Tuesday, May 20, 2008

Attack Iran, Trash the Constitution

Attack Iran, Trash the Constitution

By Ray McGovern

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Dear Admiral Fallon,

I have not been able to find out how to reach you directly, so I drafted this letter in the hope it will be brought to your attention.

First, thank you for honoring the oath we commissioned officers take to protect and defend the Constitution of the United States from all enemies, foreign and domestic. At the same time, you have let it be known that you do not intend to speak, on or off the record, about Iran.

But our oath has no expiration date. While you are acutely aware of the dangers of attacking Iran, you seem to be allowing an inbred reluctance to challenge the commander in chief to trump that oath, and to prevent you from letting the American people know of the catastrophe about to befall us if, as seems likely, our country attacks Iran.

Two years ago I lectured at the Naval Academy in Annapolis. I found it highly disturbing that, when asked about the oath they took upon entering the academy, several of the "Mids" thought it was to the commander in chief.

This brought to my mind the photos of German generals and admirals (as well as top church leaders and jurists) swearing personal oaths to Hitler. Not our tradition, and yet…

I was aghast that only the third Mid I called on got it right – that the oath is to protect and defend the Constitution, not the president.

Attack Iran and Trash the Constitution

No doubt you are very clear that an attack on Iran would be a flagrant violation of our Constitution, which stipulates that treaties ratified by the Senate become the supreme law of the land; that the United Nations Charter – which the Senate ratified on July 28, 1945, by a vote of 89 to 2 – expressly forbids attacks on other countries unless they pose an imminent danger; that there is no provision allowing some other kind of "preemptive" or "preventive" attack against a nation that poses no imminent danger; and that Iran poses no such danger to the United States or its allies.

You may be forgiven for thinking: Isn't 41 years of service enough; isn't resigning in order to remove myself from a chain of command that threatened to make me a war criminal for attacking Iran; isn't making my active opposition known by talking to journalists – isn't all that enough?

With respect, sir, no, that's not enough.

The stakes here are extremely high, and with the integrity you have shown goes still further responsibility. Sadly, the vast majority of your general officer colleagues have, for whatever reason, ducked that responsibility. You are pretty much it.

In their lust for attacking Iran, administration officials will do their best to marginalize you. And, as prominent a person as you are, the corporate media will do the same.

Indeed, there are clear signs the media have been given their marching orders to support attacking Iran.

At CIA I used to analyze the Soviet press, so you will understand when I refer to the Washington Post and the New York Times as the White House's Pravda and Izvestiya.

Sadly, it is as easy as during the days of the controlled Soviet press to follow the U.S. government's evolving line with a daily reading. In a word, our newspapers are revving up for war on Iran, and have been for some time.

In some respects the manipulation and suppression of information in the present lead-up to an attack on Iran is even more flagrant and all encompassing than in early 2003 before the invasion of Iraq.

It seems entirely possible that you are unaware of this, precisely because the media has put the wraps on it, so let me adduce a striking example of what is afoot here.

The example has to do with the studied, if disingenuous, effort over recent months to blame all the troubles in southern Iraq on the "malignant" influence of Iran.

But Not for Fiasco

Joint Chiefs of Staff Chairman Adm. Mike Mullen told reporters on April 25 that Gen. David Petraeus would be giving a briefing "in the next couple of weeks" that would provide detailed evidence of "just how far Iran is reaching into Iraq to foment instability."

Petraeus' staff alerted U.S. media to a major news event in which captured Iranian arms in Karbala would be displayed and then destroyed.

Small problem. When American munitions experts went to Karbala to inspect the alleged cache of Iranian weapons they found nothing that could be credibly linked to Iran.

News to you? That's because this highly embarrassing episode went virtually unreported in the media – like the proverbial tree falling in the forest with no corporate media to hear it crash.

So Mullen and Petraeus live, uninhibited and unembarrassed, to keep searching for Iranian weapons so the media can then tell a story more supportive to efforts to blacken Iran. A fiasco is only a fiasco if folks know about it.

The suppression of this episode is the most significant aspect, in my view, and a telling indicator of how difficult it is to get honest reporting on these subjects.

Meanwhile, it was announced that Iraqi Prime Minister Nouri al-Maliki had formed his own Cabinet committee to investigate U.S. claims and attempt to "find tangible information and not information based on speculation."

Dissing the Intelligence Estimate

Top officials from the president on down have been dismissing the dramatically new conclusion of the National Intelligence Estimate released on Dec. 3, 2007, a judgment concurred in by the 16 intelligence units of our government, that Iran had stopped the weapons-related part of its nuclear program in mid-2003.

Always willing to do his part, the malleable CIA chief, Michael Hayden, on April 30 publicly offered his "personal opinion" that Iran is building a nuclear weapon – the National Intelligence Estimate notwithstanding.

For good measure, Hayden added: "It is my opinion, it is the policy of the Iranian government, approved to the highest level of that government, to facilitate the killing of Americans in Iraq. … Just make sure there's clarity on that."

I don't need to tell you about the Haydens and other smartly saluting generals in Washington.

Let me suggest that you have a serious conversation with Gen. Anthony Zinni, one of your predecessor Centcom commanders (1997 to 2000).

As you know better than I, this Marine general is also an officer with unusual integrity. But placed into circumstances virtually identical to those you now face, he could not find his voice.

He missed his chance to interrupt the juggernaut to war in Iraq; you might ask him how he feels about that now, and what he would advise in current circumstances.

Zinni happened to be one of the honorees at the Veterans of Foreign Wars convention on Aug. 26, 2002, at which Vice President Dick Cheney delivered the exceedingly alarmist speech, unsupported by our best intelligence, about the nuclear threat and other perils awaiting us at the hands of Saddam Hussein.

That speech not only launched the seven-month public campaign against Iraq leading up to the war, but set the terms of reference for the Oct. 1, 2002, National Intelligence Estimate fabricated – yes, fabricated – to convince Congress to approve war on Iraq.

Gen. Zinni later shared publicly that, as he listened to Cheney, he was shocked to hear a depiction of intelligence that did not square with what he knew. Although Zinni had retired two years earlier, his role as consultant had required him to stay up to date on intelligence relating to the Middle East.

One Sunday morning three and a half years after Cheney's speech, Zinni told Meet the Press: "There was no solid proof that Saddam had weapons of mass destruction. … I heard a case being made to go to war."

Gen. Zinni had as good a chance as anyone to stop an unnecessary war – not a "preemptive war," since there was nothing to preempt – and Zinni knew it. No, what he and any likeminded officials could have stopped was a war of aggression, defined at the post-WWII Nuremberg Tribunal as the "supreme international crime."

Sure, Zinni would have had to stick his neck out. He may have had to speak out alone, since most senior officials, like then-CIA Director George Tenet, lacked courage and integrity.

In his memoir published a year ago, Tenet says Cheney did not follow the usual practice of clearing his Aug. 26, 2002, speech with the CIA; that much of what Cheney said took him completely by surprise; and that Tenet "had the impression that the president wasn't any more aware of what his number-two was going to say to the VFW until he said it."

It is a bit difficult to believe that Cheney's shameless speech took Tenet completely by surprise.

We know from the Downing Street Minutes, vouched for by the UK as authentic, that Tenet told his British counterpart on July 20, 2002, that the president had decided to make war on Iraq for regime change and that "the intelligence and facts were being fixed around the policy"

Encore: Iran

Admiral Fallon, you know that to be the case also with respect to the "intelligence" being conjured up to "justify" war with Iran. And no one knows better than you that your departure from the chain of command has turned it over completely to the smartly saluting sycophants.

No doubt you have long since taken the measure, for example, of Defense Secretary Robert Gates. So have I.

I was one of his first branch chiefs when he was a young, disruptively ambitious CIA analyst. When Ronald Reagan's CIA Director William Casey sought someone to shape CIA analysis to accord with his own conviction that the Soviet Union would never change, Gates leaped at the chance.

After Casey died, Gates admitted to the Washington Post's Walter Pincus that he (Gates) watched Casey on "issue after issue sit in meetings and present intelligence framed in terms of the policy he wanted pursued." Gates' entire subsequent career showed that he learned well at Casey's knee.

So it should come as no surprise that, despite the unanimous judgment of the 16 U.S. intelligence agencies that Iran stopped the weapons related aspects of its nuclear program, Gates is now saying that Iran is hell-bent on acquiring nuclear weapons.

Some of his earlier statements were more ambiguous, but Gates recently took advantage of the opportunity to bend with the prevailing winds and leave no doubt as to his loyalty.

In an interview on events in the Middle East with a New York Times reporter on April 11, Gates was asked whether he was on the same page as the president. Gates replied, "Same line, same word."

I imagine you are no more surprised than I. Bottom line: Gates will salute smartly if Cheney persuades the president to let the Air Force and Navy loose on Iran.

You know the probable consequences; you need to let the rest of the American people know.

A Gutsy Precedent

Can you, Admiral Fallon, be completely alone? Can it be that you are the only general officer to resign on principle?

And, of equal importance, is there no other general officer, active or retired, who has taken the risk of speaking out in an attempt to inform Americans about President George W. Bush's bellicose fixation with Iran? Thankfully, there is.

Gen. Brent Scowcroft, who was national security adviser to President George H.W. Bush, took the prestigious job of chairman of the President's Foreign Intelligence Advisory Board when asked to by the younger Bush.

From that catbird seat, Scowcroft could watch the unfolding of U.S. policy in the Middle East. Over decades dealing with the press, Scowcroft had honed a reputation of quintessential discretion. All the more striking what he decided he had to do.

In an interview with London's Financial Times in mid-October 2004 Scowcroft was harshly critical of the president, charging that Bush had been "mesmerized" by then Israeli Prime Minister Ariel Sharon.

"Sharon just has him wrapped around his little finger," Scowcroft said. "He has been nothing but trouble."

Needless to say, Scowcroft was given his walking papers and told never to darken the White House doorstep again.

There is ample evidence that Sharon's successors believe they have a commitment from President Bush to "take care of Iran" before he leaves office, and that the president has done nothing to disabuse them of that notion – no matter the consequences.

On May 18, speaking at the World Economic Forum at Sharm el-Sheikh, Bush threw in a gratuitous reference to "Iran's nuclear weapons ambitions." He said:

"To allow the world's leading sponsor of terror to gain the world's deadliest weapon would be an unforgivable betrayal of future generations. For the sake of peace, the world must not allow Iran to have a nuclear weapon."

Pre-briefing the press, Bush's National Security Adviser Stephen Hadley identified Iran as one of the dominant themes of the trip, adding repeatedly that Iran "is very much behind" all the woes afflicting the Middle East, from Lebanon to Gaza to Iraq to Afghanistan.

The Rhetoric Is Ripening

In the coming weeks, at least until U.S. forces can find some real Iranian weapons in Iraq, the rhetoric is likely to focus on what I call the Big Lie – the claim that Iran's president has threatened to "wipe Israel off the map."

In that controversial speech in 2005, Ahmadinejad was actually quoting from something the Ayatollah Khomeini had said in the early 1980s. Khomeini was expressing a hope that a regime treating the Palestinians so unjustly would be replaced by another more equitable one.

A distinction without a difference? I think not. Words matter.

As you may already know (but the American people don't), the literal translation from Farsi of what Ahmadinejad said is, "The regime occupying Jerusalem much vanish from the pages of time."

Contrary to what the administration would have us all believe, the Iranian president was not threatening to nuke Israel, push it into the sea, or wipe it off the map.

President Bush is way out in front on this issue, and this comes through with particular clarity when he ad-libs answers to questions.

On Oct. 17, 2007, long after he had been briefed on the key intelligence finding that Iran had stopped the nuclear weapons-related part of its nuclear development program, the president spoke as though, well, "mesmerized." He said:

"But this – we got a leader in Iran who has announced he wants to destroy Israel. So I've told people that if you're interested in avoiding World War III, it seems you ought to be interested in preventing them from have [sic] the knowledge necessary to make a nuclear weapon. I take the threat of Iran with a nuclear weapon very seriously."

Some contend that Bush does not really believe his rhetoric. I rather think he does, for the Israelis seem to have his good ear, with the tin one aimed at U.S. intelligence he has repeatedly disparaged.

But, frankly, which would be worse: that Bush believes Iran to be an existential threat to Israel and thus requires U.S. military action? Or that it's just rhetoric to "justify" U.S. action to "take care of" Iran for Israel?

What you can do, Admiral Fallon, is speak authoritatively about what is likely to happen – to U.S. forces in Iraq, for example – if Bush orders your successors to begin bombing and missile attacks on Iran.

And you could readily update Scowcroft's remarks, by drawing on what you observed of the Keystone Cops efforts of White House ideologues, like Iran-Contra convict Elliot Abrams, to overturn by force the ascendancy of Hamas in 2006-07 and Hezbollah more recently. (Abrams pled guilty to two misdemeanor counts of misleading Congress, but was pardoned by President George H.W. Bush on Dec. 24, 1992.)

It is easy to understand why no professional military officer would wish to be in the position of taking orders originating from the likes of Abrams.

If you weigh in as your (non-expiring) oath to protect and defend the Constitution dictates, you might conceivably prompt other sober heads to speak out.

And, in the end, if profound ignorance and ideology – supported by the corporate press and by both political parties intimidated by the Israel lobby – lead to an attack on Iran, and the Iranians enter southern Iraq and take thousands of our troops hostage, you will be able to look in the mirror and say at least you tried.

You will not have to live with the remorse of not knowing what might have been, had you been able to shake your reluctance to speak out.

There is a large Tar Baby out there – Iran. You may remember that as Brer Rabbit got more and more stuck, Brer Fox, he lay low.

A "Fox" Fallon, still pledged to defend the Constitution of the United States, cannot lie low – not now.



Ray McGovern; Steering Group; Veteran Intelligence Professionals for Sanity (VIPS)

Report: EPA Head Reversed Stand on Greenhouse Gas

Report: EPA Head Reversed Stand on Greenhouse Gas

By Erica Werner

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Washington - The head of the Environmental Protection Agency initially supported giving California and other states full or partial permission to limit tailpipe emissions - but reversed himself after hearing from the White House, a report said Monday.

The report by the Democratic staff of the House Oversight and Government Reform Committee cites interviews and depositions with high-level EPA officials. It amounts to the first solid evidence of the political interference alleged by Democrats and environmentalists since Administrator Stephen Johnson denied California's waiver request in December.

Johnson's decision also blocked more than a dozen other states that wanted to follow California's lead and regulate greenhouse gas emissions from cars and trucks. It was applauded by the auto industry and supported by the White House, which has opposed mandatory caps on greenhouse gas emissions.

Johnson, a 27-year career veteran of the EPA, frequently has denied that his decisions are being directed by the White House. "I am the decision maker," Johnson said Monday, meeting with reporters at the Platt's Energy Podium newsmaker session, before the California waiver report surfaced.

A White House spokeswoman denied interference.

Johnson "made an independent decision," said Kristen Hellmer, spokeswoman for the White House Council on Environmental Quality.

That's not what staff of the Oversight Committee, chaired by Rep. Henry Waxman, D-Calif., concluded after hearing from eight EPA officials and reviewing over 27,000 pages of EPA documents, some obtained under subpoena.

Perhaps the strongest evidence came from EPA Associate Deputy Administrator Jason Burnett, a political appointee.

Deposed under oath, Burnett told committee staff that Johnson "was very interested in a full grant of the waiver" in August and September of 2007 and later thought a partial grant - allowing the waiver for two or three years - "was the best course of action."

Johnson's position changed after Johnson communicated with the White House, Burnett said.

Burnett also said there was White House input into the December letter to Gov. Arnold Schwarzenegger announcing the waiver denial, and into the formal decision document released in February.

The committee was stymied in its attempts to discover the extent and rationale for the White House's involvement.

Burnett refused to answer questions about whom Johnson talked to and when, saying EPA told him not to.

Also, the EPA continues to withhold documentation of contacts with the White House, the report said. The White House Counsel's office told committee investigators the EPA has 32 documents showing telephone calls or meetings involving at least one high-ranking EPA official and at least one assistant to the president or the president. The Counsel's office described these documents as "indicative of deliberations at the very highest level of government."

"It appears that the White House played a significant role in the reversal of the EPA position," the report concludes.

EPA spokesman Jonathan Shradar dismissed the report as "nothing new."

Johnson "made his decision based on the facts and the law," Shradar said. He did not respond when asked if it was true Johnson initially supported the waiver.

Rep. Tom Davis of Virginia, top Republican on the Oversight Committee, asserted that if the decision had gone the other way, there would be no complaints of presidential meddling.

"Yes, the White House was involved," Davis said in a statement. "Just as President Clinton's White House was involved in 107 agency rule-makings.... The majority's problem is not with the process; it's with the outcome."

The committee also found, as has been previously reported, that career EPA staff was unanimously in favor of granting the California waiver and believed that a denial would not stand up in court. The report detailed previously unreported attempts by political appointees to soft-pedal EPA staff conclusions supporting the waiver in presentations to Johnson, or to avoid committing them to paper.

An internal EPA e-mail said Bob Meyers, the principal deputy assistant administrator for the Office of Air and Radiation, was "not happy" that a staff conclusion that California met the waiver criteria was included in a briefing to Johnson last summer. Meyers' chief of staff suggested staff should "permanently delete the offending language and not have it arise again."

Because California began regulating air emissions before the federal government it has unique authority under the Clean Air Act to institute its own air rules if it gets a federal waiver. Other states can then follow California's rules or the federal ones. No waiver request had previously been fully denied.

California's law would have forced automakers to cut greenhouse gas emissions by 30 percent in new cars and light trucks by 2016, beginning with the 2009 model year. Thirteen other states already have adopted the standards - Arizona, Connecticut, Maine, Maryland, Massachusetts, New Mexico, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington.

Johnson justified denying the waiver by arguing that California is not alone in suffering the effects of global warming and therefore doesn't have a compelling need for its own greenhouse gas standards. A new federal fuel efficiency law is a better approach, he said, though California officials argue their law is tougher and faster-acting.

The EPA has been sued by California, other states and environmental groups over the decision, and Sen. Barbara Boxer, D-Calif., has introduced legislation to overturn it. Boxer plans to bring her bill to a vote Wednesday in the Environment and Public Works Committee she chairs.

I Declared My Independence By Cynthia McKinney

I Declared My Independence

By Cynthia McKinney

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On my birthday last year, I declared my independence from a national leadership that, through its votes in support of the war machine, is now complicit in war crimes, torture, crimes against humanity, and crimes against the peace.I declared my independence from every bomb dropped, every veteran maimed, and every child killed. I noted that the Democratic leadership in Congress had failed to restore this country to Constitutional rule by repealing the Patriot Acts, the Secret Evidence Act, and the Military Commissions Act. That it had aided and abetted illegal spying against the American people. And that it took impeachment off the table.

In addition, the Democratic Congressional leadership failed to promote the economic integrity of this country by not repealing the Bush tax cuts. They failed to institute a livable wage, Medicare-for- all health care, and gave even more money to the Pentagon as it misuses our hard-earned dollars.
We can add to that list, too, an abject failure to stand up for human rights and dignity.

If the Democratic and Republican leadership won't respect the right of return for Hurricanes Katrina and Rita survivors, how can we expect them to champion the right of return for Palestinians?

If this country's leadership tolerates the wanton murder of unarmed black and Latino men by law enforcement officials—extra-judicial killings—how can we expect them to stop or even speak out against targeted assassinations in the Middle East?

If the Democratic and Republican leadership accept ethnic cleansing in this country by way of gentrification and predatory lending, why should we expect them to put an end to it in Palestine?

If the leadership of this country impedes self-determination for native peoples in this country, why should we expect them to support indigenous rights for anyone abroad?

And sadly, the sensationalist corporate media would rather trick us into thinking that reporting on a pastor, a former Vice Presidential nominee, and a former cable TV magnate constitutes this country's much-needed discussion of its own apartheid past and present, so why should we expect an honest discussion of apartheid and Zionism?

I hope by now it is clear. Our values will never be reflected in public policy as long as our political parties and our country remain hijacked. Hijacked by false patriots who usurp the applause of the people and all the while betray our values.

I've decided that neither the Democrats nor the Republicans will operate any longer as business as usual—not in my name. That Democrats and Republicans will use my tax dollars and betray my values, not one day longer—not in my name. That neither the Democrats nor the Republicans have earned my most precious political asset—my vote. And that now is the time to do some things I've never done before in order to have some things I've never had before. And so here today, I declare my independence from weapons transfers: including Apache Helicopters; F'16s; sidewinder, hellfire, and Stinger missiles.

I declare my independence from occupation, demolished homes, political prisoners, and babies dying at checkpoints.

I declare my independence from UN vetoes, expropriated land, stolen resources, and the installation of puppet regimes.

I declare my independence from all forms of dehumanization and am not afraid to speak truth to power. And I am happy to join with peace-loving people around the world who know that there can be no peace without justice.

Let us never tire in our work for justice. Thank you.

Credit Crisis Will Extend Into 2009, Oppenheimer Says

US Navy Aircraft Violates Venezuela's Airspace

By Patricia Rondon

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Caracas - A US Navy jet violated Venezuelan airspace around two small Caribbean islands over the weekend in what the South American country said was a provocation coordinated with neighboring Colombia.

Venezuela and the United States bicker over everything from energy policy to arms sales. The incursion comes amid heightened tensions over accusations that Venezuela helped a guerrilla army fighting the government in U.S. ally Colombia.

The Pentagon said a Navy aircraft on a counternarcotics mission had navigation problems that led it to stray into Venezuelan airspace on Saturday.

The U.S. ambassador in Caracas was being summoned to explain the incident, Venezuela's foreign minister said.

"In the event a U.S. aircraft unintentionally enters into the sovereign airspace of another nation, its crew is required to take swift action to exit the airspace and report the incident to their immediate chain of command, which this aircrew apparently did," said U.S. Navy Cmdr. J.D. Gordon, a Pentagon spokesman.

The anti-Washington government of President Hugo Chavez said the flight, which took the jet close to the OPEC member's presidential retreat on the island of La Orchila, was a provocation after Venezuela accused Colombian troops of crossing its border.

"This was a conscious action by the U.S. Navy," Defense Minister Gustavo Rangel said at a news conference. "This is just the latest step in a series of provocations."

Rangel said such incidents probably had happened in the past, but now Venezuela has equipment to detect airspace violations in the area.

Viking S-3

The U.S. warplane penetrated Venezuelan airspace around La Orchila and another island about 80 miles from the country's mainland, Rangel said.

Venezuela's air traffic control contacted the aircraft after it entered Venezuela's airspace. The jet identified itself and told the Venezuelan authorities a possible navigation error had occurred, the Pentagon said.

The incident came against a backdrop of tensions between Venezuela and Colombia and the United States. Last week they said an Interpol probe into rebel document proved Chavez has links to Colombian guerrillas.

Chavez rejected the investigation and said he was reviewing ties and trade with Colombia because of the accusations.

A U.S. defense official said the plane was a Viking S-3, a jet often used in anti-drugs operations to track and attack boats.

Chavez frequently accuses the United States and Colombia of plotting to invade Venezuela, one of the largest oil exporters to the United States.

Colombia specifically denied Chavez's charge over the weekend that 60 Colombian soldiers strayed some 500 yards (460 meters) into Venezuelan territory on Friday.

The jet in Saturday's incident belongs to the Joint Interagency Task Force South, an anti-drugs operation based in Florida. It was on a mission from the Caribbean island of Curacao, a U.S. official said.

Curacao is a former Dutch colony that the United States uses for military training.

La Orchila has a military base in addition to the presidential residence. It is well-known in Venezuela because Chavez was held prisoner there during a brief coup against him in 2002. Venezuela generally bans all but its military from flying over the island.

Target Profit Declines as Consumers Curb Spending

Target Profit Declines as Consumers Curb Spending

By Lauren Coleman-Lochner

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Target Corp., the second-largest U.S. discount retailer, said first-quarter profit fell after shoppers curbed purchases of clothing and home goods.

Net income dropped 7.5 percent $602 million, or 74 cents a share, from $651 million, or 75 cents, a year earlier, Target said today in a statement. Revenue advanced 5.4 percent to $14.8 billion.

Consumers contending with rising fuel and food costs have cut spending on the more profitable jewelry, home goods and clothing Target sells in favor of food and pharmacy items. At the same time, larger competitor Wal-Mart Stores Inc. is upgrading its general merchandise and vying for shoppers with discounts on groceries and drugs.

‘‘Their core customer is still sensitive to the economy, price increases, the price of gas, and a lot of items at Target are discretionary purchases,'' said David Abella, who helps manage $2.5 billion in assets, including Target shares, for Rochdale Investment Management LLC in New York.

Twenty-one analysts surveyed by Bloomberg estimated profit of 71 cents a share, on average.

Target also said it completed the $3.6 billion sale of 47 percent of its credit-card loans to JPMorgan Chase & Co yesterday.

Target advanced 7 cents to $54.99 at 9:33 a.m. in New York Stock Exchange composite trading. Before today, the shares rose 9.8 percent this year.

Home Depot Profit Drops 66% on U.S. Housing Slump

Home Depot Profit Drops 66% on U.S. Housing Slump

By Mark Clothier

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Home Depot Inc., the largest home- improvement retailer, said first-quarter profit fell 66 percent as consumers grappling with the deepest U.S. housing slump in more than 25 years cut back on remodeling projects.

Full-year earnings may be at the low end of its previous forecast, Chief Financial Officer Carol Tome said today. Home Depot fell 4.3 percent in New York trading.

Chief Executive Officer Frank Blake, who took over from Robert Nardelliprofit has declined the past seven quarters, while Lowe's Cos. earnings have fallen in five of the past six. last year, cut headquarters jobs and hired plumbers and electricians to advise consumers who have limited spending as they pay more for food and gasoline. Home Depot

‘‘The home-improvement market remains difficult, but we believe the results show that Home Depot is making early progress in its efforts to refocus,'' Chris Horvers, an analyst with Bear Stearns & Co., wrote in a research note today.

Net income decreased to $356 million, or 21 cents a share, from $1.05 billion, or 53 cents, a year earlier, on costs to close stores, Atlanta-based Home Depot said in a statement. Profit excluding some expenses was 41 cents a share, beating analysts' estimates by 4 cents.

Revenue for the three months through May 4, excluding the wholesale-supply unit Home Depot sold last year, fell 3.4 percent to $17.9 billion.

Home Depot declined $1.25 to $27.62 at 10:17 a.m. in composite trading on the New York Stock Exchange. Home Depot gained 7.2 percent this year through yesterday after falling each of the previous three years. Lowe's has also increased 7.2 percent.

‘Severe Recession'

‘‘These results really reflect what we're seeing in the housing market,'' Jeffrey Malcom, who helps manage $500 million at Horan Capital Management LLC in Towson, Maryland, said today in a Bloomberg Radio interview. ‘‘It's a severe recession at this point.'' Horan owned about 1.1 million Home Depot shares through March.

Twenty-one analysts estimated profit of 37 cents a share excluding some costs, the average in a Bloomberg survey. Seventeen analysts projected sales of $17.6 billion.

‘‘The housing and home improvement markets remained difficult in the first quarter; in fact, conditions worsened in many areas of the country,'' Blake said in the statement. ‘‘We will continue to invest wisely in our core retail business.''

Profit Forecast

Home Depot reiterated May 1 that profit from continuing operations for the year that ends in early 2009 is expected to drop 19 percent to 24 percent from a year earlier. Home Depot is ‘‘comfortable'' with the low end of the range, Tome said today on a conference call with analysts and investors.

Sales at stores open at least a year dropped 6.5 percent, helped by an extra week. That was less than the 7 percent decline estimated by Horvers. He recommends investors buy Home Depot shares. So-called same-store sales have declined the past two years.

The retailer said May 1 that it will eliminate 1,300 jobs, close 15 stores and scrap plans for 50 more. The moves cost Home Depot $543 million in the first quarter.

Slowing the store openings will free up $1 billion over three years, Blake said on a conference call with analysts and investors.

‘‘Home Depot is bouncing back from the problems that Nardelli passed along,'' Burt Flickinger, managing director at New York-based Strategic Resource Group, said in a Bloomberg Television interview. Blake ‘‘is doing a great job with his team in rebuilding the business for the future.''

Lowe's Profit

Profit at Lowe's dropped 18 percent to $607 million, or 41 cents a share, and the retailer forecast full-year earnings that trail some analysts' estimates. Sales declined 1.3 percent to $12 billion, Mooresville, North Carolina-based Lowe's said yesterday.

Record gasoline prices that surged past $3.75 a gallon and declining home values have caused consumers to limit spending, pushing the U.S. economy toward a recession. U.S. consumer confidence, as measured by the Reuters/University of Michigan preliminary index of consumer sentiment, fell in May to the lowest level in almost 28 years, according to the survey released May 16.

Sales of previously owned homes, which account for about 85 percent of the housing market, fell in March, the seventh decline in eight months. Purchases of existing houses typically trigger home-improvement spending as owners prepare for a sale and buyers paint or remodel after moving in.

Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults

Hedge Funds in Swaps Face Peril With Rising Junk Bond Defaults

By David Evans

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It's Friday, March 14, and hedge fund adviser Tim Backshall is trying to stave off panic. Backshall sits in the Walnut Creek, California, office of his firm, Credit Derivatives Research LLC, at a U-shaped desk dominated by five computer monitors.

Bear Stearns Cos. shares have plunged 50 percent since trading began today, and his fund manager clients, some of whom have their cash and other accounts at Bear, worry that the bank is on the verge of bankruptcy. They're unsure whether they should protect their assets by purchasing credit-default swaps, a type of insurance that's supposed to pay them face value if Bear's debt goes under.

Backshall, 37, tells them there are two rubs: The price of the swaps is skyrocketing by the minute, and the banks selling the insurance are also at risk of collapsing. If Bear goes down, he tells them, it may take other banks with it.

‘‘There's always the danger the bank selling you the protection on Bear will fail,'' Backshall says. If that were to happen, his clients could spend millions of dollars for worthless insurance.

Investors can't tell whether the people selling the swaps - - known as counterparties -- have the money to honor their promises, Backshall says between phone calls.

‘‘It's clearly a combination of absolute fear and investors really not knowing,'' he says.

On this day, a CDS-market meltdown doesn't happen. In a frenzy of weekend activity, the Federal Reserve and JPMorgan Chase & Co. rescue Bear Stearns from bankruptcy -- removing the need for the sellers of credit-default protection to pay up on their contracts.

Chain Reaction

Backshall and his clients aren't the only ones spooked by the prospect of a CDS catastrophe. Billionaire investor George Soros says a chain reaction of failures in the swaps market could trigger the next global financial crisis.

CDSs, which were devised by J.P. Morgan & Co. bankers in the early 1990s to hedge their loan risks, now constitute a sprawling, rapidly growing market that includes contracts protecting $62 trillion in debt.

The market is unregulated, and there are no public records showing whether sellers have the assets to pay out if a bond defaults. This so-called counterparty risk is a ticking time bomb.

‘‘It is a Damocles sword waiting to fall,'' says Soros, 77, whose new book is called ‘‘The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means'' (PublicAffairs).

‘‘To allow a market of that size to develop without regulatory supervision is really unacceptable,'' Soros says.

‘Lumpy Exposures'

The Fed bailout of Bear Stearns on March 17 was motivated, in part, by a desire to keep that sword from falling, says Joseph Mason, a former U.S. Treasury Department economist who's now chair of the banking department at Louisiana State University's E.J. Ourso College of Business.

The Fed was concerned that banks might not have the money to pay CDS counterparties if there were large debt defaults, Mason says.

‘‘The Fed's fear was that they didn't adequately monitor counterparty risk in credit-default swaps -- so they had no idea of where to lend nor where significant lumpy exposures may lie,'' he says.

Those counterparties include none other than JPMorgan itself, the largest seller and buyer of CDSs known to the Office of the Comptroller of the Currency, or OCC.

The Fed negotiated the deal to bail out Bear Stearns by allowing JPMorgan to buy it for $10 a share. The Fed pledged $29 billion to JPMorgan to cover any Bear debts.

‘Cast Doubt'

‘‘The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets,'' Fed Chairman Ben S. Bernanke told Congress on April 2. ‘‘It could also have cast doubt on the financial positions of some of Bear Stearns's thousands of counterparties.''

The Fed was worried about the biggest players in the CDS market, Mason says. ‘‘It was a JPMorgan bailout, not a bailout of Bear,'' he says.

JPMorgan spokesman Brian Marchiony declined to comment for this article.

Credit-default swaps are derivatives, meaning they're financial contracts that don't contain any actual assets. Their value is based on the worth of underlying loans and bonds. Swaps are similar to insurance policies -- with two key differences.

Unlike with traditional insurance, no agency monitors the seller of a swap contract to be certain it has the money to cover debt defaults. In addition, swap buyers don't need to actually own the asset they want to protect.

It's as if many investors could buy insurance on the same multimillion-dollar home they didn't own and then collect on its full value if the house burned down.

Bigger Than NYSE

When traders buy swap protection, they're speculating a loan or bond will fail; when they sell swaps, they're betting that a borrower's ability to pay will improve.

The market, which has doubled in size every year since 2000 and is larger in dollar value than the New York Stock Exchange, is controlled by banks like JPMorgan, which act as dealers for buyers and sellers. Swap prices and trade volume aren't publicly posted, so investors have to rely on bids and offers by banks.

Most of the traders are banks; hedge funds, which are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall; and insurance companies. Mutual and pension funds also buy and sell the swaps.

Proponents of CDSs say the devices have been successful because they allow banks to spread the risk of default and enable hedge funds to efficiently speculate on the creditworthiness of companies.

‘Seeing the Logic'

The market has grown so large so fast because swaps are often based on an index that includes the debt of scores of companies, says Robert Pickel, chief executive officer of the International Swaps and Derivatives Association.

‘‘Whether you're a hedge fund, bank or some other user, you're increasingly seeing the logic of using these instruments,'' Pickel says, adding he doesn't worry about counterparty risk because banks carefully monitor the strength of investors. ‘‘There have been a very limited number of disputes. The parties understand these products and know how to use them.''

Banks are the largest buyers and sellers of CDSs. New York- based JPMorgan trades the most, with swaps betting on future credit quality of $7.9 trillion in debt, according to the OCC. Citigroup Inc., also in New York, is second, with $3.2 trillion in CDSs.

Goldman Sachs Group Inc. and Morgan Stanley, two New York- based firms whose swap trading isn't tracked by the OCC because they're not commercial banks, are the largest swap counterparties, according to New York-based Fitch Ratings, which doesn't provide dollar amounts.

Untested Until Now

The credit-default-swap market has been untested until now because there's been a steady decline in global default rates in high-yield debt since 2002. The default rate in January 2002, when the swap market was valued at $1.5 trillion, was 10.7 percent, according to Moody's Investors Service.

Since then, defaults globally have dropped to 1.5 percent, as of March. The rating companies say the tide is turning on defaults.

Fitch Ratings reported in July 2007 that 40 percent of CDS protection sold worldwide is on companies or securities that are rated below investment grade, up from 8 percent in 2002. On May 7, Moody's wrote that as the economy weakened, high-yield-debt defaults by companies worldwide would increase fourfold in one year to 6.1 percent by April 2009.

The pressure is building. On May 5, for example, Tropicana Entertainment LLC filed for bankruptcy after the casino owner defaulted on $1.32 billion in debt.

‘Complicate the Crisis'

A surge in corporate defaults may leave swap buyers scrambling, many unsuccessfully, to collect hundreds of billions of dollars from their counterparties, says Satyajit Das, a former Citigroup derivatives trader and author of ‘‘Credit Derivatives: CDOs & Structured Credit Products'' (Wiley Finance, 2005).

‘‘This is going to complicate the financial crisis,'' Das says. He expects numerous disputes and lawsuits, as protection buyers battle sellers over the technical definition of default - - this requires proving which bond or loan holders weren't paid -- and the amount of payments due.

‘‘It's going to become extremely messy,'' he says. ‘‘I'm really scared this is going to freeze up the financial system.''

Andrea Cicione, a London-based senior credit strategist at BNP Paribas SA, has researched counterparty risk and says it's only a matter of time before the sword begins falling. He says the crisis will likely start with hedge funds that will be unable to pay banks for contracts tied to at least $35 billion in defaults.

$150 Billion Loss Estimate

‘‘That's a very conservative estimate,'' he says, adding that his study finds that losses resulting from hedge funds that can't pay their counterparties for defaults could exceed $150 billion.

Hedge funds have sold 31 percent of all CDS protection, according to a February 2007 report by Charlotte, North Carolina-based Bank of America Corp.

Cicione says banks will try to pre-empt this default disaster by demanding hedge funds put up more collateral for potential losses. That may not work, he says. Many of the funds won't have the cash to meet the banks' requests, he says.

Sellers of protection aren't required by law to set aside reserves in the CDS market. While banks ask protection sellers to put up some money when making the trade, there are no industry standards, Cicione says.

JPMorgan, in its annual report released in February, said it held $22 billion of credit swap counterparty risk not protected by collateral as of Dec. 31.

‘A Major Risk'

‘‘I think there's a major risk of counterparty default from hedge funds,'' Cicione says. ‘‘It's inconceivable that the Fed or any central bank will bail out the hedge funds. If you have a systemic crisis in the hedge fund industry, then of course their banks will take the hit.''

The Joint Forum of the Basel Committee on Banking Supervision, an international group of banking, insurance and securities regulators, wrote in April that the trillions of dollars in swaps traded by hedge funds pose a threat to financial markets around the world.

‘‘It is difficult to develop a clear picture of which institutions are the ultimate holders of some of the credit risk transferred,'' the report said. ‘‘It can be difficult even to quantify the amount of risk that has been transferred.''

Counterparty risk can become complicated in a hurry, Das says. In a typical CDS deal, a hedge fund will sell protection to a bank, which will then resell the same protection to another bank, and such dealing will continue, sometimes in a circle, Das says.

‘Daisy Chain Vortex'

The original purpose of swaps -- to spread a bank's loan risk among a large group of companies -- may be circumvented, he says.

‘‘It creates a huge concentration of risk,'' Das says. ‘‘The risk keeps spinning around and around in this daisy chain like a vortex. There are only six to 10 dealers who sit in the middle of all this. I don't think the regulators have the information that they need to work that out.''

And traders, even the banks that serve as dealers, don't always know exactly what is covered by a credit-default-swap contract. There are numerous types of CDSs, some far more complex than others.

More than half of all CDSs cover indexes of companies and debt securities, such as asset-backed securities, the Basel committee says. The rest include coverage of a single company's debt or collateralized debt obligations.

A CDO is an opaque bundle of debt that can be filled with junk bonds, auto loans, credit card liabilities and home mortgages, including subprime debt. Some swaps are made up of even murkier bank inventions -- so-called synthetic CDOs, which are packages of credit-default swaps.

AIG $9.1 Billion Writedown

On May 8, American International Group Inc. wrote down $9.1 billion on the value of its CDS holdings. The world's largest insurer by assets sold credit protection on CDOs that declined in value. In 2007, New York-based AIG reported $11.5 billion in writedowns on CDO credit default swaps.

Michael Greenberger, director of trading and markets at the Commodity Futures Trading Commission from 1997 to 1999, says the Fed is fully aware of the risk banks and the global economy face if CDS holders can't cover their losses.

‘‘Oh, absolutely, there's no doubt about it,'' says Greenberger, who's now a professor at the University of Maryland School of Law in Baltimore. He says swaps were very much on the Fed's mind when Bear Stearns started sliding toward bankruptcy.

‘‘People who were relying on Bear for their own solvency would've started defaulting,'' he says. ‘‘That would've triggered a series of counterparty failures. It was a house of cards.''

Risk Nightmare

It's concerns about that house of cards that have kept Backshall, the California fund adviser, up at night. His worries about a nightmare scenario started in early March. The details of what happened are still fresh in his mind.

It's Monday, March 10, and the market is rife with rumors that Bear Stearns will run out of cash. Some of Backshall's clients have pulled their accounts from Bear; others are considering leaving the bank. Backshall's clients are exposed to Bear in multiple ways: They keep their cash and other accounts at the firm, and they use the bank as their broker for trades. Backshall advises them to spread their assets among various banks.

That same day, Bear CEO Alan Schwartz says publicly, ‘‘There is absolutely no truth to the rumors of liquidity problems.''

Backshall's clients are suspicious. They see other hedge funds pulling their accounts from Bear. In the afternoon after Schwartz's remarks, the cost of protection soars past 600 basis points from 450 before Schwartz's statement.

CEO Didn't Calm Fears

Swaps are priced in basis points, or hundredths of a percentage point. At 600 basis points, a trader would pay $6,000 a year to insure $100,000 of Bear Stearns bonds.

‘‘I don't think his comments did anything to calm fears,'' Backshall says.

The next day, March 11, Securities and Exchange CommissionChristopher Cox says his agency is monitoring Bear Stearns and other securities firms. Chairman

‘‘We have a good deal of comfort about the capital cushions at these firms at the moment,'' he says.

Cox's comments are overshadowed by rumors that European financial firms had stopped doing fixed-income trades with Bear, Backshall says.

‘‘Nobody has a clue what's going on,'' he says. Bear swap costs are gyrating between 540 and 665.

For most investors, just getting default-swap prices is a chore. Unlike stock prices, which are readily available because they trade on a public exchange, swap prices are hard to find. Traders looking up prices on the Internet or on private trading systems see information that is hours or days old.

‘Terribly Primitive'

Banks send hedge funds, insurance companies and other institutional investors e-mails throughout the day with bid and offer prices, Backshall says. For many investors, this system is a headache.

To find the price of a swap on Ford Motor Co. debt, for example, even sophisticated investors might have to search through all of their daily e-mails, he says.

‘‘It's terribly primitive,'' Backshall says. ‘‘The only way you and I could get a level of prices is searching for Ford in our inbox. This is no joke.''

In the past three years, at least two companies have developed software programs that automatically parse an investor's incoming messages, yank out CDS prices and build them into real-time price displays.

The charts show the highest bids and lowest offering prices for hundreds of swaps. Backshall tracks prices he gets from banks using the new software.

‘It's Very Hard'

Backshall has been talking with hedge fund managers in New York all week.

‘‘We'd quite frankly been warning them and giving them advice on how to hedge,'' he says of the Bear Stearns crisis and banks overall. ‘‘It's very hard to hedge the counterparty risk. These institutions are thinly capitalized in the best of times.''

The night of Thursday, March 13, Backshall can't sleep. He lies awake worrying about Bear and counterparty risk. The next morning, he arrives at work at 5 a.m., two and a half hours before sunrise.

Through the window of his ninth-floor corner office, he takes a moment to watch the distant flickers of light in the rolling foothills of Mount Diablo. Across the street, he sees the still-dark Walnut Creek train station, about 30 miles (48 kilometers) east of San Francisco.

Backshall, wearing jeans and a blue, button-down shirt, sits at his desk, staring at a pair of the 27-inch (68.6- centimeter) monitors that display swap costs. CDS prices jumped by more than 10-fold in just a year. The numbers show rising fear, he says.

Until early in 2007, the typical price of a credit-default swap tied to the debt of an investment bank like Merrill Lynch & Co., Bear Stearns or Morgan Stanley was 25 basis points.

‘Unknowns Are Out There'

If a swap buyer wanted to protect $10 million of assets in the event of a company default, the contract would cost about 0.25 percent of $10 million, or $25,000 a year for a five-year protection contract.

Backshall's screens tell him the cost of buying protection on Bear Stearns debt in the past 24 hours has been moving in a range between 680 and 755 basis points.

‘‘The unknowns are out there,'' Backshall says.

He advises his clients not to buy CDS protection on Bear because the price is too high and the time is wrong. It's too late to buy swaps now, he says.

At 9:13 Friday morning in New York, JPMorgan announces it will loan money to Bear using funds provided by the Federal Reserve. The JPMorgan statement doesn't say how much it will lend; it says it will ‘‘provide secured funding to Bear Stearns, as necessary.''

‘Significantly Deteriorated'

Bear CEO Schwartz says his firm's liquidity has ‘‘significantly deteriorated'' during the past 24 hours. Protection quotes drop immediately into the low 500s, as some dealers think a rescue has begun.

That doesn't last long.

‘‘Very quickly, the trading action is swinging violently wider,'' Backshall says. Bear's swap cost jumps to 850 basis points that afternoon, his screen shows. ‘‘When fear gets hold, fundamental analysis goes out the window,'' he says.

In the calmest of times, making reasoned decisions about swap prices is a challenge. Now, it's impossible. Traders don't have access to any company data more recent than Bear's February annual report. Sharp-eyed investors looking through that filing might have spotted a paragraph that's strangely prescient.

‘‘As a result of the global credit crises and the increasingly large numbers of credit defaults, there is a risk that counterparties could fail, shut down, file for bankruptcy or be unable to pay out contracts,'' Bear wrote.

‘Material Adverse Effect'

‘‘The failure of a significant number of counterparties or a counterparty that holds a significant amount of credit-default swaps could have a material adverse effect on the broader financial markets,'' the bank wrote.

Even after JPMorgan's Friday morning announcement, the market is alive with rumors. Backshall's clients tell him they've heard some investment banks have stopped accepting trades with Bear Stearns and some money market funds have reduced their short-term holdings of Bear-issued debt.

On Sunday, March 16, the Federal Reserve effectively lifts the sellers of Bear Stearns protection out of their misery. JPMorgan agrees to buy Bear for $2 a share.

While that's devastating news for Bear shareholders -- the stock had traded at $62.30 just a week earlier -- it's the best news imaginable for owners of Bear debt. That's because JPMorgan agreed to cover Bear's liabilities, with the Fed pledging $29 billion to cover Bear's loan obligations.

Turned to Dust

For traders who sold protection on Bear's debt, the bailout is a godsend. Faced with the prospect of having to hand over untold millions to their counterparties just three days earlier, they now have to pay out nothing.

For traders who bought protection swaps just a few days earlier -- when prices were in the 600s to 800s -- the Fed bailout is crushing. Their investments have turned to dust.

On Monday morning, the cost of default protection on Bear plunges to 280. Backshall sits back in his chair and for the first time in two weeks, he can breathe easier.

‘‘No wonder I look so tired all the time,'' he says, finally showing a bit of a smile.

When it bailed out Bear Stearns, the Federal Reserve effectively deputized JPMorgan to monitor the credit-default- swap market, says Edward Kane, a finance professor at Boston College. Because regulators don't know where the risks lie, they're helpless, Kane says.

Default swaps shift the risk from a company's credit to the possibility that a counterparty might fail, says Kane, who's a senior fellow at the Federal Deposit Insurance Corporation's Center for financial Research.

‘Off Balance Sheet'

‘‘You've really disguised traditional credit risk, pushed it off balance sheet to its counterparties,'' Kane says. ‘‘And this is not visible to the regulators.''

BNP analyst Cicione says regulators will be hard-pressed to prevent the next potential breakdown in the swaps market.

‘‘Apart from JPMorgan, there aren't many other banks out there capable of doing this,'' he says. ‘‘That's what's worrying us. If there were to be more Bear Stearnses, who would step in and give a helping hand? You can't expect the Fed to run a broker, so someone has to take on assets and obligations.''

Banks have a vested interest in keeping the swaps market opaque, says Das, the former Citigroup banker. As dealers, the banks see a high volume of transactions, giving them an edge over other buyers and sellers.

‘‘Dealers get higher profitability through lack of transparency,'' Das says. ‘‘Since customers don't necessarily know where the market is, you can charge them much wider margins.''

Banks Try to Hedge

Banks try to balance the protection they've sold with credit-default swaps they purchase from others, either on the same companies or indexes. They can also create synthetic CDOs, which are packages of credit-default swaps the banks sell to investors to get themselves protection.

The idea for the banks is to make a profit on each trade and avoid taking on the swap's risk.

‘‘Dealers are just like bookies,'' Kane says. ‘‘Bookies don't want to bet on games. Bookies just want to balance their books. That's why they're called bookies.''

The banks played the role of dealers in the CDO market as well, and the breakdown in that market holds lessons for what could go wrong with CDSs. The CDO market zoomed to $500 billion in sales in 2006, up fivefold from 2001.

Banks found a hungry market for CDOs because they offered returns that were sometimes 2-3 percentage points higher than corporate bonds with the same credit rating.

CDO Market Dried Up

By the middle of 2007, mortgage defaults in the U.S. began reaching record highs each month. Banks and other companies realized they were holding hundreds of billions in toxic debt. By August 2007, no one would buy CDOs. That newly devised debt market dried up in a matter of months.

In the past year, banks have written off $323 billion from debt, mostly from investments they created.

Now, if corporate defaults increase, as Moody's predicts, another market recently invented by banks -- credit-default swaps -- could come unstuck. Arturo Cifuentes, managing director of R.W. Pressprich & Co., a New York firm that trades derivatives, says he expects a rash of counterparty failures resulting in losses and lawsuits.

‘‘There's a high probability that many people who bought swap protection will wind up in court trying to get their payouts,'' he says. ‘‘If things are collapsing left and right, people will use any trick they can.''

Frank Partnoy, a former derivatives trader and now a securities law professor at the University of San Diego School of Law, says it's high time for the market to let in some sunshine.

Centralized Pricing

‘‘There should be a centralized pricing service for credit-default swaps,'' he says. Companies should disclose their swaps holdings, he adds.

‘‘For example, a bank might disclose the nature of its lending exposure based on its use of credit-default swaps as a hedge,'' he says.

Last year, the Chicago Mercantile Exchange set up a federally regulated, exchange-based market to trade CDSs. So far, it hasn't worked. It's been boycotted by banks, which prefer to continue their trading privately.

Leo Melamed, 76, chairman emeritus of Chicago Mercantile Exchange Holdings Inc., says there aren't any easy solutions.

‘‘Plus we're not sure the banks want us to be in this business because they do make a good deal of money, and we might narrow the spreads considerably,'' he says.

‘Central Clearing House'

For now and for some time in the future, CDSs will remain unregulated and their trades will be done in the secrecy of Wall Street's biggest securities firms. That means counterparty risk will stay out of the sight of the public and regulators.

‘‘In order for us to get away from worries about counterparty risk, in order for us to encourage more trading and more transparency, there's got to be some way to bring all the price data together with exchange trading or a central clearinghouse,'' Backshall says.

Until that happens, the sword of Damocles will remain poised to fall, as banks, hedge funds and insurance companies can only guess whether their trillions of dollars in swaps are covered by anything other than darkness.

Crude oil rose above $129 a barrel

Oil Rises to a Record After Pickens Says Prices May Reach $150

By Mark Shenk

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Crude oil rose above $129 a barrel in New York for the first time after billionaire hedge-fund manager Boone Pickens said that oil will reach $150 a barrel this year.

Prices will climb because supply isn't keeping up with demand, Pickens, the founder and chairman of Dallas-based BP Capital LLC, told CNBC today. Oil advanced on May 16 when Goldman Sachs Group Inc. boosted its estimate for the second half of the year to $141 a barrel, from $107, citing supply constraints.

‘‘There is so much momentum in the market that it doesn't take much for prices to reach new records,'' said Brad Samples, commodity analyst for Summit Energy Inc. in Louisville, Kentucky. ‘‘We rose today after Boone Pickens basically parroted the Goldman line on prices.''

Crude oil for June delivery rose $1.82, or 1.4 percent, to $128.87 a barrel at 9:25 a.m. on the New York Mercantile Exchange. Futures reached $129.31, the highest since trading began in 1983. Prices are 98 percent higher than a year ago.

Credit Suisse Group AG and Societe Generale SA raised their oil prices forecasts for 2008 and 2009 in reports today, citing investor flows and supply limitations.

Brent crude oil for July settlement rose $2.05, or 1.6 percent, to $127.11 a barrel on London's ICE Futures Europe exchange. The contract touched a record $127.49 today.

Oil prices also rose because the dollar weakened against the euro, prompting investors to buy commodities as a hedge against the currency's decline. The euro gained after an adviser to the German government said European policy makers may increase interest rates as soon as the financial crisis ends.

German consumer prices rose 2.6 percent in April from a year earlier after jumping 3.3 percent the previous month, the most in 12 years. German producer-price inflation accelerated to 5.2 percent in April, the fastest in almost two years, the Federal Statistics Office said today. The European Central Bank aims to keep inflation in the euro region just below 2 percent.

‘‘Oil is up because the dollar is being pounded on the bigger-than-expected increase in German inflation,'' said Addison Armstrong, director of market research at TFS Energy LLC in Stamford, Connecticut. ‘‘The likelihood that the ECB will cut rates to be more in line with those in the U.S. is reduced by the German inflation numbers.''

Producer Prices in U.S. Increase More Than Forecast

U.S. Producer Prices, Minus Food, Energy, Rise 0.4%

By Courtney Schlisserman

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Prices paid to U.S. producers, excluding food and fuel, rose more than forecast in April, reflecting increases in automobile and furniture costs.

The 0.4 percent gain in so-called core prices was twice as big as anticipated and followed a 0.2 percent increase in March, the Labor Department said today in Washington. A drop in energy costs and unchanged food expenses held the total price measure to a 0.2 percent gain.

Soaring raw-material costs are likely to hurt profits as a slowing economy prevents companies from raising prices enough to cover expenses. A report last week showed prices paid by consumers rose less than forecast in April.

Businesses ‘‘have considerable pipeline cost pressures,'' said Aaron Smith, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. While companies may find it tough to pass the costs on to consumers given the economic slowdown, today's figures are ‘‘a reminder that inflation pressures reside even as we have slower growth,'' he said.

Treasury securities rallied, with benchmark 10-year notes yielding 3.80 percent at 9:39 a.m. in New York, down from 3.83 percent late yesterday.

Economists' Forecasts

Economists forecast producer prices would rise 0.4 percent, according to the median of 70 projections in a Bloomberg News survey. Estimates ranged from no change to a 1 percent gain. Excluding food and energy costs, producer prices were expected to rise 0.2 percent, according to the Bloomberg survey.

Factories, farmers and other producers were paid 6.5 percent more in April than a year earlier. That compares with a 6.9 percent gain for the 12 months ended in March.

The core index was up 3 percent in April from a year earlier, the biggest gain since December 1991.

Rising costs for metals, chemicals and fuel propelled the increases in raw materials, the report showed. The price of steel-mill products jumped 5.5 percent in April and agricultural chemicals surged 5.6 percent. Further down the pipeline, prices for scrap steel and iron soared 32 percent, the most since July 2004, and scrap copper costs jumped 5.3 percent.

So far this year, wholesale costs are up 8.5 percent at an annual pace compared with 8.4 percent for the same time last year. The core rate has increased at a 5.2 percent annual pace, compared with 2.1 percent in the first four months of 2007.

Food, Fuel

Food prices were unchanged and fuel costs dropped 0.2 percent, the first decline this year.

The increases in fuel costs last month were less than the gains recorded for April of prior years and may have lead to the government reporting that energy costs were lower on a seasonally adjusted basis.

Crude oil and other energy products prices have continued to rise this month and may elevate inflation figures in coming months. The price of a barrel of crude on the New York Mercantile Exchange closed at a record $127.05 a barrel yesterday.

The cost of passenger cars climbed 0.4 percent, light trucks were up 1.3 percent and commercial furniture jumped 1.8 percent, the most since February 1981.

Costs of intermediate goods, those used in earlier stages of production, increased 0.9 percent, after a 2.3 percent gain the prior month. They rose 11 percent from a year ago.

Excluding food and energy, intermediate prices increased 1.2 percent. Prices for raw materials, or so-called crude goods, increased 3.2 percent.

Impact on Deere

Deere & Co., the world's largest maker of tractors and combines, is among companies being constrained by rising costs. The Moline, Illinois-based company said last week that profit this quarter will fall short of analysts' estimates as U.S. construction slows and material prices jump.

Materials, which represent as much as 20 percent of Deere's costs, and freight expenses will rise as much as $500 million this year, twice as much as the company's earlier forecast. It spent $60 million more than in the year-earlier quarter.

Producer prices are one of three monthly inflation gauges reported by the Labor Department. The government said last week that prices of imported goods jumped 1.8 percent in April, pushed up by higher energy and metals costs.

The consumer price index, the government's broadest measure of inflation, increased a less-than-forecast 0.2 percent last month, as cheaper costs for cars and hotel rooms offset the biggest jump in food in 18 years.

Rate Expectations

Concern over inflation has led investors to project Fed policy makers will keep the benchmark interest rate unchanged at 2 percent at least through September. It would be the first pause since the central bank started cutting rates in September.

While uncertainty is ‘‘high,'' inflation is likely to moderate as the economic slowdown continues, policy makers said last month in announcing a reduction in the benchmark rate. Even so, some officials are expressing greater concern.

Other companies have said they are likely to pass on price increases to customers. Dr. Pepper Snapple Group Inc., a beverage maker, may raise prices this year to counter higher transportation and ingredient costs, Chief Executive Officer Larry Young said May 7.

‘‘We took pricing last year, we'll be looking at probably taking some pricing again this year,'' Young said in a Bloomberg television interview. The company is working on 23 cost-cutting projects, he said.

-- With reporting from Rhonda Schaffler and Monica Bertran in New York. Editors: Carlos Torres, Chris Anstey