Business News: Toyota Can't Shake Its Malaise

Business News: Toyota Can't Shake Its Malaise

Toyota Can't Shake Its Malaise

Posted: 04 Jan 2011 08:45 PM PST

add to Business Exchange

By David Welch

Jan. 4 (Bloomberg) -- Toyota Motor Corp.’s U.S. vehicle sales fell in 2010 while industrywide sales rose 11 percent and every other major automaker reported gains. Ford Motor Co. moved up to second place behind only General Motors Co.

Ford displaced Toyota as No. 2 in the U.S. with 1.97 million vehicles sold in the year, up 17 percent from 2009, compared with Toyota’s sales of 1.76 million cars and trucks. GM retained the top spot with U.S. sales of 2.22 million vehicles, an increase of 7 percent. Deliveries in December accelerated to the fastest pace of the year.

Toyota recalled more than 8 million vehicles worldwide last year, mostly for flaws related to unintended acceleration, with the majority occurring in the U.S. The company temporarily halted U.S. production and sales of eight models, including its top-selling Camry and Corolla cars in January to fix the flaws. Meanwhile, GM, Ford, Nissan Motor Co. and Hyundai Motor Co. lured buyers away with new models.

“The black clouds from Toyota’s recalls just don’t seem to go away,” said Jesse Toprak, vice president of industry trends for Santa Monica, California-based auto pricing website Truecar.com. “We saw Ford, GM and Hyundai-Kia come on strong. Brand loyalty isn’t what it used to be.”

Industrywide sales in 2010 totaled 11.6 million, according to Autodata Corp., based in Woodcliff Lake, New Jersey. That’s up from 10.4 million the previous year for the first gain since 2005 and the largest percentage increase since 1984.

Toyota’s incentive spending rose in December to $2,253 a vehicle, up 37 percent from last year, Toprak said. Toyota’s incentives were below the industry average of $2,721 a vehicle. The rising deals are a sign that Toyota will fight to hold market share, Toprak said.

GM’s Increase

GM’s deliveries in the month rose 7.5 percent from December 2009 to 224,185, the Detroit-based automaker said today in a statement. The largest U.S. automaker was expected to post a 4.3 percent sales increase, the average of four analysts’ estimates compiled by Bloomberg. Ford’s sales gained 3.5 percent, topping the 3.3 percent average estimate of five analysts.

“This is a market that’s coming back significantly,” said Rebecca Lindland, an analyst with IHS Automotive, a researcher in Lexington, Massachusetts. “And with really strong products coming from GM, Ford and Chrysler, there’s a lot of opportunity for change in the marketplace.”

Deliveries of GM’s Chevrolet Cruze small car rose 35 percent from November to 10,865 in December, and Ford’s sales of the new Fiesta subcompact increased to 5,212, a 50 percent gain from a month earlier. Deliveries of Chrysler’s redesigned Jeep Grand Cherokee more than tripled from a year earlier.

Topping Estimates

Industrywide light-vehicle sales rose to a seasonally adjusted annual rate of 12.6 million, according to Autodata. That exceeded the 12.3 million average of eight analysts’ estimates that would have matched the October and November paces that were the fastest since the U.S. government’s “cash for clunkers” program in 2009.

Ford was the best-selling make in the U.S. in 2010, displacing Toyota’s namesake brand, which fell to third behind GM’s Chevrolet. Ford sold 1.76 million Ford-brand vehicles last year, while GM sold 1.57 million Chevrolets and Toyota sold 1.49 million Toyota cars and trucks.

Chevrolet deliveries gained 9.1 percent to 147,960 vehicles in December, GM said today. Buick sales climbed 40 percent to 17,095, led by the Enclave sport-utility vehicle. GMC sales gained 35 percent to 42,159. Cadillac deliveries rose 13 percent to 16,718.

Sales of the Chevy Equinox SUV gained 79 percent, while the Cadillac SRX climbed 18 percent, GM said.

‘On A Roll’

Since filing for bankruptcy in 2009, GM has closed Hummer, Pontiac and Saturn and sold Saab to focus on Buick, Cadillac, Chevrolet and GMC. Sales of GM’s four remaining brands rose 16 percent compared with December 2009, the company said.

“GM is on a bit of a roll,” said Jeremy Anwyl, chief executive officer of auto researcher Edmunds.com. “Incentive spending was down, market share should be up. They’re doing it with nice products. The Cruze is doing pretty well.”

For the year, GM sales rose 6.3 percent from the 2009 performance for the company’s eight brands. Full-year sales of GM’s four remaining brands rose 21 percent, the company said.

GM gained 84 cents, or 2.3 percent, to $37.90 at 4:15 p.m. in New York Stock Exchange composite trading. The shares gained 15 percent from their $33 sale price in an initial public offering in November. Dearborn, Michigan-based Ford added 13 cents to $17.38. The shares gained 68 percent in 2010.

Rising consumer confidence and retail spending bode well for car sales and may help boost 2011 industrywide sales, including heavy-duty trucks, to 13 million to 13.5 million vehicles, Don Johnson, GM’s vice president of U.S. sales operations, said today on a conference call.

Credit Eases

Banks are starting to lend more freely, giving buyers with weaker credit an opportunity to purchase new cars, he said. Subprime borrowers account for about 5 percent of GM’s sales right now, he said.

Ford sold 190,976 vehicles in December, and deliveries of its namesake brand gained 9.6 percent to 174,523, the company said today in a statement. Lincoln sales fell 23 percent to 8,060, and the discontinued Mercury marque dropped 11 percent to 8,393.

Deliveries of the Fusion sedan gained 20 percent in December and reached a record 219,219 for the year, the first Ford car to top 200,000 since 2004. Sales of the redesigned Explorer, introduced last month, rose 53 percent.

Ford’s light-vehicle sales in 2010 rose 17 percent to 1,968,500, including sales of Volvo, which the automaker sold last year.

Chrysler Up

Chrysler, based in Auburn Hills, Michigan, boosted sales 16 percent last month, topping the 9.3 percent average estimate of four analysts. Deliveries of the Grand Cherokee climbed to 12,753 from 4,097 a year earlier.

Sales of Chrysler’s namesake brand dropped 28 percent, and Dodge deliveries fell 6.4 percent, while Jeep deliveries gained 49 percent and Ram brand truck sales increased 87 percent, the company said in a statement.

Toyota’s U.S. deliveries fell 5.5 percent to 177,488, according to a statement on the company’s website. The average estimate of three analysts was for the Toyota City, Japan-based company to report a decline of 10 percent. Its full-year U.S. sales fell 0.4 percent to 1.76 million, the sole annual decline among major carmakers.

Nissan, Honda

Nissan Motor Co.’s U.S. sales in December increased 28 percent, Al Castignetti, the company’s U.S. vice president, said in an interview. The average estimate of analysts surveyed by Bloomberg was for a gain of 20 percent. Deliveries for all of 2010 gained 18 percent, he said.

Honda Motor Co.’s sales rose 21 percent, according to a tally of 2010 sales the Tokyo-based company released. The average estimate of analysts surveyed by Bloomberg was for an increase of 7.2 percent.

Hyundai Motor Co., based Seoul, boosted deliveries 33 percent to 44,802 in December, the company said in a statement. South Korea’s largest automaker sold a record 538,228 vehicles in the U.S. last year, a 24 percent gain.

--With assistance by Keith Naughton in Southfield, Michigan, and Alan Ohnsman in Los Angeles. Editors: Kevin Orland, Jamie Butters.

To contact the reporter on this story: David Welch in Southfield, Michigan at dwelch12@bloomberg.net.

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net.

Chevy Camaro Ends Ford Mustang's Long Run

Posted: 04 Jan 2011 07:14 PM PST

add to Business Exchange

By Keith Naughton

(Updates with final truck sales in the 7th paragraph.)

Jan. 4 (Bloomberg) -- General Motor Co.’s Chevy Camaro snatched the sports-car crown Ford Motor Co.’s Mustang had held for 24 years.

The Camaro in 2010 outsold the Mustang 81,299 to 73,716. The two models have been battling for sports-car sales supremacy since the redesigned Camaro returned to the market in 2009 after a seven-year hiatus. Mustang had been the U.S. leader since 1986, according to Ward’s AutoInfoBank of Southfield, Michigan. The rivalry dates to the 1960s.

The muscle-car matchup broke out as President Barack Obama and automakers sought to shift U.S. vehicle buyers to more fuel- efficient models. GM just introduced the Volt plug-in hybrid, Nissan Motor Co. has begun selling the Leaf electric hatchback and Ford has new hybrid and electric models that are scheduled to be revealed at the Detroit auto show next week.

“This race represents the America that loves cars,” said Rebecca Lindland, an auto analyst with IHS Automotive in Lexington, Massachusetts. “These vehicles demonstrate that Americans still love well-designed, well-proportioned and well- performing cars.”

Camaro sales rose 32 percent in 2010, while Mustang sales rose 11 percent. Sales of both fell in December: Camaro by 26 percent, Mustang by 16 percent.

“Some of our competitors have been out of the market for some period of time,” Ken Czubay, Ford’s U.S. sales chief, said today on a conference call with analysts and reporters. “We’re very, very pleased with the fuel economy and technology gains” in the 2011-model Mustang.

Escape Versus Equinox

In a less glamorous battle, the Ford Escape small sport- utility vehicle held off the surging Chevy Equinox, 191,026 to 149,979. The Equinox, redesigned in 2010, outsold the Escape in November and December. Light trucks overall outsold cars last year for the first time since 2007, before record gasoline prices in July 2008 pushed buyers to more fuel-efficient cars.

“Small crossovers like these are what consumers are demanding,” Lindland said today in a telephone interview. “And the manufacturers are making money on them, too.”

Ford retained bragging rights in full-sized pickups, with the F-Series line extending its truck sales leadership for a 34th consecutive year. Ford sold 528,349 F-Series, a 28 percent gain, making it the top-selling vehicle of any kind in the U.S.

“Ford certainly still makes a lot of money on the F- Series, but now they make money on other vehicles as well,” Lindland said. “At one point, trucks were the only cash cow and that’s changed for the better.”

Top Brand

Ford was the best-selling auto brand in the U.S. in 2010, displacing Toyota Motor Corp.’s namesake brand, which fell to third behind GM’s Chevrolet brand. Ford sold 1.76 million Ford- brand vehicles last year, while GM sold 1.57 million Chevrolets and Toyota sold 1.49 million Toyota-brand cars and trucks.

Asian automakers overall retained their U.S. sales lead over U.S.-based car companies with a 46.3 percent market share compared with 45.1 percent as Honda Motor Co., Nissan Motor Co. and Hyundai Motor Co. offset Toyota’s loss. GM lost market share, while Ford and Chrysler Group LLC picked up share.

Ford rose 13 cents to $17.38 at 4:15 p.m. in New York Stock Exchange composite trading, the highest closing price since May 31, 2002. GM gained 84 cents to $37.90, the highest close since public trading of the restructured company began Nov. 18.

--With assistance from Jeff Green in Southfield, Michigan. Editors: Jamie Butters, Kevin Orland.

To contact the reporter on this story: Keith Naughton in Southfield, Michigan, at Knaughton3@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

Real-World Woes for Disney's Ideal Town

Posted: 29 Dec 2010 02:00 PM PST

Manhattan Apartment Sales Fall

Posted: 04 Jan 2011 04:36 PM PST

add to Business Exchange

By Oshrat Carmiel

(Updates with east-side buyer in 19th paragraph; apartment prices by size in 24th paragraph.)

Jan. 4 (Bloomberg) -- Manhattan apartment sales dropped 7.2 percent in the fourth quarter, returning to historically normal levels after government tax credits helped push transactions to a two-decade high for the period a year earlier.

The number of completed sales fell to 2,295 from 2,473 in the fourth quarter of 2009, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. They declined from 2,661 in the previous three months.

The city’s property market is “flat” after homebuyer tax credits and pent-up demand following the financial crisis skewed sales in the past year, according to Miller Samuel President Jonathan Miller. Transactions in the final three months of 2010 were close to the 10-year average of 2,323 per quarter, he said.

“Flat is the new black,” Miller said. “Recovery used to mean ‘getting better.’ Now it means it’s not getting worse.”

The median price of co-ops and condos that changed hands in the quarter increased 4.3 percent from a year earlier to $845,000 as people bought larger apartments. Properties stayed on the market an average of 125 days, in line with the 10-year average of 133 days, Miller said. Apartments spent 204 days on the market in the fourth quarter of 2009.

“A lot of the metrics are falling into some sort of level that we’re more accustomed to,” Miller said.

Improving Jobs

New York City’s jobless rate dropped to 9.1 percent in November, the lowest level since April 2009, the state Department of Labor said Dec. 16. The city’s financial industry added 5,900 jobs in the 12 months through November, the department reported.

“We’re getting far enough removed from the shock of Lehman Brothers now, and people realize, at least locally, that there doesn’t seem to be a smoking gun out there,” said Gregory Heym, chief economist at Terra Holdings LLC, which owns brokerages Halstead Property LLC and Brown Harris Stevens. Both firms also published market reports today.

“We only knew extremes for the prior two years,” Heym said. “Now we’re seeing a stable rate of growth and getting back on a seasonal pattern.”

Five reports issued today showed declines in sales volume in the fourth quarter. They all reported increases in median price, fueled by larger apartments after last year’s tax credits for first-time homebuyers spurred demand for studios and one- bedrooms. Buyers had to complete deals by Sept. 30 to qualify for the benefits of as much as $8,000.

Brown Harris, Corcoran

Brown Harris and Halstead reported a 25 percent decline in recorded transactions, and a median price increase of 5 percent to $840,000. The Corcoran Group said transactions fell 17 percent, and median prices gained 3 percent to $825,000.

StreetEasy.com said sales decreased 20 percent. The median price rose 8.8 percent, according to the property listings website.

“The story was not at all about price this year,” said Pamela Liebman, chief executive officer of the Corcoran Group. “If you were showing a property in January and you were showing that same property in August, there’s not going to be that much of a difference in pricing.”

“The talk was more about trying to find the right apartment,” she said. “And if they found it, they bought it.”

Buying Over Renting

It was that sentiment that led Jerome Jacalone to sign a contract last month on a one-bedroom apartment after initially searching for a rental. Jacalone, an art dealer and researcher of 17th and 18th-century European paintings, was looking for a “home office” away from his actual home. His broker, William Costigan of Prudential Douglas Elliman, suggested he look at both the rental and sales market, he said.

The two-month search brought Jacalone to several rentals near the galleries of Madison Avenue, and units for sale on the Upper East Side -- all of which were “unsuitable,” he said. In October, a ground-floor apartment in his current building at 51st Street and Beekman Place came up for sale at $595,000. The previous owners bought it a year earlier for $555,000, according to StreetEasy.

Jacalone, liking that he could “go to work in a bathrobe if I need to” made an offer for the pre-war, one bedroom apartment with black granite counters and stainless steel appliances. He reached a deal for $601,500 after a bidding war with another would-be buyer, and is scheduled to close Jan. 6.

Confidence Return

“Business was good enough and I just felt confident now to invest in more space and made the leap,” Jacalone said. “It was the confidence factor. People are tired of not spending money.”

Harris Chatwal, 37, had been following the Manhattan market for several years online from his home in Palm Beach, Florida, where his knitwear company, Rani Arabella Cashmere Inc., is based. When he decided to move his firm’s headquarters to Manhattan this year and spend more in the city, he opted to buy a place rather than rent.

“I would always come and rent something and stay in a hotel for a month or rent an apartment for a month,” he said. “I was ready to buy now.”

Working with an agent at Brown Harris, his criteria were specific: a new development with high ceilings and within walking distance to the garment district -- but not too close to Times Square. After a two-week search, he closed on a two- bedroom apartment at the Alexander on East 49th Street for $1.3 million, he said.

“I think I got a great deal,” he said.

Two-Bedroom Jump

Buyer interest in two-bedroom apartments surged in the fourth quarter, with those units accounting for 37 percent of all sales, up from 25 percent a year earlier, according to Miller Samuel. One-bedrooms comprised 34 percent of sales, down from 40 percent in the final three months of 2009.

Studio apartment prices were almost flat with a year earlier, selling at a median of $375,180. One-bedrooms slid 7 percent to $615,000. Prices for two-bedrooms fell 1.4 percent to $1.23 million and three-bedrooms rose 11 percent $2.6 million.

Sales of luxury apartments, defined as the top 10 percent by price, fell 6.9 percent to 230, even as the median price jumped by 15 percent to $4.35 million. That’s because buyers of luxury units bought apartments that were about 12 percent bigger this year, Miller said.

Luxury buyers in the fourth quarter purchased units with an average of 2,923 square feet (272 square meters) compared with an average of 2,606 square feet a year ago.

“It isn’t because there’s appreciation,” Miller said. “It’s because there’s simply more larger units moving.”

--Editors: Kara Wetzel, Daniel Taub

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

Republicans' Intentions May Exceed Ability to Cut Spending

Posted: 05 Jan 2011 03:24 AM PST

add to Business Exchange

By Lisa Lerer and James Rowley

Jan. 5 (Bloomberg) -- As Republican lawmakers move to challenge President Barack Obama on topics as varied as health care and federal spending, they will have to overcome divisions within their own party as well as Democratic opposition.

Republicans take control of the House today for the first time in four years, with plans to vote on a repeal of the health-care overhaul and to approve $100 billion in spending cuts -- both among measures intended to fulfill campaign pledges they made before their November victory.

Those moves will likely be blocked by the Democratic- controlled Senate. On top of that, public opinion may stand in the way, with polls showing that voters trust Obama more than they do congressional Republicans to deal with the country’s biggest problems. And the spending reductions would require slashing popular education, law enforcement and transportation programs.

“There is more that can backfire than there are bull’s- eyes in this world,” said Stephen Hess, a political analyst at the Brookings Institution in Washington.

For incoming House Speaker John Boehner of Ohio, the tension within his own party will add to the obstacles posed by the Democrats. Many Republican freshmen are coming into office with the support of the Tea Party movement, which vowed to wage war on big government, and they are pressing the party leadership to make fundamental changes.

Past Mistakes

Other Republicans warn of repeating the mistakes of 1994, when the party took power with a broad agenda. Republicans wouldn’t compromise on the budget with President Bill Clinton, leading to a government shutdown that voters blamed on them.

“The lesson of 1994 is take smaller bites that are achievable versus lofty goals,” said Senator Richard Burr of North Carolina, who was first elected to the House that year.

Boehner, 61, and other Republican leaders have adopted a restrained tone, avoiding the pomp and posturing that typically accompany a power change on Capitol Hill.

“We know very clearly that that election was a repudiation of what had gone on in this town, it wasn’t necessarily an election about us,” incoming House Majority Leader Eric Cantor of Virginia told reporters yesterday, referring to the 2010 vote.

Boehner, who was ousted from the party leadership in 1998 after Republicans lost seats in the midterm elections that year, today will usher in his new role with a bipartisan prayer service at St. Peter’s Catholic Church that 10 of his 11 siblings will attend. He plans to skip an evening celebration at the W Hotel featuring a performance by country music star LeAnn Rimes.

Symbolic Measures

“He understands this is about policy and issues,” said David Winston, a former aide to onetime House Speaker Newt Gingrich, a Georgia Republican. “That’s the focus of where the majority is going and not necessarily about individuals.”

House leaders will focus the first weeks of the new session on measures more symbolic than substantial. Tomorrow they are expected to vote on a bill that would cut 5 percent from the budgets of members’ offices, committees and leadership staff. That would save $35 million from a federal budget that exceeds $3.5 trillion.

On Jan. 12, they will hold a vote on repealing Obama’s health-care plan, a move that Senate Democrats have pledged to block.

That vote is “nothing but political theater,” Representative Rosa DeLauro, a Connecticut Democrat, told reporters.

After considering the repeal measure, Republicans plan piecemeal attacks on the health-care law with attempts to remove funding from parts of the overhaul, conduct hearings to question administration officials, and encourage court cases brought by states.

Spending Cuts

As party leaders try to ease into their new power, many of their top lieutenants are laying out plans to take on the Obama administration. Some are planning a “rescission” package that will attempt to claw back unspent money approved by the last Congress, including funds from the stimulus plan.

“We need to do a rescission package and fast,” Representative Jeff Flake, an Arizona Republican, said in an interview. “And then cut, cut cut.”

Overall, Republicans plan to offer one spending cut a week, Cantor told reporters yesterday. “Everything’s got to be on the table,” he said.

Still, curbing government programs presents a “minefield,” said Allen Schick, a University of Maryland professor of public policy.

“As much as Americans want smaller government, they still want bigger government programs,” especially when it comes to education, roads and other projects, Schick said.

Highway Funds

House Republicans also want to change the way highway funds are distributed, giving the Appropriations Committee the right to halt spending for repairs and construction. The rule is meant to keep the Highway Trust Fund from spending more than it brings in, Brendan Buck, a spokesman for the Republicans who proposed the change, said in an e-mail.

Some federal programs will come under scrutiny by Representative Darrell Issa of California, the new chairman of the Oversight and Government Reform Committee. He has outlined six areas for potential investigations, including administration policies on food safety, housing and Afghanistan, said spokesman Kurt Bardella.

And the new chairman of the House Energy and Commerce Committee, Fred Upton of Michigan, has signaled that he will try to block Environmental Protection Agency rules regulating greenhouse gases.

Obama Hopeful

Obama said yesterday that he hopes to work with the Republican House majority.

“My hope is that John Boehner and Mitch McConnell will realize that there’ll be plenty of time to campaign for 2012 in 2012 and that our job this year is to make sure that we build on the recovery,” he told reporters on Air Force One as he returned from Honolulu to Washington. McConnell, of Kentucky, is the Republican leader in the Senate

Some of the president’s fellow Democrats dismiss many of the changes Republicans are promising, saying they will be impossible to achieve with Obama’s party controlling the Senate.

“We got punished politically for doing things that were unpopular; I think they’re going to have trouble because they promised things that were impossible,” said Representative Barney Frank, a Massachusetts Democrat. “Reality is going to bite them in the butt.”

Intra-Party Dispute

Trouble within the Republican Party started before this session even began, when Tea Party-affiliated lawmakers opposed a tax deal negotiated by Republican leaders. They also criticized the leadership’s picks for the heads of the Appropriations Committee and the Energy and Commerce Committee.

To satisfy those members, the caucus is expected to approve rules that acknowledge Tea Party priorities. House members won’t be able to introduce a bill without citing the power granted in the Constitution to enact it, and all bills will be available online for three days before a vote.

Those measures are unlikely to satisfy some lawmakers who promised voters that they would slash spending.

“We’re very much on probation; we just happen to look at little bit better than the other side,” said Flake. “If we don’t make good on our promises, we’ll suffer the same fate.”

--With assistance from Catherine Dodge in Washington. Editors: Mark McQuillan, Leslie Hoffecker.

To contact the reporters on this story: Lisa Lerer in Washington at llerer@bloomberg.net; Jim Rowley in Washington at jarowley@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

Leaderless Republicans Look to 2012 Free-for-All: Albert Hunt

Posted: 04 Jan 2011 10:55 AM PST

add to Business Exchange

By Albert R. Hunt

Jan. 3 (Bloomberg) -- The Iowa caucuses and New Hampshire primary, the start of the 2012 U.S. presidential race, are only a little over a year away. For more than four decades, at this stage, Republicans had either an incumbent president or an established front-runner who goes on to win the nomination.

There is no such figure today, making the race more wide open.

Many of the events that will shape this contest have yet to occur; who actually runs, how the economy and the war in Afghanistan fare, the performance of the Republican majority in the U.S. House.

There is no candidate like a Richard Nixon, Ronald Reagan or Bob Dole, waiting his turn as the nominee. “We’re not going to do what we normally do, nominate the steady beau,” says Richard Land, a leader of the Southern Baptist Convention and one of the Republicans’ most influential social conservatives.

As the grassroots Tea Party movement showed in state after state in the 2010 congressional elections, this is no longer a hierarchical party. And the field of contenders doesn’t overwhelm anyone. “All the major candidates have significant problems,” Land says.

This prompts increasing chatter among party strategists about non-candidates such as former Florida Governor Jeb Bush, brother of President George W. Bush, or New Jersey Governor Chris Christie, only in office a year. Both have said they aren’t running.

Candidate Scorecard

Of those who are more likely to run, here is how experts size up their strengths, and weaknesses.

MITT ROMNEY: The closest thing to a front-runner, the 63- year-old former Massachusetts governor has business and economic expertise, is solid in New Hampshire, where he finished second in 2008, and can raise plenty of money. The downside: Some Christian conservatives remain skeptical of his Mormon faith; Iowa, the first test, isn’t friendly, though Tom Rath, the longtime national committeeman from New Hampshire, dismisses the impact of a loss there: “No Republican ever wins Iowa and New Hampshire.” Most of all, the Massachusetts health-care measure, enacted when Romney was governor, looks like a state version of the national plan put in place by President Barack Obama. “It’s hard to distinguish the two,” says one of his likely rival candidates. “Most Americans don’t like Obamacare; almost all Republicans don’t.”

One-Term Governor

SARAH PALIN: No candidate arouses the passions and intensity engendered by the 46-year-old, 2008 vice-presidential candidate. She is setting the agenda on issues ranging from the proposed mosque in New York City to the Federal Reserve’s quantitative easing program; she opposed both, and others in her party followed. Many voters, and privately many Republican politicians, question whether she could win a general election or has the capacity to govern. An abbreviated single term as Alaska governor doesn’t reassure.

MIKE HUCKABEE: The 55-year-old, former Arkansas governor won the Iowa caucuses in 2008, and grasps popular culture. Had he won the South Carolina primary -- he finished a close second to John McCain. -- he might have been the nominee.

If he runs, he will have more competition for the religious right vote, particularly from a Palin candidacy. He isn’t trusted by economic conservatives, who view him as a closet populist. As governor, he handed down more than 1,000 clemencies, including one for a man who went on to kill four cops in Seattle.

‘Insurmountable Liability’

NEWT GINGRICH: The 67-year-old former House speaker is the most policy-versed figure in the field. He is comfortable and conversant on any subject. Yet in a party that stresses personal virtues, his two messy divorces and ethical transgressions may be disqualifications. “His personal life probably is an insurmountable liability,” Land says.

TIM PAWLENTY: The 50-year-old Minnesota governor could be the strongest of the long shots. He meets the conservative litmus tests on most issues, and has moved to the right on matters like immigration, is devoid of hard edges, and his working-class roots are an alluring asset. He is spending a lot of time in neighboring Iowa, and David Yepsen, the former longtime political reporter for the Des Moines Register, says, “He has a style very appealing to Iowa; he could take off.” Still, even his supporters say the likeable Pawlenty lacks charisma. There are serious doubts that he can raise the $100 million that may be necessary for the nomination.

Straight From House

MIKE PENCE: No president has come directly from the House since James Garfield in 1881. The 51-year-old Indiana lawmaker, a favorite of evangelical conservatives, would be one of the stronger candidates to try. Some political observers believe that Pence, aware of this 130-year-drought, is more likely to run for governor of Indiana in 2012.

MITCH DANIELS: The current Indiana governor would bring the most comprehensive and cogent policy prescriptions. A former budget director under President George W. Bush, he has won wide praise from other Republicans and business executives for his six-year stewardship of his state. More interested in policy than politics, it’s an open question whether the 61-year-old Daniels would be willing to put in the thousands of hours a nominee is required to devote to fundraising and campaigning in small hamlets.

Republican Establishment

HALEY BARBOUR: There is no one more connected to the Republican political and moneyed establishment than the Mississippi governor and former party chairman. The convivial, portly 63-year-old looks very much the part of the big-time, special-interest lobbyist he used to be, not a winning credential. A recent magazine article, in which he praises the old segregationist Citizens Councils in the South, doesn’t help.

JOHN THUNE: The 49-year-old tall, athletic, one-term South Dakota senator looks the ideal presidential candidate. Yet he has no experience in national politics, and the Senate, where his record is very thin, isn’t a much better launching pad for Republicans than the House.

RICK SANTORUM: Defeated in a bid for re-election to his Pennsylvania Senate seat four years ago, the 52-year-old Santorum stresses his conservative Catholic credentials, assailing John F. Kennedy’s famous 1960 speech on the separation of church and religion from state. Even in today’s conservative Republican Party, it seems unlikely an anti-JFK message will be a game changer.

(Albert R. Hunt is the executive editor for Washington at Bloomberg News. The opinions expressed are his own.)

Click on {LETT <GO>} to send a letter to the editor.

--Editors: Max Berley, Mark McQuillan.

To contact the writer of this column: Albert R. Hunt in Washington atahunt1@bloomberg.net. To contact the editor responsible for this column: at mberley@bloomberg.net.

Trump Tests His Brand on the Golf Links

Posted: 29 Dec 2010 02:00 PM PST

U.S. Economy Overheating? We Should Be So Lucky: Caroline Baum

Posted: 05 Jan 2011 05:13 AM PST

add to Business Exchange

By Caroline Baum

Jan. 5 (Bloomberg) -- Wall Street lives in a world of extremes.

Today’s raging bull market may morph into tomorrow’s angry bear. Forecasts of inflation and deflation can be found on the same page. The Federal Reserve’s plans for an early exit from its emergency stimulus were derailed by the need to re-enter the treatment arena.

And now, just when you thought fears of a double-dip recession had faded and the coast was clear, along comes a new hobgoblin: overheating.

That’s the last word I expected to see in association with the U.S. economy. But there it was, in bold print, on page one of the Jan. 3 edition of the Wall Street Journal.

Investors’ forecast for 2011 is “sunny with a chance of overheating,” according to the headline.

It sounds more like a weather forecast than an investor outlook. An economy emerging from a long and deep recession can grow at elevated rates for “an extended period,” as the Federal Reserve might say, before overheating becomes an issue. Steep declines in real gross domestic product typically give way to sharp snapbacks in growth of as much as 8 percent in the first year of recovery, even as inflation falls.

With the unemployment rate at 9.8 percent, the economy heating past the boiling point would be something of a feat.

So where exactly is the risk of overheating?

Hot Stuff

In the Journal’s too-hot-to-handle scenario are 4 percent real GDP growth, an unemployment rate that quickly dives below 8 percent and inflation rising to 2 percent from about 1 percent now. Such a scenario would be compounded by a falling dollar, rising commodity prices and surging yields on long-term Treasuries.

Real GDP growth of 4 percent this year is certainly feasible; a dive in the unemployment rate and rise in inflation are less likely. Economic growth of about 3 percent in 2010 “didn’t do much to bring down the unemployment rate,” says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. “You have to wonder why the Fed keeps forecasting -- i.e. hoping -- the economy will grow 4 percent if that represents overheating.”

The context -- in this case, the point in the business cycle -- is important in determining when growth is too hot, too cold or just right, Glassman says. The recession may be over, but the U.S. has a lot of what economists refer to as “excess capacity” to provide a buffer if growth exceeds potential. (Potential growth is circumscribed by the growth in the labor force plus the growth in productivity.)

Room to Grow

Currently there’s a surfeit of unemployed, underemployed and discouraged workers -- those who have stopped looking for work, are no longer part of the labor force and are not counted as unemployed -- who can be redeployed before employers start bidding up wages to attract labor. That’s only one reason why the too-hot-to-handle scenario of a tighter labor market driving up wages is off the mark.

There is no such thing as “wage inflation.” Wages are a price: the price of labor. Like other prices, they respond to changes in supply and demand.

Rising wages don’t cause inflation any more than rising oil prices do. The central bank is the culprit when it prints more money than the public wants to hold. Both wages and prices are manifestations of the inflation impulse.

Like the labor market, U.S. industry is operating well below its version of full employment, or capacity. The capacity utilization rate for manufacturing stood at 73.2 percent in November, up from an all-time low of 65.2 percent in 2009 but well below the four-decade average of 79 percent. Factories can bring idled production facilities back on line, even add extra shifts, before they’re supply constrained.

Corollary Damage

As for too-hot growth driving up interest rates and putting a damper on growth, all I can say is, consider the alternatives. Falling long-term interest rates are symptomatic of weak economies, especially when the central bank has been dragging its feet in lowering short-term rates. Remember those 30-year mortgage rates at multigeneration lows of close to 4 percent? It didn’t trigger booming demand because it was a result of slack demand, not a cause of stronger demand in the future.

Maybe one day economists will figure out a way for credit demand to increase without pushing up the price. Until then, we should hope it happens sooner rather than later.

(Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

--Editors: Steve Dickson, James Greiff

Click on “Send Comment” in sidebar display to send a letter to the editor.

To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

For-Profit Colleges Charge More While Doing Less

Posted: 05 Jan 2011 05:12 AM PST

add to Business Exchange

By John Lauerman

(Updates education index in 29th paragraph.)

Dec. 31 (Bloomberg) -- Kimberly Connacher, a bank teller, tried to get to Modesto Junior College early enough each evening to beat about 44 other students to a seat and avoid having to stand through her English class.

It was the long, nighttime walk through the community college’s jammed parking lots in Modesto, California, that prompted Connacher to transfer about a year ago from the campus, where she paid about $80 a class, to Apollo Group Inc.’s University of Phoenix, where the cost was more than $1,000. She took out $12,000 in loans to cover the expense.

“I didn’t want to go to school at night, but that was all that was open at Modesto,” said Connacher, now 20, who earns $11 an hour. “The classes were crowded and hard to get into, my teachers seemed overwhelmed, and that was the last straw.”

As state budget cuts lock students out of community-college classrooms or force them to stand in class, for-profit colleges are attracting hundreds of thousands of poor and minority students, charging up to 10 times as much for the same degree.

The industry, including Washington Post Co.’s Kaplan University, has tripled enrollment to 1.8 million in the past decade by pouring billions of dollars into marketing and recruiting, offering flexible online classes and outfitting more-modern campuses while states slash funding for community colleges. As much as 90 percent of revenue at each for-profit college comes from federal student aid.

Minority Students

Today, one in seven minority students attends a for-profit college, as does one in four poor students who receive federal Pell grants for low-income families, according to the U.S. Department of Education and an industry group. Students in for- profit college programs graduate or stay in school less than those at community colleges, according to a study sponsored by the U.S. Department of Education and released this month.

Students in two-year programs at for-profit colleges are also eight times likelier to be in debt than those at community colleges, according to a report last month from the Education Trust, a nonprofit advocacy organization based in Washington.

“One of the reasons the for-profits have grown so much is that the community colleges are filled to capacity and even turning people away,” said Thomas Bailey, director of the New York-based Community College Research Center. Bailey provided information on community colleges for a White House conference on Oct. 5.

Budget Cutbacks

While President Barack Obama at the conference lauded the almost 1,200 U.S. community colleges as the “unsung heroes of America’s education system, Congress last year considered a $12 billion, 10-year-plan to support community colleges -- and cut it to $2 billion.

California and Virginia were among states that reduced community college budgets during the past two years, eliminating courses, capping enrollment and in some cases turning away students. Working adults, along with low-income and minority students, seek out community colleges because, unlike traditional four-year undergraduate programs, they offer two- year degrees and job training.

Community colleges have been inundated with applicants, said Bob Templin, president of Northern Virginia Community College, based in Annandale, Virginia. U.S. community college enrollment rose 17 percent over two years to 8 million in September 2009, according to the American Association of Community Colleges in Washington.

‘More Affordable’

“It’s been a tsunami,” said Templin, whose college’s enrollment has grown 13 percent to 72,563 since the 2007-2008 school year while state funding for the institution fell 21 percent to about $62 million. “More people are looking for job training because of the recession; more students are choosing community colleges over traditional colleges because they’re more affordable; and we have more adults looking for career- changing skills.”

For-profit colleges have targeted low-income and minority students who typically attend community colleges. The University of Phoenix in 2004 opened the two-year, online Axia College, which primarily attracts lower-income students who depend on federal financial aid. Axia now has more than 200,000 students. Phoenix spent $1.1 billion on sales and promotion of its programs in the year ended Aug. 31, Apollo said in a regulatory filing.

ITT Educational Services Inc., based in Carmel, Indiana, had 80,766 students at the end of last year and employs about 1,700 recruiters, according to a February regulatory filing. About 29 percent of the company’s $1.3 billion in revenue last year paid for advertising, recruitments and other student and administrative services, according to the filing.

$500 a Month

Amy Shope, 23, was making $500 a month as a waitress and looking for a better life for her 14-month-old daughter, Kalani, when she began thinking about a degree in visual communications. She considered attending J. Sargeant Reynolds Community College in Richmond, Virginia, her hometown, where she would have paid $117.60 a credit hour.

Attracted by television advertisements, Shope bypassed the community college for ITT Educational’s Richmond campus, which charges as much as $468 a credit hour. After two semesters, she owes about $11,000 and is getting ready to transfer to Reynolds to avoid racking up more debt, she said.

“I felt like I was doing something with my life, getting a better future for my baby,” said Shope, who is the first in her family to attend college. “The recruiters talked so fast and all I saw was college. That’s all I could hear.”

Pell Awards

Lauren Littlefield, a spokeswoman for ITT Educational, declined to comment.

For-profit colleges took in $7.6 billion last year in Pell Grants -- federal higher-education money for low-income individuals -- more than triple the amount in 1998-1999, according to Education Department data. In the 2008-2009 school year, about 25 percent of the 6 million students who got Pell money attended a for-profit college, according to the department. About 13 percent of minority students attend for- profit colleges, according to the Association of Private Sector Colleges & Universities, a Washington trade group.

For-profit colleges receive a growing share of grants for poor students because their officials ensure that students apply for funds, said Harris Miller, president of the trade group. A 2009 study showed that while fewer than half of eligible students at community colleges fill out and send in forms for the grants, for-profit colleges make certain that more than 95 percent of their eligible students seek the funds, he said.

No Apology

“I don’t think we should have to apologize for that,” Miller said in an interview Dec. 17. “The community colleges should apologize for not serving the needs of their students.”

For-profit colleges are succeeding because they quickly develop programs to prepare students for expanding job opportunities, said Robert Silberman, chairman and chief executive officer of Strayer Education Inc., based in Arlington, Virginia.

The colleges also control costs and quality by using mostly part-time, nontenured faculty members whose contracts can be terminated when courses empty or teachers burn out, Silberman said in an interview at the Washington campus of for-profit Strayer University.

Muted Yellow

Strayer’s student population has grown almost sevenfold, to about 56,000, since 1996 when the company made its initial public offering of shares. Strayer is planning to expand throughout the U.S. from the east and southeast, where most of its campuses now are located, Silberman said. For-profit colleges more than tripled their U.S. enrollment to 1.8 million in September 2008, from 550,000 a decade earlier, according to the Education Department.

At Strayer’s Washington campus, Silberman points to walls painted muted yellow because studies showed the color aids student concentration. Every hallway is adorned with pictures of students in graduation caps and robes. Computer terminals are available for student use in the library and a resource room.

Rather than costlier individual offices, the campus offers one room of about 20 carrels to part-time teachers as a group. There is no cafeteria. The focus is on educating students, Silberman said.

“Traditional college presidents are always asking me, ‘How can we be more like you?’” Silberman said. “I’ve had at last three Ivy League college presidents ask me that.” Silberman declined to name the presidents from the Ivy League of eight northeastern-U.S. universities.

Recruitment Curb

The federal government is tightening regulations. The Education Department this year banned for-profit colleges from paying recruiters on the basis of how many students they enroll. The department also has proposed to cut off aid to for-profit colleges if their graduates don’t earn enough to pay off student loans.

The department has set a nationwide cap of 5 percent on the proportion of for-profit college programs that could be shut off from government loans in 2012, the first year of the rule’s implementation. For-profit colleges have said that hundreds of thousands of students might lose access to needed training programs when the rule goes into effect. The regulatory threat helped drive down an index of industry shares by 24 percent this year.

Apollo’s University of Phoenix, Washington Post’s Kaplan and other for-profit colleges are scaling back recruitment and introducing remedial and introductory programs designed to address federal concerns and improve graduation rates.

Business Incubator

LaGuardia Community College, part of the City University of New York, epitomizes challenges facing community colleges: crowding, funding shortfalls and competition from the for-profit colleges.

LaGuardia, situated in the Long Island City section of Queens, calls itself “the community college that’s 10 minutes from Times Square” by subway. Students can apply for internships at a small-business incubator that gets funding from New York-based Goldman Sachs Group Inc., and LaGuardia’s professors won a $50,000 grant in November from the National Aeronautics and Space Administration to help students research global warming.

LaGuardia has 17,028 students, 50 percent more than a decade ago. At least 73 percent are minorities, and more than half get financial aid.

The campus capped enrollment this year, turning away about 1,000 applicants, said Michael Baston, acting vice president of student affairs. Students say they frequently have to wait a semester or longer to get into math and science courses.

August Closing

“Every year we close enrollment earlier,” Baston said in an interview in his office. “Last year we closed it in mid- August, this year it was early August.”

LaGuardia owns 340,000 square feet (32,000 square meters) of unused former factory space and doesn’t have the budget for renovations needed to create classrooms, said Tom Gaimaro, interim director of the college’s facilities, design and construction department.

“I don’t have heat, I don’t have walls, I need elevators to move people up and down,” said Gaimaro, looking around the skylit empty top floor of an unfinished building.

LaGuardia spent $631,000, or less than 1 percent of its $158 million budget, on marketing and advertising this year, mostly for community outreach and for posters on buses and on the No. 7 subway line that passes in front of the college.

DeVry Inc., an Oakbrook Terrace, Illinois-based for-profit education company with a Queens campus, spent $224 million, or 12 percent of its fiscal 2010 budget, on advertising nationally, according to a regulatory filing.

Nursing Slots

Orquidea Mejia, the daughter of immigrants from the Dominican Republic living in Brooklyn, didn’t know how much cheaper her tuition at LaGuardia Community College would be than at the Queens campus of DeVry -- $3,150 compared with $14,640 -- until she transferred. She said she still owes $14,000 for loans she took out to attend DeVry.

While Mejia said she loves LaGuardia, she will have to compete to get into a registered-nurse program that has only 70 spaces each semester and takes students with the highest grades. A second program, in licensed practical nursing, also has limited space. Math and science courses that she needs to get into the nursing programs are crowded, she said.

“In my first semester, I started late and all the classes I wanted were taken,” Mejia said. “I got into biology in my second semester.”

California’s community college system, the largest in the U.S., with about 2.8 million students, turned away at least 140,000 applicants last year as the Sacramento-based system’s allocation of state funds dropped 8 percent to $6 billion, Chancellor Jack Scott said. Course offerings were cut 6.3 percent.

‘Tragedy’ for Students

“I’ve never seen us go through quite as tough a time for meeting the needs of students and flat not having the resources to do it,” Scott said in a telephone interview Nov. 22. “It’s a tragedy for the students and it’s going to be a tragedy for the economy of California because we’re going to have less of the trained personnel we need to fill jobs.”

Concerned that capacity wasn’t sufficient, Scott made a deal last year with Kaplan, allowing students who couldn’t fit into the California system to get a price break if they enrolled at Kaplan. Even with the discount, Kaplan was charging about 10 times the community college’s tuition.

Scott canceled the agreement in August when other systems in the state -- the Oakland-based University of California and the Long Beach-based California State University -- refused to recognize Kaplan’s course credits from transfer students.

Quality Question

“I think they questioned the quality of the Kaplan courses,” Scott said. “As more and more problems arose, and we began to worry about students not getting good training and having to borrow a lot of money, we began to think this wasn’t really part of our mission.”

Kaplan has regional accreditation and hundreds of its graduates have transferred to California state colleges, the company said in an e-mailed statement. Kaplan has agreements to transfer credits with 70 community colleges in California and more than 500 across the U.S., according to the statement.

“Kaplan offered a solution that could have increased access for California students and would have presented California legislators with another option for solving California’s educational challenges,” according to the statement.

Moving to Merced

For her part, Kimberly Connacher -- the bank teller who quit attending Modesto -- said she has found a spot enabling her to return to California’s community college system next year after leaving the for-profit University of Phoenix to keep debts from mounting. This time, instead of going to classes in Modesto, she’ll be attending Merced College in Merced, California, where she won’t be borrowing any money, she said.

“I’ll be able to work full time and still go to school, and I won’t have to worry about whether I’m getting into my classes,” Connacher said.

As community colleges struggle to meet the demands of an expanding student population, they might learn from techniques that have helped for-profit colleges grow, said Tom Snyder, president of Ivy Tech Community College, the Indianapolis-based statewide system for Indiana.

Snyder said he’s using more online courses to have the flexibility of colleges such as the University of Phoenix, which can instantly add students and allow them to pursue classes, whenever and wherever they like, through the Internet.

Flexibility Urged

About 75 percent of Ivy Tech’s 200,000 students are adult learners who are changing professions or trying to improve job prospects, Snyder said. Such students need flexibility to juggle job and family expectations, he said.

“It’s very similar to the population targeted by the for- profits,” Snyder said. “Many of them have the option of 24/7 scheduling, and that’s what we want to give our students.”

Community colleges need to learn to help students stay in school until they obtain degrees or professional credentials, Snyder said.

The budgets at community colleges are unlikely to resume growing until states’ finances improve, and both Democrats and Republicans in Congress are suggesting that, to meet demand for training and education, for-profit colleges will need to retain access to student-aid programs.

The Education Department is proposing to measure the quality of for-profit colleges by tracking former students’ incomes and ability to repay loans. Colleges that fail to hit benchmarks risk losing eligibility for student financial aid.

Quality Index

John Kline of Minnesota, who will become chairman of the House education committee in January, said all colleges, including for-profits, should be required to disclose accurately to students how much their programs cost, how much debt students are likely to take on, and job-placement results.

Kline favors use of the Educational Quality Index, a rating system proposed by Democratic Representative Robert Andrews of New Jersey that would compare colleges according to their job- placement success, graduation rates, and loan-repayment records. Colleges that fail to meet benchmarks would lose eligibility for financial-aid programs.

Meeting the standards would keep the money flowing, Andrews said in a telephone interview.

“If a school takes unemployed people and turns them into taxpayers who pay their loans back, I don’t care how much financial aid they use,” Andrews said.

--Editors: Robin D. Schatz, Jeffrey Tannenbaum, Andy Davidson

To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net.

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

For-Profit College Plunge Makes Sperling Rail at Obama

Posted: 05 Jan 2011 05:12 AM PST

add to Business Exchange

By Daniel Golden

(Updates stock prices starting in the ninth paragraph.)

Dec. 29 (Bloomberg) -- As a humanities professor at San Jose State University from 1961 to 1973, John Sperling pioneered remedial reading classes for Mexican Americans and courses in social problems for police officers.

Defying the education establishment, he expanded such programs into the for-profit University of Phoenix, now largely online and the biggest U.S. university, with almost 500,000 students. Sperling and his proteges transformed a backwater of mom-and-pop trade schools into a $30 billion industry attracting Washington Post Co. and Goldman Sachs Group Inc. as investors. For-profit colleges enroll 12 percent of U.S. undergraduates and consume 24 percent of U.S. Pell grants for low-income students.

Now those colleges, after flourishing under loosened regulations during George W. Bush’s presidency, are under attack from President Barack Obama’s administration, which wants to tighten the rules. Stock prices for the parent companies of for- profit colleges have plunged.

The colleges use deceptive practices to lure homeless people, veterans and individuals who aren’t prepared for college into unsuitable courses in order to obtain tuition funded by grants and also by federal loans that students have trouble repaying, according to advocates for the homeless, veterans’ groups and current and former students. Almost 90 percent of Phoenix’s students use federal grants or loans to pay tuition.

Defending Apollo

The 89-year-old Sperling, whose fortune peaked at $1.9 billion in 2005, and who had until recently been tending to non- educational interests ranging from cloning to longevity, has plunged back into the fight to defend his creation. As the value of his Apollo common stock plummeted by about $300 million this year, he traveled at least twice to Washington, drawing on his history of donations to Democrats to see Senate Majority Leader Harry Reid and other legislative leaders.

In one meeting with Congressional staff members, Sperling, leaning on a cane, railed against the Obama administration, saying it was manipulated by investors betting against higher- education stocks, according to an aide who attended. This person requested anonymity because the meeting was private.

Anticipating that Apollo’s growth would decelerate, investors stepped up short sales of Apollo stock early in 2008, to a level that was almost reached again in 2009 as the Obama administration embarked on tighter regulation, Trace Urdan, a Signal Hill analyst, said in an e-mail.

Apollo peaked at $97.93 in Nasdaq Stock Market composite trading in June 2004 as the company reaped more federal financial aid from the Bush administration’s easing of restrictions on the industry’s growth.

Share Decline

The shares traded as high as $89.22 in January 2009, days before Obama’s inauguration. Apollo has since declined 57 percent before today, compared with a 48 percent rise in the Standard & Poor’s 500 index, because of Obama administration proposals to limit recruiting and access to federal financial aid -- linchpins of the company’s strategy in the past decade.

In September, Sperling sent every member of Congress a 74- page PowerPoint presentation making the case that, while four- year public and private nonprofit colleges cost taxpayers $9,709 and $6,379 a student respectively, for-profit colleges pay taxes and save the government money.

He personally made almost $100,000 in campaign donations for the 2010 elections, while Apollo Group’s political-action committee gave $92,100 to federal candidates, including $15,000 to George Miller, the outgoing chair of the House education committee, and $14,000 to John Boehner, the incoming House speaker. Starting with the 2002 campaign, Apollo Group’s PAC has given Boehner $36,600, more than any other member of Congress.

‘Legacy at Stake’

“This is his legacy at stake,” Suzanne Helburn, an economist who is a longtime friend of Sperling, said in a telephone interview. “The thought of it being dismantled by some arbitrary government policy infuriates him.”

Sperling’s defense of his industry is based largely on the argument that for-profit colleges expand poor people’s opportunities to get degrees and jobs.

The administration’s “onerous” initiatives “would make it impossible for the sector to offer many programs” that prepare students to be teachers, nurses and police officers, and “would have a devastating impact on institutions that enroll low-income students,” Sperling wrote members of Congress on Sept. 1. “It would seem wiser to restore the status quo ante.”

Sperling himself says this lobbying has galvanized opposition to the proposed regulations and set the stage for a battle in the next Congress between the Obama administration and ascendant Republicans.

“Our hard work is paying off,” Sperling said in an e-mail relayed through Helburn.

‘Political Influence’

“John Sperling carries more political influence than I think a lot of people realize,” said Raul Grijalva, an Arizona Democrat and member of the House education committee. “When he comes to Congress, people listen. His word carries a lot of weight, and it’s been that way for a long time.”

Sperling sought to sway Grijalva in a meeting on Capitol Hill around the beginning of September.

“His pitch to me was that, by overregulating for-profit colleges, we are constricting the access of people of color to higher education,” Grijalva, who has received campaign donations from Sperling, said in a telephone interview.

“My response is, to have someone saddled with a debt they can’t pay back, and they don’t finish school, and put their financial lives in jeopardy, that’s a double-edged sword. The community colleges are there, that’s accessible and inexpensive.”

Union Organizer

An unlikely mogul, Sperling is a mix of pragmatist and populist, entrepreneur and social reformer, whose corporate interests don’t mesh neatly with his political views. He’s a former union organizer who runs a nonunion university, and a self-described ex-socialist whose company became a Wall Street darling. While he coauthored a book calling for an end to corporate welfare, his for-profit university depends on federal aid for 88 percent of its revenue.

A Democrat who has given almost $300,000 since 1994 to the party’s senatorial and congressional campaign committees, he owns a publishing house that attacks Republican politicians, and he supports the repeal of laws that criminalize marijuana. His restless brain generates a stream of unorthodox ideas, some of which fizzled, such as cultivating crops in salt water.

Sperling, who turns 90 next month, works out daily and keeps tabs on Apollo from his home office, former University of Phoenix president Jorge Klor de Alva said in a telephone interview. Sperling takes 30 pills a day, following a regimen set by a now-defunct longevity clinic that he established. After stepping down as chief executive officer in 2001 and chairman in 2004, Sperling returned as Apollo’s acting executive chairman in 2006 and now is executive chairman. He and his son control 100 percent of the voting stock.

‘Customer First’

Sperling was an early champion of online classes, shortened courses, electronic textbooks and marketing to adults -- innovations that traditional universities now are embracing.

“Sperling was probably the first university president to develop a model that was predicated on customer first,” Richard Chait, a professor of higher education at Harvard University in Cambridge, Massachusetts, said in an interview.

Armed with his blueprint, former Apollo and Phoenix executives converted religious schools into for-profit colleges such as Bridgepoint Education Inc.’s Clinton, Iowa-based Ashford University and Grand Canyon Education Inc.’s Phoenix-based Grand Canyon University. Under Sally Stroup, a former Phoenix lobbyist who headed federal higher-education policy, the Bush administration eased controls over for-profit colleges, spurring the past decade’s expansion.

Choosing Growth

“At critical junctures, John chose growth over academic integrity, which ultimately diminished a powerful educational model,” Robert W. Tucker, a former Phoenix senior vice president and coauthor with Sperling of “For-Profit Higher Education: Developing a World-Class Adult Workforce” (Transaction Publishers, 1999), said in a telephone interview.

Sperling’s industry has grown through misleading sales pitches from recruiters who are paid on the basis of how many people they sign up, according to Senate education committee reports and testimony and an Aug. 4 Government Accountability Office report.

For-profit colleges in 2008 graduated just 22 percent of their first-time, fulltime students seeking bachelor’s degrees, compared with 55 percent at public institutions and 65 percent at nonprofit private universities, according to the Washington- based National Center for Education Statistics. Only 36 percent of their students repay the loans, compared with at least 54 percent at traditional colleges, according to an analysis of government data by the Institute for College Access & Success, a nonprofit group in Oakland, California.

Stock Transactions

Alarmed by such disparities, the Education Department wants to cut off aid to for-profit colleges if their graduates don’t earn enough to pay off student loans.

Sperling and his son, Apollo Vice Chairman Peter Sperling, have collected almost $840 million in stock sales since 2003. The company disclosed in October that the Securities and Exchange Commission is looking at the company’s insider-trading policies.

Apollo gained 75 cents, or 2.1 percent, to $39.17 at 10:47 a.m. in New York. An index of 13 publicly traded for-profit education stocks declined 26 percent this year through yesterday.

For his part, Sperling, who declined to be interviewed and answered questions through Helburn, says Phoenix is investing hundreds of millions of dollars to improve graduation rates among low-income students.

‘New Legacy’

If Phoenix succeeds, it “will have a new legacy of solving a problem no one else has solved, significantly increasing the education level of the U.S. workforce, making it possible for a significantly larger percent of people to achieve post-secondary degrees,” Sperling said in an e-mail from Helburn.

Sperling divides his time between a Phoenix mansion with Andy Warhol paintings lining its entryway, and an Italianate home in San Francisco overlooking the Golden Gate Bridge. He keeps a 10-year-old Jaguar automobile at each place, Klor de Alva said in a telephone interview.

Twice divorced, Sperling has had an on-and-off relationship for 45 years with Joan Hawthorne, a memoirist who uses the pen name Candida Lawrence. He enjoys plays and operas, and reciting Emily Dickinson’s poetry. He dresses in khaki pants, a fisherman’s hat, and “the kind of shirts you don’t have to iron,” Klor de Alva said.

Birthday Revelry

Sperling was celebrating a personal milestone when he set the for-profit college industry on its track to accelerate growth. At his 80th birthday party, in 2001, a comic opera was performed to praise his accomplishments, and 125 guests were given mock money with his face on it. Amid the revelry, he proclaimed a new goal: increasing Phoenix’s enrollment fivefold to 500,000.

“It was intended as an inspirational message” rather than a formal plan, Sara Jones, an Apollo spokeswoman, who has since left the company, said in a 2009 e-mail.

Sperling faced an obstacle: The university’s market was too small to fulfill his vision. Nor could it satisfy what he called “the unrelenting pressure to grow” from Wall Street after Apollo went public in 1994.

Since Sperling founded the university in 1976, it had catered to middle managers whose employers paid for them to finish their degrees. Students had to be at least 23 years old and have two years of work experience as well as prior college credits. After his 2001 party, Phoenix discarded these requirements.

‘New Sectors’

“It couldn’t grow any faster in the sector it was in,” said Tucker, CEO of InterEd Inc., a higher-education consulting company in McCall, Idaho. “The only solution was to identify new sectors.”

Sperling did just that. Reflecting his commitment to expand college access for disadvantaged students, he conceived of a two-year program for high-school graduates from low-income and non-English-speaking families, who would take classes at inner- city campuses along with an online component, he said in an e- mail from Helburn.

Enrollment was projected to grow to about 15,000 in 10 years, said Lawrence M. Gudis, a former Apollo Group senior vice president who helped design the program, known as Axia College.

“John talked very passionately about having classes in malls in very, very poor neighborhoods in Los Angeles and Phoenix, where students wouldn’t normally have access to higher education,” and about recruiting faculty fluent in Spanish, Vietnamese and Cambodian, Gudis said in a telephone interview.

Online Unit

Plans changed when Apollo shares, after peaking in June 2004, slumped in the next two months. Apollo at the time was repurchasing Phoenix’s online unit, which had a separate tracking stock, and investors worried that the company was masking weakness in its ground-campus business, Signal Hill’s Urdan said. Todd Nelson, Apollo CEO from 2001 to 2006, then converted Axia into an online program in hope of boosting enrollment and revenue, said Gudis, now a consultant to for- profit colleges.

Axia’s student body soared to more than 200,000, increasing Phoenix’s enrollment to 470,800 students, more than the total at all for-profit colleges in 2000. While Phoenix has campuses in 39 states, the District of Columbia, and Puerto Rico, most of its students attend online.

Dropout Rate

Axia also boosted Phoenix’s dropout rate. The newcomers had “clearly different educational needs” that weren’t suited to Phoenix courses, which were designed to draw on students’ academic and work experience, Tucker said.

In 1998, 65 percent of Phoenix’s 53,200 students attained degrees, Klor de Alva said. By contrast, two-thirds of the associate’s degree students and half of the bachelor’s degree candidates who entered Phoenix from July 2008 to June 2009 withdrew by August 2010, according to a Senate education committee report. The median length of enrollment at Phoenix is about four months.

“I certainly would never recommend them to a young student over a community college,” David Breneman, a professor at the University of Virginia in Charlottesville and former dean of its school of education, who has studied the University of Phoenix, said in an e-mail. “For older adults with jobs, I think they provide a valuable option. For younger students without prior college experience or a job, I think they provide little value added.”

Nelson declined to comment. Axia’s conversion to an online program was driven by student demand, said Mark Brenner, an Apollo spokesman.

Biggest Funder

Because most of its students were low-income and qualified for federal grants and loans, Axia fostered Phoenix’s dependence on its biggest source of funds, the Education Department. Phoenix derived 88 percent of its revenue from federal student aid in the year ended Aug. 31, up from 48 percent in fiscal 2001.

Reliance on federal funds is “a bad business model,” Iowa Senator Tom Harkin, the chairman of the Senate education committee, said in a telephone interview. “You get the maximum return by recruiting the lowest-income students, and getting rid of them as soon as possible.”

Fanning Out

“I’ve been accused of being against private enterprise,” Harkin said. “This is not private enterprise. Ninety percent of their money is coming from the taxpayer.”

Phoenix executives trained under Sperling fanned out across the country, implementing Axia-like online programs for taxpayer-funded low-income students.

Founded in 2004 by a former Phoenix vice president named Andrew S. Clark, Bridgepoint Education Inc. had 77,179 students on Sept. 30, up from 1,063 at the end of 2005. Almost all took classes exclusively online. Bridgepoint, based in San Diego, had $521 million in revenue in the first nine months of this year, up 62 percent from the comparable period a year earlier, according to the company’s filings. Its flagship Ashford University derived 86 percent of revenue from federal aid in 2009.

Former Apollo Group president Brian Mueller is CEO of Phoenix-based Grand Canyon Education Inc., which had 42,300 students on Sept. 30, of whom 91 percent were enrolled online. Grand Canyon had 8,422 students at the end of 2005.

Goldman Stake

Todd Nelson, the former CEO for Apollo, now holds the same title at Pittsburgh-based Education Management Corp., the No. 2 higher-education company by enrollment, with 158,300 students in October. New York-based Goldman Sachs, Wall Street’s most profitable bank, owns a 39 percent stake in the company.

The sector also attracted Washington Post Co. Once known primarily for preparing high-school students for the SAT college-entrance examination, the company’s Kaplan unit derived 63 percent of its revenue in the quarter ended Oct. 3 from its higher-education division. Kaplan has 112,000 students, of whom about 70,000 attend online.

Jack Welch, former chairman and CEO of Fairfield, Connecticut-based General Electric Co., is an investor in Chancellor University in Cleveland, which named its online master’s degree program in business administration after him.

Sperling and his industry got a boost from the election in 2000 of George W. Bush, who in 2002 named the former Apollo lobbyist Stroup to oversee higher education.

Recruitment Curb

Congress had passed a law in 1992 that cracked down on trade schools in such fields as hairdressing and truck driving, which garnered federal aid by siphoning off students from welfare and unemployment lines.

The law banned colleges from paying recruiters on the basis of how many students were enrolled and capped the percentage of revenue that the institutions could receive from the government.

To deter fraud by correspondence schools, for-profit colleges that provided more than 50 percent of their courses or enrolled more than 50 percent of their students for distance education -- meaning that professors and their students are in different locations -- were prohibited from receiving federal aid.

The Bush administration diluted these restrictions, starting with the incentive-compensation ban. In 2002, officials put into place 12 exemptions, or “safe harbors,” allowing for- profit colleges to pay recruiters on the basis of enrollment as long as it wasn’t the sole criterion. The government also reduced the penalty for colleges’ violations of the incentive- compensation law to fines, from suspension or loss of eligibility for student aid, according to an Oct. 20, 2002, memo issued by William Hansen, then deputy secretary of education.

Lobbying for Apollo

Hansen, who left the administration in 2003, then lobbied for Apollo from 2006 to 2009, according to the Center for Responsive Politics, a Washington research group. Now president of Eagan, Minnesota-based Scantron Corp., a collector of student-performance data, Hansen declined to comment, as did Stroup, senior vice president at Scantron.

Apollo’s use of Hansen as a lobbyist was unrelated to his lowering of penalties for recruitment violations, said Brenner, the company spokesman.

Led by John Boehner, then chairman of the House education committee, Congressional Republicans scrapped the 50 percent limit for online courses in 2006.

“We are dealing with antiquated regulations that may have been well-intentioned when put in place but today are simply a burden,” Boehner said at a 2004 hearing on the issue.

Underdog Sympathizer

Sperling’s childhood ingrained sympathy for the underdog. He grew up in rural Missouri, the sickly child of a drifter who beat him often. His father’s death, when Sperling was 15, “was the happiest day of my life,” he wrote in “Rebel With a Cause” (John Wiley & Sons, 2000), his autobiography. “It still is.”

After graduating from high school, Sperling joined the merchant marine, where he read widely in his spare time. He earned a bachelor’s degree from Reed College in Portland, Oregon, followed by graduate study at the University of California at Berkeley. There he met Virginia Sperling, his second wife.

“We were beatniks and we loved it,” Virginia Sperling, 84, said in a telephone interview. “We lived in a co-op. We were all sort of outcasts.”

Sperling earned a doctorate in economic history from Cambridge University in Cambridge, England. He now funds scholarships for Reed graduates to study at Cambridge, according to Reed’s website. Reed and Cambridge will receive donations through Sperling’s will, Helburn said. “He has great affection for his alma maters,” she said.

‘So Driven’

Raising a family held little appeal for her ex-husband, said Virginia Sperling, a dancer and art dealer, who is Peter Sperling’s mother.

“He was so driven,” she said. “He always felt that a family would be a distraction. His theory is, you can’t be a genius and have a family.”

Nor did the academic career on which he embarked after Cambridge fulfill him.

“When we were at a party, he would often grab me by the arm and say, ‘My boy, there’s not a group on the face of the earth more boring than the professoriat,’” said Tucker, the former Phoenix executive.

Sperling led a faculty strike at San Jose State University in San Jose, California, in 1968, and the action’s failure cost him the presidency of a union at California public universities. The following year, he and his students celebrated Earth Day with a protest against air pollution. They bought a new Ford Maverick automobile and buried it in a grave they dug on campus.

‘Actively Engaged’

“John was unlike any other professor,” said John Murphy, who was a San Jose State student and later worked as a Phoenix executive from 1977 to 1997. “He was actively engaged in bringing the university to the community. He didn’t mind getting his hands dirty.”

Training that Sperling ran for police officers and teachers about juvenile delinquency proved so popular that he turned it into the Institute for Professional Development, which offered adult education under a contract with the University of San Francisco.

Sperling made the institute a for-profit corporation because, after his ouster from the union presidency, he was “quite wary of creating another nonprofit organization some board could yank away from me,” he wrote.

Arizona Bound

The Western Association of Schools & Colleges, the accrediting body for California, complained that San Francisco’s faculty hadn’t been consulted about the program. Faced with the threat of losing accreditation, the university cut ties with the institute in 1977. Sperling decamped to Arizona, with different accreditors, and established his own university.

There, Sperling barely staved off legislation giving control of private higher education to the state’s public universities.

Phoenix’s quest for acceptance was “was one nasty, brutal, bare-knuckled fight,” said Murphy, 64, a screenwriter and producer who is writing a history of the University of Phoenix during his time there. “Everything we did drove traditional education into absolute apoplexy. We didn’t know on Friday if we’d be open for business on Monday.”

At the urging of Phoenix’s vice president for product development, Sperling started an online campus in 1989 and stuck with it through unprofitable years.

“He persisted when virtually all of the institution was opposed to the idea,” Tucker said.

Ballot Measures

Once his gamble on for-profit higher education paid off, Sperling bet much of his newfound wealth on other interests. He invested more than $10 million on 20 state-ballot questions from 1996 to 2008, seeking to treat rather than incarcerate marijuana offenders and legalize the substance for medical purposes, said Ethan Nadelmann, executive director of the Drug Policy Alliance in New York, who worked with Sperling on the proposals. Fifteen of the measures passed.

Sperling had less luck achieving a “second green revolution” that he envisioned for deserts in poor countries. In 2001, after a disagreement with the government of Eritrea, he pulled out of a joint venture to raise shrimp in Red Sea water and use the runoff to grow a crop tolerant of salt water, Eric Rey, a consultant on the project, said in a telephone interview. Sperling now is majority owner of Arcadia Biosciences Inc., a Davis, California-based developer of technologies to reduce greenhouse-gas emissions, said Rey, the company’s CEO.

Anti-Aging Clinic

Sperling also shuttered an anti-aging clinic that he had opened in Phoenix and hoped would beget a for-profit growth industry. The Kronos center, which sought to slow degeneration associated with old age, charged patients thousands of dollars for comprehensive assessments that insurance rarely covered.

The Apollo founder owns Polipoint Press, a Sausalito, California-based publisher that put out books this year advocating a public option for health-insurance buyers and likening the Republican right to the Taliban. The press also published “The Great Divide: Retro vs. Metro America,” a 2004 manifesto -- coauthored by Sperling -- advising the Democrats to reduce defense spending and end corporate welfare.

“I’m one of the few surviving liberal economists, and he’s more liberal than I am,” Carl Hunt, one of Sperling’s coauthors, said in a telephone interview.

Reluctant to lose his beloved dog, Missy, Sperling funded pet-cloning research by Texas A&M University in College Station, Texas, and now-defunct Genetic Savings & Clone Inc. While GS&C’s successor, BioArts International in Mill Valley, California, succeeded in cloning the late Missy in 2007, it stopped replicating dogs in 2009 because of black-market competition from South Korea and unpredictable results, such as a clone born greenish-yellow instead of the expected white, according to the company’s website.

‘Not as Lovable’

The duplicate Missy lacks its predecessor’s personality, Sperling’s ex-wife said.

“The dog he paid millions to clone, he takes her to the park at the Presidio, she seems like a disappointment,” Virginia Sperling said. “She’s not as lovable as the original.”

As pressure from Washington on for-profit colleges mounts, Sperling has cut back other enterprises to fight for his main business.

“A disproportionate amount of his time in the last 9-12 months has really been back on Apollo,” said Josh Rosen, president and chief financial officer of Southwest Solar Technologies Inc., a Phoenix-based startup in which Sperling, its chairman and sole funder, invested $40 million. “As the political environment has gotten more challenging, that has taken up more of his bandwidth.”

He’s “not the least retired,” Joan Hawthorne wrote under her Candida Lawrence pseudonym in “Vanishing” (Unbridled Books, 2009). “He’ll run his company until he drops.”

--Editors: Robin D. Schatz, Jeffrey Tannenbaum

To contact the reporter on this story: Daniel Golden in Boston at dlgolden@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

For-Profit Colleges Slump Converges With Debtors

Posted: 05 Jan 2011 05:12 AM PST

add to Business Exchange

By John Hechinger

(Updates with closing price of Corinthian shares in the 13th paragraph.)

Dec. 28 (Bloomberg) -- Ronnie Franklin borrowed to pay his tuition at a for-profit college that advertised its success in preparing graduates for better jobs. That decision haunts him.

Frustrated that his degree didn’t lead to work in electronics, Franklin -- now a $12-an-hour housepainter -- decided to go to a community college this year. He can’t qualify for a federal grant that would have paid the cost because he defaulted on $20,000 of his earlier U.S. student loans.

Debt from a for-profit college education also shadows Christina Bergschneider and Michael DiGiacomo. Landlords rejected Bergschneider’s apartment applications more than 20 times because of her unpaid student loans. DiGiacomo, who works in a copy shop, forfeits 15 percent of his after-tax income when the U.S. Education Department garnishees his paycheck to collect on $30,000 in federal loans for two different for-profits.

Students seeking to move up in life by getting a degree from a for-profit college are being trapped in a growing underclass of education debtors. Under U.S. law, their loan obligations can rarely be discharged in bankruptcy, making them more onerous than credit-card debt or subprime mortgages taken out before the housing bubble burst. Along with blocking students from further education and access to housing, defaults can subject them to government confiscation of tax refunds and Social Security payments, as well as paychecks.

“I’m cornered, and I don’t know what to do,” DiGiacomo, a 30-year-old former U.S. Army supply and logistics specialist, said in an interview. “I would love to forget I ever went to those two schools and start from scratch.”

Taxpayer Money

Students at for-profit colleges, which rely on federal financial-aid programs for as much as 90 percent of revenue, carry the biggest loans in U.S. higher education. Bachelor’s degree recipients at for-profits have median debt of $31,190 compared with $17,040 at private, nonprofit institutions and $7,960 at public colleges, according to Education Trust, a Washington-based nonprofit research and student-advocacy organization.

While currently enrolling one in eight U.S. students, for- profit colleges account for almost one in two federal-loan defaults, according to data released Sept. 13 by the Education Department.

“These students have debt loads that leave them out of the running for a productive life in America,” Jose Cruz, a vice president of Education Trust, said in a telephone interview. “It’s a dead end.”

Piling Up Debt

With the U.S. unemployment rate at 9.8 percent, many college graduates, from traditional universities as well as for- profit colleges, aren’t finding jobs and are piling up debt. Thirty-four million borrowers owe $713 billion, not including interest, in federal student loans, 11 times the amount of two decades ago, according to the Education Department. A total of $50 billion in these loans was in default in the year ended Sept. 30, twice the sum five years earlier.

President Barack Obama’s administration wants to curb rising default rates and the threat of student destitution by cutting off federal funds to for-profit college programs whose students have the worst loan-repayment rates and lowest incomes relative to debt. Representative John Kline, the Minnesota Republican who will lead the House education committee beginning in January, pledged this month to block the plan, known as “gainful employment,” saying the measures don’t reflect an accurate picture of the quality of for-profit education.

Apollo Shares

Shares of University of Phoenix parent Apollo Group Inc., the largest for-profit college chain by enrollment, rose as high as $97.93 in June 2004, as President George W. Bush’s administration eased regulations that resulted in more federal financial aid flowing into the industry. Apollo shares traded at $89.22 in January 2009 and have since declined by more than 50 percent as the Obama administration proposes more regulation and investors question the business model of the industry.

An index of 13 publicly traded for-profit education stocks fell 26 percent this year through today, while the Standard & Poor’s 500 index has increased about 13 percent.

Investors are giving some of the lowest valuations to companies with above-average default rates such as Corinthian Colleges Inc., according to Jarrel Price, an analyst with Height Analytics in Washington. Shares of Santa Ana, California-based Corinthian fell 6 cents, or 1.3 percent, today to $4.62 in Nasdaq Stock Market composite trading at 4 p.m. and have declined 66 percent this year.

Assessing Value

Wally Weitz, founder of Omaha-based Weitz Funds, which manages $3.5 billion, said he is undecided about the value of the education provided by for-profit colleges.

“The pressure to make the numbers and so on maybe means you make too many loans to student who can’t pay them back and admit students less likely to succeed,” said Weitz, whose firm owned 874,250 shares of Phoenix-based Apollo at the end of the third quarter. His funds bought the shares, a small holding, because of their depressed valuation, Weitz said in a telephone interview.

For-profit colleges have higher student-loan default rates because they serve lower-income students, minorities, immigrants and working adults, Harris Miller, president of the Association of Private Sector Colleges & Universities, a Washington-based trade group, said in a telephone interview.

Culling Students

The colleges have taken steps to cull students who can’t succeed, a move that will lower defaults, Miller said.

The University of Phoenix began an orientation program designed to lower dropout and default rates. Washington Post Co.’s Kaplan Higher Education, the third-biggest chain, announced a program to let prospects enroll for a trial period and opt out without owing tuition.

“Higher education is a hugely beneficial investment that pays off with a lifetime of higher earnings,” Miller said. “Most Americans are willing to take some risk with a student loan, knowing the payoff for them individually can be quite significant.”

Taking a loan didn’t pay off for Franklin.

The son of a nurse’s assistant and a sheriff’s deputy who didn’t attend college, Franklin dropped out of high school and spent two decades as a shoplifter and heroin addict, he said. After kicking his drug habit, he decided to turn his life around through education, he said.

He heard about RETS Technical Center in Boston from a television advertisement.

He remembers a message that he paraphrases as: “Are you tired of dead-end jobs with no real future?”

No Preparation

After graduating in 2000 from the 18-month electronics program, Franklin found himself unprepared for jobs in the field, he said. Classmates are now working as janitors, security guards and bus drivers, he said. Of RETS students who were required to start making payments in 2001, 23 percent defaulted on their loans within two years, quadruple the national average for all colleges.

Besides defaulting on $20,000 in student loans and ending up as a $12-an-hour painter, Franklin stayed with his two sons in a homeless shelter last year, he said.

Deciding he should study electronics from what he called a “reputable” institution, Franklin contacted Roxbury Community College in Boston this year, he said. Officials there told him he can’t qualify for financial aid because, under Education Department rules, students aren’t eligible if they are in default on government loans, he said.

Only 14 percent of community college students take out loans, compared with 97 percent of for-profit students seeking an associate’s degree, according to Education Trust.

‘Further in Debt’

“I got an outstanding student loan, and I got no job, and I’m further and further in debt,” said Franklin, 55, who received a notice that he may forfeit his tax refund. “It’s basically crippling me from doing a lot of things to improve my living condition for me and my family.”

Eighty percent of graduates from RETS Technical Center succeeded in finding jobs related to their fields within 60 days of graduating, Don Harris, president of RETS at the time Franklin attended, said in an interview. The center’s default rate reflects the socioeconomic background of students, many of whom come from inner-city Boston, he said. Each student received $1,800 in new equipment during the program, he said.

“Our school had a reputation as one of the best electronics programs in the area,” Harris said.

Washington Post’s Kaplan bought RETS in 2002, said Harris and a Kaplan spokeswoman, Melissa Mack. Now called Kaplan Career Institute, RETS had a 20.1 percent two-year default rate for borrowers who started making payments in 2008, according to the Education Department.

Low-Income Students

Kaplan students are typically lower-income working adults, with no financial support from their families, accounting for the institute’s default rate, along with the weak economy, Mack said.

Once in default on student loans, people often can’t pass the credit screenings needed to rent apartments, said Deanne Loonin, a lawyer with the National Consumer Law Center, a nonprofit advocacy organization in Boston.

U.S. Department of Housing and Urban Development rules governing public housing, which is often oversubscribed, allow agencies to take credit histories into account in considering applications, costing student-loan debtors access to affordable apartments, Loonin said in a telephone interview.

Bergschneider, the unsuccessful apartment hunter, has $100,000 in government and private education loans from her 2003 bachelor’s degree in computer arts from the Academy of Art University, a for-profit institution in San Francisco.

Minimum-Wage Work

After graduation, she found mostly minimum-wage work as a liquor-store clerk, a lifeguard, a maid, a waitress and a pet sitter, she said in a telephone interview.

Unable to make the $1,000-a-month payments on the loans, Bergschneider watched her credit score plummet to 526, on a scale of 300 to 850, leading to her frequent rejection by landlords, she said.

Bergschneider, 40, shared a 300-square-foot, one-bedroom apartment with her mother, she said. They moved this year into a two-bedroom house in Oakland, California, near an industrial strip and an auto-body shop, she said. Bergschneider sold her compact-disc collection to get by, and her mother sold jewelry, including her wedding band. They use a couch left behind by a previous tenant.

Representing herself in court, Bergschneider filed for bankruptcy in 2008. The judge declined to discharge her $100,000 in loans.

“I’m going to be in debt until I die,” Bergschneider said.

The Academy of Art’s official federal student-loan default rate is 5.5 percent, below the national average for all colleges, Lisa Cohen, an Academy spokeswoman, said in an e-mail.

Loan Counseling

All first-time Academy of Art students receive loan counseling, and students are responsible for making sure they can afford their obligations, Rebecca Delgado Rottman, vice president of the school, said in a telephone interview.

In this economy, graduates must work to find a job, canvassing employers, networking and attending mixers, Rottman said.

“Hundreds of students who graduated at the time she did are working,” Rottman said after being asked about Bergschneider.

Collecting Payment

To collect on federal loans, the Education Department can seize borrowers’ paychecks, tax refunds and Social Security payments without a court order -- as much as 15 percent of a borrower’s disposable income.

The department is currently authorized to collect tax refunds and Social Security from 3.4 million borrowers. About 98,000 borrowers are having their wages garnisheed, the agency said.

In part because of those powers and the laws discouraging bankruptcy discharge, the department estimates it will collect 100 percent of the dollar value of all defaulted student loans.

DiGiacomo, the Army veteran who makes about $15 an hour as a salesman in a copy shop, said he has first-hand knowledge of the government’s power.

The education department is taking 15 percent of his after- tax income to repay his $30,000 in federal loans, which he used for two for-profit colleges, according to loan documents and pay stubs.

Additional $50,000

DiGiacomo owes an additional $50,000 in education loans taken from private companies, he said. He financed an associate’s degree in graphic design from Gibbs College, owned by Career Education Corp., a Hoffman Estates, Illinois-based chain of more than 90 campuses.

DiGiacomo also did coursework toward a bachelor’s degree from New England Institute of Art, owned by Education Management Corp., the second-largest for-profit chain. His current job requires only a high-school diploma, he said in an interview.

Most students who graduated from the same program as DiGiacomo obtained jobs in their field of study, Jeff Leshay, a spokesman for Career Education, said in an e-mail. “Gibbs Boston takes the issue of job placement very seriously” and has staff dedicated to the task, he said. Jacquelyn P. Muller, a spokeswoman for Pittsburgh-based Education Management, declined comment, citing federal law on student privacy.

DiGiacomo, who lives in Brockton, Massachusetts, eats mostly ramen noodles and cold cuts rather than costlier foods because he ends up with about $100 a month after other necessities such as rent, he said.

‘Feel Trapped’

“I feel trapped,” DiGiacomo said. “I feel angry. I feel bullied.”

Congress eased the burden on debtors this year. The legislators authorized a program that will let some borrowers, starting in 2014, make payments based on as little as 10 percent of their incomes -- down from 15 percent now -- over 25 years. In some instances, obligations may then be forgiven.

In one case, a bankruptcy judge eased the debt burden on a borrower who attended a for-profit college.

Amanda Lynne Jackson, now 27, went to Brooks College, also owned by Career Education. She studied graphic arts at the Long Beach, California, campus, receiving an associate’s degree in 2005 with a 3.79 grade-point average, court records show.

After she couldn’t get a job, she enrolled in a massage- therapy program at for-profit National Institute of Technology in Dearborn, Michigan -- now known as Everest Institute and owned by Corinthian.

Jackson filed for bankruptcy last year, listing $99,000 in student loans, the majority to pay for Brooks College. Unemployed, she lives on $725 a month, according to court records. In her most recent position, she earned $13.24 an hour, working in a call center for a credit union.

“I was making myself sick on a daily basis,” Jackson said in a telephone interview. “How was I going to pay this?”

‘Credible’ Testimony

Jackson’s testimony was “credible” that she couldn’t find work in graphic arts because the degree from Brooks was “of little value in securing employment,” Bankruptcy Court Judge Walter Shapero wrote in his August opinion. He noted that Brooks was the defendant in a class-action suit, alleging that students were misled about employment prospects, salaries and the quality of career services. Career Education settled the suit in 2008 for $12.2 million, and Jackson received $2,750, the judge wrote. Career Education has since closed Brooks.

Shapero ordered Jackson to pay $13,200 starting December 2012 in $100 monthly installments. If she does, the court will discharge the rest of her student loans.

Boost Income

Students who enroll at Corinthian for massage therapy often are earning at or near the legal minimum wage and can boost their income through the short-term programs, Kent Jenkins Jr., a spokesman for the company, said in an e-mail.

“For graduates who work hard and are successful, the increase in their earnings power substantially exceeds the cost of their education,” Jenkins said. Jackson initially borrowed $10,800 for her Corinthian degree, Jenkins said.

Career Education disputes the judge’s assessment of the value of a Brooks degree because most graduates find jobs related to their fields, and the college’s closing wasn’t related to the litigation, said Leshay, the company’s spokesman. Tuition, room and board in Jackson’s program at the time would have been about $43,000, Leshay said. Career Education didn’t participate in the bankruptcy court trial, he said.

Without help from the court, Jackson’s life would have been ruined, she said.

Her degree from Brooks “had no value,” she said. “It hasn’t done anything for me. I don’t know what I would have done if I lost.”

--Editors: Jeffrey Tannenbaum, Daniel Golden, Andrew Pollack

To contact the reporter on this story: John Hechinger in Boston at jhechinger@bloomberg.net.

To contact the editor responsible for this story: Jonathan Kaufman at Jkaufman17@bloomberg.net.

Quinn Weighs $15 Billion Illinois Borrowing &lsquo;Option&rsquo;

Posted: 05 Jan 2011 05:12 AM PST

add to Business Exchange

By Tim Jones and Darrell Preston

(Updates with comments from spokesmen for legislative leaders in fifth paragraph.)

Dec. 28 (Bloomberg) -- Illinois Governor Pat Quinn is considering borrowing $15 billion to pay overdue bills and balance the biggest budget deficit in the state’s history.

The plan is among a range of proposals that Quinn is discussing with state lawmakers as they prepare to return to Springfield Jan. 3 for the final days of the legislative session, said Kelly Kraft, a Quinn spokeswoman.

Illinois faces a budget shortfall of at least $13 billion because of declining tax revenue. The state Senate in November didn’t have the votes to approve the borrowing of $3.7 billion to cover pension-fund contributions for the fiscal year that ends June 30.

“We are working on a variety of options,” Kraft said in an interview today. “Nothing has been finalized. We’re talking with legislators on both sides of the aisle. Our goal is to stabilize the budget.”

Senate President John Cullerton and House Speaker Michael Madigan declined through spokesmen to say if the bond sale would draw enough support to pass.

Cullerton met recently with Quinn to discuss the idea, said John Patterson, a spokesman for Senate Democrats. Steve Brown, a spokesman for Madigan, said it’s “difficult” to react to Quinn’s idea “because it’s not a hard and fast proposal.”

The Senate Republican leader, Christine Radogno, criticized the proposal as lacking specifics about how the money would be paid back.

Republican Response

“A discussion about state finances can’t just be about raising more taxes and borrowing more money,” said Patty Schuh, a spokeswoman for Radogno.

Other ideas under consideration include a 2 percentage- point increase in the state income tax that the Senate approved in 2009. The current rate is 3 percent. The House didn’t take it up for a vote.

Quinn’s new borrowing proposal, which the Chicago Tribune reported today, drew criticism from one municipal-bond investor. Matt Dalton, chief executive officer of Belle Haven Investments Inc., in White Plains, New York, questioned the wisdom of borrowing.

“He’s trying to sign up for another credit card,” said Dalton. “That’s going to put a lot of pressure on Illinois.”

The cost of insuring Illinois’s bonds against default rose to the highest level in five months as the state headed for the new year without a plan to finance the pension-fund contributions.

The cost of credit-default swap insurance on the lowest- rated state after California has risen 16 percent since Dec. 3 to $330,000 to protect $10 million of debt, from $285,000, according to data compiled by Bloomberg. That’s the most expensive since July 12, when it reached $335,000.

To contact the reporters on this story: Tim Jones in Chicago at tjones58@bloomberg.net; Darrell Preston in Dallas at dpreston@bloomberg.net

To contact the editor responsible for this story: Flynn McRoberts at fmcroberts1@bloomberg.net

Illinois Default Insurance Cost at Five-Month High: Muni Credit

Posted: 05 Jan 2011 05:12 AM PST

add to Business Exchange

By Darrell Preston

Dec. 28 (Bloomberg) -- The cost of insuring Illinois’s bonds against default rose to the highest level in five months as the state headed for the new year without a plan to finance a $3.7 billion pension-fund contribution.

The cost of credit-default swap insurance on the lowest- rated state after California has risen 16 percent to $330,000 to protect $10 million of debt, from $285,000 on Dec. 3, according to data compiled by Bloomberg. That’s the most expensive since July 12, when it reached $335,000.

“They’re punishing all the states but they’re punishing the worst states more,” said Alan Schankel, director of fixed- income research for Janney Montgomery Scott LLC, a money- management firm based in Philadelphia. “Illinois has been worse for a while.”

Insuring Illinois against default now costs more than that for California, the lowest-rated U.S. state according to Standard & Poor’s. Covering the most-populous state’s general- obligation debt averaged $291,000 in December, Bloomberg data show. S&P ranks California at A-, its fourth-lowest investment grade, and Illinois at A+, two levels higher.

The cost of insuring Illinois debt is more than three times that of Texas at $102,000. Texas, which S&P said felt the effects of the recession later and began to pull out earlier, may face a deficit of as much as $25 billion in the next two years, according to an Oct. 25 report in the Dallas Morning News. State officials have already begun asking for spending cuts in advance of the 2011 legislative session, during which the next two-year budget will be written.

Gross Comments

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said Illinois’s budget may be only 55 percent-funded.

“That means the other 45 percent they can’t pay or have to borrow,” Gross said today in an interview on CNBC. “How a state like that can get in that type of position, I’m not quite sure.”

He said he would avoid buying any Illinois debt.

Municipal issuers are selling about $483.4 million in the last week of 2010, Bloomberg data show.

Top-rated 10-year municipal bonds were yielding 3.16 percent yesterday, unchanged from last week, according to Municipal Market Advisors data.

The budget Illinois lawmakers passed earlier this year has a $13 billion gap, about half of total spending. The state sold securities backed by its share of a settlement with tobacco companies to help pay $2 billion of bills left over from fiscal 2010.

Illinois issued $3.47 billion of pension bonds in the first week of 2010 at as much as 4.421 percent on debt that matures in one to five years. The top rate was 182 percentage points higher than the yield on five-year U.S. Treasuries, according to data compiled by Bloomberg.

Outstanding Contribution

The state was planning a sale of $3.7 billion for its fiscal 2011 pension contribution until lawmakers refused to pass a measure authorizing the debt when they met to wrap up legislative affairs after the November election. The plan still may be considered when lawmakers meet again starting next week. Kelly Kraft, spokeswoman for Illinois governor Pat Quinn’s office of management and budget, didn’t immediately respond to two e-mails seeking comment.

Quinn yesterday proposed borrowing $15 billion to alleviate the pressure of the state’s unpaid bills, the Chicago Tribune reported. The governor approached legislators with the plan to plug Illinois’s budget hole for a year, the newspaper said.

State and local issuers have been seeing costs for their credit-default swaps widen since banking analyst Meredith Whitney on Dec. 19 predicted “hundreds of billions of dollars” of municipal defaults during an episode of CBS Corp.’s “60 Minutes,” Schankel said. Those states in worse financial shape have seen their costs rise more, he said.

Following is a description of a pending sale of U.S. municipal debt:

METROPOLITAN WATER RECLAMATION DISTRICT OF GREATER CHICAGO, a wastewater utility that serves more than 5 million people, plans to sell as much as $500 million in taxable and tax-exempt debt next year. The offering will need to be re-authorized in January, so a new pricing date hasn’t been set, according to acting Treasurer Mary Ann Boyle. The bulk of the issue will be tax-free bonds, she said. The securities are top-ranked by all three major credit-rating companies. (Updated Dec. 28)

--With assistance from Brendan A. McGrail in New York and Tim Jones in Chicago. Editors: Walid el-Gabry, Ted Bunker, Mark Schoifet.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

Shanghai Pushing Gold to $1,600 Thwarts Fight to Shut Mines

Posted: 05 Jan 2011 05:11 AM PST

add to Business Exchange

By Bloomberg News

(For more on Gold’s Affliction, see EXTRA <GO>.)

Dec. 30 (Bloomberg) -- Yu Zudong rides an orange truck rattling down Xiaoqinling mountain in central China, past a landscape pockmarked with gold caves and the garbage-strewn tent homes of workers.

“Everybody here wants to earn a fortune,” says Yu, a migrant miner who is taking a 24-ton load of gray rocks to a grinder in the foothill town of Yuling.

Nearby, sitting in one of the shanties, miner Li Shanchi waits for his next payday. He hasn’t worked for two months since officials closed some mines after a fire killed nine workers on the mountain, 800 kilometers (500 miles) southwest of Beijing. His lungs are filled with dust he inhaled during a decade of mining, he says, leaving him with silicosis, an incurable lung disease.

The opposite fates of Li and Yu, both 31, show how China’s hunger for gold will both help drive the price of the metal higher, and at the same time undermine the country’s goal of gaining control of its Wild West mining industry, interviews with more than two dozen miners, analysts and labor activists show.

China displaced South Africa as the world’s biggest gold producer in 2007, the same year Li was diagnosed. Its imports through October also rose almost fivefold from the total shipped in last year, surprising analysts including Yuichi Ikemizu, the head of commodity trading at Standard Bank Plc in Tokyo.

“China is the biggest bullish factor in the gold market,” says Ikemizu, who forecasts gold may hit $1,600 an ounce next year. The price hit a record $1,431.25 an ounce on Dec. 7. “Gold doesn’t have much room to go down.”

Trading Surge

Trade volume on the Shanghai Gold Exchange, set up in 2002 to end the People’s Bank of China’s monopoly on gold trading, surged 43 percent in the year to Oct. 31 from the same period in 2009, Shen Xiangrong, chairman of the bourse, said Dec. 2. The country’s gold consumption may double in the next decade, the World Gold Council forecasts.

Higher gold prices put at risk China’s efforts to clean up an industry that relies on cheap labor working without adequate protection, according to Zhao Qingming, a Beijing-based senior analyst at China Construction Bank Corp. Migrant workers move from mine to mine without contracts, and are often unable to get insurance or even compensation, the miners say.

China cut the number of licensed gold mines from 1,200 in 2002 to fewer than 800 last year. Yet miners are still flocking to the mountain to feed Chinese gold demand that is growing faster than the mines can satisfy it.

Victims Take Action

“The state has repeatedly issued orders to ban illegal mining, but it hasn’t been totally stopped,” says Gao Rukun, an independent gold researcher based in Beijing. “With gold at such a price it means huge interest for local governments, companies and individuals.”

In the past two months, representatives of silicosis- stricken gold miners from Yunnan in the south to Gansu in the north, where more than 130 workers say they got sick in one mine, traveled to Beijing to highlight their plight and seek help. The disease is caused by inhaling too much silica dust, which scars the lungs. It is irreversible, disabling and eventually fatal, according to the World Health Organization.

“Unless the Chinese government takes urgent action, it is going to see more demonstrations by increasingly angry and desperate citizens,” says Geoff Crothall, a spokesman for China Labor Bulletin, a Hong Kong-based workers’ rights group that has helped hundreds of occupational disease victims fight for compensation. “And that is the last thing the government wants.”

At stake is maintaining the balance between China’s economic growth and social stability.

Social Harmony Risk

“Increased protection of worker health is part of the economic development process that China is navigating,” says economist David Cohen, of Singapore-based Action Economics. “In order to maintain its desired social harmony, China will need to safeguard the health of the gold miners.”

The number of workers across all industries that got lung disease from inhaling dust rose by 14,495 in 2009, up from 10,829 new cases the previous year, according to China’s Ministry of Health. About half of the 650,000 victims recorded since the 1950s are coal miners who powered the country’s industrialization. No figure for gold miners is released.

“This is just the tip of an iceberg,” says Chang Kai, a professor of labor law at Renmin University of China in Beijing. “Our problem is a market economy with no proper labor rules and laws.”

Villages of Death

A gold miner typically contracts lung disease faster than a coal worker -- as early as three months into the job -- and can die faster, says Li Yuhuan, the former secretary general of the China Coal Miner Pneumoconiosis Treatment Foundation, set up by the state’s work safety authorities.

Until July, Li Yuhuan ran a medical facility in Beidaihe, on the east coast. It treated victims by administering a lung lavage, an operation to remove dust from the lungs that doctors say can ease pain and prolong life. Tu Mingli, a doctor at Taihe Hospital in Shiyan City where Li Shanchi was diagnosed, says a fifth of the lung disease cases it now sees are gold miners.

On the border of Hubei and Shaanxi provinces, a region which has fed workers including Yu and Li to the mountain 400 kilometers to the north for two decades, local leaders and villagers make their own count of cases. Their unofficial toll in one cluster of eight villages is 64 dead and more than 400 diagnosed or suspected, according to interviews with them.

Gold Earrings

Clinging to steep mountain slopes, the area has no industry, forcing workers to seek jobs elsewhere. In miner Li’s hometown of Hongjun, his next-door neighbor He Quangui says profits from mining in 2000 enabled him to buy his wife Mi Shixiu a pair of gold plum flower-shaped earrings. After he was diagnosed with silicosis a few years later, the couple sold them to help pay for lung treatment.

“We haven’t been able to afford gold since,” He said. The piercings in Mi’s ears are empty, a framed photo on the ledge of their bedroom window the only remaining sign of gold.      Tales of death and sickness are told in villages in every direction. In Fengji, 20 minutes south of Hongjun by road, the noise of car engines couldn’t drown out the wheezing of Zhang Jianbin, sitting on a red wooden chair outside his house on a sunny November afternoon. Hardly able to talk, he was wrapped in four layers of clothing, the bags under his eyes swollen. He spent his nights hooked up to an oxygen tank. Two days later, he died.

Coffin at Home

In Xiaoxinchuan village, 70 kilometers north, Qi Zeming’s living room is dominated by a mahogany coffin his family built with timber from nearby trees.

“They made that for me,” says Qi, 33, squatting in the corner of the porch, his eyes lifeless, trying to warm himself in the sun. “I’ve not been well recently.”

Pleas for help to the township government of Hubeikou, fall on deaf ears, says Yuan Meng, the chief of Xiaoxinchuan. He tallies 19 dead and 24 more diagnosed with silicosis.

“We report the issue each year,” he says. “They simply said we should tell villagers not to go to the gold mines.”

Ha Rongxia, head of Hubeikou township, says there isn’t a policy or budget to help occupational lung disease victims.

“There isn’t much we can do other than show our sympathy,” she says.

China’s State Council announced a plan last year to limit the growth of occupational lung diseases. The sicknesses are caused by irresponsible employers, weak supervision, and poor prevention measures, it said.

Fragmented Industry

The Chinese government has implemented measures to strengthen production safety, Jiang Yu, a spokeswoman for the Ministry of Foreign Affairs, said Dec. 23.

China’s supervision focuses on fatal accidents and doesn’t pay enough attention to chronic disease, says Yang Shaoshan, who retired as director of the Gold Administration in China’s northeastern Jilin province last year.

The fragmented industry on Xiaoqinling mountain, straddling Henan and Shaanxi provinces, illustrates the size of the challenge. All production sites in one 6.3 square kilometer upper stretch of valley on Xiaoqinling are licensed to Wenyu Gold Mines, says Liu Jinlu, an administrator at the company’s headquarters in Yuling.

Wenyu, part of state-owned China National Gold Group Corp., outsources mining to labor companies, which are responsible for workers’ welfare, Liu says. Any private miners who sell ore from the company’s territory are acting illegally, he says.

‘Stealing From Mines’

“On the surface they offer labor, and we pay for that,” Liu says. “But Chinese are flexible on anything. If we know they’re stealing from the mines, we’ll punish them.”

Yu, the migrant miner, secured his spot inside a 1,000 meter-high cave in the area last year from subcontractors of Wenyu, he says. Middlemen get 30 percent of his rocks, he says.

Yu says he hopes his latest load of ore will yield 150 grams of gold, earning him 15,000 yuan profit that he will share with his three co-workers.

“There’s a lot of subcontracting,” Yu says. “It’s the way it is on the mountain. I don’t know the deal between Wenyu and the bosses.”

The practice of parceling out mines to small-scale operators, though illegal, is a countrywide phenomenon that leads to poor safety conditions and damages the mines, says Shen Lei, a researcher at the Beijing-based Chinese Academy of Sciences.

“It will exhaust the resources and breed corruption,” says Shen, who has studied consolidation efforts in Henan, China’s second-biggest gold producing province.

Recycling Waste Rocks

Song Quanli, deputy party secretary of Beijing-based China Gold, Wenyu’s parent, says he isn’t aware of the practice on Xiaoqinling. The group plans to build its own workforce to improve safety and ensure better environmental protection, he says. He didn’t give a timetable for the plan.

As the price of gold rises, the state-owned company is starting to mine low-grade sites and recycle waste rocks, Song says. Its gold mine production this year will be about 32 tons, up from 18 tons in 2006, Song says.

With 4 percent of the world’s known gold reserves, China’s mines may be exhausted within six years, the World Gold Council says. Wang Jianhua, chairman of Jinan-based Shandong Gold Group, is more sanguine. The group may increase mined output this year by 18 percent to 25 metric tons, he said in a Dec. 2 interview at a gold conference in Shanghai.

“I think there’s much potential if we negotiate with nature,” Wang says.

Raising Output

Gold production increased 8.8 percent through October from the same period a year earlier. In recent years, a number of small-scale, low-grade and high-cost mines were rapidly brought into production to feed the boom, GFMS Ltd., a London-based research firm, said in an April report.

In Yuling, in the shadow of Xiaoqinling, more than 100 makeshift storefronts display signs offering to buy gold. Family businesses inside rely on private operators for raw gold, which they heat in ceramic bowls to purify. The shops’ gold ends up with buyers including Lingbao Jinyuan Tonghui Refinery Co., a supplier to the Shanghai exchange.

Business has been slow since the fatal mine fire in October, says shop owner Zhang Xiaokang, 38.

“When there’s an explosion up on the mountain or water gets polluted, the government cracks down hard on the mining,” says Zhang, inside the Switzerland Gold Shop where he keeps track of prices on the exchange by computer. “Everything gets shut down and nobody sells to us.”

No Safety Checks

Yu Yigui, 38, is one of six survivors of the blaze. He kept his face close to a dirty water pool and covered it with a soaked sock as heavy smoke engulfed the cave until rescuers arrived a few hours later, he says.

The miner says he worked for one of several private operators in the cave and earned a profit share from gold sold to collector shops. He says he can’t recall any safety checks on the mine, where colleagues smoked, during the two months he worked there.

The mine’s operator, state-owned Tongguan Tonggold Mine Industry Co., had no valid mining license and safety permits, according to a report on the website of the Shaanxi Work Safety Administration.

Che Xusheng, the company’s chairman, said in a phone interview that labor outsourcing is a standard business practice and the mine was subject to safety inspections.

Defying Doctors’ Orders

     In the mountainside shanty, miner Li says he continues to seek work in the mines, even though his clogged lungs frequently leave him gasping for breath.

“Doctors warned me not to drill again,” says Li, whose wife Wang Zhongmei earns 1,000 yuan ($150) a month cooking for miners. Their two-year-old son Xinxin -- whose name includes six Chinese characters for gold -- plays nearby. “Occasionally I still do it. I need the money.”

As he waits for the mines to open, Li says he hasn’t sought compensation, deterred by the difficulty.

    “I’ve been out there for too long and in too many places,” says Li. “Who would admit that I got sick in their mine?”

To qualify for compensation, workers need a diagnosis from a hospital and proof of employment. The process can prove bewildering for migrant workers, says Crothall, with the Hong Kong worker rights group.

‘It’s Depressing’

“None of them have work contracts,” says Taihe Hospital’s Tu. “We cannot help but shake our heads. It’s depressing.”      Even as awareness of occupational disease spreads, a new generation of miners from the villages around Hongjun still feels the lure of Xiaoqinling. Among them is 20-year-old Zhu Rongxing.

    Zhu first went into the caves in May, earning 3,000 yuan a month, triple what he made in a factory in southern China.

“You don’t earn money without taking risks,” says the long-haired Zhu.

His mother, She Fazhen, doesn’t want him to go. She has reason to worry. Her first husband was swallowed by a mud pool at the mines. Her second spouse has silicosis.

    “On the front line, other soldiers go up when their buddies die,” she says. “That’s how the mountain looks to me. The dead are carried back, and the living continue to go.”

--Fan Wenxin in Shanghai. With assistance by Feiwen Rong, John Liu and Yidi Zhao in Beijing, Margaret Conley in Shanghai and Chanyaporn Chanjaroe in Singapore. Editors: Neil Western, Robert L. Simison.

To contact the Bloomberg News Staff on this story: Fan Wenxin in Shanghai at Wfan19@bloomberg.net

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net.