention of hard data beyond stock market declines and the price of bailouts.

As an engineer, and founder of a company where one of our core values is “quantify everything”, lack of numbers bothers me. How bad are things really? Answers like “really bad” or “worst since the Great Depression” just don’t do it for me. What does it mean in dollars and cents?

Fortunately, is in a unique position to answer this question – quantitatively. Since the crisis first hit in September, our user registration rate has more than quadrupled, giving us 900,000 sample points on the economy. That’s close to 1% of US households. All told, tracks more than $50B in assets & liabilities.

For the past year, we’ve been using this data to help people set budgets using our SpendSpace feature. For example, do you spend more or less on coffee than the average San Franciscan? Or, how does your average purchase price and purchase frequency at, Starbucks, and JetBlue compare to other Mint users?

We’ve discovered this data – in aggregate and entirely anonymous of course – is tremendously valuable in serving as a consumer advocate: the WSJ used our empirical data on bank fees to identify the worst banking offenders. As of late, it also provides a tremendous insight into consumer spending trends, and that’s valuable for all of us.

Looking across spending as a whole in 2008, we can see a phase change beginning in the summer. After a bump in the May/June time frame from tax refunds and credits, we see spending declined by $400 / month / household. Spending eroded even further (a $200 drop) in November along with consumer confidence, bouncing back only slightly for the holidays.

Looking by category from January to November, we see greater than 20% declines in entertainment (-22%), Home – including furnishings, services, and home improvement (-21%), gas/fuel (-32%), and travel (-24%). Spending also declined in food, shopping, and bills/utilities, with the only increase being spending on financial advisors as people look for help during uncertain times.

Looking at average account balances is also interesting. From August to December, the average savings account was halved to $5,500. Fortunately, credit card debt remained roughly constant, but investments declined by 24%, while loans (mortgage, HELOC, student loans, and personal loans) increased by 11%.

Is it Great Depression bad? That’s a qualitative question I can’t answer. But what the data, the hard facts, mean for you – if you run a consumer business – is that your customers are spending $400 less each month than they were a year ago, have burned through half of their savings, and on average have taken on an additional $5k in debt.

Good decisions are based on good data. And data – in itself – may be one of the most valuable by-products of any startup.

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What’s with all the People Holding Signs on the Street Corner?

Is it just me, or does it seem like every retail establishment these days feel its necessary to send one of their low-level employees to dance around like an intoxicated hobo on the street corner holding a sign? What the hell is the going on with this, and when did awkwardly dancing and flailing your arms about become an acceptable advertising strategy? This seems like a practice that should cease immediately.

The guy on the street looked nothing like this.

By my estimations, this nonsense started a few years ago, and it was stupid then, but at least it made a little sense. Pizza companies were the first ones to do it; they would have their $5 pepperoni pizza deal, some poor schlub would be sent out to the street to hold a sign and dance like a maniac. Was it stupid? Of course. But it also worked. I will be the first one to admit that while I never decided on a whim to go grab a $5 pizza on the way home, it most certainly made me aware that these cheap pizzas were available, and where I could find them. I’m sure many other people did, in fact, go and get a pizza because of this type of advertising.

Then for some reason, the sign-holding thing began to branch into other food establishments. Shortly after one pizza company started this shit, every pizza joint was doing this, along with a couple burger joints, a taco stand, and the furniture store that holds one of those going-out-of-business sales every other week. At this point, it was starting to wear on my nerves.

So imagine my dismay when yesterday, as I’m driving down the street, I see a guy dressed up like the statue of liberty waving at people as they drive by. His costume consisted of what appeared to be a bedsheet haphazardly painted that greenish-blue color of oxidized copper, and a shoddy foam hat that had some of the little spike things missing. He was not holding a sign or anything else that would identify what store we should be patronizing. In fact, he was standing in front of an auto-parts store, and, if I didn’t already know the company he was representing (more on that in a minute), I would have thought he was some crazy guy wearing a costume and waving at cars just for the hell of it, which is what many other motorists undoubtedly assumed. However, I’m almost certain that he is employed by Liberty Tax Service (their office is located about 200 yards from where the guy was standing). Yes, that’s right, now this brilliant arm-flailing, costume-wearing marketing strategy has been picked up by a company that specializes in filing people’s taxes.

This whole thing is somewhat perplexing to me for several reasons. First, if this company is so desperate for business that are willing to engage in such half-assed advertising tomfoolery, why wouldn’t they give the guy a sign? After all, logic would dictate that an advertisement that doesn’t bother inform the target market with at least the name of the business is a pretty piss-poor advertisement. Secondly, why did they put the guy at an intersection a couple hundred yards from the business, especially since the road this place is on is really, really busy. Lastly, is just copying what some other company is doing a good way to communicate to potential customers that their company is different from (or superior to) the competition? Hardly.

I only reason I can possibly imagine for this idiocy is to simply get the company’s name out there, to raise (ugh, I hate this word) “awareness” of their business and the service they provide. While the idea that “any publicity is good publicity” works for celebrities and shit on the internet, I don’t think a group of wannabe-accountants trying to pass themselves off as professional tax-preparers are well-served by this idea. Because if I was in the market for someone to do my taxes, the last place I would ever go is Liberty Tax Service, because based on their advertising, the people who run the place are complete and utter morons. Besides, the only way this stuff would ever work is on impulse purchases, like , you know, $5 pizzas you can grab on the way home from work. Can you imagine any reputable law firm doing this? Or an engineering company? Or some software developers? Of course not, because it would be retarded.

Now I’m certainly not an expert on advertising, but there must be more cost-effective methods of advertising out there. It seems like newspaper ads, local television, mailers, something, anything, would be infinitely less retarded than paying some miscreant $7.50 an hour to wear a half-assed costume and stand on the side of the road, far away from the building’s entrance, and wave at people for seemingly no reason. I can’t believe this company hasn’t folded under the weight of their own idiocy.

This has been Andy sayin’, “Breaks are for guys on disability!”

Original here

Why Your Bank Is Broke

By Stephen Gandel

Paul Havard talks on his cell phone inside a Citibank branch in New York on Jan. 16, 2009
Paul Havard talks on his cell phone inside a Citibank branch in New York on Jan. 16, 2009

Even without doing the math, you probably get that the government's financial-rescue effort is failing. The signs are hard to miss. Your friend in finance got pink-slipped. A house sale down the street fell through because the buyer couldn't get a mortgage. A local bank is closing a nearby branch or maybe shutting down altogether.

But do the math, and you can begin to understand how really botched this bailout has been. Since October, the government has deposited $165 billion into the accounts of the nation's eight largest banks. Yet those same financial firms are now worth $418 billion less than they were four months ago, and the Congressional Budget Office estimates that the government's preferred shares are worth at least $20 billion less. In Wall Street terms, that's throwing good money after bad. All told, the government's annualized rate of return on its investment in the nation's largest banks is -1,096%. That's well beyond Bernie Madoff territory; he topped out at a mere -100%. (See pictures of the demise of Bernie Madoff.)

So how could $438 billion — $418 billion of their money and $20 billion of ours — go poof, just like that? Here's the easiest explanation: our banking system has sprung a leak.

Financial firms are built on capital. They take in a dollar, borrow against it and then lend out $3, $4 or $9. Or $30. In the past few years, executives have been using thinner and thinner capital — acquisitions and questionable off-balance-sheet arrangements — to build their money pails. In good times, the more of those cheap sources of capital you use, the more profitable your bank will be.

For the past few decades, banks have been piling up risk, making more and more loans based on less and less capital. Years of economic growth, shallow recessions and record-low default rates lulled bankers into thinking that the future would resemble the immediate past, at least as far as risk went. Turns out it didn't. All it was going to take was a worse-than-average recession — and it looks as though we've got one — and many banks, including a number of the biggest ones, were bound to fail. The shockingly poor lending standards — housekeepers being approved for million-dollar mortgages — have only hastened their demise. "This crisis needs to be understood as something that has developed over the past decade," says Joseph Mason, a finance professor at Louisiana State University's E.J. Ourso College of Business. "This isn't just one black swan. It's a bunch of black swans that have hung out for a while and created a giant problem." (Read George W. Bush's top 10 economic mistakes.)

There's little hope that the type of shares the government is buying in banks as part of the Troubled Asset Relief Program (TARP) will plug the hole in the banking system's bucket. Paul Miller, an analyst at FBR Capital Markets who has written a number of reports on the capital issues of banks, says the only way to solve the problem is for the government to stop buying preferred shares and start taking direct ownership stakes. Of course, the issue with that approach is that the problem at the banks is so large, Uncle Sam may end up owning a good portion of the banking sector. Few seem to want nationalization. Unfortunately, that could be the only way out.

Playing with House Money

To understand why nationalization may be inevitable, you have to get a handle on the true source of the banks' problems. The banking business — at least the way George Bailey practiced it in It's a Wonderful Life — was all about deposits and loans. You take in deposits, on which you pay a relatively low interest rate, say 2%. Then you lend that money to other people at a higher interest rate, say 7%. Pocket the difference. Repeat. But starting in the early 1970s, banks began funding less of their lending with old-fashioned deposits. Bank deposits backed 90% of all loans four decades ago; today they back 60%. Where does the rest of the loan money come from? From the bank's past earnings and the money given to it by its investors. Using the house's money has generated higher profits — with significantly higher risks.

Regulators have long had a lower capital requirement on loans that are not backed by deposits. But in 2004, the Securities and Exchange Commission (SEC) removed rules that capped leverage at 15 to 1 for investment-banking firms like Goldman Sachs. That allowed the firms to vastly expand their lending activities without raising a single new dollar of capital. One big backer of the rule change was reportedly former Treasury Secretary Henry Paulson, who was then Goldman's CEO. By that time, the regulatory separation between investment banks and traditional banks had long since been removed, so traditional banks such as Citigroup and Bank of America shifted more and more of their lending operations to their investment-banking divisions, and leverage took off. By the end of 2007, many banks were lending $30 for every dollar they had in the vault. "Changing the net-capital rule was an unfortunate misjudgment by the SEC," says former SEC official Lee Pickard. "It's one of the leading contributors to the current financial crisis." (See who else is to blame.)

Another way banks sought to boost their profits — at least those available to shareholders — was through stock buybacks. Investors cheer buybacks, because they shrink the number of outstanding shares, boosting a company's profits per share and usually its stock price. But corporate stock purchases also decrease banks' capital, because their earnings are used to purchase shares rather than being retained as cash. Worse, sometimes banks borrow money in order to buy back shares, upping their leverage and lowering their capital at the same time. In the past four years alone, the nation's largest banks, as defined by Standard & Poor's, have spent $300 billion buying back stock.

One of the firms leading the charge to capital-light banking was Bank of America (BofA). Starting in 1993, a predecessor firm became one of the first banks to develop and embrace computer models that were supposed to improve a bank's ability to determine the risk of a particular type of loan. After a merger in 1998 that formed the bank, BofA officials often argued to investors and regulators that these new advanced risk controls meant the bank needed to carry less capital per loan. The officials also frequently fought regulations that would boost capital requirements for them and other banks. In 1998, BofA asserted that tying capital requirements to credit ratings, which would have required banks to hold more funds in the vault to account for the riskiness of subprime loans, was silly.

And to the delight of investors, BofA was pushing for the freedom to make risky loans at the same time it was aggressively repurchasing shares. Since 1998, it has spent $62 billion on share buybacks, according to S&P. The result is that over the past decade, BofA's tangible-capital ratio — the amount of tangible equity in relation to tangible assets — has nearly halved from 5% in 1998 to 2.8% in the third quarter of 2008. It became a bank built on air. (See pictures of scared traders.)

But BofA wasn't alone. By early 2008, nearly all the big banks were poorly positioned to weather a downturn — particularly this downturn. Accounting rules demand that banks take a hit to their earnings by the value of a loan when it becomes clear a borrower is not going to pay it back. When a bank's loan losses are greater than its income, it has to take money from its shareholders' equity account to make up the difference. That's a big deal for a company's investors. If shareholders' equity is wiped out, their stock is effectively worthless. So investors watch this account intensely; if they think shareholders' equity is headed to zero, so too is a bank's stock.

FBR's Miller looked at eight of the largest financial firms in the U.S. and determined that on average, if just 3.4% of their loans go unpaid, their shareholders will be wiped out. The good news is that these firms are so large that 3% of their loan portfolio is a really big number: some $400 billion. The timing of when the loans go bad matters too. If, say, 5% of a bank's loans go bad over 10 years, the bank will survive. It can cover the loan losses with the earnings it gets from all its paying customers. But given the way banks capitalize themselves these days, if 5% of a bank's loan portfolio goes bad in a single year, the bank is toast.

The switch to doing more lending through investment-banking operations has only made matters worse. For deposit-based loans, the banks have wide discretion as to when they record a loss. Some do it after a borrower misses his first payment. Other banks wait until the loan is 120 days past due. But for loans made through a firm's investment-banking division, the bank has to reduce the value of those debts according to what similar pools of loans are worth. This is known as mark-to-market accounting. And when investors grow increasingly nervous that borrowers will not pay back their debts, as they are now, the bonds on which those loans are based plummet in value, even before payments stop coming in. As a result, banks are watching their capital bases erode much faster than their executives ever expected — and probably faster than they can handle.

Building a Better Bailout

TARP does nothing to patch the hole in the banking system. And it certainly doesn't do anything to encourage banks to make more loans. Yes, banks have gotten nearly $300 billion in money from the government, and that's a lot of dough. But it's not free dough. In return for federal cash, the government has taken preferred-stock shares as the firm's markers. Unlike common stock, which is the kind you or I would buy from a broker, preferreds have to eventually be paid back, so they are really loans, not additional capital. (See which country has the best bailout plans.)

Say a bank has $5 in capital and $100 in loans. Now the government gives the bank an additional $100 in preferred shares and says, "Go make more loans." Well, the bank might then have $200 in loans, but it still has only $5 in common shareholders' equity. The result: if just 2.5% of its loans go bad, the bank's shareholders are wiped out. Wisely, the largest banks in the nation lent less in the fourth quarter of 2008 than in the previous three months — a strategy that has drawn some complaints. But that hasn't removed the pressure on their shares. That's because the banks have had to continue to take loan losses. And banks don't have the option to pass those losses off on the new money they got from the government. They have to write down their common stockholders' equity first. And as that capital falls, so go the bank's shares. Some are alarmingly close to zero.

No bank's stock has fallen more in value during the past four months than Bank of America's. The combined value of its shares is now $37 billion. That's $123 billion less than they were worth at the end of September. In the third quarter, BofA was forced to write down $4.4 billion in loans, or about 1.8% of its loan portfolio. Compared with what some of its competitors wrote down, that wasn't a heck of a lot; Citigroup, for instance, had a $13.2 billion charge in the same quarter, primarily related to loan losses. But the relatively small loss took BofA's thin tangible equity, the type of capital that matters most to shareholders, down to a ratio of just 2.6% of loans, according to FBR. By that measure, Bofa was a weaker bank than any of its rivals, including Citigroup. But since the market was so focused on bad loans and the charge-offs banks had to take, no one seemed to notice BofA's faults.

That is, until the fourth quarter. In mid-September 2008, in a deal pushed by regulators, BofA agreed to buy Merrill Lynch. The acquisition actually boosted BofA's capital ratios, but it also added losses to an already fragile capital structure; Merrill Lynch lost $15 billion in the fourth quarter alone. Knowledge of the impending losses forced BofA CEO Ken Lewis to ask the government for an additional $20 billion in TARP funds — on top of the $25 billion it had already received — as well as about $100 billion in loan guarantees. Without the government assistance, BofA says, it couldn't have closed the merger.

The Merrill losses, which weren't publicly revealed until early January, have angered shareholders, some of whom have sued the company for not informing them sooner. And last week, the losses also led Lewis to ask Merrill's top executive, John Thain, to resign for failing to keep BofA officials apprised of his firm's bottom-line problems. Thain says Lewis knew all along. (See pictures of TIME's Wall Street covers.)

Cleaning Up the Mess

Nouriel Roubini, the New York University economics professor who was famously early in predicting that the end of the housing boom would cause a financial crisis, estimates that continued loan losses will force U.S. banks to come up with an additional $1.4 trillion just to stave off bankruptcy. And since the banks aren't likely to earn much money or attract new investors anytime soon, much of the money will have to come from the government.

Regulators are split on what to do next. The Federal Deposit Insurance Corporation is backing a plan to create what it calls an aggregator bank, which would buy up the loans of BofA, Citigroup and the rest of our now troubled system, theoretically putting an end to the escalating losses eating away at the banks' capital. But if the government buys those assets at current market rates, banks would be forced to take immediate losses on the sales, doing more harm than if the government just left the troubled loans where they are. Sources say the Federal Reserve would prefer to let the banks keep the loans and troubled bonds for now and instead provide the banks with insurance policies guaranteeing that the government will swallow a good deal of future credit losses. But a similar deal that the Fed struck with Citi did little to boost that company's stock or stave off fears that it may soon go under.

That's why a small but growing number of people are starting to talk about nationalization. Speaker of the House Nancy Pelosi recently said nationalization, or something close to it, is a better solution than just buying bad assets, because if the government takeovers succeed, then taxpayers get to keep the profits when they eventually resell the banks. But if the government doesn't turn a nationalized bank around, it could be very costly to taxpayers.

No matter what happens, things have definitely changed for Lewis and other former titans of the banking business. A few months ago, BofA's CEO was hailed for running a bank so prosperous that it was able to swallow mortgage lender Countrywide Financial and investment bank Merrill Lynch in the depths of the worst banking crisis in recent history. The trade magazine American Banker named Lewis Banker of the Year in December. Now he's fighting to keep his job. And even if he succeeds, he's got a new partner. The government already has a large stake in his bank, with its $45 billion in preferred shares. The government's ownership could dramatically rise if the Fed starts buying common shares of BofA, which would mean that Washington would be calling more of the shots. Increasingly, the only shareholder that matters to Bank of America and other banks is Uncle Sam. Without the government, the math of the banking business these days just doesn't add up.

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JPMorgan Exited Madoff-Linked Funds Last Fall

Peter Foley/European Pressphoto Agency

Bernard Madoff arrived at court on Jan. 14. Months before Mr. Madoff’s arrest, JPMorgan Chase took money out of hedge funds linked to him.


JPMorgan Chase says that its potential losses related to Bernard L. Madoff, the man accused of engineering an immense global Ponzi scheme, are “pretty close to zero.” But what some angry European investors want to know is when the bank cut its exposure to Mr. Madoff — and why.

As early as 2006, the bank had started offering investors a way to leverage their bets on the future performance of two hedge funds that invested with Mr. Madoff. To protect itself from the resulting risk, the bank put $250 million of its own money into those funds.

But the bank suddenly began pulling its millions out of those funds in early autumn, months before Mr. Madoff was arrested, according to accounts from Europe and New York that were subsequently confirmed by the bank. The bank did not notify investors of its move, and several of them are furious that it protected itself but left them holding notes that the bank itself now says are probably worthless.

A spokeswoman, Kristin Lemkau, said the bank withdrew from the Madoff-linked funds last fall after “a wide-ranging review of our hedge fund exposure.” Ms. Lemkau acknowledged, however, that the bank also “became concerned about the lack of transparency to some questions we posed as part of our review.”

Investors were not alerted to the move because, under sales agreements, the issues did not meet the threshold necessary to permit the bank to restructure the notes, she said. Under those circumstances, she added, “we did not have the right to disclose our concerns.”

That doesn’t satisfy some investors. As they see it, they were the first people who should have been alerted to the bank’s concerns. “Instead, we continued to pay our fees to the bank and remained the only ones exposed to the risks that JPMorgan did not want to assume,” said the chief asset manager of an Italian investment firm, who declined to be identified because of potential litigation.

The tale began several years ago when a unit of JPMorgan Chase in London issued a series of complex derivatives that gave investors a way to triple their bets on the Fairfield funds, whose solid consistency mirrored the track record that had quietly — and ruinously — drawn investors to Mr. Madoff for decades.

Leveraged notes issued by big banks like JPMorgan Chase and Nomura became conduits through which fresh money flowed from institutional investors into the Fairfield Sentry and the euro-based Fairfield Sigma funds, both run by the Fairfield Greenwich Group — and, in turn, into Mr. Madoff’s hands.

The arrangement worked like this: Investors put up cash to buy the notes from the bank. In return, the bank promised to pay them up to three times the future earnings of the Fairfield funds. When the notes matured in five years, assuming the funds did well, these investors would get more than if they had invested in the funds directly. The bank collected just under 2 percent in fees, investors said.

And because the bank had to hedge its entire risk, it put up to three times the face amount of the notes into the Fairfield funds. Thus, Fairfield Greenwich got more cash to manage than it otherwise would have, increasing its own fee income. To reward note-holders for making that possible, Fairfield paid them a so-called rebate of a fifth to a third of a percentage point a year, according to documentation of those transactions.

The first sign of trouble came in early October, when Fairfield Greenwich notified investors that it would no longer pay them rebates.

The reason, according to the Italian asset manager, was that JPMorgan Chase had “suddenly cashed out” of the Fairfield funds. “The official explanation was that there had been a strategic decision to get out of all hedge funds,” the asset manager said. “The Fairfield official was quite upset.”

Several other European money managers said they were told the same thing.

A spokesman for Fairfield Greenwich declined to comment on the bank’s actions last fall, citing restrictions imposed by the beleaguered firm’s lawyers.

Given the turbulent times, the Italian asset manager said he thought the bank urgently needed to raise cash. That seemed the only way to explain why the bank would pull out of a fund that was up 5 percent when other major market indexes were down 30 percent, he added.

A source close to JPMorgan Chase, however, recalled bank officials saying that the bank’s “due-diligence people had too many doubts” about the performance of the underlying funds.

“They felt the consistency of its performance wasn’t any longer credible” given the downturn in the overall market, the source said. He added: “Just three months before that, I remember that they were ready to issue more notes.”

Steve Forrest for The New York Times

Some wonder if JPMorgan saw trouble brewing and got its London unit, above, out of two hedge funds before the storm.

Some investors now note that Mr. Madoff maintained several accounts with JPMorgan Chase, and wonder if the parent bank saw trouble brewing in those accounts and got its London affiliate out of Fairfield before the storm hit.

The Italian asset manager’s colleague, the firm’s chief institutional adviser, said, “Since I heard about Madoff’s arrest, I have been wondering if it was just a tremendous stroke of luck — or if there was something JPMorgan in New York knew that led London to cash out.” Told on Tuesday about the bank’s explanation for its move, he added, “Now that I know why they say they got out, my doubts increase.”

Did the bank use its access to the Madoff checking accounts to detect trouble before his arrest? “Absolutely not,” Ms. Lemkau said.

In any case, banking authorities say there is nothing wrong with a bank looking into a customer’s checking account to get information for its other lines of business.

“It is routine for the bank to look into your checking account if you apply for a loan — so why couldn’t they look into your account if someone else applies for a loan whose risks are tied up with you?” said Stuart I. Greenbaum, a banking specialist who is the retired dean of the Olin Business School at Washington University in St. Louis.

He added, “Still, I suspect that’s worth a lawsuit somewhere.”

One of the key tests in court would be whether investors could show that they were harmed by anything the bank did or failed to do last fall, or whether any other course of action would have simply made things worse, said Charles Mooney Jr., a law professor at the University of Pennsylvania. “If I were the bank’s lawyer, those are the questions I’d ask — and the answers are far from clear,” he said.

Investors say the bank should have done a better job of investigating the Fairfield funds before it issued the notes. Another European investment manager, who also declined to be identified because of potential litigation, says he decided to purchase the notes for his clients partly on the strength of the bank’s reputation.

He said that when he saw JPMorgan Chase “put its brand name” on the Fairfield notes, “I thought that there was no more reason to remain cautious.” He added, “For me, the JPMorgan notes were the final imprimatur of Sentry’s financial soundness.”

What has upset him and other investors interviewed about their stake in the notes is that they did not know that JPMorgan Chase had already exited from Fairfield, almost unscathed, without notifying them.

“We looked at the prospectus and concluded that they had no obligation to do that,” the Italian asset manager said. “But I certainly expected it, after such an unusual move.”

After JPMorgan started pulling out of Fairfield, with credit markets in disarray everywhere, the quoted price of the notes fell by about 12 cents on the dollar, a discount that discouraged some investors from selling because the price seemed at such odds with the Fairfield Sentry fund’s continued good performance.

An executive with a Swiss financial advisory firm said that he had placed an order to redeem some notes at the end of October. But when he found out how low the quotes were, he said, “I immediately placed a stop to the withdrawal — a decision that, after Madoff’s arrest, I haven’t stopped regretting.”

His regrets seem to be justified. Some buyers of the notes face the loss of their entire investment.

In a letter dated Dec. 31, 2008, Timothy R. Hailes, a managing director and associate general counsel for the bank in London, notified investors that Mr. Madoff had been arrested and that his firm was being liquidated by regulators. These events activated provisions in the terms of the notes that allowed the bank to substitute some other asset for the Fairfield funds, which “may have a considerable impact on the value and the amount payable” to investors, according to those contracts.

Investors said that the bank had not provided any further information about their potential losses, even when asked for updates. “As of today, I still do not know if JPMorgan attributes any value to those notes,” said one European money manager.

About two-thirds of the Fairfield-linked notes the bank issued were guaranteed against principal loss, according to the bank. But the bank said the owners of the remaining notes, like all the investors cited here, had probably lost their entire stake. That would mean a loss the bank puts at about $30 million but that investors say could be much larger.

“We believe the notes that are not guaranteed are now valued at zero,” said Ms. Lemkau, although investors “could reach some recovery through bankruptcy proceedings.” In any case, she added, “The risks were fully explained to clients in the purchase agreements.”

If the bank had withdrawn almost $250 million directly from Mr. Madoff’s firm, Bernard L. Madoff Investment Securities, the bank would be subject to federal bankruptcy rules that give the court-appointed trustee leeway to recover money paid out over the previous year and use it to repay creditors. It is less likely that a similar withdrawal from Fairfield Greenwich would be within the trustee’s reach, but the question is certain to be posed in litigation, several lawyers said.

“I would consider it a probable development,” said the source close to JPMorgan Chase. “Especially with a redemption so close in time to Madoff’s arrest.”

Original here

Wall Street bonusfest 2008: 6th largest haul on record

This post comes from partner site The Big Money.

Investors may not be happy with the performance of bank executives and their top employees these days, but, apparently, compensation committees are satisfied.

The New York Times kicks off its business coverage today with some numbers that are hard to swallow. New York's financial institutions paid out a gaudy $18.4 billion in bonuses in 2008, "the sixth-largest haul on record," it reports.

Citing figures released by the New York State comptroller, the NYT calculates, "Wall Street workers still took home about as much as they did in 2004, when the Dow Jones industrial average was flying above 10,000, on its way to a record high."

Meanwhile, the bonus largesse Merrill Lynch bosses distributed in the firm's dying days continues to dog former CEO John Thain. The Wall Street Journal reports New York Attorney General Andrew Cuomo will expand his probe into the Merrill bonus payout scheme, zeroing in on Thain to determine if directors and shareholders were misled about the giant losses looming at the Wall Street firm.

The newspaper adds that Bank of America (BAC) CEO Kenneth Lewis is likely to be questioned as well. "Looking at Bank of America, if they did a bad deal and didn't tell anyone, it not only hurt shareholders, it hurt taxpayers because of the government funding that has been extended to the bank," the WSJ's source-in-the-know says.

With the lopsided bonus payouts, the still-frozen credit markets, the $700 billion taxpayer lifeline going fast, and fresh reports of mounting losses at banks, it's not surprising then that BusinessWeek concludes that "the bank bailout is broken." A banking analyst with Keefe, Bruyette & Woods tells the magazine, "Money is moving throughout the system, but there is increasing recognition that these institutions don't have enough capital to withstand the losses from all the crazy loans they have."

Fear not: Newly appointed Treasury Secretary Timothy Geithner says he has a better, more comprehensive plan on the drawing board to “repair the financial system,” the NYT writes. Geithner wasn't specific, but, he did rule out nationalizing struggling banks.

And what about this "bad bank" idea that collects all the toxic assets out there to give these firms some breathing room? The newspaper says top Obama administration officials have been floating the idea by Wall Street execs to determine the feasibility. It wouldn't come cheap, though. A second bank bailout plan could cost up to $2 trillion, the WSJ estimates.

The "bad bank" discussion sent shares higher on Wednesday, particularly for (no surprise here) bank stocks. Also on Wednesday, the Obama administration's $819 billion stimulus plan passed in the House of Representatives, as expected. In the words of the WSJ, it's modeled as "a recession-fighting effort that would extend the reach of the federal government across the U.S. economy by reshaping policy on energy, education, health care and social programs."

A similar $900 billion stimulus bill awaits a Senate vote next week. Whichever one eventually makes it to the president's desk will prove costly. "Either bill, if enacted, would push the federal debt toward levels not seen since the second World War," the newspaper writes.

The Federal Reserve was busy on Wednesday, too—even if it voted to do nothing. According to the Washington Post, the Fed left the benchmark rate unchanged at virtually zero.

With its main recession-fighting weapon spent, the Fed announced some unconventional moves: The Federal Open Market Committee will buy up more mortgage-backed securities, start buying long-term government bonds, and may take further steps to make loans more widely available, the newspaper writes. Elsewhere in Washington, "federal regulators on Wednesday guaranteed $80 billion in uninsured deposits at the powerful institutions that service the nation's credit unions -- a maneuver that shows how the economic crisis continues to ripple across the U.S.," the WSJ writes.

Perhaps not all the banks were blinkered to risk. The NYT reports that some European investors are asking questions about why JPMorgan Chase started pulling $250 million out of Bernard Madoff's Ponzi scheme last fall. While many financial institutions have been left red-faced by their investments with Madoff, JPMorgan says its exposure is "pretty close to zero."

As the NYT writes: "The bank did not notify investors of its move, and several of them are furious that it protected itself but left them holding notes that the bank itself now says are probably worthless." So, who knew what within Madoff's firm? That's what the feds want to know, and today the WSJ reports that several core employees have received subpoenas from regulators seeking documents about their dealings with defrauded investors.

This group was heavily involved in client activity, including setting up new accounts, monitoring client balances, and providing clients with updates on where their portfolio of investments were spread. While none has been accused of any wrongdoing, "investigators don't believe Mr. Madoff committed the fraud alone," the WSJ writes.

Bad news out of Asia this morning. Sony (SNE) and Toshiba (TOSBF) both posted losses for the last quarter, and Nintendo (NTDOF) issued a profit warning, the NYT reports. Sony’s loss was nearly 18 billion yen -- an astounding 95% drop from the year before.

Back in Europe, even Shell is feeling the pinch. It posted its biggest drop in quarterly profits in a decade, though it still managed to rake in $4.8 billion in the last quarter, the Guardian reports. Oh, that Starbucks (SBUX) had such breathing room. It missed the Street's expectations on fourth-quarter profit and sales, and the coffee giant announced 6,700 new job cuts and the closure of 300 stores. In one of the more bizarre cost-cutting moves, Starbucks says it will stop brewing pots of decaf after noon.

Finally, the downturn has clipped the wings of the once-soaring corporate-jet industry. The NYT reports that many companies are canceling their private-jet orders, as they are increasingly "becoming symbols of high-flying excess." The latest company to trim its corporate-jet fleet? You guessed it: Starbucks.

This post was written by Bernhard Warner and Matther Yeomans of The Big Money.

Original here

Wall Street Workers Get Bonuses, Many Still Unhappy (Update1)

By Christine Harper

Jan. 27 (Bloomberg) -- More Wall Street employees received bonuses for 2008 than were expecting to in October, though many remained unhappy with them, according to an online poll.

EFinancialCareers.Com said about 79 percent of workers who responded to an online poll this month said they received a bonus for 2008, more than the 66 percent of respondents who expected to get a reward in October. Still, 46 percent said they were dissatisfied with their bonus.

“What it shows is the bonus culture is very deep-set in the securities industry,” said John Benson, founder and chief executive officer of the Web site, a unit of Dice Holdings Inc. “There’s an entitlement culture amongst a number of people in the industry, which I think in the current environment is very misplaced.”

Wall Street’s system of paying year-end bonuses to reward workers is under criticism after the worst financial crisis since the Great Depression led to record losses and forced the government to pump taxpayer money into banks. Former Merrill Lynch & Co. Chief Executive Officer John Thain has drawn criticism for accelerating bonus payments before the firm’s sale to Bank of America Corp. was completed.

About 900 U.S. users of the financial jobs Web site responded to the survey conducted Jan. 7-12. In October, 1,300 people responded, and 36 percent said then that they anticipated a higher bonus.

Most of the people who said they were unhappy with their bonus, 89 percent, had five years or less experience, the survey found.

Merrill, which was acquired by Bank of America Corp. this year and has reported six straight quarters of losses, reduced 2008 compensation by 6 percent to $15 billion from $15.9 billion in 2007. Year-end bonuses typically account for the majority of compensation.


“I have been a defender of the bonus system in the past because it provides banks with a degree of flexibility on their cost structure,” Benson said. “I think most people on Main Street would say their organization incurred losses of this size that very few people in the organization if anybody would receive bonuses at all.”

Most of the people who reported a drop in their bonus said it fell between 11 percent and 50 percent, while the biggest portion of increases were 10 percent or less, the survey found.

Many firms instituted changes to their bonus systems and reduced average compensation as revenue fell. The most senior executives at firms including Goldman Sachs Group Inc. and Morgan Stanley turned down bonuses.

Firms including Morgan Stanley, Credit Suisse Group AG and UBS AG also have added so-called clawback provisions that set aside portions of workers’ bonuses that can be recouped in later years if an employee leaves or is found to have behaved in ways that are harmful to the company.

“You’ve got as good an opportunity today as you’re ever going to have for this culture to change,” said Benson. “There needs to be a clearer risk-reward balance, rather than reward- reward.”

To contact the reporter on this story: Christine Harper in New York at

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Japan pledges $17 billion Asia aid package

DAVOS, Switzerland (AFP) – Japanese Prime Minister Taro Aso pledged 1.5 trillion yen (17 billion dollars) in development aid to other Asian countries on Saturday for infrastructure projects that will help boost growth.

The prime minister highlighted Japan's involvement in projects in the Mekong region and the Delhi-Mumbai industrial corridor and said overseas development assistance (ODA) would increase by 20 percent this year.

"Japan is ready to provide ODA not less than 1.5 trillion yen or about 17 billion dollars in total," he told the World Economic Forum here.

Japan's official development aid, an important diplomatic tool for the pacifist country since the end of World War II, has historically focused on Southeast Asian countries.

Turning to the causes of the global financial crisis, Aso pointed to the responsibility of leading exporting countries such as Japan and China in what his spokesman said was a call to end the blame-game.

Russian Prime Minister Vladimir Putin and Chinese premier Wen Wen Jiabao made forceful speeches here pointing the finger at the United States for its overconsumption and poorly regulated banking sector.

"In order to put the world economy back onto a stable growth trajectory, one imperative is correcting the global imbalance that has arisen from overconsumption in the United States and insufficient internal demand in other countries," he said.

"Countries must shed their dependence on external demand," he said.

Elsewhere, Aso announced a new emissions plan for the country and reiterated a pledge last November to lend 100 billion dollars to the International Monetary Fund.

"We are currently examining our mid-term target (for emissions reductions) based on scientific analyses ... and I intend to announce the target in June," he said.

Aso also highlighted Japan's own efforts to increase domestic demand with stimulus packages worth a total of 75 trillion yen, calling for other nations to adopt similar economic policies.

Also in Davos, Japan's Trade Minister Toshihiro Nikai and Farm Minister Shigeru Ishiba are to propose a plan to cut or lift tariffs on environmentally friendly products at an informal meeting of World Trade Organisation members here, the Japanese business daily Nikkei reported.

The proposal is aimed at promoting trade in goods such as lithium-ion batteries and solar power generation systems, which could help address global warming, it said. These are areas in which Japanese companies are strong.

Aso left Friday on a lightning visit to the Davos gathering, where he also underlined the ability of Japan to take a leadership role to help the Asian economy power global growth.

The prime minister, embroiled in a stormy session of the politically divided parliament, was to spend only six hours in the Swiss mountain resort and return to Tokyo by late Sunday.

He called for greater international cooperation to battle the global financial crisis and concluded with a call for optimism in the face of adversity.

Original here

Poker aficionados watching Texas Hold 'em legal case

COLUMBIA, S.C. - Each week for nearly 30 years, Bob Chimento and his college buddies have gathered around tables in a Mount Pleasant home to play the popular version of poker known as Texas Hold 'em, bringing $20 and spending an evening with pizza, sodas and beer.

As the cards flew during a night in April 2006, a half-dozen police officers burst into the house, seizing several thousand dollars in cash and a small amount of marijuana. They ticketed Chimento and about 20 other players for breaking the conservative state's 200-year-old prohibition on games of chance.

Most of the poker players pleaded guilty and paid a $250 fine but Chimento and four others are challenging what they say is an antiquated law - poker, after all, is seen almost nightly on TV and is played around thousands of kitchen tables around the country. Even President Barack Obama is one of the estimated 55 million Americans who are fond of the game.

Next month, a Charleston-area municipal judge will have to decide a primary question: Is poker a game of chance or one that involves skill and therefore legal under the law?

"The typical police raid of these games ... is to literally burst into a home in SWAT gear with guns drawn and treat poker players like a bunch of high-level drug dealers,'' says Jeff Phillips, a Greenville attorney representing Chimento's group. "Using the taxpayers' resources for such useless Gestapo-like tactics is more of a crime than is playing of the game.''

Chimento and his friends aren't alone. The Washington-based Poker Players Alliance says it has received so many calls about poker-related arrests that it's created a national network of attorneys - many of them poker players themselves - to serve as a legal brain trust for its membership.

"Our interest runs deep in this case,'' said John Pappas, the group's executive director.

Thirty-eight other states have similar laws that consider games based more on skill than chance to be legal, according to data maintained by Chuck Humphrey, a Colorado attorney who tracks gambling laws and a founder of the Tournament of Champions of Poker.

Chimento and his attorneys hope several recent rulings will support their case. Earlier this month, a Pennsylvania judge ruled that Texas Hold 'em is more skill than chance, exonerating a man arrested for running a $1 to $2 buy-in tournament out of his garage.

A few days later, a Colorado man was acquitted of illegal- gambling charges when a jury ruled that his friendly poker gathering was a game of skill.

Read literally, a South Carolina law established in 1802 makes "any game with cards or dice'' - including popular board games such as Monopoly and Sorry - illegal in the state.

Attorney General Henry McMaster says his office has adopted a looser interpretation of that statute, one that only considers games more reliant on chance than on a player's skill to be gambling and, therefore, illegal - an interpretation the top prosecutor says includes Texas Hold 'em.

"This office, over many years, interpreted that as a gambling game,'' McMaster said recently. "This is our law, and the people of our state, speaking through their elected representatives, have made this the law.''

South Carolina lawmakers have tried recently to change state gambling laws, but with no success. Last spring, lawmakers scuttled a chance that would have officially legalized games like Chimento's, sending the bill back to a House panel without debate.

Chimento says the men paid a $20 buy-in each to go toward pizza, beer and soft drinks for the group. The "house'' didn't take a cut of the money involved in each poker hand.

Police said the gathering was not merely a friendly game but an encounter that had been advertised online. They used an informant, armed with $100 in marked bills and recording devices, to gather information.

Mount Pleasant Municipal Judge J. Lawrence Duffy Jr.'s decision on whether Texas Hold 'em is more skill than chance will have direct bearing only on how the game is viewed at the local level.

If appealed, though, the case could reach the state Supreme Court, where justices could gauge the game's legality statewide.

"I don't know if what happens in South Carolina will be a harbinger of change in case law across the country,'' Pappas said. "It certainly sets a very valuable precedent to something that many scholars and poker players already agree on: that poker is a game of skill and not a game of luck.''

Original here

Obama's half-brother arrested on charge of marijuana possession

NAIROBI, Kenya (CNN) -- George Obama, the half-brother of U.S. President Barack Obama, has been arrested by Kenyan police on a charge of possession of marijuana, police said Saturday.

George Obama was arrested in Kenya on a charge for possession of marijuana, according to police.

George Obama was arrested in Kenya on a charge for possession of marijuana, according to police.

Inspector Augustine Mutembei, the officer in charge, said Obama was arrested on charges of possession of cannabis, known in Kenya as Bhang, and resisting arrest. He is scheduled to appear in court Monday, Mutembei said.

He is being held at Huruma police post in the capital of Nairobi.

Speaking from behind bars, Obama denied the allegations.

"They took me from my home," he said, "I don't know why they are charging me."

George Obama and the president barely know each other, though they have met. George Obama was one of the president's few close relatives who did not go to the inauguration in Washington last week.

In his memoir, "Dreams from My Father," Barack Obama describes meeting George as a "painful affair." Barack Obama's trip to Kenya meant meeting family he had never known.

McKenzie tracked down George Obama in August and found him at a small house in Huruma, a Nairobi slum, where he lives with his mother's extended family. His birth certificate shows that he is Barack Obama's half-brother.

The two men share a Kenyan father. In the memoir, Barack Obama struggles to reconcile with his father after he left him and his mother when he was just a child.

Barack Obama Sr. died in a car accident when George was just 6 months old. Like his half-brother, George hardly knew his father.

George was his father's last child and had not been aware of his famous half-brother growing up.

Unlike his grandmother in Kogela, in western Kenya, George Obama had received little attention from the media until reports about him surfaced in August.

The reports sprung from an Italian Vanity Fair article saying George Obama lived in a shack and was "earning less than a dollar a day." Those reports left George Obama angry.

"I was brought up well. I live well even now," he said. "The magazines, they have exaggerated everything.

"I think I kind of like it here. There are some challenges, but maybe it is just like where you come from, there are the same challenges," Obama said.

Obama, who is in his mid-20s, said at the time that he was learning to become a mechanic and was active in youth groups in Huruma. He said he tried to help the community as much as he can.

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Israel 'hides settlements data'

Cars drive past the Jewish settlement of Ofra in the West Bank
Illicit building has been taking place in well-established settlements, such as Ofra

The Israeli defence ministry has concealed information about the extent of illegal settlement-building in the West Bank, a leading newspaper reports.

A classified database of construction compiled by the ministry was leaked to the Israeli newspaper Haaretz.

It suggests most construction took place without the right permits, and more than 30 settlements were built in part on land owned by Palestinians.

Settlements are a contentious issue in the Israeli-Palestinian conflict.

The defence ministry has not commented on the report, which appears to contradict Israel's official position that it does not requisition private land for settlements.

The internationally-backed "road map" peace plan also calls on Israel to halt all settlement activity.

Publication 'blocked'

The database - compiled over about two years - was leaked to Haaretz by the Israeli human rights group Yesh Din.

Israeli police officers and soldiers remove Jewish settlers during the evacuation of a disputed house in the West Bank city of Hebron on 4 December 2008
Israel says it does not tolerate the seizure of private land for settlements
It focuses not only on some 100 unauthorised settler outposts, but also on about 120 settlements officially authorised since Israel captured the territory in the 1967 Arab-Israeli war.

An analysis of the data shows a big majority - about 75% - of construction in settlements was carried out without the right permit or in contravention of permits issued, Haaretz reported.

In more than 30 settlements, buildings including schools, synagogues and police stations, had been built on private Palestinian land.

The newspaper said Defence Minister Ehud Barak blocked publication of the data, arguing it could endanger state security or harm Israel's foreign relations.

Yesh Din told the BBC the report showed that the Israeli government ignored its own distinction between settlements considered legal under Israeli law, and illegal outposts built on privately owned land.

The group said it would use the information to help Palestinians sue Israel for damages.

Mitchell visit

The Haaretz article comes in the same week as the visit of the new US envoy to the Middle East, George Mitchell.

In 2001 he released a report which called on Israel to freeze settlement building.

Earlier this week Israeli Prime Minister Ehud Olmert was quoted in another newspaper as saying he had offered in talks with the Palestinians to remove 60,000 settlers from the West Bank.

Haaretz says the right-wing opposition leader Benjamin Netanyahu has vowed not to be tied to any pledges to withdraw settlers.

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Zimbabwe's starving millions face halving of rations as UN cash dries up

Chris McGreal, Africa correspondent

Aid workers offload supplies for people in Harare

Aid workers offload supplies for people in Harare Photograph: Desmond Kwande/AFP/Getty Images

The United Nations is to halve the food ration to millions of Zimbabweans, bringing it below what will keep an adult alive, as the numbers of people dependent on aid rises sharply and donations from foreign governments fall well short of demand.

The World Food Programme is to cut the core maize ration in February from 10kg to 5kg a month – or just 600 calories a day – for 7 million Zimbabweans, about 70% of the people left in the country. The recommended ration is 12kg a month.

As a result of the cuts, many Zimbabweans will be fortunate to eat once a day. Millions have been left dependent on food aid because of years of crop failures mostly caused by the knock-on effects of the government's seizure of white-owned farms and the collapse of the economy and infrastructure. Most shops sell food only for US dollars because hyperinflation has wiped out the value of the Zimbabwe currency, and what is available is relatively expensive imports beyond the reach of the mass of unemployed and desperate Zimbabweans.

The WFP says it has cut the ration to meet increased demand and cope with a shortfall in donations. It says it requires another $65m to keep feeding Zimbabweans until the end of March. But donors are reluctant to put more resources into the beleaguered African state and what aid there is has been partly diverted to the cholera crisis that has claimed 3,000 lives.

Richard Lee, a WFP spokesman in southern Africa, said that while the calorie count would be boosted by a ration of beans and vegetable oil, recipients of food aid would now have to find additional means to stay alive.

"The new ration falls below what is considered the survival ration. They will be sending their children to hunt for wild fruits or selling the possessions they haven't already sold to buy food," he said. "People will be more vulnerable, they will be more malnourished and they will be more susceptible to disease."

Oxfam is feeding 253,000 in Zimbabwe's Midlands province. One of its workers there, Caroline Gluck, said the organisation relied on food supplied by the WFP and so would be forced to halve the ration.

"Families are being stretched. They're selling livestock, they're selling household goods to buy staple foods," she said. "People told us they were having a meal a day. Sometimes adults are skipping a meal so the children can be fed. They are supplementing what they have with wild fruits.

"But now it's going to be a disaster because people have sold what they can sell. There's very little they can do to supplement their rations. I think it's going to be extremely hard for families, it's going to make them incredibly vulnerable. You look at people and they are already thin, their frames are skin and bone. When you look at the fields you see there's been no agricultural inputs. The soil is little better than sand."

The WFP is already feeding about 4.5 million Zimbabweans, with a coalition of non-governmental organisations distributing to another million. Next month, the total number of Zimbabweans reliant on food aid will rise by 1.5 million.

"We are concerned. The reason we are cutting the ration is so we do provide assistance to everybody who needs food assistance so that we can make sure they can get through these two hungriest and worst months of the year, February and March, before the harvest starts in April," said Lee.

"But on top of that we haven't received all the resources we had hoped for. The donors have been very generous. We've now received over $200m for our operations in Zimbabwe in 2008 and 2009. It's just that the scale of the crisis, the worsening crisis, means that we do require additional resources."

The food shortages are contributing to the rising number of cholera deaths. About 1,000 people have died in the past fortnight, many of them too weak for treatment because they have not had enough to eat. Nearly 58,000 people have been infected.

The food crisis has been compounded by the government's failure to meet a target of importing 800,000 tonnes of maize. It is believed to have bought only 200,000 tonnes.

The April harvest is unlikely to bring relief. Agriculturalists say it will again fail; they estimate it will provide less than a quarter of the country's needs and that drastic food shortages will continue into next year once the results of the harvest have been consumed.

Original here

World gets its first gay leader

By Peter Popham

Johanna Sigurdardottir is Iceland's new Prime Minister Johanna Sigurdardottir is Iceland's new Prime Minister

The first government collapse of the global economic crisis is about to yield the world's first openly-gay leader. Johanna Sigurdardottir, a former air hostess, is expected to be sworn in as Iceland's Prime Minister by the end of the week.

Her moment in the international spotlight comes at the most horrendous moment in her nation's recent history. As the global meltdown began, the collapse of Iceland's grossly over-leveraged economy was followed smartly by the implosion of its banks and currency. Now its government has gone the same way, the first to succumb to the backwash from the crisis.

Ms Sigurdardottir's party, the Social Democrat Alliance, was asked to form a new government but its leader is taking a leave of absence to recover from treatment for a benign tumour. And so, "Saint Johanna", as she has come to be known, has been propelled from the social affairs ministry – which she has presided over for a decade – to take centre stage in a choice hailed as "unexpected but brilliant".

The 66-year-old politician lives with her partner, Jonina Leosdottir, a journalist and playwright. The couple were joined in a civil ceremony in 2002. Don't expect them to show up togetherfor photocalls, however – that's not the Icelandic way. Though she is famous across the island, having been a top politician for years, her lesbian union was no big deal in this calmly progressive nation of only 300,000 people.

"Johanna is a very private person," said an Icelandic government source. "A lot of people didn't even know she was gay. When they learn about it people tend to shrug and say, 'Oh'. That's not to say they are not interested; they are interested in who she's living with – but no more so than if she was a man living with a woman."

Ms Sigurdardottir has two grown-up sons. She entered politics via the labour movement, was first elected to parliament in 1978 and was given her first ministerial office in 1987. She will be Prime Minister of a minority caretaker government composed of her Social Democratic Alliance and the Left-Greens, with outside support. It is only expected to hold office for two or three months, until fresh elections are called.

"In opinion polls Johanna has repeatedly been chosen as the most popular politician in Iceland," said the government source. "She is a good choice, because one of the problems the government is facing is lack of trust. Getting Johanna to become Prime Minister was a way of saying trust is an issue. Politicians want a fresh mandate from the electorate and, before they get it, they need to rebuild trust. Choosing Johanna is a way of saying, 'Let's bridge this gap, let's have peace to be able to implement the emergency measures'."

Geir Haarde, the former prime minister, endured months of angry protests over his poor handling of the economy; demonstrators pelted his car with eggs and police were forced to use tear gas on the streets for the first time in 50 years. Compare that to a poll in November that gave Ms Sigurdardottir a 73 per cent approval rating, she was the only minister to improve on the previous year's score.

"She is often described as the only politician who really cares about the little guy," wrote Icelandic journalist Iris Erlingsdottir in a blog this week.

She did stand for the leadership of her party back in 1994 and lost badly, but in her concession speech she predicted "my time will come". And some 15 years later, it truly has.

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