Saturday, May 05, 2007

Financial Times Editorial Comment: The case for an independent media

Financial Times Editorial Comment: The case for an independent media
Copyright The Financial Times Limited 2007
Published: May 4 2007 22:46 | Last updated: May 4 2007 22:46

“You are in the field to defend the public interest, the financial truth for investors and the funds that should support the widow and the orphan,” said Clarence Barron, proprietor of The Wall Street Journal from 1902 until 1928. The founders of many media companies left trusts and special voting powers to protect such journalism, but with profits hurt by a shift to digital media, those structures are under siege.

Reuters, a financial information provider and the world’s largest news agency, has received an approach. Rupert Murdoch’s News Corporation has bid for Dow Jones, owner of the Journal. Rebel investors, meanwhile, are demanding change at the New York Times Company.

All three targets are protected: Reuters by a trust that can veto shareholdings above 15 per cent; Dow Jones and the NYT by dual-voting structures that guarantee family control. But these defences are not as potent as they once were.

The challenge, in one form or another, comes from the internet. Demand for media content – words, music, video and data – is large and growing, but the way consumers access it is changing. Established distribution channels, such as newspapers, including the Financial Times, must therefore invest to build up their online presence. At the same time, profits from their traditional business and stock market valuations are generally in decline, which makes companies such as Dow Jones vulnerable to bids as never before.

The competitive pressures are visible across the media industry. EMI, the music company, has received multiple bids. Even in the youthful internet media industry there is pressure for consolidation, with talk that Microsoft will buy Yahoo. But it is the news media, with its central role in political debate, where the public interest is strongest.

It is not true that every takeover is bad and companies will always have to produce an economic return. Founding families are not necessarily benevolent and disinterested; new proprietors will not necessarily set out to debauch standards of journalism. Any new owner of Reuters ought to preserve its principles of integrity, independence and freedom from bias. That is the job of the Reuters Trust.

The ownership arrangements at the New York Times have served the journalism of the newspaper well. The Wall Street Journal’s reputation has also been built on a willingness to invest in robust reporting. These are qualities worth defending. A vigorous and independent press is an essential part of the fabric of open societies.

The challenge is to reconcile this public good with the pressures of the marketplace and the legitimate interests of investors. There is no single formula. But it is in everyone’s interest that changes in ownership are accompanied by serious commitments to quality.

Casablanca breeds new wave of bombers

Casablanca breeds new wave of bombers
Copyright The Financial Times Limited 2007
Published: May 4 2007 19:43 | Last updated: May 4 2007 19:43

From the moment he and a friend walked into a Casablanca cybercafé shortly after 9pm, Abdelfattah Raydi’s behaviour raised suspicion.

It was a warm evening yet both men wore jackets. Raydi complained about the computer he was allocated, then switched to another and entered a website related to the Iraq war. When the café owner blocked the site, he lost his temper and bashed the keyboard.

He then tried to log into MSN Messenger, but failed, angering him further. After the owner threatened to call the police, Raydi uttered a chilling threat: “If you do not let me go out, you will see something you have never seen in your life.” He then blew himself up as the owner telephoned the authorities.

The March 11 explosion triggered a chain of events that culminated in police raids and five other men blowing themselves up in Casablanca, rekindling memories of May 2003 suicide attacks that killed dozens.

Those bombers had originated from Sidi Moumen, a neighbourhood of slums in Morocco’s commercial capital where the tin-roofed houses are packed so tightly they create a warren of alleys barely wide enough for a wheelbarrow to pass. Raydi, who was in his 20s, and three other men who blew themselves up on April 10 also grew up in this impoverished setting.

Poverty and high unemployment are often viewed as fertile ground for radical cells seeking new recruits, and Raydi’s background provides a glimpse into the lives of the men who fastened suicide belts around themselves.

He was born into a poor family with six brothers, according to two friends. His father used to drink, sometimes beat his sons and divorced their mother several years ago. The friends say Raydi was “normal” – an unemployed youth who did not finish school; a young man who used to drink and occasionally smoke hashish.

His thirst for those vices grew after his parents’ divorce, but he changed his ways after warnings from neighbours to avoid the path taken by his father. He turned to religion, as had his mother after her divorce.

The 2003 bombings then rocked Morocco. In response, police rounded up hundreds – some say thousands – of men, including Raydi, who was jailed for five years for his association with the attackers. He had prayed at a mosque used by some of those connected to the 2003 attacks, his friends say.

“The first time he was arrested, he was innocent,” one friend says. He was released early and was a good prisoner, an interior ministry official says. When he returned to Sidi Moumen, he had grown a beard and wore a jalabiya, his friends say. He married and never spoke about his experiences in prison.

About a year ago he disappeared, surfacing with the March 11 explosion that shocked friends and neighbours.

Few speak openly about the events. But some young men are happy to describe the frustrations of slum life. “They blow themselves up and die quickly. We are dying slowly,” says Mourad, one of a group of jobless men smoking hashish.

Some of those arrested in connection with the explosions used to tell them to pray and change their ways, they say, but they decided to stick to their hashish. The stigma of living in the neighbourhood following the 2003 attacks has made it even harder to find jobs, they add.

But officials and analysts say poverty alone does not account for the men’s transformation into suicide bombers. Mohammed Darif, an expert in Islamist groups, says their radical ideology is spread by regional groups, aided by international factors such as the war in Iraq.

Poor areas such as Sidi Moumen tend to be more devout, and security there has been less tight, allowing people to do what they like while attracting less attention, he adds. “What happens is you have a kind of surveillance cell. They are in the neighbourhood and see who could be a candidate,” Mr Darif says. “When they find someone, the surveillance cell’s work ends and another cell . . . starts to influence his ideology.”

As if to prove the point that slums are not the only recruiting grounds, two brothers from a central Casablanca neighbourhood blew themselves up outside the US consulate there on April 14.

Both men, Mohammed and Omar Maha, had jobs and lived with their father, stepmother and sister in an apartment above a ladies’ hairdressing saloon. The elder son, Mohammed, was described by a neighbour as a private, devout person. Omar was a friendly young man who enjoyed football, a fan of Juventus and Rajaa, a Moroccan team.

Abid Maha, their father, puffs on a cigarette while trying to fathom what happened. When he heard two men had blown themselves up he says he turned to a café waiter and said: “God have no mercy on those who did that.”

Later he realised it was his sons. Neither had many friends or stayed out late, he says. “Anyone can be a victim of what happened, even you. It’s a kind of trap that can catch you.”

Republican frontrunners fail to thrill

Republican frontrunners fail to thrill
By Edward Luce in Washington
Copyright The Financial Times Limited 2007
Published: May 4 2007 22:32 | Last updated: May 4 2007 22:32

If Republicans had been hoping their first debate of the 2008 presidential election would restore enthusiasm to a demoralised party, they were probably disappointed. Compared with the diverse range of Democratic candidates who held their first debate in South Carolina last week, the Republicans presented a uniform picture – 10 white men in dark suits jostling for a magic moment that never arrived.

It was too soon on Friday for pollsters to assess whether any of the candidates had gained traction from Thursday night’s 90-minute debate at the Ronald Reagan presidential library in California. But among the three frontrunners, Rudolph Giuliani, John McCain and Mitt Romney, only Mr Romney, who is in third place, sustained a fluent and confident tone.

Most tellingly, all three avoided praising George W. Bush, whose approval ratings are hovering close to a low. In contrast, each tried to associate themself with Ronald Reagan, whose widow, Nancy, sat in the audience. “What we can borrow from Reagan is that great sense of optimism that he had,” said Mr Giuliani.

Mr Romney said: “Gosh, I love America . . . It’s that optimism we thank Ronald Reagan for. Thank you, Mrs Reagan, for opening up this place in memory for us.” Mr McCain said: “Ronald Reagan used to say we spend money like a drunken sailor. I never knew a sailor, drunk or sober, with the imagination of Congress.”

Yet in spite of efforts to capture some of Reagan’s “morning in America” optimism – Reagan was cited 20 times, all favourably, compared with five mixed references to Mr Bush – the candidates’ sombre attire gave off more of an impression of mourning.

Opinion polls suggest registered Republicans, particularly the third who describe themselves as evangelical Christians, are prepared to overlook a candidate’s position on issues such as abortion if they believe he can prevent a Democrat from capturing the White House in 2008. Yet with the exception of Mr Giuliani, who stuck to a defence of women’s “right to choose”, candidates tried to outbid each other’s social conservative credentials. In a show of hands, three out of the 10 said they did not believe in the evolutionary account of human origins.

And eight out of 10 said they would applaud the Supreme Court if it overturned the 1973 ruling that legalised abortion. Sam Brownback, the Kansas senator who has so far had little luck in achieving the status of social conservative frontrunner, said: “I think it would be a glorious day of human liberty and freedom.”

Tom Tancredo, the firebrand anti-immigrant congressman from Colorado, said: “After the 40m dead we have aborted in this country, I would say that would be the greatest day in this country’s history.” Only Mr Giuliani, who is still leading the Republican polls, said: “It would be OK . . . I supported it [abortion] in New York. But in other places people could come to a different decision.”

Nor did they strike out new positions on the Iraq war or direct engagement of Iran over its uranium programme. Most took care to avoid endorsing Mr Bush’s prosecution of both but none questioned the strategy.

“Mahmoud Ahmadi-Nejad [Iran’s president] is clearly irrational,” said Mr Giuliani. “He has to look at an American president and he has to see Ronald Reagan. Remember they [the Iranians in 1980] looked into his eyes and released the hostages.”

Mr McCain, whose support for Mr Bush’s 30,000-troop “surge” to Iraq has cost him some credibility with the wider public, said: “I think it’s on the right track. The war was terribly mismanaged and we now have to fix a lot of those mistakes.”

Only Mr Romney was relaxed enough to joke. His faith has been a source of controversy. The former governor of Massachusetts, who would be the first Mormon president, was asked what he would say to Catholic bishops who denied communion to those with whom they disagreed. “I don’t say anything to Roman Catholic bishops,” he said. “They can do what the heck they want.”

On Wall St: The real value of a vote on Wall St

On Wall St: The real value of a vote on Wall St
By Thorold Barker
Copyright The Financial Times Limited 2007
Published: May 4 2007 17:13 | Last updated: May 4 2007 17:13

Every four years, nearly half of Americans do not bother to participate in presidential elections. Investors are often just as lazy. But, periodically, Wall Street gives them a stark reminder of just how valuable a vote can be.

This week provided two perfect examples. On Tuesday, Rupert Murdoch launched an audacious attempt to buy Dow Jones and its flagship Wall Street Journal title.

The juicy 65 per cent premium on offer would usually have meant investors trampling down his door to tender their shares. Instead, a protracted battle is likely. Success will depend on winning the support of the Bancroft family, which controls the company through super-voting shares but has limited influence in the day-to-day running of the business. If Mr Murdoch cannot charm or bully them into selling, ordinary shareholders will probably see their stakes plummet in value.

Then, on Wednesday, the Dolan family finally got a board recommendation to take Cablevision private after two failed attempts. The trouble is, the price is still too low. Time Warner Cable would almost certainly snap it up for more than the Dolans are willing to pay. But the family, again with voting control through a dual structure, has denied other shareholders full value by refusing to sell the company to anybody else.

It is not all doom and gloom. Such shareholder structures can sometimes work in favour of the disenfranchised. For example, Mr Murdoch would not have offered anything like $5bn as an opening bid for Dow Jones if he had not needed to dislodge the Bancrofts. If a deal does get done, the entrenched family position will have made all shareholders a lot richer.

Meanwhile, it is feasible to argue that super-voting shares can give public companies some of the advantages enjoyed by privately-owned businesses. The shares allow owners to take a long view, without being fixated on quarterly earnings. Predators cannot swoop in to take advantage of short-term share price weakness.

Mr Murdoch, who controls News Corporation through a dual structure is, ironically, a case in point. He has done a number of deals, such as buying MySpace and launching the Fox network, that investors disliked initially and came to love over time. With Dow Jones, it is possible he could make even today’s high price today look like a shrewd investment in the future.

But those are exceptions. The basic rule should be one share one vote. Too often investors have held their noses and accepted dual structures as the only way to get exposure to specific companies. The thinking, presumably, is that by the time the structure comes back to bite them, they will be long gone. But bite somebody it almost certainly will.

It could simply be a question of time. The genes of a brilliant entrepreneur who investors were willing to trust with absolute power may not be passed to the next generation. That could leave investors powerless to force change in the face of an incompetent owner with voting control.

Alternatively, a big transaction materialises. But ordinary shareholders are either incapable of forcing a sale (as with Dow Jones), or are not able to get the full price (as with Cablevision).

In spite of many cautionary tales, starry-eyed investors still waved through Google’s dual structure three years ago in a vote of confidence in the abilities of founders Larry Page and Sergey Brin. The structure is irrelevant now. Google’s conquest of the internet world continues apace. But one day it will matter. Google will become an “ordinary” company and, no doubt, in the future, it will do something to make investors feel abused.

Perhaps the solution is for those who believe their companies need the protection of a dual structure (such as newspaper owners wanting to protect editorial integrity) to keep them in private ownership. That would hardly be a big handicap in today’s capital-flooded world.

And for those who want the dual-structure to ensure family control and avoid short-termism, how about signing up to an finite timetable? The super-voting shares remain in place for the tenure of the founder whose talent persuaded investors to accept it in the first place. But future generations have to re-earn the privilege, through a full shareholder vote.

Labour set back in Scottish voting/British politics is competitive again

Labour set back in Scottish voting
By Alan Cowell
Copyright by The International Herald Tribune
Published: May 4, 2007

LONDON: In a stunning reverse, the separatist Scottish National Party emerged narrowly Friday as the biggest political grouping in Scotland, ending 50 years of dominance there by the Labour Party and redrawing Britain's political landscape.

The result emerged from a series of regional votes across Britain as Prime Minister Tony Blair began a long and choreographed goodbye to British politics. The outcome represented a sharp farewell rebuke to Blair and a troubled, embarrassing debut for Gordon Brown, a Scot who is expected to become Britain's next prime minister, challenged by opposition in his own home territory as he seeks to stamp his authority and spread popularity farther south.

Although he was not a candidate, Brown, who is now chancellor of the Exchequer, had traveled to Scotland to campaign vigorously against the Scottish National Party, staking his prestige on a Labour victory.

But as the results emerged after a chaotic night in which tens of thousands of Scottish ballots were declared invalid, Alex Salmond, who leads the Scottish National Party, declared: "Never again will we say Labour has a divine right to rule Scotland. They have no moral authority left to govern."

The vote, Salmond said, shows a "wind of change" in Scottish politics.

In the voting for the 129 seats in the Scottish Parliament, the Scottish National Party surged to increase its number of seats to 47 from 25 while Labour fell back to 46 from 50, according to results tabulated by the BBC with all the votes counted.

The outcome meant, however, that no single party could dominate the Scottish Parliament without going into a coalition. It was not clear on Friday how that coalition might be formed.

The vote was severely disrupted by glitches with counting machines and by as many as 100,000 spoiled ballots, apparently resulting from voter confusion with complex voting forms and technical problems with newly installed computers. Salmond said the procedural problems had "profoundly unsettled" Scotland and demanded an inquiry.

Labour also fell back in Wales as its share among the 60 seats in the Welsh Assembly slid to 26 from 29, while the Welsh nationalist party, Plaid Cymru, increased its share to 15 from 12, according to final results. That outcome also seemed likely to lead to a coalition government in Wales.

In a further setback for Labour, the Conservatives expanded their position significantly in elections for local councils, claiming support outside their traditional heartland in the prosperous south of the country. With votes counted from most of 312 local councils, Conservatives had won about 5,000 of the 10,500 seats up for grabs. Both Labour and the smaller opposition Liberal Democrats lost heavily in the English local council voting.

"We're the one national party speaking up for all of Britain," the Conservative leader, David Cameron, declared. "I think we can really build from this point, really go forward."

Blair had sought to play down the impact of the vote on the prospects of Labour's retaining national power.

"Everyone said we were going to get hammered, it was going to be a rout," Blair told supporters at his party headquarters in London before the outcome in Scotland was publicly announced. "And it's not turned out like that."

He added, "You always take a hit in the midterm, but these results provide a perfectly good springboard to go on and win the next general election."

The voting did not affect the composition of the Parliament in London, but it was the biggest sampling of political sentiment since the last general election in 2005. The next general election is expected in 2009 or 2010 at the latest, likely pitting the Conservatives under Cameron against Labour led by Brown.

The most challenging for Labour is the Scottish vote. The Scottish National Party has promised its followers a referendum on whether Scotland should secede from Britain and declare independence, ending 300 years of union since May 1, 1707.

While only a quarter of Scotland's five million people are said by political analysts to favor independence, the very prospect of a referendum will set the British and Scottish administrations against one another from the beginning of Brown's tenure. During the campaign, Brown, who is deeply opposed to Scottish independence, said he could not cooperate with the Scottish National Party.

Before the election, there was much speculation that a triumphant Scottish National Party would need to go into coalition with the Liberal Democrats, who are deeply opposed to a referendum on independence.

British politics is competitive again
Copyright The Financial Times Limited 2007
Published: May 4 2007 21:47 | Last updated: May 4 2007 21:47

A meltdown it was not. Widespread salivation at the prospect of humiliation in local and regional elections for Tony Blair and New Labour turns out to have been something of a metropolitan media phenomenon.

The picture painted by the voters, still not quite complete, is more complex and a lot more interesting.

It shows setbacks for Labour, no decisive breakthrough for the Conservative party, unexpected retreat for the Liberal Democrats and, north of the border, a big advance for the Scottish National party but no mandate for independence. In short, after a decade of Labour dominance, British politics is competitive again. About time.

The principal messages seem to be: Labour can count on some residual good will, maybe because voters know Mr Blair, deeply unpopular because of Iraq, is finally going; there is no national desperation to elect Tories, but they are reinvigorated by David Cameron’s breezy leadership; and the Liberal Democrats under Sir Menzies Campbell have stodgily missed the chance to break through on their own. There is a lot to ponder here for strategists and spinners in all parties.

Ministers and Labour leaders have seized on the fact the party’s share of the vote is slightly better than it managed two years ago – after which it went on to win a third general election. Conversely, while the Tories broke through the psychological barrier of 40 per cent of the popular vote, that is still short of the 47 per cent won by Labour two years before Mr Blair won the 1997 general election.

The Tories did well but should have done better against a government midway through its third term. They have made modest gains in the north but not in cities such as Liverpool and Manchester, and are marooned on the margins of Scottish and Welsh politics.

But Labour is losing its foothold in the south – ominously for the Scotsman Gordon Brown’s ability to win the next general election. This cumulative loss of local councils not only signals Labour’s retreat to its heartlands but the erosion of the activist base it must maintain to win power in Westminster.

The Lib Dems may point, in contrast, to their more evenly spread national presence and largely intact local cadres. But their real hope is that these results point to a hung parliament at the next election, handing them the balance of power.

In Scotland, the high drama of the future of the Union sank to the low farce of electoral cock-up, with tens of thousands of spoiled ballots. The SNP has emerged from this mess as the leading party, ending what its leader Alex Salmond scornfully called Labour’s “divine right to rule”. The nationalist victory is democratically healthy. But it is still not certain it can muster a big enough alliance to displace the Labour-Liberal Democrat coalition at Holyrood – and two-thirds of voters still back the Union.

Friday, May 04, 2007

Obama gets Secret Service protection

Obama gets Secret Service protection
By Christi Parsons and Mike Dorning
Copyright © 2007, Chicago Tribune
Published May 3, 2007, 7:35 PM CDT

WASHINGTON -- Although Sen. Barack Obama has been drawing enormous crowds and intense attention during his presidential campaign, friends say he has resisted the idea of a U.S. Secret Service detail for fear it would limit what has been a great part of his appeal, namely his ability to make a close connection with voters.

But those reservations gave way to security concerns on Thursday, when the Secret Service assigned a team to the Illinois Democrat — the earliest point in a campaign cycle at which the agency has ever taken responsibility for a candidate not already under its protection as an office holder.

Several congressional sources familiar with the situation say there was no specific event or threat that triggered the decision, but that a bipartisan panel of congressional leaders reviewed threats to Obama on Web sites and in letters before recommending special protection.

Obama declined to talk about the federal agents who accompanied him and who were posted outside his Kenwood neighborhood home, a development that came after friends and colleagues expressed worry about his safety.

Sen. Dick Durbin (D-Ill.), the colleague whose concerns set the Secret Service detail in motion, said he thinks the protection is a good idea and that Obama will "learn how to live with the limits" imposed by the presence of agents.

"I love this guy, and I never want to see anything happen to him," Durbin said of Obama. "He's making a great sacrifice for his country. Doing our best to guarantee his safety is the least we can do."

Obama isn't the first African American candidate to face heightened security concerns while considering a campaign or running for office. After being heavily courted to run for the White House in 1996, Colin Powell cited his family's fears of an assassination attempt when he announced he would not run.

Rev. Jesse Jackson said he received a steady stream of death threats when he ran for president in 1984, most of which were expressed in racist terms, and that the threats picked up as his campaign gained momentum, particularly in his second run in 1988. He said he had Secret Service protection from the day he announced his candidacy.

"There is gender bigotry, racial bigotry and religious bigotry," Jackson said in an interview Thursday. "Those forces are very real and they always have a fanatical bent to them . . . It's test time for your faith. You must determine to go forward by your faith and not be paralyzed by your fears."

It's not unheard of members of Congress who are running for president to get protection. Sen. Hillary Clinton (D-N.Y.) has a detail because of her status as a former first lady. Also, two government security officers accompanied Sen. Joe Lieberman (D-Conn.) wherever he went on the campaign trail in 2003 and 2004.

But for weeks, Obama has shied away from the additional security, instead employing a private set of guards. But two weeks ago, Durbin went to the Senate's top Democrat to point out the danger he thought Obama might be in.

Durbin said he told Senate Majority Leader Harry Reid (D-Nev.) about the size of the crowds he'd seen on the campaign trail with Obama, and also that he showed Reid some unspecified material that added to his concern. Durbin declined to characterize the material he showed Reid or to say where he got it.

"I wasn't forcing this on Harry Reid," Durbin said. "I gave him what I thought to be the facts of the matter. I asked him, based on his experience, to make a judgment if it should be brought up for consideration."

Reid brought the concerns to the attention of the Department of Homeland Security, the U.S. Secret Service and a special congressional committee that reviews the need for special protection.

A congressional aide said that the request for Obama's Secret Service protection was unanimously backed by Republican and Democratic congressional leaders. The aide said Reid made a vigorous argument for the detail when the advisory group met.

"Reid was very adamant," said the aide.

On Thursday, at least four Secret Service agents stood out front of Obama's home, with one of their SUVs blocking entrance to the driveway. Obama attended a private fundraiser in New York.

Tribune staff reporter John McCormick contributed to this report from Chicago.

GM profits tumble 90% after subprime mortgage arm losses

GM profits tumble 90% after subprime mortgage arm losses
By Bernard Simon in Toronto
Copyright The Financial Times Limited 2007
Published: May 4 2007 03:00 | Last updated: May 4 2007 03:00

General Motors' first-quarter earnings shrank almost 90 per cent, with improved automotive operating profits more than offset by heavy subprime mortgage losses at GMAC, the financial services group in which the carmaker has a 49 per cent stake.

Rick Wagoner, GM chief executive, described the quarter as one of "continued progress" in the group's turnround plan. However, the earnings fell well short of analysts' expectations and the shares fell 4.3 per cent to $31.04 in lunchtime trading.

Analysts were especially disappointed with the North American results. Some said they underlined the urgency of further labour concessions in forthcoming contract talks with the US United Auto Workers union.

Referring to North America, Fritz Henderson, chief financial officer, acknowledged that "as we look at it, the market environment is pretty tough."

The latest results highlight GM's growing dependence on fast-growing emerging markets. The Asia-Pacific region, along with the Latin America, Africa and Middle East division, accounted for almost a third of vehicle output over the past three months, up from 28 per cent a year earlier. The trend is set to continue this quarter.

The Latin America, Africa and Middle East division was by far the biggest single contributor to GM's earnings, reporting a record first-quarter profit of $201m (€148m). Global net income tumbled from $602m, or $1.06 a share, to $62m, or 11 cents.

Last year's results included a one-time gain of $395m from the sale of part of GM's stake in Suzuki Motors of Japan. Excluding special items, earnings dropped from $350m to $94m.

GMAC reported a first-quarter loss of $305m on Wednesday, compared with earnings of $495m a year earlier. ResCap, its home-lending unit, lost $901m.

The net loss from GM's core North American automotive arm narrowed from $292m to $46m, owing to savings in healthcare and manufacturing costs, and a more profitable vehicle mix.

Brian Johnson, analyst at Lehman Brothers, said new vehicles' contribution fell short of expectations. "Without substantial labour concessions, meaningful improvements in profitability are unlikely."

Subprime losses wipe out GM profits
By Bernard Simon in Toronto
Copyright The Financial Times Limited 2007
Published: May 3 2007 13:34 | Last updated: May 3 2007 13:34

General Motors’ first-quarter earnings withered by almost 90 per cent, with improved results from automotive operations more than offset by heavy subprime mortgage losses at GMAC, the financial services group in which the carmaker has a 49 per cent stake.

Rick Wagoner, chief executive, described the quarter as one of “continued progress” in GM’s core automotive business. He cited “progress in our turnaround initiatives” in North America and Europe, and a strong performance in emerging markets such as China, Russia and South America.

The Detroit-based carmaker, which lost its 76 year-old crown as the world’s biggest vehicle manufacturer to Toyota in the first quarter, reported net income of $62m, or 11 cents a share, down from $602m, or $1.06 a share, a year earlier.

Last year’s results included a one-time gain of $395m from the sale of part of GM’s stake in Suzuki Motors of Japan.

Excluding special items, earnings dropped to $94m, or 17 cents a share, from $350m, or 62 cents. Analysts surveyed by Thomson Financial had projected per-share earnings of 87 cents.

Richard Beales examines subprime lending fallout at General Motors
Revenues dropped to $43.9bn from $52.4bn, mostly due to the exclusion of GMAC. GM sold a controlling stake in the financial services company last December to a group led by Cerberus Capital Management. First-quarter automotive revenues were slightly lower at $42.9bn.

GMAC reported a first-quarter loss of $305m on Wednesday, compared with earnings of $495m a year earlier. Its home-lending unit, ResCap, incurred a $901m loss.

The net loss from GM’s ailing north American operations narrowed to $46m from $292m, due to savings in healthcare and manufacturing costs, and a more profitable vehicle mix.

The company ascribed the improved mix to new vehicles, such as the Chevrolet Silverado pick-up truck and GMC Acadia sport-utility vehicle, and to lower sales of discounted vehicles to car-rental companies. First-quarter production in north America fell by 192,000 vehicles.

Net profit at GM Europe fell to $5m from $59m, in spite of record sales volumes and the highest market share in a decade. Sales in Russia more than doubled.

The deterioration in Europe was due to unfavourable product mix, higher material costs and lower gains on commodity hedging.

Net income in the Asia-Pacific region fell to $116m from $492m. Excluding the Suzuki sale, earnings grew to $150m from $97m. Sales volumes rose by about 20 per cent, led by China, India and South Korea, and revenues climbed by 35 per cent.

Earnings from Latin America, Africa and the Middle East set a first-quarter record.

Cash flow from automotive operations stood at $300m for the quarter, a $1.5bn improvement. Liquid reserves totaled $24.7bn on March 31, up from $21.6bn a year earlier, but down from $26.4bn on December 31 2006.

Microsoft and Yahoo in talks over deal/Google, News Corp touted as potent/Computing the future for Yahoo and Microsoft/Microsoft takeover of Yahoo

Microsoft and Yahoo in talks over deal
By Richard Waters in San Francisco and James Politi in New York
Copyright The Financial Times Limited 2007
Published: May 4 2007 14:11 | Last updated: May 4 2007 23:27

Google’s runaway success in the search-engine business threatened to spark an upheaval in the online media world, as it emerged that Microsoft has made a tentative takeover approach to internet giant Yahoo.

People familiar with the situation said that the talks between the two – the latest in a series of on-again, off-again discussions in the past year – were preliminary and could lead to an alliance or other forms of cooperation. By late on Friday, one person familiar with the talks said an outright acquisition had become “unlikely”.

The talks have been prompted by an acceleration in the shift of audience and advertisers online, and Microsoft’s failure to build effective search engine and online advertising arms of its own, say analysts and industry executives.

News of the bid approach capped a week of upheaval in the media industry, as both new and old media companies tried to catch up with the shift towards digital forms of consumption. Reuters on Friday said it had received a bid approach, known to be from Canadian publisher Thomson, while Rupert Murdoch’s News Corp rocked the newspaper world this week with its unsolicited bid for Dow Jones, whose assets include the internet’s biggest paid subscription site and one of Reuters’ main newswire competitors.

Yahoo’s shares closed up nearly 10 per cent, valuing the company at $42bn. However, the shares are still about 25 per cent below their level at the start of last year. Microsoft’s shares fell 1.3 per cent.

With one of the biggest audiences on the internet, Yahoo would make a prize catch for any company looking to extend its online reach, said Imran Khan, internet analyst at JPMorgan.

For Steve Ballmer, Microsoft’s chief executive, who is estimated to have spent hundreds of millions of dollars in the past three years to try to build both a search engine and an online advertising network capable of keeping pace with Google, the deal would also mark an aggressive new front. This battle has become more intense following Google’s $3.1bn agreement to buy DoubleClick, which would launch it into the online display advertising business. But combining Microsoft and Yahoo would create huge management and cultural challenges, analysts warn.

The bid approach to Yahoo points to growing frustration at Microsoft after more than a decade of trying to become a major force on the internet.

While its MSN service claims one of the biggest audiences, it has failed to compete head on with a succession of internet leaders, from AOL to Yahoo and Google. “They’ve spent $1bn building a business that is melting like an ice cube today,” said Youssef Squali, an analyst at Jefferies & Co.

Google, News Corp touted as potential suitors
By Kevin Allison in San Francisco
Copyright The Financial Times Limited 2007
Published: May 5 2007 03:00 | Last updated: May 5 2007 03:00

Google, News Corp and Walt Disney were among the companies being touted as possible rivals to a Microsoft move for Yahoo yesterday, although some analysts warned that a bidding war was unlikely.

While some experts said Yahoo's big audience could make it a tempting target, they cautioned that few companies were in a position to make such a deal work, assuming they are interested.

"There are not a lot of other potential suitors out there," said Scott Kessler, an analyst at Standard & Poor's.

"Only a handful of entities could have the wherewithal to do this."

Yahoo's market capitalisation grew to about $44bn yesterday following an 18 per cent rise in its share price in early trading to $33.29. The climb followed a report in the New York Post that Microsoft was mulling a $50bn bid for the company.

Such a price tag would put Yahoo out of reach for all but a handful of the biggest internet or media companies.

Yet even that figure could be too low, according to Mark Mahaney, an analyst at Citigroup.

A $50bn deal would put Yahoo on a price to earnings ratio of 16 times 2008 earnings, well below that of recent deals such as Yahoo's acquisition of Right Media or Google's deal for DoubleClick. "We believe that potential strategic advantages of this deal versus Google could necessitate a higher multiple - more like [20 times 2008 earnings] or a $42 stock," Mr Mahaney said.

Any media company interested in a deal with Yahoo would be forced to confront the painful lessons of past mega-deals, such as Time Warner's disastrous $160bn merger with AOL in 2000.

"There is still the AOL/Time Warner stigma that will be daunting for anyone in the offline media world to overcome," said Youssef Squali, an analyst at Jeffries & Co. "I just don't see another suitor [emerging]," said Mr Kessler at S&P. "That's beneficial for Microsoft and not for Yahoo."

Mr Kessler said News Corp, which is stalking Dow Jones, the owner of the Wall Street Journal, was among the companies that had the scale necessary to pull off a Yahoo deal.

Computing the future for Yahoo and Microsoft
By Chris Nuttall and Richard Waters in San Francisco
Copyright The Financial Times Limited 2007
Published: May 5 2007 03:00 | Last updated: May 5 2007 03:00

Analysts yesterday struggled to find the right search query to answer why Microsoft would seek a merger with Yahoo.

Charlene Li, internet analyst with Forrester Research, summed up the scepticism of many observers in a blog note: "Why Microsoft + Yahoo makes sense - and why it won't work."

In its favour, a deal would combine two of the largest online audiences. According to comScore, Google has 528m unique users globally, compared with 527m for Microsoft and 478m for Yahoo. Stripping out the duplicated audience, that would give Microsoft/Yahoo 634m users.

Yahoo and Microsoft together would also dominate display advertising, in spite of Google's recent acquisition of the DoubleClick online display advertisement company, which may have intensified the two rivals' merger discussions.

Ms Li said the two together would also have tremendous technological strength, given the level of Microsoft investment in research and Yahoo's skills at display advertisement management. Yahoo would also bring significant internet media experience to the deal and successful "Web 2.0" acquisitions such as Flickr and

The main reason for the deal for Microsoft would be the declining importance of the Windows operating system, relegated into the background as users turned to web browsers to run applications such as e-mail.

"To survive going forward, Microsoft needs to have a robust online strategy and just doesn't cut it," Ms Li said.

But she concludes that a merger would be messy, of limited benefit to Yahoo and is not likely to happen soon. Integrating brands and management would be difficult and the distraction of a merger would not allow the new entity to gain ground on Google.

Last month's first quarter earnings revealed a mixed picture on advertising dollars being earned by the main competitors.

Google's $2.53bn were 65 per cent up on the year before, Yahoo's $980m were up only 9 per cent, while Microsoft took in an estimated $350m, up 23 per cent.

For Microsoft, this was good news, as AdCenter began to show results. AdCenter is an advertising system it built and which had led to its ending a partnership for advertising technology with Yahoo.

Asked at the Web 2.0 conference last month about whether Microsoft could still be a big online player, Jeff Weiner, head of Yahoo's network division, said: "You never ever count Microsoft out. We were strong partners and I would have loved to see that partnership stay intact as long as possible."

John Battelle, author of The Search, the story of Google's success, says Microsoft may be trying to renew that partnership now.

"Microsoft is in a strategic bind at the moment, they don't have significant leverage when it comes to online ad growth. They need scale, they don't have a way to get there without a significant acquisition," he told the Financial Times. "I can't imagine it's going to be an easy deal if it's going to be put together. I'd say there is as much chance of a significant partnership as an M&A."

Any merger would see Microsoft's MSN service being folded into Yahoo, he predicted, with Yahoo having more success in the content business.

Financial analysts also saw the strategic rationale for Microsoft. Mark Mahaney at Citigroup said while it had enjoyed limited success in internet advertising, MSN had continued to lose search query share and had underperformed the internet advertising market.

But he questioned whether any merger would gain users and advertisers from Google.

"Two simple questions," he said. "Would Microsoft owning Yahoo change consumers' clear strong preference for Google's search engine? We doubt it. Would advertisers - who have been appreciative of a third search engine in the past, though disappointed with Microsoft traction - switch ad dollars from Google? We doubt it."

Microsoft eyes takeover of Yahoo
By Daniel Pimlott and James Politi in New York
Copyright The Financial Times Limited 2007
Published: May 4 2007 14:11 | Last updated: May 4 2007 15:05

Microsoft is in early stage talks with Yahoo with a view to a possible takeover in a move that would allow the software giant to compete more effectively with Google for online advertising, according to people familiar with the matter.

Yahoo shares were up 18 per cent in early trading at $33.29, while Microsoft shares were down 1 per cent at $30.66.

Last year Yahoo turned down an offer from Microsoft to buy a stake in Yahoo’s search business. Terry Semel, chief executive of Yahoo, said discussions about the software group acquiring his company had not taken place.

News of merger talks, first reported in the New York Post, may indicate the lengths that internet companies are going to as they seek to mount a challenge in the lucrative search business dominated by Google.

Microsoft is working with Goldman Sachs on a possible deal, the newspaper said, citing an unnamed banking source. Yahoo is considered an obvious target for Microsoft, as a takeover would massively cut Google’s lead in internet search.

A deal would practically triple Microsoft’s share of the US search market to 38.4 per cent, compared with Google‘s 48.3 per cent share, according to ComScore figures.

Based on Thursday’s closing stock price, Yahoo has a market value of $38.2bn. Wall Street analysts consider the company to be worth as much as $50bn, the New York Post said.

Yahoo would also bring a leading market position in display advertising and, added to Microsoft’s existing operations, help create a massive e-mail and instant messaging user base.

But Yahoo faces problems because it has not delivered enough search advertising revenue from its army of users. Its shares fell 35 per cent in 2006.

Google has in recent months gone on a spending spree, buying YouTube, the video sharing website, for $1.6bn, and winning a bidding war against Yahoo and Microsoft for DoubleClick, paying $3.1bn for the online display advertising company.

Yahoo has also been seeking to bump up its dealmaking outside its core search advertising business. Last week it agreed to pay $680m for the 80 per cent it does not own of Right Media, which operates an online advertising exchange, in a deal aimed at hitting back against Google’s growing dominance of the online advertising services business.

Microsoft has complained that the acquisition of DoubleClick would give Google almost monopolistic powers in search advertising online, with the power to dictate terms to online publishers and service providers.

However, any Microsoft/Yahoo merger would probably attract the attention of anti-trust regulators.

The merger speculation comes shortly after the exit of Christopher Payne, who led Microsoft’s efforts to compete with Google and Yahoo in internet search.

Judge blocks ABN’s plan to sell LaSalle/BofA sues ABN over LaSalle deal/ABN Amro calls a halt to LaSalle offers

ABN Amro calls a halt to LaSalle offers
By Peter Thal Larsen in London, Ian Bickerton in Amsterdam and Ben White in New York
Copyright The Financial Times Limited 2007
Published: May 4 2007 22:15 | Last updated: May 5 2007 00:00

ABN Amro on Friday night called a halt to any new offers for its US subsidiary, LaSalle, after a Dutch court refused to clarify a ruling that freezes the sale of the business to Bank of America for $21bn.

The Dutch bank’s decision created further uncertainty about the status of talks over a €72bn ($98bn) takeover bid by a consortium of European banks led by Royal Bank of Scotland.

Earlier in the day, BofA filed a lawsuit in New York claiming ABN Amro had breached its contract by halting the sale of LaSalle.

Sir Fred Goodwin, chief executive of RBS, Maurice Lippens, chairman of Fortis and a senior executive of Santander, the Spanish banking group, last night flew to Amsterdam to present their case to Rijkman Groenink, ABN Amro chief executive and Arthur Martinez, chairman of the bank’s supervisory board.

The first face-to-face meeting between the consortium and ABN Amro came as bankers and lawyers grappled with the consequences of the Dutch court’s decision on Thursday to halt the sale of LaSalle, ABN Amro’s US subsidiary, to BofA.

BofA’s complaint said if it fails to acquire LaSalle the “resulting not compensable in money damages”. It also said BofA stands to sustain billions in losses in the dispute. The BofA lawsuit is the first salvo in what could be a protracted battle over the LaSalle sale and, thus, the whole of ABN Amro.

The RBS-led consortium had been expected to submit a rival bid for LaSalle conditional on its offer for the whole of ABN Amro succeeding. But BofA’s lawsuit indicated that it would not accept a conditional bid for LaSalle as valid.

The Dutch court’s ruling has also raised questions about the position of Mr Groenink, who negotiated the sale of LaSalle and has argued against a break-up of the bank, preferring an agreed takeover by Barclays, the UK group.

ABN Amro on Friday publicly continued to stand by Mr Groenink, while people close to the bank said removing him would only add to the uncertainty at the bank.

BofA said that in its agreement to sell LaSalle, ABN gave assurances that it had the legal authority to transfer the asset without a shareholder vote.

Judge blocks ABN’s plan to sell LaSalle
By Peter Thal Larsen in London and Ian Bickerton in Amsterdam
Copyright The Financial Times Limited 2007
Published: May 3 2007 16:21 | Last updated: May 3 2007 16:21

The battle for control of ABN Amro was thrown into confusion on Thursday when a commercial court in Amsterdam blocked the Dutch bank’s plans to sell LaSalle, its US subsidiary, to Bank of America for $21bn.

The decision, prompted by a petition by VEB, a Dutch shareholder group, represents a victory for investors who want to force ABN Amro to consider a break-up bid from a consortium led by Royal Bank of Scotland. It also represents a severe blow to Barclays’ ambitions to complete its agreed takeover of the Dutch bank.

However, the ruling by judge Huub Willems takes the cross-border takeover battle into unchartered waters and could trigger further legal action in several other countries. Lawyers for BofA warned last weekend that the world’s second-largest bank would “be compelled” to file a claim for damages against ABN Amro if the court delayed the LaSalle deal.

Barclays may also have grounds for legal action against ABN Amro for breaching the terms of its takeover agreement, which is dependent on the sale of LaSalle.

In a long-awaited ruling, the court said that while it was the decision of ABN Amro’s management to sell LaSalle, the deal should be put to shareholders.

ABN Amro had argued that its statutes did not require it to put the sale to a shareholder vote because LaSalle did not constitute a sufficiently large proportion of its assets. BofA had also argued that it would never have agreed to buy LaSalle on the current terms if it realised the deal required approval from ABN Amro shareholders.

The decision represents a triumph for shareholders, who have been pressing ABN Amro to consider higher offers for the bank, over its management, which has been resisting a break-up bid on the grounds that it would not be in the best interests of the bank or its stakeholders.

However, the ruling also seems certain to extend the uncertainty about ABN Amro’s future, unsettling employees and raising concerns among regulators eager to maintain the stability of the financial system.

At a hearing last Saturday Rijkman Groenink, ABN Amro’s chief executive, told the court that the bank had become a “toy for hedge funds”.

BofA sues ABN over LaSalle deal
By Ben White in New York
Copyright The Financial Times Limited 2007
Published: May 4 2007 16:35 | Last updated: May 4 2007 16:35

Bank of America on Friday filed a suit in New York against ABN Amro, alleging that the Dutch bank violated the terms of its agreement to sell its Chicago-based LaSalle unit to BofA for $21bn.

BofA demanded in the suit that ABN be barred from negotiating to sell LaSalle to a third party and be ordered to sell the bank to BofA under terms of the initial agreement.

The complaint does not specify potential monetary damages and says if BofA fails to acquire LaSalle, the “resulting injury ... is not compensable in money damages.” However, the complaint also says BofA stands to sustain billions of dollars of losses in the dispute over LaSalle and asks for money damages to be awarded at trial.

BofA said that in its agreement to sell LaSalle, ABN gave assurances that it had the authority to transfer the asset without a shareholder vote. However, a commercial court in Amsterdam on Thursday blocked the LaSalle sale, saying it must be put to a vote of ABN shareholders.

The ruling was a victory for shareholders who had challenged the sale because it undermined a bid for ABN Amro by a trio of European banks led by Royal Bank of Scotland. ABN already has an agreed bid to sell itself to Barclays of the UK, but that deal is contingent on the transfer of LaSalle to BofA. The trio led by RBS wants to buy all of ABN and split in into parts.

In the lawsuit, BofA said it “has suffered substantial harm as a result of ABN Bank’s breaches of its representations and warranties. The opportunity to acquire LaSalle represents a unique and irreplaceable business opportunity and the loss of that opportunity would cause irreparable damage to Bank of America. The LaSalle transaction is critical to Bank of America’s long term strategy to expand into the Chicago market.”

BofA added, “LaSalle is one of only two potential acquisition targets that could give Bank of America a meaningful presence in that market and the other bank is not for sale. The alternative ― expanding into the Chicago market through internal growth ― would take years and would be extremely costly.”

BofA said the US court has jurisdiction because ABN agreed to make US federal courts the sole forum to resolve any disputes over the LaSalle sale.

Why it is time for America to start talking to its enemy/Iran skips high-level meeting with US

Why it is time for America to start talking to its enemy
By Philip Stephens
Copyright The Financial Times Limited 2007
Published: May 3 2007 19:33 | Last updated: May 3 2007 19:33

Some things are so obvious they need to be said aloud before anyone takes any notice. Javier Solana, the European Union’s foreign policy chief, perhaps had this in mind the other day when he suggested that the time had come for the US to normalise relations with Iran.

Over the years I have heard many European and one or two American policymakers make the same observation: for all the residual trauma of the 1979 hostage crisis, and Washington’s (mostly justified) concern about Tehran’s contemporary support for terrorism, US interests would be better served by engagement.

The difference was that Mr Solana spoke out publicly – and at a moment when he is acting as the west’s principal interlocutor in the dispute about Iran’s nuclear ambitions. He has also been working closely with Condoleezza Rice, the US secretary of state, in efforts to restore a semblance of stability to the wider Middle East.

Mr Solana made his remarks at the 2007 Brussels Forum, the annual transatlantic gathering hosted by the German Marshall Fund of the United States. He had travelled to Brussels from Istanbul where he had met Ali Larijani, Iran’s nuclear negotiator.

His was not, though, as some suspected and others had hoped, a choreographed initiative ahead of Ms Rice’s expected meeting in Sharm el-Sheikh with Manouchehr Mottaki, the Iranian foreign minister. Rather, Washington was irritated. A senior US official told me that Mr Solana had “gone too far” in pressing the case for US engagement.

The remit for Ms Rice’s encounter with Mr Mottaki confined discussion to Iraq. In her description, it was “not an opportunity to talk about US-Iran issues”. As for a broader dialogue, there is a US offer on the table. But it is conditional on Iran’s suspension of its uranium enrichment programme.

As Mr Solana’s comments indicated, there is a chicken-and-egg dilemma here. The position of moderates in Tehran, who might be willing to negotiate a way out of the nuclear deadlock, is undercut by Washington’s stance. “It is very difficult,” as Mr Solana said, “to continue in a situation where Iran is considered a country with whom you cannot organise some sort of dialogue.”

The more so because any long-term solutions to most of the myriad conflicts in the wider Middle East will depend, at the very least, on Iranian acquiescence. That, in turn, requires a deal between Washington and Tehran. Put bluntly, Iran is a powerful regional player, one left a great deal stronger by America’s failure in Iraq. As a source of much of the tension in the region, it cannot be excluded from efforts to rebuild security.

To make this case, is not, and the “not” bears repeating here, in any way to endorse or condone the present regime in Tehran. Given the history, one can see why the present US administration – indeed any US administration – might be sensitive about this. One of the unfortunate by-products of George W. Bush’s foreign policy has been a certain blindness among critics as to the nature of America’s adversaries. Too often nowadays, tyrants are afforded the benefit of the doubt.

Iran is often spoken of as a state rich in cultural and intellectual heritage, with a national temperament that inclines to engagement with the rest of the world. We would all profit from Iran’s reintegration into the international community. So would Iranians. But for the moment, it is governed by a regime described by Human Rights Watch – scarcely a US stooge – as one of the world’s most repressive. Alongside routine suppression of individual freedoms, the Tehran regime systematically abuses human rights, including by the use of torture and extra-judicial execution. Support for terrorism abroad has become a central instrument of its foreign policy.

As much, though, as President Mahmoud Ahmadi-Nejad presides over a loathsome government, Iran – the country as opposed to its present rulers – does have legitimate strategic interests and security concerns. One way or another it has to be recognised as a powerful regional actor.

Washington’s mistake is to equate diplomacy with surrender. By continuing to ostracise Tehran, it has trapped itself in a mindset that says to restore relations would be to reward the bad guys.

This is to misunderstand the purpose and utility of diplomacy – to confuse means with ends. The reopening of formal and regular channels of communication need not in any way confer approval. By my count, the US has diplomatic contacts with just about every other nasty autocrat in the world. Diplomatic dialogue with Iran would be the means to the end of discovering whether differences – over the nuclear programme, Iraq and support for Hizbollah – are susceptible, or otherwise, to negotiation.

Decades of silence have amplified mutual misunderstanding – and empowered the radicals in Tehran. Talking would dispel confusion and misrepresentation in Iran of America’s present intentions. As things stand, there is precious little to challenge those in Tehran who say a nuclear capability is the only sure guarantee against US aggression.

Even the most optimistic among European diplomats are uncertain whether it is possible to conclude a strategic bargain to settle the nuclear question. We do know, though, because Tehran secretly tabled such proposals in 2003, that Iran has been willing to discuss all the relevant issues. Mr Solana’s judgment seems to be that that remains the position.

Engagement should be seen not as a substitute for “grand bargain” but rather as a way of properly exploring whether such a compact is possible. One plausible outcome would be the further exposure to international scrutiny of Iranian intransigence. In that case, the US would emerge stronger from the process.

US officials answer that Washington has shifted its position. Its present offer includes talks about anything Iran cares to raise. The only condition – and one, the officials remind you, that has been endorsed twice by the United Nations security council – is that Iran suspend its enrichment programme. Ms Rice’s open door in Sharm el-Sheikh, to the Syrian as well as the Iranian foreign minister, is cited as further evidence of America’s diplomatic intent.

A fair-minded appraisal of US diplomacy over the past year would acknowledge these shifts – though it might add that force of circumstance has played a part. But Washington is still missing the obvious. It has nothing to lose from starting a conversation with Tehran and, whatever the eventual outcome, something to gain. That, after all, is a fair definition of good diplomacy.

Iran skips high-level meeting with US
By Steve Negus in Sharm el-Sheikh
Copyright The Financial Times Limited 2007
Published: May 4 2007 11:49 | Last updated: May 4 2007 19:13

US and Iranian officials had low-level contacts at a meeting intended to stabilise Iraq, after the Islamic republic’s foreign minister walked away from an opportunity to speak to Condoleezza Rice, US secretary of state, over dinner, ostensibly because of the presence of a woman violinist in a red dress.

The encounter between Iranian and US ambassadors at the two-day Iraq neighbours conference in the Egyptian Red Sea resort of Sharm el Sheikh lasted only a few minutes. But it was a further sign of a new US willingness to engage with regimes that oppose its policies and that it had sought to isolate.

Tehran, however, has apparently ruled out any substantive meeting with the US before the US military releases five Iranians held in Iraq since January.

In a departure from recent policy, Ms Rice met Walid Muallem, her Syrian counterpart, on Thursday. The talks were the highest level meeting since Washington pulled its ambassador out of Damascus in 2005, in the wake of the assassination of Rafiq Hariri, the former Lebanese prime minister.

Ms Rice had been hoping to speak to Manouchehr Mottaki, the Iranian foreign minister, at a conference dinner. But he told a press conference on Friday that he left the dinner, where he was supposed to be seated directly across from Ms Rice, because there was “something wrong” with its “Islamic standards”, a reference to the violinist.

The US accuses Iran – and Syria – of fomenting Iraqi violence. Tehran, which on Friday blamed the Iraqi conflict on the US, had been reluctant to send representatives to the Sharm el Sheikh conference without a US promise that five Iranians arrested in Iraq would be released.

Ryan Crocker, the US ambassador to Iraq, told the Financial Times in an interview that the US would treat the five Iranian employees seized from an unofficial consular office as it would any other security detainees.

“They will have their case reviewed a couple months down the road,” he said. “It goes beyond the limits of imagination to characterise these guys as diplomatic officers or consular officers [as Iran does].”

The Sharm el Sheikh meeting, partly intended to break the ice between the US and Iraq’s neighbours, ended with a communiqué calling on governments to work to stabilise Iraq. It also produced an Arab League pledge to resume preparations for a national reconciliation conference that has been put on hold for more than a year.

The conference also reaffirmed the creation of several working groups that would deal with issues involving Iraq and its neighbours, including border security, in which Iran is expected to participate.

US and Iraqi officials have said they have detected some signs that Iraq’s neighbours are cracking down on support for militants.

A US military spokesman said on Thursday that the number of militants crossing the Syrian border had dropped in the last month.

'D.C. Madam' case enthralls capital - Phone list creates tremors of scandal/Facts and fantasy of US sex scandal

'D.C. Madam' case enthralls capital - Phone list creates tremors of scandal
By William Neikirk
Copyright © 2007, Chicago Tribune
Published May 1, 2007

WASHINGTON -- "Miz Julia" sent tremors through the nation's capital Monday simply by threatening to call her "clients" to testify at her trial. Talk about real power.

But Miz Julia, otherwise known as Deborah Jeane Palfrey, is neither a politician nor a high government official involved in making war or policy. Nor is she a CIA undercover agent.

Instead, she says she merely ran a legal escort service in the nation's capital featuring massages and sexual fantasy. To the contrary, say U.S. government prosecutors. They have charged her with racketeering by allegedly running a prostitution ring, with women charging $300 an hour.

Now, those allegations have given Palfrey, 50, of Vallejo, Calif., a nickname other than Miz Julia. She's become widely known as the "D.C. Madam" who has brought Washington an old-fashioned sex scandal.

And she's angry. "I believe there is something very, very rotten at the core of my circumstances," she said Monday after a court hearing in which a federal judge agreed to appoint a new public defender for her.

When sex and politics combine in this uptight capital, they can achieve explosive results. They forced the resignations of Reps. Wilbur Mills of Arkansas and Robert Livingston of Louisiana and resulted in the House voting to impeach President Bill Clinton in the wake of his affair with Monica Lewinsky.

And that raises questions about how big this scandal will become. Another prominent name or two could turn it into a very large one.

Already edgy about war, terrorism and political upheaval, this city could be on the verge of sensational disclosures about some highly prominent figures -- or so Palfrey claims. She has given a list of clients' telephone numbers to ABC News, which plans to air a story about her on Friday, during a "sweeps" rating period.

High-level resignation

Her disclosure already has swept away one of the State Department's top officials -- Randall Tobias, 65, who was in charge of foreign aid programs. Tobias resigned abruptly last week but claimed he only received massages from Palfrey's workers and did not have sexual relations with them.

As he put it, he called "to have gals come over to the condo to give me a massage."

The Washington Post reported over the weekend that Palfrey's lawyer had been contacted by five lawyers asking whether their clients' names were on her list of as many as 15,000 telephone numbers.

Of course, this scandal could quickly fade if only "small fries" show up on the list in coming days. Stephen Hess, a political science scholar at the Brookings Institution, said, "In this world of Britney Spears and Paris Hilton, this sad, pathetic little scandal of Washington will hardly get above the fold [of newspapers]. This one can't last more than a day or so."

After her court appearance, Palfrey told reporters she was "genuinely sorry" for Tobias and his family but added that his admission that he used the service only for massages is "valuable exculpatory evidence" for her.

She said she wished he had come forward earlier. "Had he done so earlier, along with many, many others who have used my company's services throughout the years, I most likely would not be in my current predicament."

Palfrey said she turned over phone records to ABC News in hopes the network would come up with the names of clients whom she could call to testify about her service, which she contends is legal.

She said she hired college-educated women for her firm, Pamela Martin and Associates, to provide "legal, high-end erotic fantasy service" and a "refined way of life" to clients.

She asked reporters "to put aside the titillation of the who's who list at least in part and instead investigate the disturbing genesis, the confounding evolution and the equally alarming continuation of this matter."

She also said the government should prosecute those "who disobeyed my directives, their signed contracts, and participated in illegal behavior, be they a client or subcontractor."

Palfrey said the Internal Revenue Service seized her life's savings after allegations were made that she operated a prostitution business from 1993 through August 2006, when she shut down her operations and retired.

$500,000 in property seized

She has sued the government for the return of $500,000 in seized property, but a federal judge recently ruled that the criminal case against her must first be resolved.

At first, she said she thought of selling the phone records to help pay for her defense, but she changed her mind, saying "this option quickly was abandoned for fear the records would end up in the possession of an unscrupulous person or persons."

Palfrey said ABC News is under no obligation to assist her, except to help her discover the names of the clients.

"For me, this is a necessity, since the government has placed me in the untenable position whereby I do not have sufficient monies to undertake this extraordinarily expensive task on my own."

The attorney handling her civil case, Montgomery Blair Sibley, took umbrage when a reporter asked if Palfrey's tactics amounted to blackmail.

"I don't know why that's blackmail," he said. "I call that due process of law. We don't have any options left."


- - -

Recurring frolic and misfortune
If power is the great aphrodisiac, then Washington is a natural habitat for sex scandals, and history provides its share of examples:

Rep. Wilbur Mills (D-Ark.)

Chairman of the powerful, tax-writing House Ways and Means Committee, was stopped by U.S. Park Police in his speeding Lincoln Continental in 1974, accompanied by Annabella Battistella. Both of them were intoxicated, and she ran from the car and jumped into the Tidal Basin. Battistella, 38, was a stripper known professionally as Fanne Fox, the "Argentine Firecracker." Though Mills, 65, won re-election that year, his career came crashing down after he appeared on the stage of Boston's Pilgrim Theater, a seedy nightspot, to get a kiss from Battistella. He later checked himself into a clinic for treatment of alcoholism and retired in 1976.

Rep. Wayne Hays, (D-Ohio)

The influential chairman of the House Administration Committee kept a woman on his office staff in the mid-1970s who claimed she was paid $14,000 a year in public money to be his mistress. Hays, then 65, at first disputed her contentions but later admitted a relationship with Elizabeth Ray, 33, who famously declared in 1976: "I can't type. I can't file. I can't even answer the phone."

President Bill Clinton

Clinton was impeached in 1998 on grounds of perjury and obstruction of justice after his affair with White House intern Monica Lewinsky became public and he was accused of trying to cover it up. In 1999, Clinton was acquitted by the Senate.

Rep. Henry Hyde (R-Ill.)

Hyde, 74, chairman of the House Judiciary Committee investigating Clinton, acknowledged in 1998 having had a five-year affair with Cherie Snodgrass in the 1960s when both of them were married. Hyde admitted the affair after an online magazine, Salon, told Hyde's office it was publishing a story about Hyde and the beauty stylist. Hyde, who had the affair while he was in his 40s, said "the statute of limitations has long since passed on my youthful indiscretions."

Rep. Bob Livingston (R-La.)

Livingston was the presumptive speaker-elect of the House and was among Republicans calling for the ouster of Clinton in 1998. Ironically, it was Livingston who resigned amid allegations of his marital infidelity.

-- Tribune staff and news services

Facts and fantasy of US sex scandal
By Alex Barker in Washington
Copyright The Financial Times Limited 2007
Published: May 4 2007 03:00 | Last updated: May 4 2007 03:00

A sex scandal that has titillated Washington gossips and led to the resignation of a senior government official seems to be moving towards a denouement today, when a television programme opens up the workings of an escort service used by members of the political establishment.

Fighting charges of running prostitutes in the US capital, Deborah Jeane Palfrey, the "DC Madam" or "Beltway Bawd", has threatened to call prominent former clients to testify that her business was a legal "sexual fantasy service".

The prospect has thrown the press into turmoil, prompting commentary on issues ranging from Ms Palfrey's stock portfolio to her red lipstick and four-inch heels.

Last week, in a development that shocked Washington and gave some credence to her threats, Randall Tobias, the deputy secretary of state in charge of foreign aid, resigned after being forced to admit he used Ms Palfrey's service. Mr Tobias had been in charge of enforcing US policy that required recipients of Aids-related funding to condemn prostitution.

Mr Tobias was caught out by 20kgs of phone bills kept by Ms Palfrey. These record the calls she made since 1993 to thousands of clients and the 130 or more women who worked for her. After offering the records to the highest bidder, she eventually gave four years of the files to ABC news last month to identify prominent men.

The results of the investigation - which included spotting Mr Tobias's number - will be aired on ABC tonight. The network says the logs include calls from and to "a Bush administration economist, the head of a conservative think-tank, a prominent CEO, several lobbyists and a handful of military officials". It has not confirmed whether these people will be named.

The candid approach puts Ms Palfrey apart from infamous American madams, such as the "Hollywood Madam" Heidi Fleiss and the "Mayflower Madam" Sydney Biddle Barrows, who are known as much for the secrets they kept as the ones they told.

Explaining her response, Montgomery Sibley, Ms Palfrey's lawyer, told the Financial Times that both he and his client had served time in prison, giving them the "strength to look a bully in the eye and kick him in the nuts".

Whatever comes of the peek into the Ms Palfrey's big black book this evening, it will at least set limits to the hitherto unchecked speculation fuelled by the defendant and her lawyer.

Ms Palfrey has claimed "the tentacles of this matter reach far, wide and high into the echelons of power in the US". By contrast, journalists at ABC only think theinvestigation warrants one segment in an hour-longtelevision programme.

Yet, even if the disclosures prove to be a disappointment, the scandal may rumble on. "What people don't appreciate is that the four years given to ABC were the slow years of a declining business," said Mr Sibley.

Whereas those records include 10 to 15 prominent clients, he said, the "go-go years of the dotcom boom and Clinton administration" could include up to 35 more noteworthy names.

Ms Palfrey and Mr Sibley have yet to decide what to do with those documents. But Mr Sibley assured the FT that if he "did not appear on a regular basis" he had made arrangements for the records to be published online "for the whole world to see".

The pair have already published a sample page of the records on Ms Palfrey's website. But this simply highlights how difficult any investigation into Ms Palfrey's claims would be.

The 10-year-old document records calls to disconnected lines, the lobby of an apartment building, and the customer services of an electricity provider.


Deborah Jeane Palfrey was nicknamed the "DC Madam" after being charged with running prostitutes in Washington. She claims her business was a legal escort service and wants to call former prominent clients to testify to that effect. She gave four years of her phone records to ABC news and the network is reporting on its investigation tonight.

Randall Tobias, the deputy secretary of state, resigned last week after ABC told him his number was on Ms Palfrey's phone logs. The network says it has found numbers for a number of other prominent figures.

Afghan clashes raise concerns

Afghan clashes raise concerns
By Rachel Morarjee in Kabul
Copyright The Financial Times Limited 2007
Published: May 3 2007 17:32 | Last updated: May 3 2007 17:32

Fighting in Afghanistan has erupted outside the Taliban strongholds of the south and east, catching growing numbers of civilians in the crossfire and stoking public anger at the US and Nato.

Clashes in recent weeks at opposite ends of the country signal a widening of the conflict and increasing confusion among western military officials over the enemy they are confronting.

The worst fighting to strike Afghanistan this year erupted in the western province of Herat leaving 136 people dead after two days of clashes which culminated in a 14-hour-long battle on Sunday, the US military said.

The US military initially said all of the dead were militants but a UN investigative team who visited the battle site “found credible reports of 49 civilian deaths” including unconfirmed numbers of women and children, spokesman Adrian Edwards said.

A US soldier was also killed in the operation by US special forces and Afghan troops in Herat against what a US military statement described as ground operations and air strikes targeting Taliban positions.

President Hamid Karzai warned US and Nato generals and other senior western officials in a meeting on Wednesday that “the patience of the Afghan people was wearing thin”, with heavy-handed army tactics.

Mr Karzai’s warning came after four days of protests in the eastern city of Jalalabad over what locals claim were the deaths of six civilians in a raid on a compound suspected of housing a suicide bomber. The US military said a woman and a teenager were killed in a firefight that erupted when US forces raided the compound following a tip-off.

The Jalalabad protest coincided with similar demonstrations in western Herat’s Shindand district in which scores of locals chanted “Death to America” in the wake of Sunday’s airstrikes.

Violence in Afghanistan has sharply increased in recent weeks with pitched battles between insurgents and government troops in areas of the country far away from the traditional Taliban strongholds in the south and east.

A western diplomat estimated that some 2,250 insurgents, foreign troops and civilians had been killed in the first four months of this year compared with under 5,000 casualties for the whole of 2006. On Thursday, the UK defence ministry said a British soldier was killed in fighting with militants in southern Afghanistan.

Nato spokesman Nicholas Lunt said that as the Afghan army and Nato troops moved into areas where there had been no government presence they were clashing with anti-government militias.

These clashes could easily be exploited by the Taliban, Joanna Nathan, Kabul-based analyst with the International Crisis Group said. “The Taliban are very clever about using local rivalries and conflict and appealing to the side that feels disenfranchised,” she said.

In one of their boldest moves, Taliban militants seized control of a highway just 70km outside the capital Kabul in Tagab district of central Kapisa province on April 18. Government forces retook the road in 24 hours but the clash marked a new frontier for the Taliban – who were able to stage the heaviest battle in the region of the capital since 2001.

Nato troops have launched a string of offensives around the country with the heaviest fighting continuing in the southern province of Helmand where British troops are based.

More than 2,000 Nato and Afghan troops were deployed over the weekend in the Helmand’s Sangin valley aimed at driving the Taliban from the heart of the opium-producing province.

Military officials said the effort involved some 1,100 British troops, 600 US soldiers and more from the Netherlands, Denmark, Estonia and Canada as well as more than 1,000 Afghan government troops.

Olmert defies calls for him to quit/Israeli foreign minister says Olmert should resign/Thousands call on Olmert to go

Olmert defies calls for him to quit
By Sharmila Devi in Jerusalem
Copyright The Financial Times Limited 2007
Published: May 4 2007 16:28 | Last updated: May 4 2007 16:28

Ehud Olmert, Israeli prime minister, remained defiant on Friday and vowed to stay in office in spite of a rally of 100,000 protesters urging him to quit because of his mishandling of last year’s Lebanon war.

Israelis from across the political spectrum gathered in Tel Aviv on Thursday night, united by their desire to see the man they call a discredited leader resign. However, the leftwing Peace Now movement criticised the rally for a lack of coherence, saying a likely winner if Mr Olmert stepped down would be Benjamin Netanyahu, the hawkish leader of the opposition Likud party.

Miri Eisen, Mr Olmert’s spokeswoman, said the best way to deal with the situation was “a stable government, not a transition period, and to immediately ... fix the mistakes and face the challenges”.

Amir Peretz, defence minister in the coalition government and Labour party leader, was reported as still considering his resignation after he and Mr Olmert were slammed by a commission of inquiry’s report into the first days of the conflict against Hizbollah.

However, the Labour party’s central committee is due to hold a meeting on May 13 to discuss calls to quit the coalition. The party will hold leadership primaries at the end of this month and Mr Peretz is widely expected to lose. Frontrunners include Ehud Barak, former prime minister, and Ami Ayalon, a former security chief.

If Mr Olmert hangs on to power, the political turmoil could last until July, when the Winograd commission is expected to issue its final report. The recriminations could also overshadow US attempts to implement Israeli and Palestinian steps this year towards eventual peace talks.

The US timeline recently sent to Israeli and Palestinian leaders would see Israel allowing Palestinians to travel between the Gaza Strip and West Bank and easing humanitarian conditions in the occupied territories, while the Palestinians would do more to tighten security on the Gaza-Egypt border and prevent the firing of rockets.

Israel was reported on Friday to be against parts of the proposals – intended to be implemented over the next eight months – but the Palestinians welcomed it.

Many other obstacles lie ahead, including the continued western embargo against the Palestinian unity government that includes Hamas and Fatah. Mahmoud Abbas, Palestinian president and Fatah leader, was said to be considering his resignation if western sanctions were not lifted within two months.

Israeli foreign minister says Olmert should resign
By Steven Erlanger
Copyright by The Associated Press and The New York Times
Published: May 2, 2007

JERUSALEM: A deputy of Prime Minister Ehud Olmert of Israel called on him to resign Wednesday following the release of a harshly critical government report about his management of the war against Hezbollah last summer.

The deputy, Foreign Minister Tzipi Livni, said she had met with Olmert in his office and "told him that resignation would be the right thing for him to do." She added that she would be a candidate within the Kadima party to replace him as prime minister.

"Now is the time to restore the public's trust in government," Livni said during a news conference in her office.

But Olmert insisted that he would not quit, and his aides suggested that Livni had violated the principle of collective government and should herself resign.

Livni said that she would not organize a coup against Olmert and would not resign, but planned to work as best as possible to fix the flaws in governance laid bare by the interim report, written by a government-appointed committee led by a retired judge, Eliyahu Winograd.

On Wednesday night, however, it appeared that Olmert would hang on. An Israeli broadcast report said that party leaders were giving him more time, until the final Winograd report was released this summer.

Still, a large anti-Olmert demonstration was planned for Thursday evening in Tel Aviv, and opinion polls showed that about two-thirds of Israelis wanted Olmert to step down.

Livni is a popular but austere figure, and her statement was hardly a clarion call to rebellion against Olmert. He must make his own decision, she said.

But her defection was the biggest blow so far to his chances of staying in office. She also made it clear that she would fight to replace him inside their party.

Some Olmert aides suggested that he would fire Livni, but others said that might only make her more popular. One Olmert aide said that Livni was hoping that Olmert would fire her, but that instead, Olmert had left her "out to dry."

Olmert told a meeting of Kadima legislators that "I am in a personally uncomfortable position, but I will not shirk my responsibility and will fix all the mistakes," according to Israel Radio.

Earlier, Olmert told a cabinet meeting, "To all those who are in haste in order to take advantage of the report for political profit, I tell them not to be hasty."

Kadima was established by former Prime Minister Ariel Sharon when he, Olmert, Livni and others broke away from the Likud party. Sharon essentially handpicked the candidates before his incapacitating stroke in January 2005, and the party lacks detailed rules. The party leader, now Olmert, cannot be ousted, and he is clearly not prepared to go.

If he does resign, there will not be new elections, but the acting president of Israel, Dalia Itzik, would have a week to consult with Parliament and name a new legislator to try to form the next government - presumably a member of Kadima, the largest party.

It is not a given that Kadima would choose Livni to replace Olmert. Livni said Wednesday that the next Kadima leader should be chosen through a democratic primary process in the party, and that she would compete.

But there are other figures, including Shimon Peres, Shaul Mofaz and Meir Sheetrit, who would also run.

It also is not clear that a new prime minister would be able to hold together the same coalition that Olmert has built, giving the government a solid parliamentary majority. A new Labor Party leader, expected to be chosen this month, could decide to leave the coalition.

The man Sharon chose as chairman of the party's parliamentary group, Avigdor Itzhaki, resigned Wednesday after also calling for Olmert to quit and trying to line up Kadima legislators to oppose him.

Itzhaki was replaced by Tzachi Hanegbi, who has asked Olmert to think about whether he remained able to lead the government.

The government-appointed Winograd commission said that Olmert had "made up his mind hastily" to launch the campaign against Hezbollah guerrillas in July and accused him of "a serious failure in exercising judgment, responsibility and prudence."

His declared aims in going to war, to free two soldiers seized by Hezbollah and crush the militant group, were "overly ambitious and impossible to achieve," the commission said in its preliminary report on the 34-day conflict.

In Lebanon, the leader of Hezbollah, Sheik Hassan Nasrallah, said that he "respects" Israel for its ability to concede failure in the war. "I will not gloat," he told an audience at a book fair in Beirut. "It is worthy of respect that an investigative commission appointed by Olmert condemns him."

Nasrallah praised the commission for having "finally and officially decided the issue of victory and defeat."

The commission, he said, "spoke about a very big defeat."

After the war, Nasrallah, known for his plain speaking, said that if he had known that Israel would retaliate in the powerful way that it did, he would not have ordered the raid which snared the Israeli soldiers, who remain captive.

Isabel Kershner contributed reporting.

Thousands call on Olmert to go
By Harvey Morris in Tel Aviv
Copyright The Financial Times Limited 2007
Published: May 3 2007 22:18 | Last updated: May 3 2007 22:18

Tens of thousands of demonstrators filled Tel Aviv’s Rabin Square last night to demand the immediate resignation of Ehud Olmert, Israeli prime minister, for his failed conduct of last year’s Lebanon war.

It was the first manifestation of the public’s disaffection with the Olmert government since this week’s publication of the damning Winograd report sparked political turmoil.

Olmert aides earlier said that he would stand by his stubborn refusal to quit, whatever the size of last night’s protest, unofficially put at more than 100,000.

The non-partisan demonstration, called by Uzi Dayan, a former general and independent political hopeful, drew protesters from across the political spectrum, from the far-right National Religious party to the leftwing Meretz.

Army reservists joined relatives of Israel’s war dead under banners proclaiming “Failures, Go Home” and “Elections Now”.

In the crowd, Amnon Nachmias, a reserve paratrooper colonel who last year went on a 19-day hunger strike to demand the appointment of a commission of inquiry into the war, said: “After the war there was no justification for Olmert to go but now a commission of inquiry has made a loud and clear declaration of his responsibilities for its failures.”

He and other leftwingers overcame concerns that last night’s protest might turn into a rally for Benjamin Netanyahu, leader of the rightwing opposition Likud party, in order to attend.

It was Mr Netanyahu’s turn on Thursday to join a chorus of calls for Mr Olmert’s resignation. He told a special session of the Knesset: “Those who failed at war cannot be those who correct the failures.”

Mr Netanyahu, the main beneficiary of Mr Olmert’s collapse in opinion polls, had previously been silent on the Winograd commission’s interim report.

Mr Netanyahu told Army Radio earlier: “It’s clear to all that this government lost the last scrap of public trust, if it ever had any. It’s clear to all that it should return to the people and let them speak their minds.”

The Knesset did not vote on a censure motion and, if the Tel Aviv protest fails to spark further public outcry, Mr Olmert will have survived the first week of the Winograd controversy as Israel starts its weekend.

The pressure on Mr Olmert to go included the announcement by Tzipi Livni, his foreign minister, on Wednesday that she had advised him to resign.

There was widespread criticism in the Israeli press, however, for what was seen as a lukewarm performance by Ms Livni, who was said to have failed to seize the opportunity to quit and try to oust Mr Olmert from leadership of their centrist Kadima party.

So far most Kadima parliamentarians are backing Mr Olmert, while his Labour party defence minister, Amir Peretz, also blasted by Winograd, continued to ponder whether to resign.

The Short View: Housing bubble By John Authers, Investment Editor

The Short View: Housing bubble By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: May 3 2007 17:21 | Last updated: May 3 2007 17:21

Behavioural economists have a dire prognosis for housing. Robert Shiller, the Yale economist whose book Irrational Exuberance diagnosed the internet bubble immediately before it burst, now sees similar symptoms in US housing.

Behavioural finance substitutes insights from experimental psychology for the economic assumption that people behave rationally. Account for the systematic ways we make bad decisions, and you can explain how markets lose touch with reality. Shiller’s Case-Shiller house price indices show US house prices moved in line with rents for years. Then they exploded. During the past 10 years they have increased 182 per cent, while rents barely moved. Why?

Shiller says home-buyers are prone to persistent flaws in the way they make decisions. First, there is wishful thinking. Exactly as sports fans overestimate their team’s chances of winning, homebuyers are sure their house is a winner. Gamblers prefer games in which they think they have skill: those whose house has appreciated fall into the same trap. Booms inflate their expectations.

The human brain indexes facts in terms of stories about people, not in terms of numbers. Once prices start rising, everyone knows someone who made a killing selling their house. That becomes the story.

Then there is money illusion. We remember the prices at which we bought and sold. Unlike stocks, house prices are not “split” over time. So we think in terms of huge nominal profits, and forget inflation, costs of repairs, and mortgage interest. Stocks are quoted as annual rates and compared to indices; not so houses.

Add this up and Shiller thinks Americans have formed a housing bubble to match the internet bubble. But others have it worse. Between 1997 and 2005, house prices in Ireland, the UK and Spain all rose by more than twice the increase for the US. Mad? Maybe not. Behavioural economists might simply say the Irish, British and Spanish are very bad decision-makers.

Pace of US job creation slows/US added 88,000 jobs in April

Pace of US job creation slows
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: May 4 2007 15:23 | Last updated: May 4 2007 21:41

US job creation slowed to its weakest pace in more than two years last month as staff cuts extended beyond the manufacturing and construction sectors to the retail trade, official figures showed on Friday.

The unemployment rate rose to 4.5 per cent from 4.4 per cent as 88,000 workers were added to payrolls, compared with an increase of 177,000 the previous month, according to the labour department.

The slowdown in job creation reflects recent economic weakness but is likely to be viewed by the Federal Reserve as a welcome sign that wage and inflation pressures are easing.

Haseeb Ahmed, an economist at JP Morgan Chase, said the heavy job losses in the retail sector were a sign of a “broad-based deceleration” in employment in the service sector. He said this would result in a “downshift” in overall job creation to a level below recent months.

The signs of weakness in service employment underlined fears about the resilience of consumer spending.

Lena Komileva, an economist at Tullett Prebon, said: “A weaker labour market as a result of the downturn in business cycle is one of the main risks to the consumer and the economy.”

But Peter Kretzmer, an economist at Bank of America, said the pace of job creation was “not sufficiently weak to arouse significant worries at the Fed”.

The figures meant “the Fed will make no significant change in its policy posture when it meets next week, expecting continued moderate economic growth while maintaining inflation as its predominant policy concern”, he said.

Mr Kretzmer said the softer job market was “consistent with the easing of labour market pressures that would be expected with recently slower GDP growth and is sought by Fed policymakers.”

Peter Morici, a professor at the University of Maryland, said: “Somewhat slower employment growth in April is consistent with the recent pickup in productivity growth and a moderately expanding economy.

“Moderate growth and rising labour productivity should keep wage inflation in check.”

Wages increased a moderate 4 cents an hour or 0.2 per cent to an average of $17.25 an hour after rising 0.3 per cent the previous month. The heaviest job losses were in the retail sector – which shed 26,000 workers – while housebuilders cut 11,000 positions and manufacturers eliminated 19,000.

David Huether, chief economist at the National Association of Manufacturers, said March was a “lacklustre month for hiring managers” as a slowdown in demand for autos “and the housing slump resonated into various industries”.

Government bond prices climbed as investors priced in a slightly greater chance of a rate cut in the coming months to bolster growth with the yield on the benchmark 10-year US Treasury note falling to 4.64 per cent from 4.67 per cent.

US added 88,000 jobs in April
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: May 4 2007 15:23 | Last updated: May 4 2007 15:23

The US unemployment rate rose in April as fewer jobs were created than expected and lay-offs spread beyond the construction and manufacturing sectors, data published on Friday showed.

The unemployment rate rose to 4.5 per cent from 4.4 per cent while 88,000 workers were added to payrolls, compared with an increase of 177,000 the previous month, according to the labour department.

The weakest job creation in more than two years may undermine wage growth for workers but is likely to be viewed by the Federal Reserve as a welcome sign that inflation pressures are easing and that the economy is on track for moderate growth.

Peter Morici, a professor at the University of Maryland, said ”somewhat slower employment growth in April is consistent with the recent pick-up in productivity growth and a moderately expanding economy”.

”Moderate growth and rising labour productivity should keep wage inflation in check,” he added.

Alan Ruskin, an analyst at RBC, said the figures would ”tend to reinforce the prospect” that the Fed would leave monetary policy unchanged next month and keep interest rates on hold.

Government bond prices climbed and the yield on the benchmark 10-year US Treasury note fell to 4.64 per cent from 4.67 per cent as investors priced in a slightly greater chance of a rate cut in the coming months to bolster growth.

The heaviest job losses were in the retail sector, which shed 26,000 workers, while housebuilders cut 11,000 positions and manufacturers eliminated 19,000.

The lay-offs in construction and manufacturing were widely expected following a protracted slowdown in both sectors while the job cuts in retail were steeper than forecast.

Wages increased a moderate 4 cents per hour or 0.2 per cent after rising 0.3 per cent the previous month.