Thursday, May 27, 2010

Progress in the Gulf Oil Leak

BP stock is trading about $45 a share, giving the company a market capitalization of $140 billion. Last month, before the explosion and start of the leak, the stock was at $60 and the company had a market cap of $188 billion.

The nightmare for BP has lowered its market cap by $48 billion. Is the company really headed for a hit that large? Not according to any credible sources.

Maybe that means now is a good time to buy BP shares. Based on today's price, the dividend yield is 7.9%. Thus, investors will enjoy significant income while they watch the stock price inch up again.

BP Has ‘Some Success’ in Bid to Halt Leak, U.S. Says

May 27 (Bloomberg) -- BP Plc temporarily stopped the flow from a leaking well in the Gulf of Mexico, indicating progress on its plans to plug a well that’s been spewing oil for more than a month, U.S. Coast Guard Admiral Thad Allen said.

“They’ve had some success overnight,” Allen, National Incident Commander for the spill, said in an interview on WWL radio in New Orleans today. “Everybody is cautiously optimistic, but there’s no reason to declare victory yet.”

The company began pumping mud-like drilling fluid into the well at 2 p.m. New York time yesterday in a procedure known as “top kill.” BP will need another 24 hours before it can be “sure of success” for the process, Robert Dudley, managing director for the London-based company, said on NBC’s “Today” show this morning.

Success of top kill would bring to an end a leak that has poured an estimated 22 million gallons of oil into the Gulf and soiled 100 miles (161 kilometers) of coast. BP rose 28.8 pence, or 5.9 percent, to 520.8 pence at 4:35 p.m. in London trading.

The process uses the drilling fluid to “arm wrestle” the gusher of oil and natural gas back into the well, said Dudley, and then allow engineers to seal it with cement. BP has halted the flow of oil and gas and now must drop the pressure in the well to zero for the seal, Allen said.

Shares Rise

BP jumped as much as 6.6 percent in London trading after the Los Angeles Times quoted Allen as saying that the top kill had succeeded. The Coast Guard issued a “technical clarification” in an e-mail, saying the temporary halt in flow doesn’t mean the effort was successful.

“The operation is ongoing, we’re not giving a commentary on it,” David Nicholas, a BP spokesman in Houston, said in a telephone interview.

The well began leaking after an April 20 explosion and fire on the Deepwater Horizon drilling rig. BP leased the rig from Geneva-based Transocean Ltd., the largest deep-water driller.

Transocean rose as much as 9.1 percent today. The shares gained $3.47, or 5.9 percent, to $62.05 at 11:38 a.m. in New York Stock Exchange composite trading. Halliburton Co., which provided services on the rig, rose $1.29, or 5 percent, to $27.08. Cameron International Corp., which provided equipment to the rig, rose $1.60, or 4.4 percent, to $37.68.

Anadarko Petroleum Corp., which owns a 25 percent stake in the well, rose $3.40, or 6.4 percent, to $56.74.

Junk Shot

“It will be Friday night or Saturday at the earliest before we know definitively that the well has been killed,” Robert MacKenzie, a Houston-based analyst for FBR Capital Markets, wrote today in a note to clients. “They are in the process of mixing more mud or perhaps even a junk shot to pump before they switch to cement to seal the well.”

BP has said a “junk shot” injection of rubber scraps, may be used as needed to seal leaks in the well piping so that enough pressure can be exerted on the column of oil and gas.

A plume from the spill may reach northeast 22 miles toward Mobile, Alabama, a research vessel from the University of South Florida found in a preliminary report. The Weatherbird II made initial tests that show the highest concentrations of “dissolved hydrocarbons” were 400 meters underwater.

Congress has scheduled at least 20 hearings on the Deepwater Horizon and offshore drilling since the incident, and the Minerals Management Service and Coast Guard held another day of hearings in Louisiana on the explosion and sinking of the rig.

Drilling Delay

President Barack Obama today extended by six months a moratorium that began after oil started to spill from BP’s well. The president also canceled a proposal to drill for oil off the coast of Virginia and planned drilling by Royal Dutch Shell Plc of exploratory wells in the Arctic off Alaska.

Obama said the changes were the result of a 30-day safety review on offshore drilling the president ordered from Interior Secretary Ken Salazar.

The well may have leaked more than twice the oil that the Exxon Valdez spilled in 1989, according to figures from a U.S. government panel.

The BP well may have gushed 12,000 to 19,000 barrels a day, Marcia McNutt, director of the U.S. Geological Survey, said today in a conference call. Based on the midpoint of the estimates released by the Flow Rate Technical Group, the well may have leaked about 527,000 barrels from April 22, when the rig sank, through yesterday. That is more than double the Exxon Valdez’s 257,000-barrel spill in Alaska.

The amount of oil being spilled will help determine BP’s liability for the leak.

Spill Costs

The spill has cost BP a total of $760 million, or about $22 million a day, the company said May 24. Average daily profit last year was $45 million a day, according to data compiled by Bloomberg.

The federal government has spent more than $100 million responding to the spill and will be reimbursed by BP, Landry of the Coast Guard said.

BP said yesterday in an e-mailed statement it has paid more than $36 million in damage claims and will appoint an independent mediator to review and assist claims.

The leaking well can be permanently sealed only by one of two relief wells it’s drilling, which won’t be complete before August.

If the top of the well can’t be plugged, the company plans to replace the damaged riser pipe at the well. That requires cutting away a kink in the existing pipe, at least temporarily increasing the size of the leak, BP Senior Vice President Kent Wells said May 25.

The top kill “procedure has not been carried out in 5,000- feet (1,524-meter) water depth before and BP has stressed its success cannot be assured,” Andrew Whittock, an analyst in London at Oriel Securities Ltd., said in a note yesterday. “Many commentators believe the chance of success is less than 50 percent.”

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Wednesday, May 26, 2010

Getting Gas from a Stone

Shale Gas Costing 2/3 Less Than OPEC Oil Incites Water Concern

May 25 (Bloomberg) -- When Victoria Switzer awoke on a cold night in March, her dog was staring out the window at the flame roaring from a natural-gas-drilling rig 2,000 feet behind her house. She remembers trees silhouetted in a demonic dance as the plume burned off gas that had been building up under her land.

She discovered later that such flaring can occur when Cabot Oil & Gas Corp. and dozens more companies drill for gas trapped in shale rock. The deposits, stretching from Texas to New York, and as far away as Australia and China, represent what may be the biggest energy bonanza in decades -- one that Switzer, 57, recalls thinking the Earth isn’t surrendering without a fight, Bloomberg Markets reports in its July issue.

Switzer, a retired teacher in Pennsylvania, is on the front line of a shale gas rush that’s dividing communities, creating millionaires and shaking up global energy markets.

Companies from India’s Reliance Industries Ltd. to Japan’s Mitsui & Co. are spending billions of dollars to dislodge natural gas from a band of Pennsylvania shale -- sedimentary rock composed of mud, quartz and calcite.

Shale gas proponents, led by 91-year-old oil patch billionaire George Mitchell, who invented the process to extract it, say the U.S. should plumb all forms of natural gas. That would help unhook the nation from coal and foreign petroleum.

Gas is about two-thirds cheaper than oil and greener too. It produces 117 pounds (53 kilograms) of carbon dioxide per million British thermal units (MMBtu) of energy equivalent compared with 156 for gasoline and 205 for coal.


“This discovery will change the course of world history, not just to de-carbonize the economy but to de-OPEC-ize it,” Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon said in December in Copenhagen as the United Nations climate conference was under way.

Chesapeake, based in Oklahoma City, has profited by selling drilling rights and gas reserves for $10.7 billion during the past 2 1/2 years, quadruple the $2.7 billion it paid. McClendon -- with $33 billion in assets left to sell -- says he’s open for business.

Shale gas has plenty of detractors. Environmentalists say fracking, a process in which drillers blast water into a well to shatter rock and unleash the gas, threatens pristine watersheds. Dish, a hamlet of 180 residents north of Fort Worth, Texas, has almost as many wells, compressors and pipelines as people.

‘Children, Old People’

Last year, the Texas Commission on Environmental Quality found benzene, which it classifies as a carcinogen, at 10,700 times the safe long-term exposure limit next to a well 6 miles (10 kilometers) west of town on which a valve had been left open.

“We have children, old people, pregnant women,” Mayor Calvin Tillman says. “They’re not supposed to be subjected to toxins.”

Switzer, who moved to Dimock Township, Pennsylvania, to build a $350,000 dream home with her husband, Jimmy, in 2004, had no idea how shale gas would consume her village of 1,400.

She says she found so much methane in her well that her water bubbled like Alka-Seltzer. Neighbor Norma Fiorentino says methane in her well blew an 8-inch-thick (20-centimeter-thick) concrete slab off the top. The $180 bonus Cabot paid to drill on Switzer’s 7.2 acres (2.9 hectares) and the $900 in royalties she gets each month don’t compensate, she says.

‘Beads and Baubles’

“I feel like one of the Indians who sold Manhattan for beads and baubles,” she says.

The economics of shale don’t look great right now for big companies either. Natural gas prices plunged to $2.41 per MMBtu in September 2009 from $13.69 in July 2008 as the recession cut demand while drilling accelerated. On May 24, gas traded at $4.04.

James Barrow, who invests one-ninth of his $50 billion portfolio in energy stocks as president of Dallas-based Barrow Hanley Mewhinney & Strauss, says leases signed as gas peaked in 2008 make drilling necessary -- even in a slump. When this new gas hits the market, the price could again sink into the mid-$2 range, he says.

For companies to profit from new wells, gas has to rise to $7.50, says Ben Dell, a Sanford C. Bernstein & Co. analyst in New York. He predicts it’s only a matter of time before firms trim production, which he says will boost gas to $8.50 by 2011.

Soaring Consumption

If gas stays above $4, a price that lets companies cover costs on existing wells, U.S. output could grow 20 percent to 65 billion cubic feet (1.8 billion cubic meters) a day from 2008 through 2030, says Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. Shale gas production could quadruple to more than 20 billion cubic feet, he says.

That would help meet rising power demand. Global energy consumption will soar 44 percent by 2030 from 2006, the U.S. Energy Department says. China and India will siphon off 28 percent by then, according to the DOE forecast. Demand is rising because the planet’s population will balloon to 8.2 billion in 2030 from 6.8 billion today.

Hydroelectric, wind and other renewable sources will plug only part of the gap: They’ll contribute 17 percent of U.S. electricity generation by 2035 from 9.1 percent in 2009, the DOE says.

“Taking advantage of the new natural gas finds, the shale finds, would be an important piece of how we begin to break our dependence on foreign oil,” Carol Browner, President Barack Obama’s senior energy adviser, told a Washington audience in April.

Investors Primed

Investors are primed for a boom. Chesapeake’s shares fell 47 percent from the beginning of 2008 to $20.75 on May 24 as gas prices sank. Bernstein’s Dell predicted in mid-May that shares would rise to $34 during the next 12 months while companies curb output, reducing supply as rebounding economies demand more energy.

The stock prices of Chesapeake and fellow gas developers Petrohawk Energy Corp. and Range Resources Corp. don’t reflect the firms’ shale holdings, says David Heikkinen, a Tudor Pickering Holt & Co. analyst in Houston.

Fort Worth-based Range has assets valued at $65 a share, he says, a third more than its May 24 stock price of $42.47.

Range began plumbing the Marcellus shale that underlies New York, Pennsylvania and West Virginia in 2004. The band of rock -- so designated because it pokes through the surface near a city of that name in northern New York -- may contain 262 trillion cubic feet of recoverable gas, the DOE estimates. The U.S. uses 20 TCF annually, mostly for power plants and home heating.

That means the Marcellus shale alone could supply America’s needs for more than a decade.

Getting a Bargain

Range CEO John Pinkerton says he got a bargain when his company paid $1,000 an acre for Marcellus drilling rights near Pittsburgh starting in 2004. India’s Reliance paid 14 times more in April, a price Pinkerton says he wouldn’t consider.

“If I sold today for $14,000 an acre, I’d be selling for a quarter of what it’s worth,” Pinkerton told investors in April.

Range has 200 wells in Washington County south of Pittsburgh and may add another 4,300 in the county over 10 years.

Even oil and coal companies are raising their bets on gas. In December, Exxon Mobil Corp. agreed to pay $41 billion in stock and assumed debt for Fort Worth-based XTO Energy Inc., the biggest U.S. gas producer.

Outside North America, unexplored geology and nonexistent pipelines make it harder to gauge how much shale gas exists.

“Regions including China, India, Australia and Europe are thought to hold large resources,” the International Energy Agency said in November.

Liking the Odds

Firms are taking those odds. European oil giants BP Plc and Royal Dutch Shell Plc are looking in China. Chevron Corp., ConocoPhillips and Exxon purchased drilling licenses in Poland.

“Companies are rushing to get the last available license,” says Henryk Jacek Jezierski, Poland’s chief national geologist.

Consol Energy Inc., the second-largest U.S. coal producer by market value, owns land near Pittsburgh that’s in the heart of Marcellus shale. It also bought shale assets valued at $4.4 billion in April. CEO Brett Harvey says coal will remain the bedrock of the U.S. economy far into the future. He’s not ignoring gas.

Because Consol already owns the Pittsburgh-area property, it can charge as little as $3.71 MMBtu for gas and still earn a 20 percent after-tax return, he says. Firms forced to pay $5,000 an acre for drilling rights and a 20 percent leasing royalty would have to charge $5.18, he says.

“If there’s a flood of gas at $4, guess who’s going to produce it?” Harvey says. “We are.”

Managing a Windfall

Pennsylvania is no stranger to energy euphoria. Edwin Drake drilled the world’s first successful oil well in 1859 in Titusville, 240 miles west of the Switzers’ home in Dimock. Now it’s learning to manage its latest windfall.

In October, companies will be required to disclose the chemical composition of fracking water, says John Hanger, secretary of Pennsylvania’s Department of Environmental Protection. The department is doubling its number of oil and gas enforcers to 193.

Switzer says it’s about time. She says she’s had nothing but trouble since Houston-based Cabot arrived in 2006. It sank 50 wells in 2009 and plans 81 this year. Convoys loaded with drilling rigs, pipes and compressors crisscross the village. Her creek ran red with spilled diesel after a truck slid on ice and hit a tree. Some neighbors are moving. Switzer wants Cabot shut down instead.

“They said we’d never notice the drilling,” she says of Cabot. “Now, we won’t be able to remember when they weren’t here.”

Methane Migration

The Switzers and 31 neighbors are suing Cabot for negligence. The company had until June 1 to respond. Cabot spokesman George Stark declined to comment on the suit.

Separately, and without acknowledging any wrongdoing, Cabot agreed with Pennsylvania officials on April 15 to stop drilling in Dimock for a year, cap three wells with casings that the state deemed defective and pay a $240,000 fine.

Ken Komoroski, a Cabot attorney, says there’s no proof drilling polluted Dimock’s water. He says loose soil collapsed at a well, snapping the drilling pipe and dragging the bit 1,700 feet (520 meters) underground. Methane may have migrated through the cavity into aquifers as Cabot recovered the bit, he says. Cabot now tests for methane and uses latex to ensure well casings are cemented properly.

‘More Like Texas’

“In the big picture, drilling is going very well,” Komoroski says. “Pennsylvania is going to look more like Texas.”

Shale gas pioneer Mitchell can take credit if that happens. His parents, Greek immigrants who ran a dry cleaning store, put him through Texas A&M University, where he majored in geology and petroleum engineering. In 1946, he started consulting for a company he later bought and renamed Mitchell Energy & Development Corp.

Mitchell knew gas had become embedded in shale, the most common sedimentary rock, when ancient seabeds were covered and compressed by erosion. Starting in 1981, he experimented with drilling down and then horizontally. He fracked the wells, pumping fluid to blast out the gas -- testing the method sparking today’s boom.

“We tried propane, diesel, anything you can think of,” says Mitchell, who uses a motorized scooter to zip around in his Houston office, where he greets emissaries from China and Europe who have been bitten by the shale bug. “Water with a small amount of sand worked best.”

Better Bet

By 1993, Mitchell had developed shale gas extraction into a viable business. Rivals didn’t pay attention until prices rose in tandem with oil and passed $4 a decade later. Mitchell sold his company to Oklahoma City-based Devon Energy Corp. for $3.1 billion in 2002. Since then, he has invested $25 million in Alta Resources LLC, which has five wells near Montrose in northeastern Pennsylvania and may drill 500 more.

Mitchell says shale gas is a better bet than oil. A typical gas well near Fort Worth costs $4 million and is virtually assured of success. In the Gulf of Mexico, oil companies spend $300 million drilling through 1,000 feet of water and 35,000 feet of rock and can still come up empty.

“They decided they better start working on shale gas,” he says.

Persistent Risk

The U.S. Congress is investigating offshore drilling for a more tragic reason. On April 20, an explosion at a BP oil rig began spewing at least 5,000 barrels of crude a day. The disaster killed 11 people, wiped $58.3 billion off BP’s value as of May 24 and prompted the governors of Florida and California to withdraw support for ocean drilling.

While Chesapeake’s McClendon, 50, expects offshore drilling to become more difficult, shale gas has its own drawbacks, Neftex’s Wells says.

“With deep-water exploration, there is a very small risk of a catastrophic event,” he says. “With shale gas, there is a persistent risk of long-term contamination of groundwater. This doesn’t have easy-to-see TV imagery, like oiled-up seabirds. It needs scientific explanation for which the public is not trained.”

The Doghouse

BP had started looking for gas before the oil spill. In 2008, it paid Chesapeake $1.75 billion for rights on 90,000 acres near Stuart, Oklahoma, 100 miles south of Tulsa. BP has since tripled initial output from wells on this land to 10 million cubic feet a day.

On a sunny February afternoon, workers prepare new wells using a road grader to scrape flat a 5-acre patch called the drill pad. They’ll cover the area with rubber and surround it with 18-inch-high berms to contain any spilled liquid from fracking or drilling debris. They’ll bore as many as eight wells in the pad.

From a 14-story white rig with a blue platform, workers in a control room called the doghouse use computers to manipulate hydraulic lifts that arrange 30-foot sections of black pipe into rows. Mechanical claws screw one pipe to a volleyball-size drill bit studded with diamonds and the other pipes to each other. An 11-ton rotating clamp called a top drive pushes the pieces into the pad to start the well.

Within 10 Feet

The bit and drilling pipes, which are surrounded by three rings of metal casings cemented in place to protect aquifers, go down 8,000 feet. Workers activate a motor in the pipe, which has a slight bend near the bit, so that 1,000 feet of drilling produces a 90-degree turn.

After probing for 3 miles, the driller, from his perch in the doghouse, can place the bit within 10 feet of his target, says Bryant Chapman, BP’s vice president for North American gas operations.

Next comes fracking. Workers park 40 tractor-trailers loaded with pumps, sand, chemicals and portable containment tanks on the pad and spend three days blasting 5 million gallons (19 million liters) of water into the well.

As much as 40 percent flows back out. In Texas, the water is injected into underground rock. In Pennsylvania, which lacks suitable deep-rock formations, the water gets recycled or goes to treatment plants.

Fracking worries people far from Stuart and Dimock. New York City serves 8 million residents from a watershed so pristine it’s exempt from federal filtration requirements.

Fracking Concern

A consulting firm hired by the city, Hazen & Sawyer PC, said in December that chemicals from fracked wells could have a catastrophic impact. Some, like pesticide 2,2-dibromo-3- nitrilopropionamide, are toxic. Each well needs 82 tons of assorted chemicals for reasons such as killing bacteria and inhibiting corrosion, the report says. New York has banned shale gas drilling statewide until it adopts new rules.

“We firmly believe, based on the best available science and current industry and technological practices, that drilling cannot be permitted in the city’s watershed,” Mayor Michael Bloomberg said in an April press release.

Bloomberg is the founder and majority owner of Bloomberg LP, the parent of Bloomberg News.

Range CEO Pinkerton says New York’s leaders are ignoring facts.

“They’re cuckoo for Cocoa Puffs,” he says, quoting a 1960s breakfast cereal slogan.

Squaring Off

Pinkerton, 56, says all Marcellus wells that will ever be built will use less water than one nuclear plant and that damage from coal mines is much worse than shale drilling.

As the drilling debate intensifies, shale gas supporters and opponents are squaring off along the Delaware River, the waterway U.S. General George Washington crossed on Christmas Day in 1776 to defeat Hessian mercenaries.

In April, Pennsylvania issued a permit for the first of up to nine exploratory shale wells in the river basin for New York- based Hess Corp. and Houston-based Newfield Exploration Co. The first well will be 2.5 miles west of the Delaware and 15 miles north of Honesdale.

Pat Carullo says drilling is a beast that can’t be tamed. Carullo, 56, co-founded Damascus Citizens for Sustainability, which wants case-by-case reviews of new wells.

“The gas industry thought they could spread money around like pimps and drill anywhere in the watershed,” he says. “I’ll be dead before that happens.”

Preserving the Farm

Marian Schweighofer, executive director of the Northern Wayne Property Owners Alliance, is rooting for shale gas. If commercial drilling is banned in the river basin, she’d lose out on income for the 712-acre farm in Tyler Hill that’s been in her family for four generations. Marian and her husband Edward, both 54, have gotten $500,000 from Hess so far.

Jack Ivey is contemplating the riches shale gas can bring. He leased 111 acres in Montrose to Mitchell’s Alta for $310,800. Ivey, 80, hopes for at least $346 a day from the first well if gas prices hold up. Royalties may reach $1,734 a day with five more wells.

“Hopefully, I’ll live five or six years so I can get some of this money,” he says.

Mitchell predicts companies will win public support for drilling in Pennsylvania the way they did in Texas.

“With money,” he says, and pauses, as if no elaboration is needed.

Learning From Dimock

Billions of dollars -- and energy for the 21st century -- are at stake. In Australia, Beach Energy Ltd. wants to explore an area that may hold 200 TCF of shale gas. China may produce a quarter of its gas from shale deposits in the next 20 years, the DOE says.

Before Schweighofer’s group signed on for drilling, members toured Dimock and met Victoria Switzer. They hired a lawyer and insisted on stronger well casings than Pennsylvania requires and that farmers be allowed to keep drilling equipment out of their best fields.

Switzer, now a shale gas veteran, says she hopes the world can learn from her and her neighbors that there are costs as well as benefits from unlocking a treasure the Earth has guarded for hundreds of millions of years.

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Never Discuss Politics or Religion -- Yeah, Right!

America is on its way to finding a way of discussing politics in public, out loud and without reservations. Hey, some of the talk is rough, unkind and disparaging. But a lot of it -- the talk on talk radio -- puts important issues in play.

Meanwhile, has anyone noticed that as loud and sometimes as obnoxious as verbal fights between conservatives and liberals have gotten, the fights occur without violence. No street violence, except for the anarchists who trashed a few blocks of Seattle a few years ago. No repeats of the the 1968 Chicago Democratic Convention. No new Kent State shootings.

Seems as though more and more people are getting things off their chests without punching anyone in the nose or without exploding into murderous furies. A national movement in which people Shout It Out appears to have relieved enormous tensions, and may well open the doors needed to reach decisions on how to deal with true problems.

Broadcast Broadside -- Rush Limbaugh? Despicable. Randi Rhodes? Convincing!

Sticks and stones may break bones, but right-wing words are killing American politics, according to Bill Press in "Toxic Talk." Mr. Press charges Rush Limbaugh and other conservative radio talk-show hosts with employing ugly rhetoric, dirty tactics and outright lies to build their audiences and advance their political agendas. In the process, he argues, the radio talkers have coarsened the political debate and diminished opportunities for bipartisanship. They are, in short, "destroying our democratic process."

"Toxic Talk" tries to buttress this indictment by quoting extensively from allegedly offensive material uttered by various national and local broadcasters. But much of what Mr. Press, who hosts a liberal radio talk show, characterizes as hateful, venomous or deceitful is really just opinion— sharply stated for maximum provocation, to be sure—that doesn't gibe with his own world-view. Is it really beyond the pale, as he alleges, to refer to the influx of illegal immigrants as "an invasion"? Or to hope that President Obama fails to implement his policy agenda if you consider that agenda a disaster waiting to happen? Or to theorize that liberal women dislike Sarah Palin because she's pretty?

Still, as "Toxic Talk" reminds us, some conservative hosts do make cringe-inducing statements. There's Michael Savage declaring that autism isn't a real medical condition; Neal Boortz dismissing the poorest victims of Hurricane Katrina as "parasites" who should be denied the right to vote; and former Tampa talk host Mark Larsen broadcasting in blackface the day after Mr. Obama's 2008 election victory.

"Toxic Talk" also spotlights how some hosts, happy to dish out the criticism, don't take it very well, lashing out at detractors or hiding behind the disingenuous "I'm just an entertainer" defense when they're caught stepping over the line.

Of course, such behavior isn't the exclusive province of the right. Mr. Press weakens his case by ignoring or glossing over comparable sins made by progressive talk-show hosts and media figures. Liberal radio host Randi Rhodes recently aired a song parody that repeatedly calls Mr. Limbaugh, among other things, a Nazi. (Mr. Press says that she is "colorful" and "convincing.")

During the campaign to fill the Senate seat long occupied by Ted Kennedy, MSNBC's Keith Olbermann attacked Republican candidate Scott Brown as a "homophobic, racist, reactionary, ex-nude model, teabagging supporter of violence against women and against politicians with whom he disagrees." Actress and former radio talker Janeane Garofalo has described the Republican Party as a "white-power movement." Liberal talker Mike Malloy's show is "a hell of a lot of fun," Mr. Press says, approvingly noting Mr. Malloy's "fun" nicknames for President Bush, including "Unelected Idiot."

Still, it's hard to see how such foolishness—of any political stripe—endangers our democracy or political discourse. Harsh words and partisan media have been part of the American political landscape since the pamphleteers and fiery orators of the colonial era.

Mr. Press complains that Republican politicians are unduly influenced by conservative hosts—he complains that when Glenn Beck called President Obama a racist (after Mr. Obama chastised a white police officer for acting "stupidly" last year in a confrontation with black scholar Henry Louis Gates), the description somehow "empowered" Rep. Joe Wilson to shout, "You lie!" during Mr. Obama's health-care speech to Congress in September. Don't blame talk radio—in the unlikely event that a politician actually is the stooge of a radio host, it's entirely the pol's fault.

Surely Mr. Press, a former chairman of the California Democratic Party, understands all this. So why write a book bemoaning the "threat" and "corrosive power" of conservative talk? Simply put: to scare the folks on his side of the political aisle and mobilize them to action. With the Republicans in disarray and no leader to function as a lightning rod, talk radio has become the progressives' bogeyman.

Mr. Press ratchets up the fear factor by claiming that conservative talk radio was created and nurtured by a cabal of wealthy conservatives using a media strategy devised in the Nixon era by future Supreme Court Justice Lewis Powell and the U.S. Chamber of Commerce. According to this gothic tale, well-heeled right-wingers bought radio stations, recruited conservative talk hosts and established think tanks to provide these mouthpieces with pro-capitalism talking points.

In reality, conservative talk radio as we know it dates from Rush Limbaugh's rise to national prominence in the late 1980s. The format's appeal to broadcasters is easily explained: It works. Radio stations succeed by attracting and holding a target audience that advertisers find desirable. As Mr. Limbaugh's success first demonstrated, affluent, conservative, middle-age guys love to hear conservative ideas aired—an uncommon phenomenon in the American media—and advertisers love affluent middle-age guys.

According to Mr. Press, progressive talk radio will languish until wealthy liberals get a clue and start buying up media properties. He confesses that he hasn't had much success in selling this idea to his liberal allies. Maybe they saw how well Air America worked out.

The true problem with conservative talk radio is that there's a glut on the market. In the over-leveraged radio industry, which is struggling to maintain its somewhat diminished place in media-saturated American life, cash-strapped station owners have in recent years eliminated hundreds of local talk programs in favor of syndicated right-leaning shows, which the stations receive in exchange for airing network commercials. The result is an off-putting sameness across dial.

The best of this programming retains a strong appeal to older listeners, but it shows no sign of attracting a new generation of fans. The median age of hardcore talk-radio listeners is upward of 58. Thus, while Bill Press has failed to convict conservative talk radio, it may yet die in a prison of its own making.

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Saturday, May 22, 2010

Security Analysis -- Credit Rating -- AAA or Junk?

There are no mysteries about assessing the quality of a bond or other fixed-income security. Credit analysts have been at it for a long time. But if we know what we are doing, why do we sometimes get it wrong, horribly wrong? In a nutshell, through good intentions, the government made a mess of things.

Put the Rating Agencies Out of Their Misery Before It's Too Late

A pillar of the financial crisis was rating agencies slapping triple-A ratings on junk mortgage products only to be mystified when the securities blew up. In the 2007 transaction involving the recent Goldman Sachs (NYSE: GS) CDO fraud saga, almost half of the debt was downgraded from triple-A (perfect) to junk (perfectly worthless) in short order.

Fool me once ...

Now, a sober person would think the rating agencies have learned from these flubs. But that makes too much sense. Truth is, they're as miserably inept as ever.

Last summer, Standard & Poor's invoked the ghost of 2005 when it rated a set of CDO-esque securities triple-A, which implies essentially zero probability of default.

Last week, it downgraded the same securities all the way to junk. That's triple-A to junk in less than a year. Again. Recall Einstein's definition of insanity, and feel free to smash your head against the nearest wall.

"The downgrades reflect our assessment of the significant deterioration in performance of the loans backing the underlying certificates," cried S&P. This is mildly true at best, and more likely a product of the same deceptive shell games rating agencies are now infamous for.

Here's your pig, there's your lipstick. Have at it.

These securities, you see, weren't new products created last summer when S&P initiated the ratings. They're called "re-remics," born from an alchemical process of taking existing bonds struggling for survival, slicing them up anew, and giving the new pieces a fresh set of ratings. The idea is that you can take a low-rated mangled mortgage bond, extract the pieces that still have a heartbeat (even though they share the same characteristics as the rapidly defaulting mortgages), and pronounce the new security triple-A.

So to be sure here, the same material that S&P called triple-A last summer was, at nearly the same time, rated far below that. David Blaine can't even fathom this stuff.

During a flood of re-remics last fall, The Wall Street Journal wrote an article questioning their validity "partly because re-remics rely on ratings firms -- faulted for failing early on to identify problems with mortgage-backed bonds -- to rate the new securities." That was spot-on, as was a comment by Rep. Dennis Kucinich, who warned, "The credit-rating agencies could be setting us up for problems all over again."

That's exactly what's happening, and it's time we do something about it. One of the central flaws in the rating agency world is that large-scale investors such as money market funds are required to hold assets scored by a rating agency registered as a Nationally Recognized Statistical Rating Organization, or NRSRO. Only a handful of raters are blessed with this status, and Moody's (NYSE: MCO), S&P, and Fitch are kings of the court. They're privileged to what amounts to guaranteed business and no threat of new competition.

While it's certainly well-intentioned, there's fairly universal agreement that the NRSRO has created the ability, if not the incentive, for rating agencies to produce wildly flawed work. They have nothing to lose. Investors have to use their services. S&P can recklessly issue wacky ratings (as it just did), and business goes on as usual.

Hedge fund manager David Einhorn summed it up perfectly: "Nobody I know buys or uses Moody's credit ratings because they believe in the brand. They use it because it is part of a government-created oligopoly and often because they are required to by law." In any normal market, new competition and customers' disgust over shoddy analysis wouldn't let this happen.

Let's do something about this

Fortunately (though long overdue) Congress is waking up. Two amendments in the just-passed Senate financial overhaul bill could euthanize the flawed parts of the rating system.

One amendment would eliminate all mention of the NRSRO from federal regulations. The organization could still exist, but language requiring investors to use products rated by an NRSRO rating agency would vanish. Competition from eager rivals like Morningstar (Nasdaq: MORN) and KPMG could then step in and sanitize the industry.

A separate amendment would create a clearinghouse set up to assign rating agencies with deals. That way, banks that issue credit products couldn't shop around for the morally bankrupt rater that's willing to assign triple-A status to toilet paper just to bag a nice fee. Both amendments aim to end a kink in the financial system that benefits exactly nobody except the rating agencies and the banks that sell glorified debt products.

We'll be patiently watching as the Senate and House reconcile their respective versions of the financial overhaul bill. Stay tuned.

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Friday, May 21, 2010

More Mocking Muhammad

Mocking Muhammad Day

Obama -- the doormat

President Obama is mastering the art of appeasement. He is the most powerful person yet who has obtained the position needed to actually weaken the role of the US in world affairs. For some inexplicable reason, he seems to believe -- or wants to believe, or wants us to believe -- that madmen like Ahmadinejad will become model citizens when they no longer feel oppressed by America. The history of the world shows us Obama is wrong. As wrong as it is possible to be.

Even with the example and experience of Jimmy Carter, Obama moves ahead, obsequiously, apologetically, foolishly. If sanity returns to the voting booth, Obama will follow Carter as a one-term president.

The fruits of weakness

By Charles Krauthammer
Friday, May 21, 2010

It is perfectly obvious that Iran's latest uranium maneuver, brokered by Brazil and Turkey, is a ruse. Iran retains more than enough enriched uranium to make a bomb. And it continues enriching at an accelerated pace and to a greater purity (20 percent). Which is why the French foreign ministry immediately declared that the trumpeted temporary shipping of some Iranian uranium to Turkey will do nothing to halt Iran's nuclear program.

It will, however, make meaningful sanctions more difficult. America's proposed Security Council resolution is already laughably weak -- no blacklisting of Iran's central bank, no sanctions against Iran's oil and gas industry, no nonconsensual inspections on the high seas. Yet Turkey and Brazil -- both current members of the Security Council -- are so opposed to sanctions that they will not even discuss the resolution. And China will now have a new excuse to weaken it further.

But the deeper meaning of the uranium-export stunt is the brazenness with which Brazil and Turkey gave cover to the mullahs' nuclear ambitions and deliberately undermined U.S. efforts to curb Iran's program.

The real news is that already notorious photo: the president of Brazil, our largest ally in Latin America, and the prime minister of Turkey, for more than half a century the Muslim anchor of NATO, raising hands together with Mahmoud Ahmadinejad, the most virulently anti-American leader in the world.

That picture -- a defiant, triumphant take-that-Uncle-Sam -- is a crushing verdict on the Obama foreign policy. It demonstrates how rising powers, traditional American allies, having watched this administration in action, have decided that there's no cost in lining up with America's enemies and no profit in lining up with a U.S. president given to apologies and appeasement.

They've watched President Obama's humiliating attempts to appease Iran, as every rejected overture is met with abjectly renewed U.S. negotiating offers. American acquiescence reached such a point that the president was late, hesitant and flaccid in expressing even rhetorical support for democracy demonstrators who were being brutally suppressed and whose call for regime change offered the potential for the most significant U.S. strategic advance in the region in 30 years.

They've watched America acquiesce to Russia's re-exerting sway over Eastern Europe, over Ukraine (pressured by Russia last month into extending for 25 years its lease of the Black Sea naval base at Sevastopol) and over Georgia (Russia's de facto annexation of Abkhazia and South Ossetia is no longer an issue under the Obama "reset" policy).

They've watched our appeasement of Syria, Iran's agent in the Arab Levant -- sending our ambassador back to Syria even as it tightens its grip on Lebanon, supplies Hezbollah with Scuds and intensifies its role as the pivot of the Iran-Hezbollah-Hamas alliance. The price for this ostentatious flouting of the United States and its interests? Ever more eager U.S. "engagement."

They've observed the administration's gratuitous slap at Britain over the Falklands, its contemptuous treatment of Israel, its undercutting of the Czech Republic and Poland, and its indifference to Lebanon and Georgia. And in Latin America, they see not just U.S. passivity as Venezuela's Hugo Chávez organizes his anti-American "Bolivarian" coalition while deepening military and commercial ties with Iran and Russia. They saw active U.S. support in Honduras for a pro-Chávez would-be dictator seeking unconstitutional powers in defiance of the democratic institutions of that country.

This is not just an America in decline. This is an America in retreat -- accepting, ratifying and declaring its decline, and inviting rising powers to fill the vacuum.

Nor is this retreat by inadvertence. This is retreat by design and, indeed, on principle. It's the perfect fulfillment of Obama's adopted Third World narrative of American misdeeds, disrespect and domination from which he has come to redeem us and the world. Hence his foundational declaration at the U.N. General Assembly last September that "No one nation can or should try to dominate another nation" (guess who's been the dominant nation for the last two decades?) and his dismissal of any "world order that elevates one nation or group of people over another." (NATO? The West?)

Given Obama's policies and principles, Turkey and Brazil are acting rationally. Why not give cover to Ahmadinejad and his nuclear ambitions? As the United States retreats in the face of Iran, China, Russia and Venezuela, why not hedge your bets? There's nothing to fear from Obama, and everything to gain by ingratiating yourself with America's rising adversaries. After all, they actually believe in helping one's friends and punishing one's enemies.

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Thursday, May 20, 2010

Fargo -- Homes on the Range -- Not Foreclosed

Simple financing principles and common sense about its economy have benefited North Dakota. Is there any reason the remaninder of the nation should ignore the lessons this state offers? It looks like the good people of North Dakota borrow no more than they can repay and they develop businesses that make the most of local resources.

Why North Dakotans Make Their Mortgage Payments

By James R. Hagerty

Because I grew up in Grand Forks, N.D., I like to tell my boss how well North Dakota is doing in terms of home-mortgage performance.

The latest quarterly report from the Mortgage Bankers Association shows that my state had the lowest percentage of mortgage borrowers who were 90 days or more delinquent (but not yet in foreclosure) as of March 31: a mere 1.15%. That compares with a national average of 4.91%, with 9.20% in Nevada, the worst performer. Even our rivals in South Dakota were far behind us at 1.69%. So what if they have Mount Rushmore.

When my boss asked me why North Dakota was No. 1, I explained that we were more sensible than most people and didn’t buy things we couldn’t afford. She thought it might be slightly more complicated than that. So I made a couple of calls.

“North Dakota’s economy has fared pretty well,” said Rick Clayburgh, president of the North Dakota Bankers Association in Bismarck. (The Clayburghs are old friends of my clan back home, and his brother was briefly my dentist, but I stand by my source.) The economy is benefiting from a boom in oil, coal and wind energy. The energy business is “going gangbusters,” Mr. Clayburgh said. Prices of our agricultural commodities have come down, but the farmers are still “doing OK,” he said.

North Dakota’s unemployment rate is around 4%, less than half the national average. Hey, you don’t move to North Dakota to loaf in the sun. You move there because you found a good job–and perhaps because you love the great outdoors, even when it’s 40 below.

Next I thought of Mark Zandi, chief economist of Moody’s, who made his name by being able to make astute comments on demand, not only about the national economy but about the backwoods, the bush, the hinterlands and the deepest boonies. I decided to put Mr. Zandi to the test by asking him to explain why North Dakotans were such reliable repayers of borrowed cash. He didn’t hesitate.

North Dakota avoided the entire housing bubble and crash, he explained: “It is difficult for speculation to infect the North Dakota housing market as there are no supply constraints on home builders, who can quickly put up homes if there is any increase in housing demand and prices.”

It’s true there is plenty of open space; the first time my wife, a native of Hong Kong, visited North Dakota, she looked around with complete bafflement and asked why we weren’t doing anything with all that empty prairie. I once calculated that if North Dakota were to match the urban population density of Hong Kong, we would have room for eight billion people. We might even attract a few good Chinese restaurants. As it is, our population is about nine people per square mile; in New Jersey, it’s 1,171, including mobsters.

Another reason we skipped the housing bubble, Mr. Zandi said, is that “subprime lenders probably bypassed North Dakota as the mortgage market is too small to cover the costs of setting up a lending operation,” Mr. Zandi said. OK, maybe that was just our dumb luck. But Mr. Clayburgh added that in North Dakota both home buyers and banks tend to be conservative about mortgage loans.

So I was right after all: We are pretty sensible.

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No Mosque, No Mosque -- Islam "a 7th Century Death Cult coughed up by a psychotic pedophile."

Looks like Mark Williams nailed it. But now that he's alerted the world about his views on Islam, he had better think of how to avoid the fate of Theo van Gogh, who was murdered by muslims angered by the movie he made showing the miseries of muslim women.

Seems the mayor's office is "appalled" by Williams' comments. Actually, it is more like the mayor is "shocked, shocked" to hear someone speak as Williams spoke. Unfortunately, state senator Daniel Squadron is utterly clueless about the rebuilding of the World Trade Center. Based on his comments he is ignorant of the new building's design, the part about making it more likely to survive an attack of the type used by muslims.

By the way, today is Mock Muhammad Day. The day non-muslims devote to creating cartoons of Muhammad.

Tea Party leader Mark Williams says Muslims worship a 'monkey god', blasts Ground Zero mosque


Published:Wednesday, May 19th 2010

A National Tea Party leader protesting a proposed mosque near Ground Zero set off a firestorm of anger Wednesday by saying that Muslims worship "the terrorists' monkey god."

Mark Williams, chairman of the Tea Party Express, blogged about the 13-story mosque and Islamic cultural center planned at Park Place and Broadway, calling it a monument to the 9/11 terrorists.

"The monument would consist of a Mosque for the worship of the terrorists' monkey-god," Williams, a frequent guest on CNN, wrote on his Web site.

His statements drew a sharp rebuke from City Hall and the Council on American-Islamic Relations, a national Muslim civil rights and advocacy group.

"It's appalling," a spokesman for Mayor Bloomberg said of Williams' comments, adding that the land is private and is zoned for a number of uses including a religious facility.

"It would be shocking if such ignorant comments failed to elicit a strong response not only from Tea Party leaders, but from other parties throughout the political spectrum," said Corey Saylor, the Muslim rights group's national legislative director.

The downtown project is being spearheaded by the Cordoba Initiative and the American Society for Muslim Advancement. Neither group had any immediate response to Williams' comments.

The glass-and-steel building - which would also include a 500-seat performing arts venue, a swimming pool and a basketball court - would be built two blocks from the World Trade Center site, in the old Burlington Coat Factory.

This month, Community Board 1's financial district committee unanimously approved the project.

In an e-mail to the Daily News, Williams was unapologetic - saying his comments were specifically aimed at the terrorists, which he described as "the animals of Allah."

"If CAIR equates terrorists with Muslims then they apparently have a little [political correctness] problem of their own now don't they?" Williams said.

The Tea Party Express headed by Williams has organized nationwide protests in recent months, drawing in angry voters who feel ignored by Washington. The Tea Party backed outside-the-Beltway candidates like Rand Paul of Kentucky, who won the Republican primary for the U.S. Senate on Tuesday.

Ibrahim Hooper, a spokesman for the Muslim rights group, pointed out other offensive statements Williams has made about Muslims on his Web site, including calling Islam "a 7th Century Death Cult coughed up by a psychotic pedophile."

At the Community Board 1 committee meeting May 5, Daisy Khan, executive director of the American Society for Muslim Advancement, defended the project as a plus for the community.

"Whatever concerns anybody has, we have to make sure to educate them that we are an asset to the community," she said.

"Religious intolerance, demagoguery and fear-mongering have no place in the discussion about development on and around the World Trade Center site," State Sen. Daniel Squadron (D-Manhattan/Brooklyn) said.

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Monday, May 17, 2010

Government Corruption

Government corruption is many things, quite a few of them in the eye of the beholder. Hence, there is a problem of knowing it when we see it.

Meanwhile, our government's role is to provide a level playing field for capitalists. Unfortunately, it strays from this role. The government is at its worst when it engages in various forms of social engineering.

The government also forms alliances with the organizations is supposed to regulate or oversee. How can a government avoid corrupting itself when it settles virtually all business controversies by accepting money from the offending corporations? The most depressing example is the lucrative relationship between the government and the tobacco industry. For sickening behavior, what is worse than a government extracting as much tax revenue as tobacco addicts can pay?

Possibly the only example that might surpass the government/tobacco joint venture in punitive taxation is the example that would arise if the US were to legalize recreational drugs. Millions of people favor the legalization of marijuana, and when they speak of legalization they always mention the windfall tax revenue that legalization would include.

To put things in stark terms, if government corruption is driven by corporate interests, it is as though the criminals are advising the police.

In my view the real question boils down to assessing the integrity of government employees and elected officials. Last year in NY City there were problems with crane inspectors. A couple were giving passing grades to cranes and crane operators in exchange for bribes. The lax inspections led to a few deaths and a considerable amount of destruction -- and at the bottom of it all there was criminal behavior.

With respect to the oil leak in the Gulf and the Transocean drilling rig, it now appears the government inspectors from the Minerals Management Service were failing to perform adequate inspections. However, there has been no suggestion of bribery or criminal behavior on either side. Just plain old government ineptitude.

In the recent mine explosion it appears that mining company was regularly cited for safety violations, but the company was also known to make the required improvements. However, it looks as though the government's rules for action to meet safety standards were lax enough for the explosion to occur. Still, by all measures, mining fatalities have dropped by about 95% over the last few decades.

Of course we need coal and oil, and we cannot construct buildings without cranes. Nevertheless, in those industries a lot of government regulatory effort is put into creating and maintaining safe operating environments. Safe for the employees and safe for anyone else touched in any way by the work being done.

That is not always the way it is. Especially in the financial industry. Inasmuch as all companies want to stay in business and maxmize their profits, they all develop an understanding of their markets. When it comes to lending money, lenders know how to identify borrowers who might fail to repay their loans. If we were asked to lend our own money to strangers, I think all of us would ask the same obvious questions and reach the same obvious conclusions about who gets a loan and who does not.

That's when the government steps in. It's social engineering time. Politicians know the number of affluent creditworthy voters is much smaller than the number of people with marginal creditworthiness. It takes only a second to realize that politicians will happily promise the world to voters who have no assets and later make adjustments to government finances to accept the risk created by laws that encourage lenders to underwrite loans to people unlikely to repay them.

How do politicians do this? They hire inspectors to check the safety of financial entities and their products. The government gave its de jure stamp of approval to S&P, Moodys and Fitch by naming them Nationally Recognized Statistical Organizations. And thus a credit rating from any of the three was incontestable. Hmmmm. Apparently the inspectors at S&P, Moodys and Fitch were less than fully competent. Or maybe overworked, maybe unaware of the aggregate impact of their ratings.

Were the financial inspectors taking bribes? No. Were they rating securities according to accepted methods? Yes.

But the only reason these outrageously risky securities were created comes back to two points. First, the financial industry understood that some of the risk was carried by the government by way of loosening standards at Fannie Mae and Freddie Mac. Second, the financial companies creating these risky securities realized that on one hand they were forced by the Community Reinvestment Act and subsequent legislation to lend money to potential deadbeats, and on the other hand, they were now positioned to exploit this requirement in ways the government regulators and inspectors did not grasp.

Thus, by creating rules forcing banks to extend loans to minority group members with poor credit profiles, the government created something else that was unintended. The government engaged in a logical fallacy known as the Fallacy of Composition. After getting started by the government, a number of financial companies jumped in and worked the fallacy until disaster hit.

Would the financial hurricane have struck if all lenders stuck to basic lending principles of lending money to people with good credit scores, decent job prospects and ample downpayments? No.

Is this an example of corruption? Of government stupidity? Of corporate greed? Or all three? All three. But the first mistake, the one that started it all, was made by the government when it believed the path to fairness involved the suspension of sane credit practices for a certain class of borrower.

Meanwhile, when it comes to global ranking for government corruption, the US government gets high marks for its relative honesty. Ecuador, however, is way down the scale. Nigeria? Disastrously corrupt.

But you seem to think Nigeria's corruption arrived with the discovery of oil. As though the arrival of western oil companies and money were the forces that sent Nigerian leaders off course. As of today, about half of Nigeria's population of 150 million has indoor plumbing and electricity. That sounds terrible until you consider that before there was oil money things were worse. Of course the country is as corrupt as a nation can get.

Worse, Nigeria is now about 50% muslim -- and climbing. The dominance of Islam guarantees the country will regress and remain in its benighted state forever.

It boils down to this. Our government should confine itself to regulating the playing fields and leave the capitalism to capitalists. Forming revenue-driven partnerships and other revenue-driven relationships between government and industry is a bad idea.

Obama's Enron Katrina Moment

It now looks like the Obama Administration has embarrassed itself. This time it has demonstrated its inability to police and maintain safety standards in the oil industry. Inspectors were failing to do their jobs, much like the corrupt New York City crane inspectors who were accepting bribes.

Will Obama fire people working in the Minerals Management Service segment of the Interior Department who are responsible for offshore oil-rig safety?

AP IMPACT: Fed'l inspections on rig not as claimed

LOS ANGELES – The federal agency responsible for ensuring that the Deepwater Horizon was operating safely before it exploded last month fell well short of its own policy that the rig be inspected at least once per month, an Associated Press investigation shows.

In fact, the agency's inspection frequency on the Deepwater Horizon fell dramatically over the past five years, according to federal Minerals Management Service records. The rig blew up April 20, killing 11 people before sinking and triggering a massive oil spill in the Gulf of Mexico.

Since January 2005, inspectors issued just one minor infraction for the rig. That strong track record led the agency last year to herald the Deepwater Horizon as an industry model for safety.

The inspection gaps are the latest in a series of questions raised about the agency's oversight of the oil drilling industry. Members of Congress and President Barack Obama have criticized what they call the cozy relationship between regulators and oil companies and vowed to reform MMS, which both regulates the industry and collects billions in royalties from it.

Earlier AP investigations have shown that the doomed rig was allowed to operate without safety documentation required by MMS regulations for the exact disaster scenario that occurred; that the cutoff valve which failed has repeatedly broken down at other wells in the years since regulators weakened testing requirements; and that regulation is so lax that some key safety aspects on rigs are decided almost entirely by the companies doing the work.

The AP sought to find out how many times government safety inspectors visited the Deepwater Horizon, and what they found. In response, MMS officials offered a changing series of numbers. The MMS has had long-standing issues with its data management.

At first, officials said 83 inspections had been performed since the rig arrived in the Gulf 104 months ago, in September 2001. While being questioned about the once-per-month claim, the officials subsequently revised the total up to 88 inspections. The number of more recent inspections also changed — from 26 to 48 in the 64 months since January 2005.

No explanation was given for the upward revisions. AP granted the officials anonymity because without that condition, communications staff at the Interior Department, which oversees MMS, would not have let them talk.

Based on the last set of numbers provided, the Deepwater Horizon was inspected 40 times during its first 40 months in the Gulf — in line with agency policy for offshore drilling rigs.

Even using the more favorable numbers for the most recent 64 months, 25 percent of monthly inspections were not performed. The first set of data supplied to AP represented a 59 percent shortfall in the number of inspections.

Interior Department spokeswoman Kendra Barkoff would not comment on the inspection numbers. Instead, she offered a general statement: "We are looking at all the questions that are coming out of the Deepwater Horizon incident."

In response to a Freedom of Information Act request filed by AP, the agency has released copies of only three inspection reports — those conducted in January, February and April. According to the documents, inspectors spent two hours or less each time they visited the massive rig. Some information appeared to be "whited out," without explanation.

Since the explosion, the agency has reiterated several times the inspection-once-per-month assertion, which appeared on its website at least as early as 1999.

In an e-mail to AP, an Interior Department official emphasized with italics that the MMS inspects rigs "at least once a month" when drilling is under way. Monthly inspections of offshore drilling rigs are an agency policy, though not required by regulation, said David Dykes, chief of the agency's office of safety management for the Gulf region.

Last week, at a joint Coast Guard-MMS investigatory hearing in Kenner, La., MMS official Jason Mathews asked Michael Saucier, MMS's regional supervisor for field operations in the Gulf, "And how often do we perform drilling inspections in the Gulf of Mexico?"

"We perform them at a minimum once a month, but we can do more if need be," Saucier said.

The job falls to the 55 inspectors in the Gulf who are supposed to visit the 90 drilling rigs once per month and the approximately 3,500 oil production platforms once per year.

The Deepwater Horizon's inspection frequency numbers struck Kenneth Arnold, a veteran offshore drilling consultant and engineer.

"I'd certainly question it," he said. "I'd ask, 'Why aren't you doing it?'"

When the AP did ask, MMS and Interior would not answer directly. Instead providing a set of conditions when a rig would not typically be inspected — including during bad weather, when it is jumping among short-term jobs, when a rig is preparing to drill or is done drilling but hasn't left for another site.

Transocean Ltd., which owned the Deepwater Horizon and leased it to BP PLC, would not provide a detailed accounting of the rig's activity history. According to RigData, a Texas firm that monitors offshore activity in the Gulf, the Deepwater Horizon was working approximately 2,896 days of the 3,131 days since it started its first well — about 93 percent of the time. That number represents the total number of days between when the Deepwater Horizon broke the sea floor during a drilling operation to when it was released to another site.

A summary of the inspection history that the MMS officials provided AP said the Deepwater Horizon received six "incidents of noncompliance" — the agency's term for citations.

The most serious occurred July 16, 2002, when the rig was shut down because required pressure tests had not been conducted on parts of the rig's blowout preventer — the device that was supposed to stop oil from gushing out if drilling operations experienced problems.

That citation was "major," said Arnold, who characterized the overall safety record related by MMS as strong.

A citation on Sept. 19, 2002, also involved the blowout preventer. The inspector issued a warning because "problems or irregularities observed during the testing of BOP system and actions taken to remedy such problems or irregularities are not recorded in the driller's report or referenced documents."

During his Senate testimony last week, Transocean CEO Steven Newman said the blowout preventer was modified in 2005.

According to MMS officials, the four other citations were:

• Two on May 16, 2002, for not conducting well control drills as required and not performing "all operations in a safe and workmanlike manner."

• One on Aug. 6, 2003, for discharging pollutants into the Gulf.

• One on March 20, 2007, which prompted inspectors to shut down some machinery because of improper electrical grounding.

Late last week, several days after providing the detailed accounting, Interior officials told AP that in fact there had been only five citations, that one had been rescinded. The officials said they could not immediately say which of the six had been rescinded.

The agency's problems with providing information extends to the data on display on its website. For example, the accounting of accident and incident reports is incomplete, making it very difficult to perform a thorough data analysis of the agency's performance and preventing a full accurate tracking of safety records of the rigs.

Data problems date back at least a decade. According to John Shultz, who as a graduate student in the late 1990s studied MMS' inspection program in depth for his dissertation, the agency's data infrastructure was severely limited.

"The thing I regret most is that, to my knowledge, MMS has not fixed the data management problem they have," said Shultz, who now works in the Department of Energy's nuclear program. "If you have the data you need, the analysis becomes fairly straightforward. Without the data, you're simply stuck with conjectures."

Whatever the correct citation total — five or six — the Deepwater Horizon's record was exemplary, according to MMS officials, who said the rig was never on inspectors' informal "watch list" for problem rigs. In fact, last year MMS awarded the rig an award for its safety history.

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Wednesday, May 12, 2010

Free Money for Rich Car Buyers

The winners in the electric-car sweepstakes are undoubtedly those who own tow trucks.

Welfare Wagons: The new electric cars are powered by taxpayer credits.

Congratulations. You're about to buy a fancy new Nissan Leaf or Chevy Volt . . . for someone else.

This is news masochists will want to grind their faces into after sending a big check last month to the IRS. GM's Volt is expected to arrive on the market first, in November. Nissan, whose all-electric Leaf will roll out in December, landed a preliminary blow last month, announcing a surprisingly modest price for an electric car of $25,280. That's after a $7,500 federal tax credit is counted.

Buyers will also have to spring for a $2,200 charging station, but another tax credit cuts the cost in half. Wonder why Nissan aims its first deliveries to California, Georgia and Tennessee? Those states will chip in additional consumer tax credits as high as $5,000.

GM originally floated a price of $40,000 for its Volt, but it certainly is rethinking that now. Neither car will make a profit for its maker. In their mental if not actual accounting, both undoubtedly will charge part of the cost to corporate marketing, since they hope the cars will lend a shine to their entire lineups. Both will mentally charge some of the cost to their pickup and SUV operations, since electric cars will create headroom under EPA rules to sell more of their bigger vehicles.

But understand something else: By pricing low and going for volume, Nissan's CEO Carlos Ghosn is making a calculated grab for the lion's share of the available tax dollars—and also pressuring Washington to extend the program when the money runs out.

And here's how much subsidy I will need . . .

Mr. Ghosn has made no secret of his expectations—"We are negotiating with the U.S. government to make sure we have a reasonable return on our investments and continue to develop the technology," he said last year.

And so a boondoggle is born. Last month, after a meeting with White House Car Czar Ron Bloom, the Alliance of Automobile Manufacturers produced a multipoint proposal for how the handouts can be made to flow more or less in perpetuity.

Let's concede that the Leaf and Volt will be nifty gadgets, but not unless we're going to start subsidizing Ferraris for the tiara set is it possible to imagine a more regressive tax subsidy.

In particular, the Leaf is a car for a wealthy hobbyist, good for a trip of 100 miles after which it becomes an inert lump at the end of your driveway (or behind a tow truck) for the many hours it will take to recharge.

The Volt at least is a car someone might live with, since it can run indefinitely on gasoline once its 40-mile battery charge runs out. Nonetheless, GM continues to make startling claims that the car will get 50 mpg in gas-powered mode and will have a 300-mile range—even as the company strangely declines to specify how many gallons the gas tank will hold.

Never mind. iPad lust applies to cars too, and early adopters can be expected to line up around the block. But it is insane to subsidize these vehicles with taxpayer dollars.

Even if you believe saving gasoline is a holy cause, subsidizing electric cars simply is not a substitute for politicians finding the courage to jack up gas prices. Think about it this way: You can double the fuel efficiency of any car by putting a second person in it. You can increase its fuel efficiency to infinity by refraining from frivolous trips.

These are the incentives that flow from a higher gas price. Exactly the opposite incentives flow from mandatory investment in higher-mileage vehicles. You paid a lot for a car that costs very little to operate—so why not operate it? Why bother to car pool? Why not drive across town for a jar of mayonnaise?

Though as eager as any to clamber aboard the electric-vehicle bandwagon, German parts maker Robert Bosch notes with rare honesty that electric cars may end up responsible for more CO2 than their conventional counterparts in regions (like much of the U.S.) where electricity is produced from coal.

Saving a certain magical amount of gasoline won't allow the U.S. to disentangle itself from the Middle East. It wouldn't allow the U.S. to walk away from its global policeman labors. We could convert all our cars to electricity and the U.S. would not willingly relinquish its military hegemony.

Unwillingly, of course, is a different matter. Tax handouts for electric vehicles are emblematic of an alarmingly childish refusal to take account of circumstances. The U.S. government is deeply in debt. In people and nations with their backs to the wall, one looks for signs of rationality. Running up more debt to subsidize electric runabouts for suburbanites is not such a sign.

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Wind, Sun and Oil are Free

The Energy Illiterates fail to understand where the money for energy supplies goes. For some reason they think crude oil is expensive but the wind and sun provide their benificent energy free of charge. For some reason they think because they can feel the wind in their faces and the warmth from the sun that kilowatt hours of electricity are waiting around for a good green utility to send that energy to homes all over America.

It's the energy conversion process that costs, and it costs a lot. Moreover, even if we were able to achieve the theoretical peak conversion efficiency, the cost of wind and sun energy would cost many times the cost of crude oil at $80 a barrel. It's that simple.

The Price of Wind

The 'clean energy revolution' is expensive

The ferocious opposition from Massachusetts liberals to the Cape Wind project has provided a useful education in green energy politics. And now that the Nantucket Sound wind farm has won federal approval, this decade-long saga may prove edifying in green energy economics too: Namely, the price of electricity from wind is more than twice what consumers now pay.

On Monday, Cape Wind asked state regulators to approve a 15-year purchasing contract with the utility company National Grid at 20.7 cents per kilowatt hour, starting in 2013 and rising at 3.5% annually thereafter. Consumers pay around nine cents for conventional power today. The companies expect average electric bills to jump by about $1.59 a month, because electricity is electricity no matter how it is generated, and Cape Wind's 130 turbines will generate so little of it in the scheme of the overall New England market.

Still, that works out to roughly $443 million in new energy costs, and that doesn't count the federal subsidies that Cape Wind will receive from national taxpayers. It does, however, include the extra 6.1 cents per kilowatt hour that Massachusetts utilities are mandated to pay for wind, solar and the like under a 2008 state law called the Green Communities Act. Also under that law, at least 15% of power company portfolios must come from renewable sources by 2020.

Two weeks ago, U.S. Interior Secretary Ken Salazar approved Cape Wind, placing it in the vanguard of "a clean energy revolution." A slew of environmental and political outfits have since filed multiple lawsuits for violations of the Endangered Species Act, the National Environmental Policy Act, the Outer Continental Shelf Lands Act, certain tribal-protection laws, the Clean Water Act, the Migratory Bird Treaty Act and the Rivers and Harbors Act.

There's comic irony in this clean energy revolution getting devoured by the archaic regulations of previous clean energy revolutions. But given that taxpayers will be required to pay to build Cape Wind and then required to buy its product at prices twice normal rates, opponents might have more success if they simply pointed out what a lousy deal it is.

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Saturday, May 08, 2010

Oil's Well that Ends Well

Looks like some smart engineers and iron-workers have designed and built something that will cap the leaking oil well. That's great news, though hardly unexpected. American engineers have always shown an impressive capacity for creating solutions to big problems when the pressure is on.

Inasmuch as the search for oil and gas now means we must drill deeper and drill in more hostile settings, it is time to give more study to preventing and stopping catastrophes that can occur at these remote and hazardous sites. In addition, we need to develop better methods for removing leaked oil from seawater. Because we are driven by our need for oil crossed with our need to keep sea habitats healthy, this technical dilemma, like every technical problem we face, will succumb to the innovation of American engineers.

Robots position giant box over oil-spewing well

May 7 02:09 PM

ON THE GULF OF MEXICO (AP) - Underwater robots positioned a giant 100-ton concrete-and-steel box over a blown-out well at the bottom of the Gulf of Mexico on Friday as workers prepared to drop the device to the seafloor in a first-of-its-kind attempt to stop oil gushing into the sea.

A spokesman for oil giant BP PLC, which is in charge of the cleanup, said the box was suspended over the main leak just after noon EDT Friday and was being moved into position.

Several undersea cameras attached to the robots were making sure it was properly aligned before it plunged all the way to the bottom.

"We are essentially taking a four-story building and lowering it 5,000 feet and setting it on the head of a pin," Bill Salvin, the BP spokesman, told The Associated Press.

If the device works, it could be collecting as much as 85 percent of the oil spewing into the Gulf and funneling it up to a tanker by Sunday. It's never been tried so far below the surface, where the water pressure is enough to crush a submarine.

Once the device in place later Friday, the robots will secure it over the main leak at the bottom, a process that will take hours.

The seafloor is pitch black, but lights on the robots illuminate the area where they are working and they have found no problems so far. The cameras are off to the side, not in the path of the oil, Salvin said.

An estimated 200,000 gallons a day have been spewing ever since in the nation's biggest oil spill since the Exxon Valdez disaster in Alaska in 1989.

The containment device will not solve the problem altogether. Crews are still drilling a relief well and working on other methods to stop the well from leaking.

The quest took on added urgency as oil reached several barrier islands off the Louisiana coast, many of them fragile animal habitats. Several birds were spotted diving into the oily, pinkish-brown water, and dead jellyfish washed up on the uninhabited islands.

"It's all over the place. We hope to get it cleaned up before it moves up the west side of the river," said Dustin Chauvin, a 20-year-old shrimp boat captain from Terrebonne Parish, La. "That's our whole fishing ground. That's our livelihood."

Out at sea, the crew of the semi-submersible drilling vessel Helix Q4000 waited hours longer than expected to hoist the containment device from the deck of the Joe Griffin supply boat because dangerous fumes rose from the oily water. Joe Griffin Capt. Demi Shaffer told an Associated Press reporter aboard his boat the fear was that a spark caused by the scrape of metal on metal could cause a fire. Crew members wore respirators while they worked.

Conditions were safe enough to allow the crane to lift the device into the Gulf after 10 p.m. CDT, dark oil clinging to its white sides as it entered the water and disappeared below the surface.

The box—which looks a lot like a peaked, four-story outhouse, especially on the inside, with its rough timber framing—must be accurately positioned over the well, or it could damage the leaking pipe and make the problem worse.

BP spokesman Doug Suttles said he is not concerned about that happening. Underwater robots have been clearing pieces of pipe and other debris near where the box will be placed to avoid complications.

"We do not believe it could make things worse," he said.

"I'm worried about every part, as you can imagine," said David Clarkson, BP vice president of engineering projects.

If the box works, a second one now being built may be used to deal with another, smaller leak from the sea floor.

Seas were calm Friday, and the Coast Guard hoped to continue skimming oil from the ocean surface, burning it at sea and dropping chemicals from the air to break it up.

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Thursday, May 06, 2010

Time to End the Corporate Income Tax

If there is one thing we know about profitable corporations, it is that any taxes they pay, they collect from customers. So why should the government take steps to raise prices of goods and services and decrease total jobs if it's possible to take a simple step that will put tax-paying people to work without sacrificing overall tax revenue?

Moreover, if the corporate income tax were eliminated, the contrived concept of depreciation would lose all meaning. Capital investments would occur as needed, rather than on a tax-accounting basis. Meanwhile, ending the corporate income tax is a way to encourage more companies to locate themselves in the US. So what are we waiting for?

Time to Junk the Corporate Tax
Nobel Laureate Robert Lucas says reform would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen.'


President Obama has put tax reform on the agenda, but surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all: the corporate income tax. Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America's global competitiveness, and raise future wages.

The U.S. has the second-highest corporate income tax rate of any advanced economy (39% including state taxes, 50% higher than the OECD average). Many major competitors, Germany and Canada among them, have reduced their corporate tax rate, rendering American companies less competitive globally.

Of course, various credits and deductions—such as for depreciation and interest—reduce the effective corporate tax rate. But netting everything, our corporate tax severely retards and misaligns investment, problems that will only get worse as more and more capital becomes internationally mobile. Corporate income is taxed a second time at the personal level as dividends or those capital gains attributable to reinvestment of the retained earnings of the corporation. Between the new taxes in the health reform law and the expiration of the Bush tax cuts, these rates are soon set to explode.

This complex array of taxes on corporate income produces a series of biases and distortions. The most important is the bias against capital formation, decreasing the overall level of investment and therefore future labor productivity and wages. Also important are the biases among types of investments, depending on the speed of tax vs. true economic depreciation, against corporate (vs. noncorporate) investment, and in favor of highly leveraged assets and industries. These biases assure that overall capital formation runs steeply uphill, while some investments run more, some less uphill. It would be comical if the deleterious consequences weren't so severe.

Of course, the corporation is a legal entity; only people pay taxes. In a static economy with no international trade, the tax is likely borne by shareholders. The U.S. economy is neither static nor closed to trade, and taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers. In a growing economy, the lower investment slows productivity growth and future wages.

There is considerable evidence that high corporate taxes are economically dangerous. In a 2008 working paper entitled "Taxation and Economic Growth," the Organization for Economic Cooperation and Development concluded that "Corporate taxes are found to be most harmful for growth, followed by personal income taxes and then consumption taxes." Virtually every major tax reform proposal in recent decades has centered on lowering taxes on capital income and moving toward a broad-based, low-rate tax on consumption. This could be accomplished by junking the separate corporate income tax, integrating it with the personal income tax (e.g., attributing corporate income and taxes to shareholders or eliminating personal taxes on corporate distributions), and/or allowing an immediate tax deduction (expensing) for investment (which cancels the tax at the margin on new investment and hence is the priority of most economists). The Hall-Rabushka Flat Tax, the Bradford progressive consumption tax, a value-added Tax (VAT), the FairTax retail sales tax, four decades of Treasury proposals and the 2005 President's Tax Commission proposals would all move in this direction.

Reducing or eliminating the negative effects of the corporate tax on investment would increase real GDP and future wages significantly. Junking both the corporate and personal income taxes and replacing them with a broad revenue-neutral consumption tax would produce even larger gains. Nobel Laureate Robert Lucas concluded that implementing such reforms would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen."

Reducing taxes on new investment could help strengthen what is a historically slow recovery from such a deep recession. It would also strengthen the economy long-term. American workers would benefit from more jobs in the short run and higher wages in the long run.

However, if a new tax device is used to grow government substantially, it will seriously erode our long-run standard of living. The VAT has served that purpose in Europe and, while better than still-higher income taxes, the larger-size governments it has enabled there are the prime reason European living standards are 30% lower than ours. Trading a good tax reform for a much larger government is beyond foolish. No tax reform can offset losses that large. Hence, a VAT should only be on the table if it is not only revenue-neutral but accompanied by serious spending control.

Further, the fraction of Americans paying no income taxes is approaching 50%. That sets up a dangerous political dynamic of voting ever-rising taxes to pay for ever-rising spending. We need more people with a stake in controlling spending. Replacing corporate and personal income taxes with a broad-based consumption tax could increase the number of those with "skin in the game." But some reforms, for example a VAT, might be much less transparent and may not serve this purpose.

Congresses (and presidents) seem unable to avoid continually tinkering with the tax code. A tax reform that is quickly riddled with special features would lose much of its economic benefit. We need a stable tax system that changes much less frequently, so families and firms can more reliably plan their future. Current fiscal policy, loaded with immense deficits, ever-growing debt, and the prospect of higher future taxes, is the biggest threat to such stability. To balance proposed spending in Mr. Obama's budget in 2015, his Deficit Commission's target year, will require at least a 43% increase in everyone's income tax. Thus, spending control is vital to tax stability.

American companies and their workers compete in the global marketplace saddled with a costly, anachronistic corporate tax system. To compete successfully in the 21st century, we will need to reform corporate taxation. There are several paths to doing so, each with its advantages. Unfortunately, tax policy is headed in exactly the wrong direction, raising taxes on corporate source income. Business investment is growing again after the collapse in the recession, which is usual in a cyclical recovery with very low interest rates. But eventually structural drags, from our antiquated tax code to massive public debt, will impede investment and economic growth.

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Mutual Savings Bank Conversions Likely to Increase

Ben Bernanke is concerned about small banks. He sees capital shortages ahead. That means mutual savings banks may demutualize and once again sell stock to depositors and other interested investors. Sounds like great news to me.

In addition to an increase in mutual-to-stock conversions, pressure on small banks is likely to result in more mergers and acquisitions. Of the many possible take-overs, there is the possible union of NewAlliance Bank (symbol NAB) and Patriot National Bank (symbol PNBK).

NAB is one of Connecticut's larger banks. Meanwhile, PNBK is much smaller and its operations are conducted mostly in Fairfield County. However, PNBK, like many small banks, blundered into some problematic real estate loans. Recently a financial investor stepped in and provided capital of about $50 million, which amounted to buying stock for roughly $1.50 a share. The stock now trades over $2.00. But the big question is the buyout price PNBK deserves. How much might NAB pay?

Meanwhile, in Massachusetts there are still about 140 mutual savings banks. Therefore, thrift conversion investors should do what they can to open accounts in those banks.

Bernanke Warns of Small-Bank Risks

Small U.S. banks will likely have to raise capital in the coming years, while bigger institutions are doing much better than a year ago, Federal Reserve Chairman Ben Bernanke said Thursday.

Regional and community banks face tough challenges, especially in residential mortgages and commercial real estate loans, Mr. Bernanke told a bankers conference in Chicago in prepared remarks a year after the Fed tested the resilience of the 19 largest U.S. banks in so-called stress tests.

Given the large number and diversity of smaller banks, Mr. Bernanke said the Fed hadn't even tried to conduct simultaneous stress tests of smaller banks. But the central bank has been working with them on an individual basis to assess their capital needs.

"Although the results vary considerably across institutions, prospective losses are such that many of these organizations may need additional capital over the next few years," the Fed chief said.

"Also, with credit demand tepid and the economy still under stress, profitable lending opportunities have been relatively scarce for many of these banks," he added.

Mr. Bernanke said the Fed has continued to receive numerous proposals from private equity investors to take stakes in regional and community banks. Over the past two years, the Fed has approved many of these proposals, including some that bring both new capital and management to the organization and some that provide new capital through minority investments, the Fed chairman said.

Mr. Bernanke noted how smaller banks generally have fewer alternatives than large banks for raising fresh capital and thus tend to rely on retained earnings for capital growth.

Meantime, Mr. Bernanke said that a year after the stress tests, the earnings and loan losses of the 19 biggest U.S. big banks looked "encouraging."

In the stress tests released in May 2009, the Fed designed dire economic scenarios and measured the resilience of big banks against those scenarios. The exercise has become a model for supervision, and some economists believe the tests and related capital-raising by banks played a key role in the economy's recovery.

The Fed last year concluded that Bank of America Corp., Citigroup Inc., Wells Fargo & Co., GMAC LLC, Morgan Stanley, Regions Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc. and SunTrust Banks Inc. required around $75 billion to bolster their capital. The other nine banks were considered sound enough.

Though the biggest banks drew the most attention during the stress tests last April and May, Fed officials also worried about large regional ones, especially in the Southeast, the scene of many bank failures.

Some Fed officials have been calling for bank stress tests to be conducted periodically and for their results to be disclosed. Although mr. Bernanke didn't embrace this view, he said the central bank was continuing to monitor large banks closely.

"Now we are working with banks to ensure they improve their risk-measurement and risk management as well as strengthen their liquidity and capital levels while also providing the credit that households and businesses need," Mr. Bernanke said.

Although bank credit remains tight, Mr. Bernanke said the strengthening economy gave reasons for some optimism.

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Wednesday, May 05, 2010

When You Absolutely Have to Get There Overnight

Fortunately, Faisal Shahzad was too dumb to hide in plain sight. He chose the wrong way to escape, which happens during those times the pressure is high. When it comes to jetting out of town in a hurry, hopping an international flight is a risky way to leave the country and the odds against walking away freely after landing on the other side of the planet are slim. On the other hand, hiding in Bridgeport, CT is easy.

Security slip let suspect on plane, near takeoff

May 4, 2010

WASHINGTON (AP) - The no-fly list failed to keep the Times Square suspect off the plane.

Faisal Shahzad boarded a jetliner bound for the United Arab Emirates Monday night before federal authorities pulled him back. Although under surveillance since midafternoon, he had managed to elude investigators and head to the airport.

The night's events, gradually coming to light, underscored the flaws in the nation's aviation security system, which despite its technologies, lists and information sharing, often comes down to someone making a right call.

As federal agents closed in, Faisal Shahzad was aboard Emirates Flight 202. He reserved a ticket on the way to John F. Kennedy International Airport, paid cash on arrival and walked through security without being stopped.

By the time Customs and Border Protection officials spotted Shahzad's name on the passenger list and recognized him as the bombing suspect they were looking for, he was in his seat and the plane was preparing to leave the gate. They knew to look for him because of updates to the no-fly list made earlier in the day.

At the last minute, the pilot was notified, the jetliner's door was opened and Shahzad was taken into custody.

After authorities pulled Shahzad off the plane, he admitted he was behind the crude Times Square car bomb, officials said. He also claimed to have been trained at a terror camp in Pakistan's lawless tribal region of Waziristan, according to court documents. That raised increased concern that the bombing was an international terror plot.

Shahzad, a Pakistani-born U.S. citizen, was charged Tuesday with terrorism and attempting to use a weapon of mass destruction in Saturday evening's failed Times Square bombing. According to a federal complaint, he confessed to buying an SUV, rigging it with a homemade bomb and driving it into the busy area where he tried to detonate it.

Shahzad had been under constant watch at his Bridgeport, Conn., home since 3 p.m. Monday and federal authorities had planned to arrest him there that evening, two people familiar with the investigation told The Associated Press. Authorities believe he decided to flee after being spooked by news reports that investigators were seeking a Pakistani suspect in Connecticut, one of the people said.

Shahzad somehow lost the investigators who were trailing him, the two people said. They spoke on condition of anonymity because they were not authorized to discuss the incident.

The FBI and the NYPD declined to comment.

The Obama administration played down the fact that Shahzad, a U.S. citizen born in Pakistan, made it aboard the plane. Homeland Security Secretary Janet Napolitano wouldn't talk about it, other than to say Customs officials prevented the plane from taking off. White House spokesman Robert Gibbs said the security system has fallback procedures in place for times like this, and they worked.

And Attorney General Eric Holder said he "was never in any fear that we were in danger of losing him."

But it seemed clear the airline either never saw or ignored key information that would kept Shahzad off the plane, a fact that dampened what was otherwise hailed as a fast, successful law enforcement operation.

The no-fly list is supposed to mean just that. And Shahzad's name was added to the list early Monday afternoon as a result of breaking developments in the investigation, according to a law enforcement official, speaking on condition of anonymity to discuss an ongoing investigation.

But when Emirates sold the ticket, it was working off an outdated list. Airline officials would have had to check a Web forum where updates are sent if it were to flag him. Because they didn't, law enforcement officials were not aware of his travel plans until they received the passenger list 30 minutes before takeoff, the official said.

By that time, passengers are usually on board.

Gibbs blamed the airline but emphasized a more positive bottom line: U.S. authorities did get Shahzad on the no-fly list and he never took off.

"There's a series of built-in redundancies, this being one of them," Gibbs said. "If there's a mistake by a carrier, it can be double-checked."

The list is only as good as the nation's intelligence and the experts who analyze it. If a lead is not shared, or if an analyst is unable to connect one piece of information to another, a terrorist could slip onto an airplane because his name is not on the watch list.

Officials allege that's just what took place ahead of the attempted Christmas Day attack on a Detroit-bound jet. In the case of the Times Square suspect, the intelligence process worked: Shahzad's name was on the list, but the airlines didn't check it when he bought his ticket.

Shahzad went through normal airport security before he boarded the plane. He was unarmed and had no explosive material on him when he was arrested.

Emirates did not return repeated calls for comments. Earlier in the day, the company issued a general statement saying it was cooperating with investigators and takes every precaution to ensure its passengers' safety.

The reliance on airlines to check government lists has been a known problem for years. The government has long planned to take over the responsibility for matching passengers to watch lists, but the transition has taken longer than expected. The new program is still in the test phase for domestic airlines and is still months away from beginning with international carriers.

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