Business News: When Wall Street Talks, Washington Listens

Business News: When Wall Street Talks, Washington Listens

When Wall Street Talks, Washington Listens

Posted: 28 Dec 2010 05:11 AM PST

add to Business Exchange

By Christine Harper

Dec. 28 (Bloomberg) -- Wall Street’s biggest banks, whose missteps caused a global financial crisis and economic slowdown two years ago, were more agile when it came to countering the political and regulatory response.

The U.S. government, promising to make the system safer, buckled under many of the financial industry’s protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban any form of derivatives. Higher capital and liquidity requirements agreed to by regulators worldwide have been delayed for years to aid economic recovery.

“We continue to listen to the same people whose errors in judgment were central to the problem,” said John Reed, 71, a former co-chief executive officer of Citigroup Inc., who estimated only 25 percent of needed changes have been enacted. “I’m astounded because we basically dropped the world’s biggest economy because of an error in bank management.”

The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America Corp., JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg. Goldman Sachs CEO Lloyd Blankfein, 56, and his top deputies are in line to collect more than $100 million in delayed 2007 bonuses -- six months after paying $550 million to settle a fraud lawsuit related to the firm’s behavior that year. Citigroup, the bank that needed more taxpayer support than any other, has a balance sheet 14 percent bigger than it was four years ago.

Army of Lobbyists

Wall Street’s army of lobbyists and its history of contributions to politicians weren’t the only keys to success, lawmakers, academics and industry executives said. The financial system’s complexity gave bankers an advantage in controlling the narrative and dismissing the ideas of would-be reformers as infeasible or dangerous. A revolving door between government and banking offices contributed to a mind-set that what’s good for Wall Street is good for Main Street.

To make their case, bankers and lobbyists characterized proposed regulations as stifling innovation, competitiveness and economic growth. They said the industry had learned its lessons and that firms were adopting changes voluntarily to be more transparent and accountable. Successful companies shouldn’t be punished for the sins of those that failed, they said.

“It is important to look beyond the rhetoric and ask the tough questions about underlying structural changes that promote responsible reforms and stability to our financial system, yet support the ability of financial firms to innovate and serve the needs of families and employers,” Timothy Ryan, CEO of the Securities Industry and Financial Markets Association, an industry lobbying group, wrote in a Feb. 5 op-ed piece for the Washington Post.

‘Culture of Greed’

That argument resonated with lawmakers under pressure to boost a fragile economy and bring down an unemployment rate that has hovered near 10 percent since August 2009, its highest level in more than a quarter of a century.

“The big financial industry has convinced a lot of people, particularly in Congress and on the regulatory side, that they bring value to the economy with new instruments and new approaches,” said Byron Dorgan, a Democratic senator from North Dakota who is retiring this year. “Anybody who wants to do things that seem aggressive is called a radical populist.”

U.S. President Barack Obama was elected in 2008, weeks after Lehman Brothers Holdings Inc. collapsed in the largest bankruptcy and the Federal Reserve and government provided unprecedented support to insurance company American International Group Inc. as well as nine of the largest banks. Obama, who raised $15 million on Wall Street, promised that his administration would “crack down on the culture of greed and scheming” that he said led to the financial crisis.

Geithner, Summers

While Obama vowed to change the system, he filled his economic team with people who helped create it.

Timothy F. Geithner, 49, who had been responsible for overseeing banks including Citigroup while president of the Federal Reserve Bank of New York, became Treasury secretary and named a former Goldman Sachs lobbyist as his chief of staff. Lawrence H. Summers, 56, who is stepping down as Obama’s National Economic Council director, opposed derivatives regulation and supported the 1999 repeal of the Depression-era Glass-Steagall Act, which separated commercial and investment banking, when he served as deputy Treasury secretary and Treasury secretary in President Bill Clinton’s administration.

‘Free Pass’

“It was very clear by February 2009 that the banks were going to get a free pass,” said Simon Johnson, a former chief economist for the International Monetary Fund who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management. “You could see from the hiring of Tim Geithner and from the messages that he and his team were putting out that this was going to go very badly.”

Even when changes were advocated by people who couldn’t be characterized as radical populists, their ideas were dismissed as unrealistic, misinformed, advancing ulterior motives or damaging to U.S. competitiveness.

Such tactics helped bat back suggestions from billionaire hedge fund manager George Soros and Berkshire Hathaway Inc. Vice Chairman Charles Munger that regulators ban purchases of so- called naked credit-default swaps -- contracts that allow speculators to profit if a debt issuer defaults.

Geithner was an early opponent of any such ban, arguing at a March 2009 House Financial Services Committee hearing that it wasn’t necessary and wouldn’t help.

“It’s too hard to distinguish what’s a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome,” he said.

‘Unbelievably Complicated’

Dorgan, 68, who offered an amendment to the Dodd-Frank bill that would have banned such swaps and who wrote a 1994 article for Washington Monthly warning about the dangers posed by over- the-counter derivatives, said supporters in Congress backed down because they didn’t get pressure from their constituents.

“The debate that’s necessary on these subjects is a debate that is so unbelievably complicated that the larger financial institutions have always controlled the narrative,” Dorgan said. “Even things that were fairly mild were contested as anti-business and going to injure and ruin the economy.”

Instead Dodd-Frank gave regulators at the Commodity Futures Trading Commission and the Securities and Exchange Commission the responsibility of writing rules governing the $583 trillion market in over-the-counter derivatives. The law, named after Connecticut Senator Christopher Dodd and Massachusetts Representative Barney Frank, requires that most derivatives be traded on third-party clearinghouses and regulated exchanges.

Private Swaps

The CFTC withdrew a proposed rule on Dec. 9 after at least one commissioner, Scott O’Malia, a former aide to Republican Senator Mitch McConnell, objected. The rule would have required dealers of private swaps to quote prices to all market users before trades could be executed on an electronic system. A new version, approved Dec. 16, will save dealers billions of dollars, according to Moody’s Investors Service, because they will be able to limit price information to select participants.

An amendment requiring banks to spin out their swaps- dealing operations into separately capitalized units, so they wouldn’t have access to government backstops, made it into the Dodd-Frank bill. It was diluted at the end to exempt interest- rate and foreign-exchange contracts that make up more than 90 percent of the derivatives held by U.S. banks.

Banks were also allowed to trade derivatives used to hedge their own risks and given up to two years to trade other types of derivatives, such as credit-default swaps that aren’t standard enough to be cleared through a central counterparty.

Too Big

A suggestion that banks deemed too big to fail should be broken up or made small enough to fail -- an idea backed by former Federal Reserve Chairman Alan Greenspan, Bank of England Governor Mervyn King and hedge-fund manager David Einhorn -- also failed to win support from U.S. policy makers, as bank executives argued that size alone didn’t make a company risky and that it could be essential for banks to compete.

Jamie Dimon, JPMorgan’s CEO, said in a January 2010 interview that most of the financial firms that collapsed during the crisis were narrowly focused investment banks, insurers, mortgage brokers or thrifts, not big integrated conglomerates.

“A lot of companies are big because they’re required to be big because of economies of scale,” he said.

Glass-Steagall

The closest the Obama administration came to trying to limit the size of banks was in January, when the president proposed levying a fee on financial firms with assets of more than $50 billion. The idea was never adopted by Congress. Instead, it supported Geithner’s plan for a so-called resolution authority that would give regulators the ability to manage an orderly wind-down of a large financial company. Critics say the authority is unlikely to work in practice because regulators won’t have power over a bank’s international operations.

“The resolution authority as drawn up by Dodd-Frank does not apply to the megabanks and doesn’t apply to JPMorgan Chase, nor can it because that authority only applies to U.S. domestic financial entities,” said MIT’s Johnson. “If anything, it’s gotten worse because we have fewer big banks. The ones that remain are undoubtedly too big to fail.”

Even before Obama took office in January 2009, former Federal Reserve Chairman Paul A. Volcker, an economic adviser to the president-elect, was calling for clear distinctions between banks that take deposits and make loans and those that engage in riskier capital markets businesses. The recommendation, a modern version of Glass-Steagall, was put forward in a report by the Group of 30, an organization of current and former central bankers, financial ministers, economists and financiers whose board Volcker chairs.

Volcker Rule

Reed, the former Citigroup co-CEO, and David Komansky, a former CEO of Merrill Lynch & Co., were among those who said publicly that they regretted having played a role in overturning Glass-Steagall. Both of their former companies were crippled by investments in mortgage-linked securities during the crisis, and Merrill was sold to Bank of America in a hastily reached agreement the same weekend Lehman Brothers went bankrupt.

“We have to think of the original reasons why Glass- Steagall was brought down in the first place, and that is the U.S. banks were competing with large, universal banks around the world,” Goldman Sachs CEO Blankfein said in a March 2009 interview with Bloomberg Television. “So I don’t think we’d turn the clock back.”

The idea was left out of Geithner’s original financial regulation proposals and didn’t gain much support until January, after a Republican upset a Democrat in a Massachusetts senate race. Obama and his economic team, including Volcker, then announced they were supporting a so-called Volcker rule that would ban proprietary trading at regulated banks and prohibit them from owning hedge funds and private equity funds.

Proprietary Trading

E. Gerald Corrigan, a former New York Fed president who worked under Volcker at the Fed and is now a managing director at Goldman Sachs, told a Senate hearing that banks shouldn’t be prevented from owning and sponsoring hedge funds or private equity funds because they promote “best industry practice.” He urged a distinction between proprietary trading and “market making” for clients or hedging related to such market making.

In the final version of Dodd-Frank, the Volcker rule ended up looking much more like the Corrigan rule. Banks were allowed to own or sponsor hedge funds and private equity funds and even to invest in them as long as their holdings didn’t account for more than 3 percent of the bank’s capital or 3 percent of the fund’s capital.

The ban on proprietary trading exempted dealing in government and agency securities. Regulators were charged with deciding what other types of trading would be considered proprietary and which would be deemed market-making.

Volcker was disappointed with the final version, according to a person with knowledge of his views.

Dodd-Frank

Goldman Sachs Chief Financial Officer David Viniar, who told analysts in January that “pure walled-off proprietary trading” accounted for about 10 percent of the firm’s revenue, said in October that the company had closed one such business and was waiting to see if the rules would require other changes.

While the Dodd-Frank Act is the most sweeping financial legislation in decades, creating a consumer-protection office for financial products and a council of regulators charged with monitoring systemic risk, it won’t fundamentally change a U.S. banking system dominated by six companies with a combined $9.4 trillion of assets, MIT’s Johnson said.

‘Falls Short’

The law won’t prevent lenders with federally guaranteed deposits from gambling in the derivatives markets, though it will place restrictions on some types of contracts and require more transparent trading and central clearing. It does little to solve the danger posed by leveraged firms reliant on fickle markets for funding.

“It’s not my point to say that the legislation enacted is worthless,” said Dorgan. “It requires more transparency and disclosure and a series of things that are useful, even though it falls short of what I think should have been done.”

The Treasury Department takes a more positive view. The law “fundamentally changes the landscape of our financial regulatory system for the better,” said Steven Adamske, a Treasury spokesman, in an e-mailed statement.

“The Obama administration and Secretary Geithner fought hard to enact a tough set of reforms that reins in excessive risk on Wall Street, protects the economic security of American families on Main Street, and makes certain taxpayers are never again put on the hook for the reckless acts of a few irresponsible firms,” Adamske said. “It also creates a safer, more transparent derivatives market through comprehensive reform, bans risky pay practices, and it puts in place the strongest consumer protections in history.”

2,300 Reasons

The biggest financial companies increased their spending on lobbying in the first nine months of 2010 as they sought to influence the legislative outcome, according to Senate records. JPMorgan’s advocacy spending grew 35 percent, to $5.8 million from $4.3 million, while Goldman Sachs’s jumped 71 percent to $3.6 million.

Banks had “2,300 pages worth of reasons” for spending, said Scott Talbott, a lobbyist at the Financial Services Roundtable, which represents the largest lenders and insurance firms, referring to the size of the Dodd-Frank bill. “The issues on Capitol Hill required more attention.”

‘Always There’

Spending during 2010 probably played only a small role in the ability of financial companies and trade groups to influence legislators, according to Anthony J. Nownes, a political science professor at the University of Tennessee in Knoxville whose books on the role of lobbyists include “Total Lobbying: What Lobbyists Want (and How They Try to Get It)” (Cambridge University Press).

“The idea that they stepped up their activity has some truth, but the larger truth is that they always spend a lot of money and this was no exception,” Nownes said. “They’re always there, their viewpoints are always heard and it is a cumulative effect -- they’ve been saying the same things for years and years and years.”

Even as they were spending more on lobbying, the largest U.S. banks cut their political giving for the 2010 elections. Of the 10 biggest financial firms, only Goldman Sachs, MetLife Inc. and the U.S. subsidiary of Deutsche Bank AG spent more from their political action committees during the 2009-2010 election cycle than they did in 2007-2008, according to Federal Election Commission filings.

Talbott said the decrease was partly because of the economic slump, and also because some members of Congress refused to take donations from banks that received federal funds during the crisis.

Orszag, Lubke

The financial industry is adept at hiring people with experience in Congress and government, which gives it an edge in understanding the best tactics to use, Nownes said. This month Citigroup recruited former Obama administration budget director Peter Orszag as a vice chairman in its global banking business, and Goldman Sachs hired Theo Lubke from the New York Fed, where he oversaw efforts to make the derivatives market safer.

Research shows that lawmakers are more susceptible to lobbying on issues that are complex, technical or economic, which benefits the banks, Nownes said.

“This certainly was a huge advantage for them, especially in designing some of the more intricate details of this piece of legislation,” he said. “The more technical and complex, the bigger the informational advantage they have.”

Tax on Bonuses

Even in areas that weren’t technical, such as bonuses, the financial industry was able to resist tough regulation.

With polls showing strong popular support for limits on pay, former British Prime Minister Gordon Brown pressed for a tax on banker bonuses and one on financial transactions to deter speculative trading.

Obama didn’t go that far. Instead, the administration appointed Washington lawyer Kenneth Feinberg to review pay for the 100 top executives at firms receiving “exceptional assistance” from the Troubled Asset Relief Program. Feinberg ordered cuts at Bank of America, Citigroup and AIG, as well as at two bankrupt car companies and their finance divisions.

The administration, while opposing any pay caps, urged regulators to require changes that would better align compensation with risk, such as paying bonuses in restricted stock. Several banks responded by raising bankers’ salaries. So far this year, five Wall Street banks -- Bank of America, JPMorgan, Citigroup, Goldman Sachs and Morgan Stanley -- have set aside more than $91 billion for salaries and bonuses.

Money ‘Paralyzes’

In early 2010, Virginia Senator James Webb and California Senator Barbara Boxer, both Democrats, proposed an amendment to a jobs bill that would have imposed a 50 percent tax on any bonuses above $400,000 collected in 2009 by executives at banks that received at least $5 billion in TARP funds.

The U.S. Chamber of Commerce, which opposed the tax, urged senators to reject the idea because it “would likely hamper efforts to resolve the ongoing financial crisis, restore economic growth, spur job creation and is likely unconstitutional.” The bill never made it to a vote.

“Neither party wanted to touch that issue,” Webb said at the Washington Ideas Forum on Oct. 1. “Quite frankly, the way that money affects the political process sometimes paralyzes us from doing what we should do.”

In a Bloomberg News National Poll conducted Dec. 4 through Dec. 7, 71 percent of Americans said big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, and 17 percent said bonuses above $400,000 should be subject to a one-time 50 percent tax. Only 7 percent of the respondents said they consider bonuses a reflection of Wall Street’s return to health and an appropriate incentive.

Protecting Stockholders

Reed, the former Citigroup executive, said he didn’t understand why lawmakers gave so much credit to arguments made by financial-industry participants whose job it is to put the interests of their shareholders above any concern for the safety of the financial system.

“I’m surprised that the people in Washington think that the stockholders are the people that they should protect,” Reed said. “It would seem to me that the people who should be protected are the overall banking system and the many, many, many companies that depend on it.”

--With assistance from Peter Cook, Phil Mattingly and Robert Schmidt in Washington and Matthew Leising, Michael J. Moore and Yalman Onaran in New York. Editors: Robert Friedman, David Scheer

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

Google Pushes Education Software Through App Store

Posted: 27 Dec 2010 09:02 PM PST

Apple Sued Over Applications Giving Information to Advertisers

Posted: 28 Dec 2010 05:06 AM PST

add to Business Exchange

By Joel Rosenblatt

Dec. 28 (Bloomberg) -- Apple Inc., making of the iPhone and iPad, was accused in a lawsuit of allowing applications for those devices to transmit users’ personal information to advertising networks without customers’ consent.

The complaint, which seeks class action, or group, status, was filed on Dec. 23 in federal court in San Jose, California. The suit claims Cupertino, California-based Apple’s iPhones and iPads are encoded with identifying devices that allow advertising networks to track what applications users download, how frequently they’re used and for how long.

“Some apps are also selling additional information to ad networks, including users’ location, age, gender, income, ethnicity, sexual orientation and political views,” according to the suit.

The suit, filed on behalf of Jonathan Lalo of Los Angeles County, identifies applications such as Pandora, Paper Toss, the Weather Channel and Dictionary.com, and names them as defendants along with Apple. Lalo is represented by Scott A. Kamber and Avi Kreitenberg of KamberLaw LLC in New York.

Apple iPhones and iPads are set with a Unique Device Identifier, or UDID, which can’t be blocked by users, according to the complaint. Apple claims it reviews all applications on its App Store and doesn’t allow them to transmit user data without customer permission, according to the complaint.

The lawsuit, claiming the transmission of personal information is a violation of federal computer fraud and privacy laws, seeks class-action status for Apple customers who downloaded an application on their iPhone or iPad between Dec. 1, 2008, and last week.

Amy Bessette, a spokeswoman for Apple, didn’t immediately return a phone call or e-mail seeking comment.

The case is Lalo v. Apple, 10-5878, U.S. District Court, Northern District of California (San Jose).

--Editors: Fred Strasser, Mary Romano

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

Stranded Passengers Still Face 'Long' Storm Delays

Posted: 28 Dec 2010 05:12 AM PST

add to Business Exchange

By Mary Schlangenstein and Will Daley

Dec. 28 (Bloomberg) -- Passengers stranded when airlines canceled more than 6,000 flights amid a winter storm in the eastern U.S. may face lengthy waits to rebook their trips as carriers move aircraft and search for seats on crowded planes.

“It’s a mess,” Jay Sorensen, president of consultant Ideaworks and a former airline marketing executive, said yesterday. “It takes a long time for this to sort out. With every day of cancellations, the problem just compounds itself.”

Six U.S. carriers canceled at least 3,299 flights yesterday, primarily in Philadelphia and the New York area, where all the major airports were closed. That’s in addition to 3,334 flights grounded Dec. 26 by snowfall of as much as 20 inches (51 centimeters) and winds gusting to 30 mph.

Teresa Harlow, who had planned to return to Manchester, England, said she didn’t learn her Dec. 26 flight with Delta Air Lines Inc. had been canceled until she checked the website for New York’s John F. Kennedy airport.

Carriers struggled to relocate aircraft and crews while factoring in airport employees unable to travel to work after New York’s heaviest December snowfall since 1948 blocked streets and canceled some local train service.

“An airline schedule, when it’s connected with staffing and equipment allocation, is like a picture puzzle,” Sorensen said. “What has happened is this storm has essentially blown into the room and tossed all the pieces up into the air.”

‘Man A Phone’

AMR Corp.’s American Airlines added reservations agents yesterday, after a flood of calls from passengers on canceled flights Dec. 26, said Ed Martelle, a spokesman for the Fort Worth, Texas-based carrier.

The volume of calls to American’s reservation lines from people trying to rebook flights is more than double the normal level, he said.

“We are calling people in off their vacation, trying to find people who can man a phone anyway we can,” Martelle said. “We’re extending part-timers so there will be additional manpower.”

The time needed to accommodate affected passengers will depend on the length of the shutdowns, he said. “It’s a moving target. I don’t know how fast we can get them on planes.”

New York’s LaGuardia airport reopened yesterday afternoon and departing flights were scheduled to resume at John F. Kennedy and Newark Liberty airport later in the evening, according to the Federal Aviation Administration.

Mandatory Overtime

US Airways Group Inc. has “several hundred” reservation agents working mandatory overtime for the next three days to help rebook travelers, said Valerie Wunder, a spokeswoman for the Tempe, Arizona-based company.

Continental Airlines, a unit of United Continental Holdings Inc., said its website was the “fastest and most convenient way” for its passengers to change their travel plans.

Carriers waived penalties for changing flight reservations in cities affected by the storm and some offered refunds for canceled flights. Southwest Airlines Co. said it notified more than 30,000 customers in advance that their flights were called off.

JetBlue Airways Corp., which canceled more than 300 flights yesterday, posted a blog entry on its website about the problems carriers face after a major storm.

“We know it’s frustrating that you can’t get from point A to point B right now because airports have been closed since last night and may remain closed through a good portion of today,” the New York-based carrier said in the posting.

‘Severe Disruption’

Harlow, the Delta passenger, said that when she called the Atlanta-based airline, she was greeted by a recording that the carrier couldn’t answer because of adverse weather conditions. On a later call, she was told she’d have to hold for an hour to get help.

A Delta spokesman said he couldn’t respond specifically to Harlow’s experience. Generally, the airline notifies customers in advance if their flights have been canceled, the spokesman, Trebor Banstetter, said in an e-mail yesterday.

“Because of the severe disruption the weather has caused, we’re experiencing an extremely high volume on our reservations assistance line,” he said. “While our call centers are fully staffed, some customers have encountered a wait as we work to rebook customers, and particularly those with travel plans occurring within the next 24 hours.”

Airlines should keep passengers informed, said Harlow, who went to a store offering Internet service to book a different Delta flight via the Web after hers was canceled.

“If you know what’s happening, you can plan,” she said. “If you don’t know what’s happening, you can’t.”

‘Given Away’

Both JetBlue and Delta have been “quite responsive” to customers, reaching them through social-networking website Twitter, said Genevieve Shaw Brown, a senior editor with Southlake, Texas-based travel website Travelocity.com. Travelers should check in for flights as soon as possible, up to 24 hours before the departure time, she said.

“There are going to be a lot of stranded people trying to get your seat,” Brown said. “If you’re late to the airport and miss the cutoff for check-in, it’ll be given away.”

Rebooking passengers is more difficult because the holidays are a high-demand travel time, and because carriers have spent the past two years cutting flight capacity to better match demand eroded by the recession.

Load factor, or the percentage of seats filled, already was on pace to finish the year at its highest since 1944, according to data from the airlines, the Air Transport Association and the U.S. Transportation Department.

‘Mother Nature’

Carriers may have to add flights to help clear the backlog of passengers, said Sorensen, of Ideaworks, based in Shorewood, Wisconsin. The airlines will count on some seats being freed as travelers switch to another mode of transportation or cancel trips altogether, he said.

That’s what Beth McCuen, an elementary school teacher from Diamond, Ohio, did after her flight from New York’s LaGuardia was canceled Dec. 26 and then postponed to today. McCuen booked a train to Pittsburgh and hoped to catch a ride from there to Diamond, about 90 minutes away by car.

“What are you going to do?” she said. “Mother Nature, you can’t fight her.”

--Editors: James Langford, Cécile Daurat

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Will Daley in New York at wdaley2@bloomberg.net

To contact the editor responsible for this story: James Langford at jlangford2@bloomberg.net

Wind-Driven Snow Blankets East Coast

Posted: 27 Dec 2010 09:02 PM PST

add to Business Exchange

By Aaron Clark

Dec. 27 (Bloomberg) -- New York City’s major airports resumed operations after the heaviest December snowfall in six decades left travelers in the Northeast struggling amid waist- high drifts and blizzard winds.

The city’s Central Park had 20 inches (51 centimeters) of snow by 8 a.m., the most for the month since 1948, the National Weather Service said. Skies cleared over New York by daybreak as the agency issued blizzard warnings for Boston and into Maine.

The storm forced airlines to cancel more than 6,000 flights since yesterday, when airports began to close. The Port Authority of New York and New Jersey said LaGuardia, John F. Kennedy International and Newark Liberty airports opened tonight for outgoing traffic.

“There may have been storms that equaled this, but it doesn’t get much worse than this,” Tom Kines, a meteorologist at State College, Pennsylvania-based AccuWeather Inc., said by telephone. “To get this much snow with the amount of wind that is accompanying it, that is devastating.”

New York, which faces a $2.5 billion deficit in the $65 billion budget projected for next year, will be more affected by lost economic activity than clean-up costs, Mayor Michael Bloomberg said at a City Hall news conference.

Getting Around

The New York Stock Exchange and the Nasdaq Stock Market kept normal hours today. The New York Mercantile Exchange delayed the opening of floor trading until 11 a.m.

“They pay me good money to be here,” said Vinny Stavola, an Oppenheimer & Co. convertible trader, who trekked from Staten Island to get to work in midtown Manhattan by 6:30 a.m. “It doesn’t take a heroic effort to get to work, just a little dedication.”

The storm, with winds gusting to 30 miles per hour (48 kilometers per hour), reached New York at midday yesterday. The day after Christmas is one of the five busiest shopping days of the year, and it may take retailers two weeks to recover from lost sales, said Marshal Cohen, chief industry analyst at NPD Group Inc., a research firm based in Port Washington, New York.

Economic Impact

The snowfall was the fifth-largest on record for the city, Sanitation Commissioner John Doherty said at the mayor’s news conference.

“In the grand scheme of things, given the size of our budget and the size of our deficit, this is very small,” Bloomberg said. “It’s the lack of commerce that takes place. Yesterday and today were big shopping days, and that didn’t happen, so your sales tax revenues will be lower, and those are the things that really hurt.”

The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

Amtrak resumed operations between New York and Boston today after canceling services late yesterday. Metro-North commuter trains resumed limited runs at midday after being halted by wind-blown snow, while the Long Island Rail Road was closed, according to the Metropolitan Transportation Authority website.

Commuter Trains

NJ Transit, which carries about 170,000 commuters to and from New York City daily, suspended bus service as of 8:30 p.m. yesterday until tomorrow, according to a statement. Service between Newark and New York was shut by signal problems and other trains will run on modified schedules, the agency said.

Four hundred subway passengers were aboard an A train that was stuck in Queens for more than six hours, until it could be pushed to a station by another train. The Coney Island area was without subway service.

As much as 29 inches of snow was reported in Bergen County, New Jersey, while Union County had as much as 26, the Weather Service said. Winds gusted to almost 70 mph in some areas. Interstate 280 westbound, one of the main approaches to downtown Newark, was almost deserted at 8 a.m. and acting Governor Stephen Sweeney ordered state offices closed.

Home Depot Inc., the world’s largest home improvement retailer, is shipping additional snow shovels, snow blowers and ice melt to stores from North Carolina to Maine, said Ron DeFeo, a company spokesman.

NYC Deploys

New York City will have 365 salt spreaders and 1,700 snowplows on the streets, and sanitation department employees will work 12-hour shifts, Bloomberg said yesterday.

Boston and its suburbs may receive as much as 18 inches from the storm, said Alan Dunham, a National Weather Service meteorologist in Taunton, Massachusetts. Part of central Massachusetts may receive as much as 22 inches.

U.S. carriers canceled at least 3,389 flights today, after cutting more than 3,334 yesterday, as they waited for airports to open in the Northeast, spokesmen said. Airlines in some cases grounded flights ahead of the storm to keep planes from getting stuck at closed facilities.

Delta Air Lines Inc. cut 1,000 flights systemwide, said Trebor Banstetter, an airline spokesman.

“As the weather clears, we are aiming to resume normal operations late Monday and into Tuesday across the East Coast,” Banstetter said in an e-mail.

Continental Airlines and its regional partner carriers have canceled 800 flights for today, while United grounded 175, said Mike Trevino, a spokesman for United Continental Holdings Inc. The carrier expects to resume flights out of New York-area airports and Boston in the afternoon, he said.

More Cancellations

Southwest Airlines Co. cut 188 flights today, primarily in Norfolk and Boston, said Brad Hawkins, a spokesman for the Dallas-based carrier. It expects to resume flights in some northeastern U.S. airports about mid-day, he said.

US Airways Group Inc. canceled 550 flights today, mostly into and out of New York, Philadelphia and Boston, said Jim Olson, a spokesman. Flights into Boston are set to resume after 11 a.m. today, he said.

American Airlines and its commuter carrier, American Eagle, canceled 446 flights today, said Ed Martelle, a spokesman. The two airlines cut 427 flights yesterday and American cut 40 scheduled for tomorrow.

JetBlue Airways Corp. scrubbed more than 300 flights today after cutting 270 yesterday, Mateo Lleras, a spokesman for the New York-based carrier, said in an e-mail.

Unsafe for Crews

“Today we’re also dealing with closed runways, roads that are barely passable and trains and buses that are not running,” JetBlue told customers today in a company blog. “In many cases, conditions are not safe for our crewmembers or our customers to get to the airports, where it’s even possible.”

The storm also brought snow as far south as parts of Jacksonville, Florida, AccuWeather said on its website.

The storm system began in the South over the Christmas holiday. Four inches of snow fell in Chattanooga, Tennessee, while 8 inches was reported in Gatlinburg, Tennessee.

Environment Canada issued a blizzard warning yesterday for northeastern New Brunswick and warned of heavy snow or rain in the rest of the Maritime provinces today. Sixteen inches of snow may fall in New Brunswick, and rain may accompany the snow in Nova Scotia.

Winds may gust to 87 mph (140 kph) in eastern Nova Scotia and 80 mph in western Newfoundland, the agency said.

--With assistance from Henry Goldman, Will Daley, Jonathan Keehner, Robert Friedman, Jim Polson, William Glasgall and James Langford in New York City; Stacie Servetah in Trenton; Chris Burritt in Greensboro, North Carolina; Mary Schlangenstein in Dallas; Matt Walcoff in Toronto; Brian K. Sullivan in Boston; Ola Kinnander in Stockholm; Andreas Cremer in Dusseldorf and Stuart Biggs in Tokyo. Editors: Charlotte Porter, Dave McCombs

To contact the reporter on this story: Aaron Clark in New York at aclark27@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

Home Prices Likely Fell, Showing Economy’s Weak Link

Posted: 28 Dec 2010 04:32 AM PST

add to Business Exchange

By Bob Willis

Dec. 28 (Bloomberg) -- Home prices probably dropped in October, a sign housing will remain a weak link as the U.S. recovery accelerates into the new year, economists said before reports today.

Property values in 20 cities were down 0.2 percent from October 2009, the first year-over-year decline since January, according to the median forecast of 17 economists surveyed by Bloomberg News. Other data may show consumer confidence rose to a seven-month high this month.

A wave of foreclosures waiting to reach the market means home prices will remain under pressure in 2011, representing a risk to household finances. Rising stock values and an improving job market will probably help offset the damage, ensuring that confidence and spending continue to strengthen.

“It’s going to take a long time for this excess inventory to clear and that means further downward pressure on prices,” said Neil Dutta, an economist at Bank of America Merrill Lynch Global Research in New York. “Consumer confidence has recovered, but it’s not predicting a boom in the economy.”

S&P/Case-Shiller home-price index is due at 9 a.m. New York time. Economists surveyed projected the gauge declined 0.6 percent in October from the prior month, when it fell 0.8 percent. The index was down 29 percent in September from its July 2006 peak.

The year-over-year gauge provides better indications of trends in prices, the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Fewer Permits

Reports earlier this month showed the housing market is stuck near recession levels even as the broader economy is recovering. Housing permits fell in November to the third-lowest level on record, while starts rose for the first time in three months, the Commerce Department reported Dec. 16.

Sales of new and existing homes last month rose less than projected by the median forecast of economists surveyed by Bloomberg, reports from the Commerce Department and the National Association of Realtors showed last week.

The lack of demand has depressed homebuilding stocks this year. The Standard & Poor’s Supercomposite Homebuilding Index, which includes Toll Brothers Inc. and Lennar Corp., is up 3.2 percent since Dec. 31, while the broader S&P 500 has increased 13 percent.

Rising stock prices are helping mend household finances even as home values slide, one reason why sentiment and spending are improving as 2010 comes to a close.

More Confidence

The Conference Board’s confidence index increased to 56.4 this month from 54.1 in November, according to the median estimate of economists surveyed. The index averaged 96.8 during the last economic expansion that ended in December 2007.

Job growth is also helping boost confidence. Employers added 951,000 workers to payrolls in the first 11 months of the year, according to figures from the Labor Department. December data is due Jan. 7.

The gains haven’t been large enough to reduce unemployment, which was at 9.8 percent last month after finishing 2009 at 10 percent.

Growing confidence and more jobs are helping lift household spending, which accounts for 70 percent of the economy. The International Council of Shopping Centers on Dec. 14 revised its November-December holiday-season sales forecast up by 0.5 percentage point to a range of 3.5 percent to 4 percent.

Carnival Corp., the world’s biggest cruise-line operator, last week forecast fiscal 2011 earnings will rise as ticket prices strengthen.

‘Strong’ Bookings

“Booking trends have continued to improve for both our North American and European brands, particularly for our peak summer season,” Chief Executive Officer Micky Arison said in a Dec. 21 statement. The Miami-based company’s heaviest booking period, which begins in early January, will be “strong,” he said.

Economists this month have boosted projections for fourth- quarter growth, reflecting a pickup in spending and passage of an $858 billion bill extending all Bush-era tax cuts for two years. The legislation also continues expanded unemployment insurance benefits through 2011 and cuts payrolls taxes by 2 percentage points next year.

--With assistance from Chris Middleton in Washington. Editors: Carlos Torres, Christine Spolar

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Ally Pays $462 Million to Settle Fannie’s Loan Buyback Demands

Posted: 28 Dec 2010 04:32 AM PST

add to Business Exchange

By Hugh Son and Lorraine Woellert

Dec. 28 (Bloomberg) -- Ally Financial Inc., the auto and home lender majority-owned by the U.S. government, agreed to pay $462 million to settle repurchase demands from Fannie Mae linked to $292 billion in home loans.

Ally, formerly known as GMAC Inc., said the deal covers loans serviced by GMAC Mortgage unit for Fannie Mae before June 30 and mortgage-backed securities purchased by the Washington- based loan-funding firm. The accord was reached on behalf of Ally’s Residential Capital unit and subsidiaries, the Detroit- based company said yesterday in a statement.

Chief Executive Officer Michael Carpenter is seeking to resolve claims tied to faulty mortgages as he prepares Ally for a public offering to repay U.S. bailout funds. Mortgage lenders typically promise to buy back loans sold to investors or cover losses if information about the borrowers or property later proves to be incorrect.

“At the start of 2010, we set a goal to substantially reduce risk in our mortgage operation,” Carpenter, 63, said in the statement. “We have successfully completed a series of steps toward that objective and are largely complete.”

The government took an almost 80 percent stake in Fannie Mae after it seized the firm in 2008.

Ally had settled buyback claims with six counterparties, the largest being government-owned finance company Freddie Mac, according to a November presentation. It agreed in May to make a one-time payment to Freddie Mac, without disclosing the amount.

Ally’s Reserves

Ally increased reserves for buybacks to $1.1 billion in the third quarter, from $855 million in the prior period. The original unpaid principal on loans involved in the Fannie Mae settlement announced yesterday was $292 billion, a figure that narrowed to $84 billion, Ally said.

Chris Katopis, executive director of the Association of Mortgage Investors, said his members are worried the Ally settlement might be too low.

The deal “may set a harmful precedent for mortgage investors and the public,” Katopis said in an interview. The Washington-based trade association represents state pension funds and other investors in mortgage-backed securities.

The agreement “modestly” exceeds prior reserves, Ally said. ResCap and Fannie Mae also reached an accord regarding ResCap’s payment of mortgage-insurance proceeds where coverage is rescinded or canceled.

“ResCap does not expect this exposure to be material,” Ally said.

Subpoenas Issued

In July, Fannie Mae’s regulator, the Federal Housing Finance Agency, said it issued subpoenas for documents related to private-label mortgage-backed securities in which Fannie Mae and Freddie Mac had invested. The agency, under pressure from lawmakers to stem losses to the two companies, is trying to determine whether misrepresentations or omissions might require lenders to repurchase failed loans.

The FHFA will withdraw subpoenas to “certain ResCap parties” that relate to Fannie Mae, Ally said today in a filing to the Securities and Exchange Commission. FHFA spokeswoman Stefanie Johnson declined to comment.

With more than $150 billion in taxpayer funds spent on bailing out Fannie Mae and McLean, Virginia-based Freddie Mac, lawmakers are pressing them to shift more of the burden back to the banks that created defective loans.

In an August letter to President Barack Obama, Representative Barney Frank, the Massachusetts Democrat who leads the House Financial Services Committee, said the battle to get refunds “should be fought with every tool.”

“We are pleased to have reached an agreement with Ally Financial Inc. and related entities which addresses our exposure on a portfolio of loans sold to Fannie Mae by GMAC Mortgage or serviced by GMAC Mortgage,” Janis Smith, a spokeswoman for Fannie Mae, said in an e-mailed statement. “The agreement also addresses Fannie Mae’s potential claims for losses on certain private label securities issued by GMAC entities.”

--Editors: David Scheer, Dan Reichl.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green at rgreen18@bloomberg.net.

China’s Stocks to Rebound, Morgan Stanley Huaxin Says

Posted: 28 Dec 2010 05:10 AM PST

add to Business Exchange

By Bloomberg News

(Updates with closing prices in fourth paragraph.)

Dec. 28 (Bloomberg) -- China’s stocks will rebound next quarter from the Shanghai Composite Index’s biggest annual drop since 2008, as slowing inflation reduces the need for further interest-rate increases and economic growth accelerates, according to Morgan Stanley’s joint venture in the country.

The central bank’s two rate rises since October will “achieve full effect” in moderating consumer prices that grew at the fastest pace in 28 months in November, said Zhao Lisong, chief strategist at Morgan Stanley Huaxin Fund Management Co., which oversees about $1.9 billion. Property developers, material producers and automakers will benefit as the government slows the pace of policy tightening and growth quickens, he said.

“China’s economic growth will support a mild bullish run in 2011,” Zhao said in a phone interview yesterday from Shenzhen, declining to give a forecast for the Shanghai Composite. “As inflation eases after the Chinese New Year, the government may reduce the frequency of tightening measures.” The Chinese lunar new year ends by mid-February.

The Shanghai Composite Index slid 1.7 percent to 2,732.99 today, extending the benchmark measure’s longest losing streak since July, after the People’s Bank of China increased key one- year lending and deposit rates by 25 basis points, or 0.25 percentage point, on Christmas Day. The benchmark measure has fallen 17 percent this year, making it the worst performer among the world’s 14 biggest stock markets.

Premier Wen Jiabao’s government has ordered banks to set aside more reserves six times this year and boosted rates to tame inflation and curb asset bubbles after record gains in lending and property prices. China reported inflation of 5.1 percent in November, exceeding the previous month’s 4.4 percent, as food costs jumped.

‘Comparatively High’

The nation’s stocks fell yesterday as JPMorgan Chase & Co. and Morgan Stanley forecast further interest-rate increases in the first half of 2011. China may raise rates as many as three times in the first six months, according to Morgan Stanley, while JPMorgan forecasts two increases in that period.

China’s inflation rate may stay at a “comparatively high level” in the first half, said Liu Jianwei, a fund manager at Bosera Asset Management Co., which manages about 19 billion yuan in Shenzhen.

He favors gold producers and airlines as a hedge against inflation and as the government allows faster appreciation of the yuan, reducing carriers’ U.S. dollar-debt costs. Liu also likes companies that benefit from the government’s next five- year economic plan, which is focused on boosting domestic consumption and increasing energy efficiency.

China’s economy will grow at a 10 percent pace next year and inflation will average 3.3 percent, the Chinese Academy of Social Sciences said in its Blue Book for the Economy in 2011 published Dec. 7. The 2010 target for GDP growth is 8 percent, according to Wen’s annual working report on March 5.

Earnings Growth

The expansion in the economy, which is set to overtake Japan as the world’s second-biggest this year, will sustain earnings growth of as much as 22 percent next year, according to Morgan Stanley Huaxin’s Zhao said.

Chinese industrial companies’ profits rose 49.4 percent in the 11 months through November from a year earlier, a report showed yesterday. The increase compared with a 7.8 percent gain in the same period in 2009.

China’s interest-rate increase will be positive for bank earnings as it will boost net interest margins without boosting the demand deposit rate, according to a report from UOB Kay Hian yesterday.

The benchmark lending rate rose to 5.81 percent and the one-year deposit rate increased to 2.75 percent. The lending rate will climb to 6.56 percent by the end of next year, according to the median forecast in a Bloomberg News survey of economists this month.

“The shortage of liquidity may ease in the first quarter,” said Zhao, predicting banks will increase their lending after the government sets a new annual quota. “Economic growth will also boost liquidity.”

--Irene Shen. Editors: Allen Wan, Richard Frost

To contact Bloomberg News staff for this story: Irene Shen in Shanghai at ishen4@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

Dollar Weakens, Franc Gains Before Housing Data; Bonds Advance

Posted: 28 Dec 2010 05:07 AM PST

add to Business Exchange

By Stephen Kirkland

Dec. 28 (Bloomberg) -- The dollar weakened and the Swiss franc climbed to a record before a U.S. housing report that may indicate prices fell, while European bonds rose as France’s economy expanded less than initially estimated. Stocks and index futures advanced.

The dollar depreciated 0.5 percent against the euro at 8 a.m. in New York. The franc gained against all 16 of its major peers. The 10-year German bund yield declined six basis points. The Stoxx Europe 600 Index increased 0.2 percent, trimming yesterday’s 0.8 percent drop, the most in a month. Standard & Poor’s 500 Index futures added 0.2 percent, while the Shanghai Composite Index slid 1.7 percent. Gold rallied for a third day. U.K. markets were closed for a holiday for a second day.

U.S. home prices probably dropped in October, a sign housing will remain a weak link as the economic recovery accelerates into 2011, economists said before today’s report. France’s economy grew 0.3 percent in the third quarter, less than the 0.4 percent preliminary estimate, the Paris based statistics office said. China’s stocks fell for a fifth day as Li Daokui, a central bank adviser, said adjustments in rates and reserve requirements are “very necessary” in 2011.

“The global economy is recovering, but as a backdrop there’s the China overheating concern because it’s still unable to be controlled,” said Danny Yan, a Hong Kong-based fund manager at Haitong International Asset Management, which oversees about $400 million.

Dollar, Franc

The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell for the fourth day, the longest run of declines since Sept. 29. The franc appreciated as much as 1.8 percent to 94.35 centimes against the dollar, and rose 0.9 percent versus the euro. A UBS AG index of Swiss consumption, which aims to predict developments about three months ahead, stayed above its long-term average in November, the Zurich-based bank said.

The yield on the French 10-year bond declined seven basis points to 3.32 percent, while the German two-year note yield dropped seven basis points.

Alcatel-Lucent SA gained 1.6 percent after it resolved U.S. criminal and civil probes into allegations of bribes. Tenaris SA fell 2.1 percent after Exane BNP Paribas downgraded the shares. Makhteshim-Agan Industries Ltd., the world’s largest maker of generic agrochemicals, climbed 7.6 percent in Tel Aviv after Koor Industries Ltd. agreed with China National Chemical Corp. to take Makhteshim private. Koor rallied 8.8 percent.

Asian Stocks

The MSCI Asia Pacific Index rose 0.5 percent. Mizuho Financial Group Inc., Japan’s third-biggest bank by market value, gained 1.3 percent after the lender said it won’t need to sell more shares in order to meet Basel Committee on Banking Supervision capital requirements. China Resources Land Ltd., a state-controlled developer, dropped 2.4 percent as the market resumed trading following the three-day Christmas break.

U.S. futures gained after the S&P 500 yesterday closed up 0.1 percent, extending what would be its biggest December rally since 1991, with the index advancing 6.5 percent this month and 13 percent in 2010. About 468 million shares changed hands on the NYSE yesterday, the fewest for a full-day session since May 1998, as trading slowed following a snowstorm. New York commuters and travelers face further disruptions today as winds hinder efforts to clear roads and runways following the heaviest December snows in six decades.

General Motors Co. rose 2.5 percent in pre-market trading as brokerages including JPMorgan Chase & Co. and Morgan Stanley initiated coverage of the automaker with a positive view.

House Prices

Property values in 20 U.S. cities were down 0.2 percent from October 2009, the first year-over-year decline since January, according to the median forecast of 17 economists surveyed by Bloomberg News before a report from S&P/Case- Shiller, due at 9 a.m. in Washington. A separate report from the Conference Board, scheduled for 10 a.m., may show consumer confidence rose to a seven-month high in December.

Same-store sales at a selection of U.S. retailers rose 4.8 percent for the week ended Dec. 25 from the comparable period a year earlier, the International Council of Shopping Centers and Goldman Sachs Group Inc. said in an e-mailed statement.

Gold climbed as much as 1.2 percent to $1,399.75 an ounce on speculation that the dollar’s retreat may boost demand for the precious metal as an alternative investment. Silver increased to a one-week high. Oil rose 0.3 percent to $91.30 a barrel.

The MSCI Emerging Markets Index advanced for the first time in three days, increasing 0.2 percent, as higher commodity prices boosted earnings outlooks for producers. Currencies gained, with the yuan rallying 0.09 percent to close at 6.6248 per dollar in Shanghai. The ruble climbed as much as 0.7 percent to a two-month high as oil traded above $91 a barrel. South Africa’s rand advanced 1.2 percent to the strongest level since December 2007 on higher prices for precious metals.

--With assistance from David Merritt and Dan Tilles in London. Editors: Stephen Kirkland, Paul Sillitoe

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.

Alfred Kahn, Father of 1970s Airline Deregulation, Dies at 93

Posted: 28 Dec 2010 05:02 AM PST

add to Business Exchange

By Anne Swardson

Dec. 28 (Bloomberg) -- Alfred E. Kahn, the economist- turned-regulator whose moves to end U.S. government controls on airlines in the late 1970s set the stage for today’s cheap fares and for much of the industry’s financial troubles, died yesterday. He was 93.

Cornell University in Ithaca, New York, where he spent most of his career, said on its Web site that he died from cancer.

As chairman of the Civil Aeronautics Board under President Jimmy Carter, Kahn was probably the first Washington regulator to put himself out of a job. He argued that airlines could serve consumers and business best by competing with each other, a novel notion at a time when prices and routes were government- controlled.

It was under pressure from Kahn and Carter that Congress passed the Airline Deregulation Act of 1978. Later, as Carter’s anti-inflation adviser, Kahn also earned fame for saying “banana” rather than “depression” to avoid uttering an unpopular word.

He was often asked in his later years whether his push for deregulation had made the industry worse off than if government oversight had remained.

“Consumers have benefited to the effect of $20 billion a year,” Kahn was quoted in the Denver Post as saying at a February 2005 conference. “Where competition is feasible, the government should get the hell out of the way.”

Stocking Feet

Kahn was known not just for what he did but for the humor and informality with which he did it. As CAB chairman, he granted media interviews in his stocking feet, hanging a leg over the arm of the old rocking chair in his office. He had a bad back, and once spoke to a conference of 60 utility lawyers while lying flat on a table.

He was chairman of the economics department and dean of the College of Arts and Sciences at Cornell before entering public service. He also finished his career there, as the Robert Julius Thorne Professor of Economics Emeritus and as a consultant to National Economics Research Associates.

At Cornell, he was an enthusiastic performer in Gilbert & Sullivan operettas. His roles -- he sang baritone -- ranged from Sergeant Meryll in “Yeomen of the Guard” in 1964 to the poet Bunthorne in the 2000 production of “Patience.”

Alfred Edward Kahn was born in Paterson, New Jersey, on Oct. 17 1917, to parents Jacob and Bertha Kahn. His father, a Russian Jewish immigrant, worked in a silk mill, according to “Prophets of Regulation,” by Thomas K. McCraw.

NYU, Yale

Kahn graduated from high school at 15 and New York University at 18, summa cum laude and first in his class. He earned his doctorate in economics from Yale University in 1942 after graduate study at NYU and the University of Missouri.

Before World War II, he also worked for policy research organizations and government agencies in Washington, including the Brookings Institution and the antitrust division of the U.S. Justice Department. He served in the Army during the war and began teaching at Cornell in 1947.

His thinking on what is called marginal-cost pricing -- setting a product’s price to account for the cost of producing one more unit -- led him to focus on ways to inject competition into industries previously viewed as monopolistic, such as power utilities. Rather than merely controlling prices and service, he argued, regulators could set the stage for lower prices by applying some of the principles of classical economics.

His two volumes of “Economics of Regulation” appeared in 1970 and 1971; McCraw called the first volume “the most influential work written on the subject.”

Utility Regulator

In 1974, Kahn was named chairman of the New York Public Service Commission, which regulated more than 40 industries, including buses, telephones, shipping docks and the electric-and gas-utility industry. Against the wishes of the affected companies, he pioneered such notions as peak- and off-peak pricing for electricity and disclosure of the cost of telephone services rather than bundling them together in rate applications.

Carter named Kahn to head the CAB as one of a host of new appointees empowered to overturn regulatory practices. At the time, the five-member board governed where airlines could fly and how much they could charge for all the routes in the U.S. It was ostensibly in the name of public service, but the lack of flexibility meant planes flew barely half-full and airlines were mostly required to charge the same price for the same route. No new airline had started up in the U.S. since 1938.

Kennedy Hearings

The airlines liked this state of affairs, as did their labor unions. But even before Kahn arrived at the CAB, calls for deregulation had begun. The late Democratic Senator Edward Kennedy of Massachusetts held congressional hearings in 1975 that showed airlines that avoided federal regulation by operating in state only, such as Southwest Airlines Co. in Texas, had full planes and fares half those of national airlines.

Kahn was no industry expert. Shortly after his appointment, he told executives at now-defunct Eastern Airlines Inc.: “I really don’t know one plane from the other. To me, they’re all marginal costs with wings.”

That didn’t stop him from going to work swiftly, helped by cost pressure from the in-state airlines that induced the national carriers to lower prices sporadically.

Under Kahn, the CAB began approving discount fares for interstate and trans-Atlantic travel. From Texas International Airlines’ “Peanuts” fare to the “Super Saver” of AMR Corp.’s American Airlines, passengers began flying cheaper, and planes began filling up. Load factors rose from 55 percent to 61 percent in 12 months, according to McCraw.

New Airlines

Kahn also loosened rules to let airlines set their own fares, rather than applying for each one to the CAB, and to choose their routes with more freedom from government oversight. Such new airlines as Midway Airlines Corp., flying from Midway Airport in Chicago, started up.

The fuller planes caused some consternation among passengers accustomed to a high level of service. One friend wrote Kahn to complain that he had had to sit next to a “hippy” on a flight to Denver.

Kahn’s response: “Since I have not heard from the hippy, I presume the distaste was not reciprocated.”

He also ended the CAB’s traditional goal of ensuring that no airline failed financially. The board’s official decision granting multiple new rights for Oakland (California) Airport said: “We cannot agree to define healthy competition as that state where the fortunes of the competitors fluctuate but no competitor ever goes to the wall.”

People Magazine

Kahn, understanding that the changes he had pushed through the CAB were subject to judicial review and the appointment of future board members, threw his weight behind congressional legislation to cement the new environment. He lobbied lawmakers concerned that service to their districts would be curtailed, and cultivated journalists to get his message across. He was one of the few federal regulators ever profiled in People magazine.

With the support of the Carter administration -- and, by this time, most of the airline industry -- the deregulation bill passed in October 1978. It gave the airlines more freedom to set fares and routes, and set a timetable for the phase-out of the CAB itself in 1985.

The day the act was signed, on Oct. 24, Kahn announced that he had a new job. He would become Carter’s anti-inflation czar, at a time when consumer prices were rising at an annual rate of 8.9 percent.

He was less successful there. With monetary policy in the hands of the Federal Reserve and economic policy run by Treasury Secretary Michael Blumenthal, Kahn’s only role was to explain and exhort.

Banana, Kumquat

His tendency toward frankness didn’t endear him to the administration. He said that certain policies would bring on a “depression” and, when rebuked by the White House for using such a negative word, instead began warning that the economy faced the threat of a “banana.” He later changed that to “kumquat” after banana companies objected.

Kahn returned to Cornell, to teach and consult, in 1980. He continued to make speeches and appearances, and to opine on such regulatory issues as telecommunications. He survived a serious auto accident in 2003 and endowed the New York hospital that saved him with funds to set up a camera traffic-surveillance system so emergency-room doctors could view the accidents that injured their patients.

In a luncheon tribute to him on June 24, 2003, former U.S. Assistant Attorney General John Shenefield said:

“He taught us a lesson that competition, even imperfect competition, is better than imperfect regulation; that facts make a difference, if only we have the humane procedures to uncover them and the brains to understand them; and that intellectual rigor, decked out in wit and flair, even in Washington, can be a winning combination.”

Kahn is survived by his wife, Mary Simmons Kahn, and three children, as well as a nephew to whom the Kahns were legal guardians.

--Editors: James Greiff, David Henry

To contact the reporter on this story: Anne Swardson in Paris at aswardson@bloomberg.net.

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

New York Travelers Face Delays as Winds Slow Clear-Up

Posted: 28 Dec 2010 05:01 AM PST

add to Business Exchange

By Aaron Clark and Stuart Biggs

(Updates with wind forecast in second paragraph.)

Dec. 28 (Bloomberg) -- New York commuters and travelers face further disruptions today as winds hinder efforts to clear roads and runways following the heaviest December snows in six decades.

While the storm is moving slowly away, rising atmospheric pressure will continue to cause winds gusting to about 40 mph (64 kph) in some open areas, commercial forecaster AccuWeather Inc. said on its website. Winds may “quickly” cover roads with snow, according to a winter weather advisory from the National Weather Service late yesterday.

Airports may struggle to keep runways clear, said Pennsylvania-based AccuWeather. New York’s LaGuardia, John F. Kennedy International and Newark Liberty airports opened last night for outgoing traffic after snows forced shutdowns. Airlines have canceled more than 6,000 flights nationwide since airports began to close on Dec. 26.

NJ Transit, which carries about 170,000 commuters to and from New York City daily, said passengers should expect delays because of local road conditions. The agency expected to restore bus services at 12:01 a.m. and planned to operate reduced train services today aside from on the Atlantic City Rail Line, it said in a statement on its website. Amtrak will pare rail services between Boston, New York and Washington, it said.

30-inch Snowfall

More than a foot of snow fell across the northeast yesterday, with some areas in New Jersey getting more than 30 inches (76 centimeters), according to AccuWeather. Central Park had 20 inches of snow by 8 a.m. yesterday, the most for the month since 1948, the National Weather Service said.

New York City will have winds between 16 mph and 20 mph with gusts as high as 31 mph, according to a Weather Service forecast. Its winter weather advisory, covering a wider region, said gusts may hit 55 mph overnight before slowing to 40 mph by morning.

The storm reached New York the day after Christmas, one of the five busiest shopping days of the year. It may take retailers two weeks to recover from lost sales, said Marshal Cohen, chief industry analyst at NPD Group Inc., a research firm based in Port Washington, New York.

New York, which faces a $2.5 billion deficit in the $65 billion budget projected for next year, will be more affected by lost economic activity than clean-up costs, Mayor Michael Bloomberg said at a City Hall news conference on Dec. 26. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

The snowfall was the fifth-largest on record for the city, Sanitation Commissioner John Doherty said on Dec. 26.

Flight Cancelations

U.S. carriers canceled at least 3,389 flights yesterday, after cutting more than 3,334 on Dec. 26, as they waited for airports to open in the Northeast, spokesmen said. Airlines in some cases grounded flights ahead of the storm to keep planes from getting stuck at closed facilities.

The storm brought snow as far south as parts of Jacksonville, Florida, AccuWeather said. The storm system began in the South over the Christmas holiday. Four inches of snow fell in Chattanooga, Tennessee, while 8 inches was reported in Gatlinburg, Tennessee.

Environment Canada issued a blizzard warning yesterday for northeastern New Brunswick and warned of heavy snow or rain in the rest of the Maritime provinces. The snowfall is expected to taper off into flurries today, the agency said.

--With assistance from Henry Goldman, Will Daley, Jonathan Keehner, Robert Friedman, Jim Polson, William Glasgall and James Langford in New York City; Stacie Servetah in Trenton; Chris Burritt in Greensboro, North Carolina; Mary Schlangenstein in Dallas; Matt Walcoff in Toronto; Brian K. Sullivan in Boston; Ola Kinnander in Stockholm and Andreas Cremer in Dusseldorf. Editors: Dave McCombs, Neil Denslow, Kenneth Wong

To contact the reporters on this story: Aaron Clark in New York at aclark27@bloomberg.net; Stuart Biggs in Tokyo at sbiggs3@bloomberg.net.

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net.

Housing Starts Seen Rising to 3-Year High With Boost for Jobs

Posted: 28 Dec 2010 04:58 AM PST

add to Business Exchange

By Joshua Zumbrun and Kathleen M. Howley

Dec. 28 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke may be about to get help in his attempt to boost the economy, from an industry at rock-bottom: housing.

Job growth, even with unemployment at 9.4 percent or higher since May 2009, and an increasing U.S. population mean home construction probably will improve in 2011 from its near-record low, said Charles Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey. Mortgage rates are less than 5 percent, further supporting affordability.

A rise in homebuilding would increase jobs for construction workers and also for people in industries supplying the stoves and sinks that go into new homes. As housing shrank to the smallest share of the economy on record, 2.23 percent, job growth slowed. The economy added 39,000 jobs in November; 5,000 construction jobs were lost.

“The housing market is going to shock people,” said Lieberman, former head of monetary analysis at the Fed Bank of New York. “Once we get the ball rolling, it becomes easy to roll. The most critical thing the Fed can do, which is not easy, is to promote job growth. If we see job growth we are going to see a very strong housing market.”

Jobs will rise by an average of 200,000 a month next year, pushing the unemployment rate, 9.8 percent in November, down by almost one percentage point, he said.

At the Fed’s meeting to discuss monetary policy on Dec. 14, Bernanke and other members of the Federal Open Market Committee reviewed their $600 billion bond-purchase program. One hope for 2011 is that the Fed’s near-zero interest rates will finally be able to start reversing a half-decade slump in housing.

Construction Jobs

Residential investment’s share of the economy fell to 2.23 percent in the third quarter of 2010, the lowest since records began in 1946, from 6.3 percent in the fourth quarter of 2005, the highest in 55 years. That plunge has driven job losses in the construction industry: They fell to 5.6 million this year from 7.7 million in 2006.

Housing starts probably will reach a three-year high of 739,000 in 2011, creating enough jobs to shave half a percentage point off the unemployment Rate, said David Crowe, chief economist of the National Association of Home Builders in Washington.

“This is an ugly economic cycle,” he said in a telephone interview. “We need job creation to get people comfortable with buying a home. If they do that, we’ll create jobs that will reinforce that home buying and fuel additional job growth.” More building in 2011 will add almost 500,000 jobs, he said. The homebuilders’ association expects an unemployment rate of 9.1 percent by the end of 2011.

Momentum in 2012

A bottom in the housing market would improve the prospects of companies in the Standard and Poor’s Midcap Homebuilding Index, which has declined 68 percent since its peak in July 2005. Douglas Yearley, the chief of index-member Toll Brothers Inc., said in a Dec. 8 interview at Bloomberg’s New York headquarters that the worst is over for housing.

“The recovery is here to stay,” said Yearley, whose company, based in Horsham, Pennsylvania, is the largest U.S. luxury-home builder. “I think 2011 will be an improving year, but I think 2012 will be a big year for us.”

The number of signed contracts to purchase Toll Brothers homes rose 6.3 percent in the 12 months ended in October, compared with a year earlier, the first gain since 2005, the company said in a Dec. 2 report.

Homebuilders ETF

The average price rose 6.1 percent to $565,079, the first increase since 2006. The builder’s shares are up 8 percent this month, compared with a 6.5 percent gain for the Standard & Poor’s 500 Index.

The S&P Homebuilders Exchange-Traded Fund, which includes Los Angeles-based KB Home and Fort Worth-based D.R. Horton Inc., has risen 13.3 percent since November 18, compared with 4.8 percent for the S&P 500 ETF.

Builders in the U.S. began work on 555,000 housing units in November at an annual rate, compared with the 477,000 units in April 2009 that was the lowest in census records dating to 1959.

Meanwhile, the U.S. population has continued to grow. Data from the 2010 census, released last week in Washington, show the population climbed to 308.7 million from 281.4 million in 2000, an average increase of 2.7 million a year.

More Households

The number of U.S. households, an indicator of real estate demand, probably will rise 0.7 percent to 118.7 million in 2011, the biggest annual gain since the beginning of the mortgage crisis in 2007, according to Patrick Newport, an economist with IHS Global Insight in Lexington, Massachusetts.

The lack of new housing starts has been “holding back the recovery, but arguably that drag is fading now that the financial system is recovering,” said James O’Sullivan, chief economist at MF Global Ltd. in New York. He expects a 12 percent increase in residential investment in 2011, along with job growth of 200,000 a month by June, as much as 225,000 a month by the second half and an unemployment rate of 8.8 percent by the fourth quarter.

Housing starts will probably improve from their current lows while remaining well below their long-term trend, he said. A key to that forecast is support from low interest rates, which boosted home-buying capacity to record levels in October.

Affording Housing

Housing affordability, measured by the ease with which a family with median income can afford a median-priced home, reached a record of 184.2 in October, the highest index reading in more than two decades of data, according to the National Association of Realtors in Washington.

Mortgage rates have shaken off the initial damping effect of the Fed’s purchase program, known as QE2 for the second round of quantitative easing. The average U.S. rate for a 30-year fixed mortgage rose to 4.81 percent during the week ended Dec. 23 from an all-time low of 4.17 percent in mid-November, according to Freddie Mac, the McLean, Virginia, mortgage buyer.

Pending sales of U.S. existing houses unexpectedly jumped by a record 10 percent in October, the Realtor group said earlier this month, indicating the industry may be stabilizing. Completed transactions in November rose 5.6 percent to 4.68 million at an annual pace, NAR said last week. Purchases of new houses rose 5.5 percent to a 290,000 annual rate in November, the Commerce Department said Dec. 23, less than the 300,000 median forecast by economists in a Bloomberg survey.

‘Gradual Improvement’

Robert Niblock, chairman and chief executive officer of Lowe’s Cos., the second-largest U.S. home-improvement retailer, and Ian McCarthy, CEO of Beazer Homes USA Inc., expressed qualified optimism for the housing outlook. Niblock said in a Nov. 15 earnings teleconference that “even in a difficult environment, we are seeing gradual improvement in the fundamentals of the housing market.”

Atlanta-based Beazer, a builder of entry homes, expects national single-family housing starts to increase in 2011, “likely in low double-digit percentages,” McCarthy said in a Nov. 5 earnings call.

The diminished share of the economy for building new homes means that improvement from record lows won’t boost growth as much as in the past, said Paul Dales, U.S. economist for Capital Economics Ltd. in Toronto. He agreed that residential investment is poised to be a modest boost to gross domestic product.

“Previously if you had a 10 percent increase it boosted GDP by 0.6 percentage points,” Dales said. “Now, if it climbs 10 percent that’s a 0.2 percent boost. Housing starts are really at rock bottom. They’re not going to be a drag on growth.”

Seeking Jobs

In October, 1.4 million construction workers were unemployed with only 46,000 job openings, a ratio of 31 workers for every available job, according to Labor Department data.

The Fed has completed $155.7 billion of its intended $600 billion in purchases. The central bank is also reinvesting proceeds from its holdings of maturing housing debt.

Its decision to begin a second round of asset purchases sparked a political backlash in Washington, with Republican lawmakers criticizing the move as likely to be inflationary. Indiana Representative Mike Pence and Tennessee Senator Bob Corker have proposed eliminating the Fed’s dual mandate for full employment and price stability, and have the central bank focus only on stable prices.

     Bernanke appeared on CBS Television’s “60 Minutes” on Dec. 5 to address critics, saying he was “one hundred percent” confident the central bank could control inflation.

Can’t Get Weaker

Asked about his outlook for the economy, Bernanke said a return to recession wasn’t likely, adding “that’s because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can’t get much weaker.”

Fed policy makers weren’t optimistic about the housing outlook at their Nov. 2-3 meeting, citing the elevated supply due to foreclosures. Some “saw disputes over mortgage and foreclosure documents as likely to delay the eventual recovery in housing markets,” according to the minutes of that meeting.

“Residential investment has failed to make a positive contribution to growth in this recovery,” said Richmond Fed President Jeffrey Lacker in a Dec. 6 speech in Charlotte, North Carolina.

“This contrasts with the two other severe recessions of the past 60 years, in which residential investment increased an average of 40 percent in the first year of the recovery,” he said. “Given the significant legacy of overbuilding, unique to this recession, I do not expect housing to contribute significantly to growth over the next two years.”

An elevated rate of foreclosure may not derail a rebound in housing, said Lieberman of Advisors Capital. The firm managed $55.7 million of U.S. stocks as of Sept. 30, including real estate investment trusts Sun Communities Inc. and Colonial Properties Trust, according to Securities and Exchange Commission filings.

Foreclosures are “half the story,” said Lieberman, because people who lose their homes must find residences elsewhere. “They neither disappear nor move to Mars. They take another rental off the market.”

--With assistance from Steve Matthews in Atlanta and Anthony Feld in New York. Editors: Anne Swardson, Christopher Wellisz

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

U.S. Retailers’ Holiday Sales Jump 5.5% on Apparel

Posted: 28 Dec 2010 04:55 AM PST

add to Business Exchange

By Cotten Timberlake

(Adds ICSC figures in sixth paragraph.)

Dec. 28 (Bloomberg) -- U.S. retailers’ 2010 holiday sales jumped 5.5 percent for the best performance in five years as shoppers snapped up clothing and jewelry at Macy’s Inc., Tiffany & Co. and other stores.

Retail sales, excluding autos, rose to $584 billion from Nov. 5 through Dec. 24, said MasterCard Advisors’ SpendingPulse, which measures retail sales by all payment forms. That compared with a 4.1 percent gain a year earlier. The numbers include sales made over the Web.

Consumers bought coats at chains such as Bloomingdale’s as their confidence improved alongside the U.S. job market. Their spending, which accounts for about 70 percent of the American economy, is a positive sign heading into next year, Michael McNamara, a vice president at Purchase, New York-based SpendingPulse, said yesterday.

“Increasing confidence has freed up more money from savings,” McNamara said. “We pretty much put a bow on what has been a positive season across a number of retail areas. We are seeing this momentum building and being sustained.”

A Northeast storm that dumped more than a foot of snow in areas from North Carolina to Massachusetts on Dec. 26 and Dec. 27 probably did little more than hamper store visits and won’t dent the overall season’s sales, McNamara predicted.

Last-minute Christmas shoppers pushed sales at stores open at least a year up 4.8 percent in the week ended Dec. 25, the strongest year-over-year gain since April, the International Council of Shopping Centers said today in a statement. The numbers are based on the ICSC-Goldman Sachs Weekly Chain Store Sales Index.

Retail Forecasts

The New York-based trade group, which tracks more than 30 chains, said sales for the November-December period will rise 4 percent or more. That compares with a previous forecast of 3.5 percent to 4 percent.

Apparel sales grew the fastest in the 50 days before Christmas, with an 11 percent gain, more than 10 times the pace of last year. Sales of jewelry accelerated 7.2 percent, more than twice as fast as in 2009, McNamara said.

Luxury sales rose 6.7 percent, compared with 0.9 percent a year ago. Consumer electronics sales increased 1.2 percent after falling 4.6 percent a year earlier. Furniture climbed 3.8 percent after a 2.2 percent drop last year.

Tiffany, the world’s second-largest luxury jewelry retailer, forecast a 10 percent increase in sales in the Americas this year after an 11 percent decline in the previous 12 months. Macy’s, the second-largest U.S. department store chain, on Dec. 2 boosted its fourth-quarter forecast for sales at stores open at least a year to as much as 4.5 percent from a previous maximum of 4 percent.

Buying increased after consumer confidence climbed in December to the highest level in six months. Initial U.S. jobless claims fell in the week ended Dec. 18 and the number of people on unemployment benefit rolls dropped to a two-year low, adding to evidence the labor market is improving.

--Editors: Julie Alnwick, Robin Ajello

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editor responsible for this story: Robin Ajello in New York at rajello@bloomberg.net.

Hedge Funds Crash, Apple Becomes Uncool in 2011: Matthew Lynn

Posted: 28 Dec 2010 04:48 AM PST

add to Business Exchange

By Matthew Lynn

Dec. 28 (Bloomberg) -- There is an old joke that economists only make predictions so that the weather guys have someone to laugh at. In much the same spirit, once a year this column also makes some predictions -- but only so the economists have something to giggle over.

With that caveat in mind, here are 10 things that might (or as likely not) happen in 2011:

No. 1. The bull market returns. Actually we’ve already been in a bull market for more than a year. Just take a look at the figures. But in the early stages of a rising equity cycle, no one says it’s a bull market. First they call it a dead-cat bounce. Then they call it a bear-market rally. By the end of 2011, the penny will have dropped. We’ll be officially back in bull territory. By the close of the year, everyone will have started piling back into equities again.

No. 2. The alternative-investment industry crashes. The main driver of hedge funds and private-equity funds was the search for yield. With stock markets in the doldrums, interest rates cut to almost nothing, and bond yields at record lows, investors were desperate for any kind of meaningful return on their money. They were willing to listen to slick hedge-fund managers who promised to make 30 percent a year on high velocity yak-hide arbitrage. Next year, interest rates will be rising, and so will bond yield and equity returns. Why bother paying a fortune to hedge- and private-equity fund managers, few of whom deliver on their promises, when you can get pretty decent returns from mainstream investments?

No. 3. Venture capital returns. The start-up industry took a terrible beating from the dot-com crash. But as a rough rule, a decade is long enough for the financial markets to forget everything. There are fantastic opportunities out there. Smartphone apps. Social networking. Alternative energy. Africa. The markets always have space for some blue-sky optimists -- and 2011 will be the year that venture capitalists fill that slot again.

No. 4. France gets smoked out in the euro crisis. Somehow France has managed to get itself grouped along with Germany as one of the strong euro nations. But it runs a bigger budget deficit than Italy. It has chronic unemployment and little growth. Crucially, it has the greatest resistance to reform. The merest suggestion of extending working hours, or retirement ages, or reforming public services, prompts massive demonstrations. It can’t last. Next year will be when France wallows with Ireland, Greece, Portugal and Spain.

No. 5. The Apple Inc. backlash starts. We used to think International Business Machines Corp. was sort of sinister. Then it was Microsoft Corp. But which business today has far too much power, is run by control freaks and puts profits before principles? That’s right. The world’s third-biggest company, measured by market value, is about to discover that the line between cool upstart and ugly monopolist is a very thin one.

No. 6. The German model is back in fashion. The words German and fashion go together about as well as Greece and solvent. But in a world trying to figure out how you get out of a debt crisis, the Rhineland model of capitalism is suddenly going to seem very appealing. Lots of mid-size companies, with huge technical expertise, low debt and skilled workforces exporting niche products to the whole world -- that sounds like a pretty good formula for success in the 2010s. By the end of 2011, expect every chief executive on the planet to start talking earnestly about how they are looking to a German management model as their guide.

No. 7. Lloyds Banking Group Plc gets broken up. The hastily assembled merger between two of Britain’s largest banks, Lloyds and HBOS Plc, increasingly looks like one of the more catastrophic decisions made during the height of the credit crunch. It is too powerful. This will be the year it gets split apart.

No. 8. Iceland teaches the world a lesson. Two years ago, every government in the world bought into the idea that you had to bail out your banks. If they collapsed, you would go straight back to the Stone Age. One country defied the consensus. Iceland couldn’t afford to keep its banks going. What happened? There’s been pain, sure, but from next year on the economy should be growing again, inflation is under control and interest rates are coming down. If Iceland keeps recovering, only one conclusion is possible: You don’t need to bail out banks after all.

No. 9. Russia puts the R back in BRIC. We’ve heard a lot about the rising economic power of Brazil, India and China. A lot less has been heard about the R in the BRICs - - Russia. It tends to get dismissed as a raw materials supplier with an authoritarian government. But it’s trying to recreate itself as a technology powerhouse -- look at the plans to create a new Silicon Valley in the Moscow suburb of Skolkovo. Crazy? Remember, this was the first country to put a man into space. Russia has always been scientifically advanced. If it can bring its brains and businessmen together, it could yet outshine the B, I and C in the acronym.

No. 10. A backlash against Christmas e-cards. Do I really need festive greetings from a small bank in Latvia I’ve never spoken to? Is that Austrian management consulting firm sincere in wishing me the best for the holiday season? I doubt it. Listen up guys. It’s not thoughtful. It’s not touching. It’s spam. Frankly, I’d rather get another e-mail from that friendly Ukrainian company that supplies Viagra without a prescription. By Christmas 2011, sending out e-cards will be socially unacceptable -- and not too soon.

(Matthew Lynn is a Bloomberg News columnist and the author of “Bust,” a book on the Greek debt crisis. The opinions expressed are his own.)

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

--Editors: James Greiff, Charles W. Stevens

To contact the writer of this column: Matthew Lynn in London at matthewlynn@bloomberg.net

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