February 12, 2006
It Doesn't Pay to Be in the A.M.T. Zone
By DAVID CAY JOHNSTON
AFTER President Bush and Congress cut tax rates on dividends and long-term capital gains to a top rate of 15 percent in 2003, many investors bought stocks that make big cash payouts, expecting to benefit from lower taxes.
For many people, it has not worked out that way. That is because your actual tax rate may not be the one that the politicians talked about or that the Internal Revenue Service prints on its tax forms.
The culprit is the alternative minimum tax, which runs parallel to the regular income tax system. The A.M.T. has its own rules, including fewer deductions and just two tax rates, 26 percent and 28 percent. If the alternative tax is higher than the one you would owe under the regular tax system, you pay the higher bill.
Taxpayers subject to the alternative system pay the 15 percent rate on dividends and long-term capital gains unless they fall into a netherworld known as the phase-out zone. In 2005, that zone included married couples with annual incomes of $150,000 to $382,000, and single filers making $112,500 to $273,000.
Taxpayers in the phase-out zone pay even higher rates on wage income than other people trapped by the A.M.T. — as much as 35 percent on each additional dollar of income. For people whose income exceeds the phase-out zone limits, the statutory rates apply and any additional wages are taxed at 28 percent and dividends and long-term gains are taxed at 15 percent.
But those unfortunate enough to dwell in the zone must pay an effective tax rate on dividends and long-term gains of 21.5 percent or 22 percent, instead of 15 percent.
This extra tax is just one of the many painful features of the alternative levy. Under the alternative tax, people cannot deduct property taxes, for example, so their cost of homeownership climbs. But the interaction of the alternative tax and the 2003 Bush tax cuts directly affect the taxation of investments in stocks.
Imposing higher taxes on people at such incomes was not part of the original intent of the alternative tax. Congress created it in 1969 to make sure that those making more than $200,000 — the equivalent of more than $1 million in today's dollars — could not live tax free by making unlimited use of exotic tax breaks like the oil depletion allowance.
Over time, Congress has excluded most of these tax breaks from the alternative levy. And in 1986, Congress revised the list of tax deductions that would push a taxpayer into the alternative system to include those routinely taken by most Americans. They include the standard deduction; personal exemptions for the taxpayer, spouse and children; deductions for state income and local property taxes; and even some medical deductions for the severely ill or injured.
The White House has said repeatedly that it will take measures to mitigate the impact of the alternative tax on people of moderate income, and restore at least some of the benefits of the Bush tax cuts that were taken back by the alternative tax.
In his State of the Union address, President Bush again called for making his tax cuts permanent, but he said nothing about overhauling or repealing the alternative minimum tax.
The A.M.T. has become such a money maker that by 2008 its repeal would cost more than repealing the regular income tax, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, two research institutions in Washington.
Over the next decade, the alternative tax will cost Americans $1.1 trillion in additional taxes, of which $739 billion is a result of the Bush tax cuts not being integrated into the levy, according to a report by the Congressional Joint Committee on Taxation. Those hit hardest are couples with two or more children who own their homes, invest and make $75,000 to $500,000 a year, according to the Tax Policy Center computer model.
WHILE the administration has never proposed a specific plan to change the alternative minimum tax or to exempt dividends and long-term gains from the phase-out range, Congress initiated a small adjustment five years ago. It exempted the first $58,000 earned by married couples ($40,250 for singles) from the alternative tax calculation for 2001 through last year. This patch was not renewed for 2006, dropping the exemption to $45,000 for couples ($33,750 for singles) unless a new patch is voted into law.
Investors who have fallen into the phase-out zone face a quandary. Should they buy high-dividend stocks, even though they will not get the full benefit of reduced tax rates? The short answer is this: if it makes sense to buy the shares for other reasons, the extra tax probably should not deter them.
Rich Carreiro is one of those rare taxpayers who knew before he invested that he would not get the 15 percent rate on dividends. Mr. Carreiro, 38, takes a keen interest in the tax code, which is as complex as the code he works with as a software engineer in Arlington, Mass.
"To move out of dividend-bearing stocks just because I am paying 22 percent instead of the promised 15 percent would cause more harm than good," he said. "The idea in investing is not to minimize your tax; it is to maximize your after-tax return. After all, you can pay no tax by living off money you've stuffed in your mattress, but that doesn't make good sense."
One investing change that Mr. Carreiro and his wife did make because of the alternative tax was to avoid money market and bond funds that buy private activity bonds — those whose proceeds are used by private entities. Under the alternative system, income from these bonds is subject to taxes at the higher rates applied to wages.
Ed Grogan, a financial planner in Gig Harbor, Wash., says he tells clients not to let the extra tax deter them from buying stocks that they believe have a good future just because they will not qualify for the 15 percent rate on dividends.
"Stick with your investing fundamentals," he said.
STEPHEN J. ENTIN, a proponent in Washington of the supply-side theory of taxation that favors eliminating most taxes on capital, said last year that denying the 15 percent tax rate to some investors "poisons the tax cut."
Mr. Entin, the president of the Institute for Research on the Economics of Taxation, said in an interview last month that "you should be a little more ticked off at the world" if you are in the phase-out range and, like Mr. Carreiro, pay higher tax rates on dividends.
In a report, Mr. Entin wrote that investors are still better off under the 2003 tax rate cuts even if they are in the phase-out range. That is because the phase-out rates are still significantly lower than the tax rates in effect before the 2003 tax cuts.
Investors who are stuck in the phase-out range and avoid dividend-paying stocks may find that they still have a vexing tax problem. That is because the higher tax rates that apply to taxes on dividends also apply to long-term capital gains. If you are in the zone, you must pay the higher tax on capital gains, and you cannot take a federal deduction for state and local income taxes on them.
Of course, if the stocks pay no dividend, no tax is due until they have been sold. By that time, your income could be above or below the phase-out range, so you could qualify for the 15 percent tax rate on their gains.
By then, though, Congress may have made the tax code even more complicated.
Copyright 2006The New York Times Company
Saturday, March 17, 2007
Mexico Eyes Tax Reform
http://www.latimes.com/business/la-fi-mextax17mar17,1,1889036.story?coll=la-headlines-business
Mexico needs to overhaul tax collection
As oil production drops, the nation must tackle loopholes and rampant evasion to raise revenue.
By Marla Dickerson
Times Staff Writer
March 17, 2007
MEXICO CITY — President Felipe Calderon has sent federal troops to hot spots around the country to combat drug traffickers in recent months. But another group of scofflaws may prove even tougher to bring to justice: Mexico's tax cheats.
In the next few weeks Calderon's administration will unveil a revenue-raising plan that will probably prove as divisive as it could be pivotal for Mexico's future.
Mexico needs better tax collection — and fast. Production at Pemex, the state oil monopoly and Mexico's biggest taxpayer, is falling. Evasion among businesses and individuals is rampant. At a time when Pacific Rim trade rivals such as China are investing billions of dollars in superhighways and research centers to speed economic growth, Mexico is struggling to fund basics such as sewers and police.
Experts across the political spectrum concur that Mexico needs significantly higher tax receipts to improve its competitiveness and fight poverty. The tough part for Calderon, who took office Dec. 1, will be getting people here to agree on who should pay.
His predecessor, Vicente Fox, was stymied by a gridlocked Congress in his attempts to implement fiscal reforms. Calderon, a conservative who won the presidency by a narrow margin, likewise lacks a strong mandate.
On one hand, he risks alienating the businesspeople who helped elect him if he attempts to close corporate loopholes. On the other, Calderon could inflame leftist opponents if he tries to crack down on off-the-books workers or relies too heavily on consumption taxes that would hit low-income Mexicans the hardest.
Groups on the right and the left are maneuvering to protect their turf. Some have already served Calderon with a tax notice of their own: Hands off.
"The biggest fear is that it won't be equitable," said Rogelio Ramirez de la O, an independent Mexico City economist who advised Calderon's populist rival Andres Manuel Lopez Obrador during the campaign. "Everyone thinks the other guy should pay."
The stakes are high. Ramirez de la O says foreign companies are looking to see whether Mexico is serious about investing in itself as they contemplate where to put their next offshore factories or service centers. Mexico's crumbling infrastructure and rising crime have persuaded some to go elsewhere. At the same time, Mexico's poor, who nearly delivered the presidency to Lopez Obrador in an extremely tight election, want to see their lives improved.
Mexico's tax crunch has been decades in the making.
The world's 13th-largest economy raises tax revenue about as effectively as Sri Lanka and Kazakhstan as a percentage of its gross domestic product, World Bank data indicate. The rate of evasion by individuals and businesses is running at about 50%, according to some estimates.
Mexico's tax collectors are so ineffective that the government has resorted to gimmicks, including prize giveaways, to entice citizens to pay their share.
Experts point to a variety of factors for the country's poor showing, including its vast underground economy, complex tax laws and overburdened auditors. Government waste and corruption have sapped the public's willingness to pay.
So has the lack of local control. The federal government collects most tax revenue, then redistributes it back to Mexico's states. The top-down approach means citizens and local officials have no assurance that their taxes will stay in their communities to improve streets and schools.
But the biggest culprit is oil. Petroleum sales and related taxes have generated more than $335 billion in the last six years alone. That gusher of riches has removed the urgency for legislators to act. It's far easier to squeeze more money out of Pemex than to enrage voters with tax increases or tougher enforcement. Oil revenue last year funded nearly 40% of public spending.
Now production at the country's largest oil field, Cantarell in the Gulf of Mexico, is declining rapidly.
With nothing on the horizon to replace it, Calderon knows that Pemex must be allowed to reinvest more of its earnings to fund exploration and development — and contribute less to the public till.
Mexico has a little more than a decade's worth of proven reserves remaining, increasing pressure on Calderon to make some headway on the nation's tax mess during his six-year term.
His financial team has been meeting quietly with legislators to start hammering out a consensus.
One of the biggest potential conflicts centers on Mexico's value-added tax, a 15% levy that functions as a sales tax for consumers. Calderon wants legislators to consider lowering the tax but applying it to items that are currently exempt, including food and medicine.
Such a strategy would raise billions of dollars quickly and easily. Consumption taxes, however, are regressive, hitting low-income households harder than rich ones. Mexico's Congress rejected a similar measure proposed by Fox.
Lopez Obrador, who charges that he was cheated out of the presidency by vote fraud, has been steadfast in his opposition to value-added taxes on staples. Mexicans already are steamed over rising food costs. Thousands took to the streets this year to protest skyrocketing tortilla prices. Lopez Obrador wants to eliminate loopholes and lucrative deductions for businesses and the wealthy.
"We won't permit more taxes to be levied on the poor and middle classes while the powerful and influential maintain their fiscal privileges," he said at a massive rally late last year.
Calderon won't have any easier a time tapping businesses. He has been in office barely three months, but companies have already rejected two attempts by his administration to raise their taxes.
The first, a 5% levy on soda pop, was defeated after heavy lobbying by soft-drink makers. The second, the elimination of some deductions that business filers can claim to reduce an asset tax, has swamped Mexico's courts with thousands of appeals by companies saying they will be irreparably harmed.
"We pay a number of taxes already," said Juan Manuel Lopez Diaz, an accountant for a mid-size home builder in Mexico City that faces an increase of $60,000 this year. "That's why we're fighting this one."
Critics say Mexico's tax code is riddled with loopholes for companies. They point to New York-based Citibank's tax-free acquisition of Mexico's Banamex in 2001, a $12.5-billion deal, as a prime example of how corporations avoid paying their fair share.
Business leaders counter that the government should focus on increasing Mexico's tiny base of contributors instead of punishing existing filers. Untold billions of dollars of commerce go untaxed in the underground economy. Entire industries, such as retail music sales, have succumbed almost completely to piracy.
As many as half the nation's workers are believed to be toiling off the books. Many of them are low-income street vendors. But plenty of doctors, dentists and other professionals aren't filing returns either, tax officials say.
Bringing tax evaders into the fold won't be cheap or easy. The effort would require an army of auditors and systems that Mexico doesn't have. Calderon has proposed simplifying the filing process to entice more people to contribute.
But entrepreneurs such as Mexico City fruit vendor Gabriel Moreno say they won't volunteer a peso.
"The government gives us no employment, no pensions, no healthcare," he said. "Why should I pay?"
*
marla.dickerson@latimes.com
Times staff writer Cecilia Sanchez contributed to this report.
*
(INFOBOX BELOW)
Lax enforcement
Mexico ranks among the world's big economies, but it's a laggard when it comes to tax collection.
Taxes as a percentage of gross domestic product*
France: 43.7%
Italy: 42.2%
Britain: 36.1%
Spain: 35.1%
Germany: 34.6%
Canada: 33.0%
Turkey: 31.1%
United States: 25.4%
Japan: 25.3%**
South Korea: 24.6%
Mexico: 18.5%
*All taxes, all levels of government in 2004
**For 2003; 2004 not available
-
Mexico needs to overhaul tax collection
As oil production drops, the nation must tackle loopholes and rampant evasion to raise revenue.
By Marla Dickerson
Times Staff Writer
March 17, 2007
MEXICO CITY — President Felipe Calderon has sent federal troops to hot spots around the country to combat drug traffickers in recent months. But another group of scofflaws may prove even tougher to bring to justice: Mexico's tax cheats.
In the next few weeks Calderon's administration will unveil a revenue-raising plan that will probably prove as divisive as it could be pivotal for Mexico's future.
Mexico needs better tax collection — and fast. Production at Pemex, the state oil monopoly and Mexico's biggest taxpayer, is falling. Evasion among businesses and individuals is rampant. At a time when Pacific Rim trade rivals such as China are investing billions of dollars in superhighways and research centers to speed economic growth, Mexico is struggling to fund basics such as sewers and police.
Experts across the political spectrum concur that Mexico needs significantly higher tax receipts to improve its competitiveness and fight poverty. The tough part for Calderon, who took office Dec. 1, will be getting people here to agree on who should pay.
His predecessor, Vicente Fox, was stymied by a gridlocked Congress in his attempts to implement fiscal reforms. Calderon, a conservative who won the presidency by a narrow margin, likewise lacks a strong mandate.
On one hand, he risks alienating the businesspeople who helped elect him if he attempts to close corporate loopholes. On the other, Calderon could inflame leftist opponents if he tries to crack down on off-the-books workers or relies too heavily on consumption taxes that would hit low-income Mexicans the hardest.
Groups on the right and the left are maneuvering to protect their turf. Some have already served Calderon with a tax notice of their own: Hands off.
"The biggest fear is that it won't be equitable," said Rogelio Ramirez de la O, an independent Mexico City economist who advised Calderon's populist rival Andres Manuel Lopez Obrador during the campaign. "Everyone thinks the other guy should pay."
The stakes are high. Ramirez de la O says foreign companies are looking to see whether Mexico is serious about investing in itself as they contemplate where to put their next offshore factories or service centers. Mexico's crumbling infrastructure and rising crime have persuaded some to go elsewhere. At the same time, Mexico's poor, who nearly delivered the presidency to Lopez Obrador in an extremely tight election, want to see their lives improved.
Mexico's tax crunch has been decades in the making.
The world's 13th-largest economy raises tax revenue about as effectively as Sri Lanka and Kazakhstan as a percentage of its gross domestic product, World Bank data indicate. The rate of evasion by individuals and businesses is running at about 50%, according to some estimates.
Mexico's tax collectors are so ineffective that the government has resorted to gimmicks, including prize giveaways, to entice citizens to pay their share.
Experts point to a variety of factors for the country's poor showing, including its vast underground economy, complex tax laws and overburdened auditors. Government waste and corruption have sapped the public's willingness to pay.
So has the lack of local control. The federal government collects most tax revenue, then redistributes it back to Mexico's states. The top-down approach means citizens and local officials have no assurance that their taxes will stay in their communities to improve streets and schools.
But the biggest culprit is oil. Petroleum sales and related taxes have generated more than $335 billion in the last six years alone. That gusher of riches has removed the urgency for legislators to act. It's far easier to squeeze more money out of Pemex than to enrage voters with tax increases or tougher enforcement. Oil revenue last year funded nearly 40% of public spending.
Now production at the country's largest oil field, Cantarell in the Gulf of Mexico, is declining rapidly.
With nothing on the horizon to replace it, Calderon knows that Pemex must be allowed to reinvest more of its earnings to fund exploration and development — and contribute less to the public till.
Mexico has a little more than a decade's worth of proven reserves remaining, increasing pressure on Calderon to make some headway on the nation's tax mess during his six-year term.
His financial team has been meeting quietly with legislators to start hammering out a consensus.
One of the biggest potential conflicts centers on Mexico's value-added tax, a 15% levy that functions as a sales tax for consumers. Calderon wants legislators to consider lowering the tax but applying it to items that are currently exempt, including food and medicine.
Such a strategy would raise billions of dollars quickly and easily. Consumption taxes, however, are regressive, hitting low-income households harder than rich ones. Mexico's Congress rejected a similar measure proposed by Fox.
Lopez Obrador, who charges that he was cheated out of the presidency by vote fraud, has been steadfast in his opposition to value-added taxes on staples. Mexicans already are steamed over rising food costs. Thousands took to the streets this year to protest skyrocketing tortilla prices. Lopez Obrador wants to eliminate loopholes and lucrative deductions for businesses and the wealthy.
"We won't permit more taxes to be levied on the poor and middle classes while the powerful and influential maintain their fiscal privileges," he said at a massive rally late last year.
Calderon won't have any easier a time tapping businesses. He has been in office barely three months, but companies have already rejected two attempts by his administration to raise their taxes.
The first, a 5% levy on soda pop, was defeated after heavy lobbying by soft-drink makers. The second, the elimination of some deductions that business filers can claim to reduce an asset tax, has swamped Mexico's courts with thousands of appeals by companies saying they will be irreparably harmed.
"We pay a number of taxes already," said Juan Manuel Lopez Diaz, an accountant for a mid-size home builder in Mexico City that faces an increase of $60,000 this year. "That's why we're fighting this one."
Critics say Mexico's tax code is riddled with loopholes for companies. They point to New York-based Citibank's tax-free acquisition of Mexico's Banamex in 2001, a $12.5-billion deal, as a prime example of how corporations avoid paying their fair share.
Business leaders counter that the government should focus on increasing Mexico's tiny base of contributors instead of punishing existing filers. Untold billions of dollars of commerce go untaxed in the underground economy. Entire industries, such as retail music sales, have succumbed almost completely to piracy.
As many as half the nation's workers are believed to be toiling off the books. Many of them are low-income street vendors. But plenty of doctors, dentists and other professionals aren't filing returns either, tax officials say.
Bringing tax evaders into the fold won't be cheap or easy. The effort would require an army of auditors and systems that Mexico doesn't have. Calderon has proposed simplifying the filing process to entice more people to contribute.
But entrepreneurs such as Mexico City fruit vendor Gabriel Moreno say they won't volunteer a peso.
"The government gives us no employment, no pensions, no healthcare," he said. "Why should I pay?"
*
marla.dickerson@latimes.com
Times staff writer Cecilia Sanchez contributed to this report.
*
(INFOBOX BELOW)
Lax enforcement
Mexico ranks among the world's big economies, but it's a laggard when it comes to tax collection.
Taxes as a percentage of gross domestic product*
France: 43.7%
Italy: 42.2%
Britain: 36.1%
Spain: 35.1%
Germany: 34.6%
Canada: 33.0%
Turkey: 31.1%
United States: 25.4%
Japan: 25.3%**
South Korea: 24.6%
Mexico: 18.5%
*All taxes, all levels of government in 2004
**For 2003; 2004 not available
-
What We See in Hugo Chavez
March 17, 2007
By LUISA VALENZUELA
Buenos Aires
THE fervent welcome that greeted President Hugo Chávez of Venezuela during his visit to Argentina a week ago was inexplicable to some Argentines and left others indignant. Many here tend to mistrust populism and demagoguery, finding them redolent of Peronism. But even among the wary, a window of hope has opened, with Mr. Chávez as its symbol.
A lot of water has passed under the bridge since Juan Perón’s time. And it was the expansive waters of our own broad river that defined the vectors of force last weekend. For once, the tensions in the American hemisphere flowed on an east-west axis along the Río de la Plata — which means “River of Silver” and by extension, very appropriately in this case, “River of Money.”
The struggle was about energy, both concrete and metaphorical, and equally combustible in both forms. Across the river in Uruguay’s capital, Montevideo, the presence of President George W. Bush caused red-hot passions to flare, along with sizable protests like those he faced in Brazil. In Buenos Aires, my city, on the opposite bank of that river of money, red abounded as well, though in our case it had a very different connotation. Red was the color of President Chávez’s jacket and of many of the flags brought by the masses who flooded into a stadium to hear the president of Venezuela speak.
Unlike the homogenous rallies of Peronist times, the 30,000 people in this crowd came from very diverse backgrounds. In Argentina, the economic crisis of December 2001 significantly altered not only our social dynamic but our semantics. We no longer talk about the “pueblo” — which means town or village as well as people. Now we talk about the “gente,” which also means people, but with a different nuance, derived as it is from the Latin gens meaning race, clan or breed.
The new vocabulary transcends distinctions of class: the middle classes have now merged with the poor to demand their rights. Hence many students and professionals were in attendance that day, not necessarily attracted by the figure of President Chávez himself so much as by the anti-imperialist opportunity he symbolized. We Argentines, who once imagined ourselves more sophisticated, or more European, than the citizens of neighboring states, were brought closer to the rest of the continent by our impoverishment, and we find ourselves more open to the idea of pan-Latin American solidarity.
Perhaps last week’s crowd also recognized the part that President Chávez’s monetary aid played in our recuperation of that illusion known as “national identity.” For Argentina had virtually disappeared as an autonomous country during the presidency of Carlos Menem from 1989 to 1999, the era of our “carnal relations” with the United States, which took the form of spurious privatizations and a fictitious exchange rate.
While many in Argentina would, nevertheless, not hesitate to call the Venezuelan president a clown or a madman, it’s worth keeping in mind that a very heady dose of megalomania is a prerequisite for even dreaming of confronting a rival as overwhelmingly powerful as the United States — which is also led by a president viewed, in many quarters, as a clown and a madman.
President Chávez’s weapons of seduction are his superabundance of petrodollars and his obsession with a shared Latin American project. His plan is to realize the dream of Simón Bolívar, the old utopian vision of Latin American integration that today seems more viable than ever before.
It may be that President Bush chose to venture into these forgotten Southern latitudes to counter that vision. In Brazil, he tried to draw attention to the production of ethanol, an ecologically correct rival to petroleum that nonetheless depletes the earth. And in Uruguay, all Mr. Bush seemed to be trying to do was irritate the other governments of South America by promoting a Free Trade Area of the Americas project in opposition to Mercosur, the southern common market formed in 1991 by Brazil, Argentina, Paraguay, Uruguay and, somewhat later, Venezuela.
These things sometimes backfire. President Bush found himself repudiated on one bank of the Plata while President Chávez was getting ovations on the opposite one: each contender in his corner and the moral triumph to the last man left standing, as in a boxing ring.
Some Argentines severely criticized President Nestor Kirchner for providing his Venezuelan counterpart with such a platform, complaining that President Chávez bought and paid for his visit by showering Argentina with dollars and benefits. Not so. The bargain seems fair — oil in exchange for agricultural technology and experts — and since he came to power, President Kirchner has made his country the platform for several other presidents from the Americas: Fidel Castro, Michelle Bachelet, Evo Morales and President Chávez himself, on previous occasions.
Two major Argentine characteristics are in play here: intrinsic distrust and the need for immediate gratification. Mr. Chávez awakens both of these inclinations, and it’s interesting to see them balance each other out. The dream of a single-currency Latin American Union, modeled on the European Union, to create, insofar as possible, a buffer against the hegemony of the United States no longer seems so impossible.
I’m no political analyst; I have delved into politics only as a fiction writer. But I’m an optimist by nature, and the feeling of empowerment that President Chávez instills, and that various South American governments are endorsing, strikes me as a good engine for further progress — a means of upgrading ourselves from the status of someone’s backyard into that of a truly autonomous region, beyond Mr. Chávez, Mr. Bush and every other form of demagoguery.
Luisa Valenzuela is the author of “Black Novel With Argentines” and “The Lizard’s Tail.” This article was translated by Esther Allen from the Spanish.
Copyright 2007 The New York Times Company
By LUISA VALENZUELA
Buenos Aires
THE fervent welcome that greeted President Hugo Chávez of Venezuela during his visit to Argentina a week ago was inexplicable to some Argentines and left others indignant. Many here tend to mistrust populism and demagoguery, finding them redolent of Peronism. But even among the wary, a window of hope has opened, with Mr. Chávez as its symbol.
A lot of water has passed under the bridge since Juan Perón’s time. And it was the expansive waters of our own broad river that defined the vectors of force last weekend. For once, the tensions in the American hemisphere flowed on an east-west axis along the Río de la Plata — which means “River of Silver” and by extension, very appropriately in this case, “River of Money.”
The struggle was about energy, both concrete and metaphorical, and equally combustible in both forms. Across the river in Uruguay’s capital, Montevideo, the presence of President George W. Bush caused red-hot passions to flare, along with sizable protests like those he faced in Brazil. In Buenos Aires, my city, on the opposite bank of that river of money, red abounded as well, though in our case it had a very different connotation. Red was the color of President Chávez’s jacket and of many of the flags brought by the masses who flooded into a stadium to hear the president of Venezuela speak.
Unlike the homogenous rallies of Peronist times, the 30,000 people in this crowd came from very diverse backgrounds. In Argentina, the economic crisis of December 2001 significantly altered not only our social dynamic but our semantics. We no longer talk about the “pueblo” — which means town or village as well as people. Now we talk about the “gente,” which also means people, but with a different nuance, derived as it is from the Latin gens meaning race, clan or breed.
The new vocabulary transcends distinctions of class: the middle classes have now merged with the poor to demand their rights. Hence many students and professionals were in attendance that day, not necessarily attracted by the figure of President Chávez himself so much as by the anti-imperialist opportunity he symbolized. We Argentines, who once imagined ourselves more sophisticated, or more European, than the citizens of neighboring states, were brought closer to the rest of the continent by our impoverishment, and we find ourselves more open to the idea of pan-Latin American solidarity.
Perhaps last week’s crowd also recognized the part that President Chávez’s monetary aid played in our recuperation of that illusion known as “national identity.” For Argentina had virtually disappeared as an autonomous country during the presidency of Carlos Menem from 1989 to 1999, the era of our “carnal relations” with the United States, which took the form of spurious privatizations and a fictitious exchange rate.
While many in Argentina would, nevertheless, not hesitate to call the Venezuelan president a clown or a madman, it’s worth keeping in mind that a very heady dose of megalomania is a prerequisite for even dreaming of confronting a rival as overwhelmingly powerful as the United States — which is also led by a president viewed, in many quarters, as a clown and a madman.
President Chávez’s weapons of seduction are his superabundance of petrodollars and his obsession with a shared Latin American project. His plan is to realize the dream of Simón Bolívar, the old utopian vision of Latin American integration that today seems more viable than ever before.
It may be that President Bush chose to venture into these forgotten Southern latitudes to counter that vision. In Brazil, he tried to draw attention to the production of ethanol, an ecologically correct rival to petroleum that nonetheless depletes the earth. And in Uruguay, all Mr. Bush seemed to be trying to do was irritate the other governments of South America by promoting a Free Trade Area of the Americas project in opposition to Mercosur, the southern common market formed in 1991 by Brazil, Argentina, Paraguay, Uruguay and, somewhat later, Venezuela.
These things sometimes backfire. President Bush found himself repudiated on one bank of the Plata while President Chávez was getting ovations on the opposite one: each contender in his corner and the moral triumph to the last man left standing, as in a boxing ring.
Some Argentines severely criticized President Nestor Kirchner for providing his Venezuelan counterpart with such a platform, complaining that President Chávez bought and paid for his visit by showering Argentina with dollars and benefits. Not so. The bargain seems fair — oil in exchange for agricultural technology and experts — and since he came to power, President Kirchner has made his country the platform for several other presidents from the Americas: Fidel Castro, Michelle Bachelet, Evo Morales and President Chávez himself, on previous occasions.
Two major Argentine characteristics are in play here: intrinsic distrust and the need for immediate gratification. Mr. Chávez awakens both of these inclinations, and it’s interesting to see them balance each other out. The dream of a single-currency Latin American Union, modeled on the European Union, to create, insofar as possible, a buffer against the hegemony of the United States no longer seems so impossible.
I’m no political analyst; I have delved into politics only as a fiction writer. But I’m an optimist by nature, and the feeling of empowerment that President Chávez instills, and that various South American governments are endorsing, strikes me as a good engine for further progress — a means of upgrading ourselves from the status of someone’s backyard into that of a truly autonomous region, beyond Mr. Chávez, Mr. Bush and every other form of demagoguery.
Luisa Valenzuela is the author of “Black Novel With Argentines” and “The Lizard’s Tail.” This article was translated by Esther Allen from the Spanish.
Copyright 2007 The New York Times Company
Thursday, March 15, 2007
University Fee Increases, California
UC, Cal State approve fee hikesCosts will climb at least 7% in the fall. The universities say the increases make up for shortfalls in funding.
By Larry Gordon and Richard C. Paddock
Times Staff Writers
March 15, 2007
University students will pay 10% more in fees at Cal State campuses in the fall and at least 7% more in the UC system to make up for what officials say are shortfalls in state funding.
The raises were approved Wednesday over the protests of students, who complained that charges have nearly doubled in a decade without regard to the escalating costs of textbooks and housing.4
But education leaders stressed that there was no fee hike last year and that the 23 Cal States and the 10 University of California campuses remain a bargain compared with other states' schools and especially compared with private colleges. They also said financial aid would cover extra costs for needy students.
The Cal State Board of Trustees, which met in Long Beach, voted to raise basic full-time undergraduate fees by $252, to an average of $3,451 for the year.
That overall figure will include $2,772 in universitywide fees and $679, on average, in campus-based charges. Room, board and books are extra. Cal State graduate fees would increase $312 to $3,414.
The UC Board of Regents, gathered at UCLA, raised fees 7% for most students. That amounts to $435 for undergraduates, who will pay an average of $7,347 in the next academic year, not including housing and books.
Most UC graduate students will pay $483 more, or an average of $9,481 before other costs. Fees will rise 10% at five UC law and business schools.
The moves affect a large swath of students: the Cal State system enrolls about 417,000 students and UC about 209,000. And not surprisingly, student reaction was angry.
The fee increase amounts to "the systematic destruction of our public education system," Payam Shahfari, a senior at Cal State Fullerton, told the trustees. A business management major, he said that those costs, along with books, parking permits and housing, were pushing out students and that financial aid was not keeping up.
At the UC meeting, dozens of students stood and raised their fists in a silent protest, then chanted "No fee increase now" as they left the meeting.
Administrators at both systems said their decisions were forced by fiscal shortfalls in Sacramento, and they pledged to roll back all or parts of the hikes if more money is appropriated by the Legislature and governor. Last year, proposals for 8% fee raises were canceled after the final state budget gave higher education extra funds.
Officials stress that no needy student will be denied an education because a third of the new fees charges will go toward financial aid.
About 146,000 of the 417,000 Cal State students will not pay any increase, said Allison Jones, assistant vice chancellor for student services and academic affairs. And UC said 43% of its undergraduates would not have to pay any of it.
The only Cal State trustee to vote against the fee plan was Melinda Guzman, a Sacramento-based attorney. She said she wanted the university to hire an outside consultant to examine all spending and revenue and determine whether the fee raise "is the best and only course of action."
But Roberta Achtenberg, chairwoman of the Cal State board, said the university could not wait if it were to keep all its programs alive and afford pay raises, including whatever contract emerges from the currently stalled talks with the faculty union.
"We need those resources, including student fees, to sustain an outstanding university," she said.
Several UC regents expressed frustration at the need to impose a significant fee hike this year. The UC board approved the increase by a vote of 13 to 6.
"It's the most agonizing decision the regents face," said UC President Robert C. Dynes, who recommended the hike and voted for it. "Nobody wants to raise fees."
"The reality is the system is under-funded," said regents board Chairman Richard Blum, a San Francisco investment manager and husband of U.S. Sen. Dianne Feinstein (D-Calif.). He voted for the increase.
State officials say that many other states have shifted more of the cost of college to the students than California has.
Cal State says it charges about half of the average fees at 15 comparable universities nationwide. For example, the State University of New York at Albany set student fees at $6,727, and Georgia State University at $4,818 this year.
UC administrators point out that its undergraduate fees compare favorably with other public research institutions, such as the University of Virginia ($8,043 this year) and the University of Michigan ($9,723).
But student activists note that the cost of living in California is significantly higher, especially at urban campuses, and UC students pay more overall than public university students in other states. More students will have to work longer hours at jobs and borrow more, they say.
"The high fees, high financial aid model is not working. Students have to face this problem every day," said Bill Shiebler, president of the University of California Student Assn.
Still, no one denies that UC and Cal States are a bargain compared with the prices of many private colleges, where annual tuition next year is reaching about $35,000.
Gov. Arnold Schwarzenegger has said that he is keeping to his 2004 compact with the public universities that student fee increases would not exceed 10% any year and that enrollments could grow 2.5% a year.
Fees at California's community colleges went down last year to $20 from $26 a unit and would remain there next year if the governor's plans are upheld.
Wednesday's decisions were made at a time of tension between the Cal State administration and the faculty union. After a deadlock in contract negotiations, the two sides are awaiting a neutral fact-finding report. Meanwhile, the faculty union is voting on whether to authorize its leadership to call two-day rolling strikes if further talks fail to reach a contract.
Cal State faculty union President John Travis said the university should be able to fund professors' pay hikes without a student fee raise. Administrators say that would be impossible.
At the UC meeting in Westwood, the regents set a 10% fee hike for law schools at UCLA, UC Berkeley and UC Davis and business schools at UCLA and UC Berkeley. A higher fee was imposed on the five schools on the assumption that most students will earn high salaries after they graduate.
The increase, for example, will be $2,111 at the UC Davis law school, where basic fees will be $25,479 a year without housing. The largest of those jumps will be at UCLA's business school, where a hike of $2,346 will bring fees to $28,312.
Christopher Edley Jr., dean of Boalt Hall law school at UC Berkeley, had urged the regents to treat professional schools separately. Edley, who is seeking to restore the law school's national standing, also proposed a 16% fee hike for Boalt this year and for at least four more years.
The regents declined to impose a higher increase for Boalt but adopted a policy allowing professional schools to be treated differently, setting the stage for bigger hikes in the future.
Although the Hastings law school in San Francisco is part of the UC system, it is governed by an autonomous board and is not subject to the fee increase.
larry.gordon@latimes.com
richard.paddock@latimes.com
*
Gordon reported from Long Beach and Paddock from Westwood.
*
(INFOBOX BELOW)
What they cost
---
The cost of Cal State and UC undergraduate programs compares favorably with some other public universities.
--
Annual fees, 2006-07
---
Cal State: $3,199
U. Florida: $3,330
National average*: $5,836
U. Washington: $5,985
UC: $6,852
U. Texas/ Austin: $7,630**
---
Note: Average tuition and fees for full-time students who are state residents
* Four-year public schools
** Liberal arts major
http://www.latimes.com/news/local/la-me-fees15mar15,1,7917120.story?coll=la-headlines-california
Thursday, March 8, 2007
A United Kingdom? Maybe
March 6, 2007
By NICHOLAS WADE
Britain and Ireland are so thoroughly divided in their histories that there is no single word to refer to the inhabitants of both islands. Historians teach that they are mostly descended from different peoples: the Irish from the Celts and the English from the Anglo-Saxons who invaded from northern Europe and drove the Celts to the country’s western and northern fringes.
But geneticists who have tested DNA throughout the British Isles are edging toward a different conclusion. Many are struck by the overall genetic similarities, leading some to claim that both Britain and Ireland have been inhabited for thousands of years by a single people that have remained in the majority, with only minor additions from later invaders like Celts, Romans, Angles, Saxons, Vikings and Normans. The implication that the Irish, English, Scottish and Welsh have a great deal in common with each other, at least from the geneticist’s point of view, seems likely to please no one. The genetic evidence is still under development, however, and because only very rough dates can be derived from it, it is hard to weave evidence from DNA, archaeology, history and linguistics into a coherent picture of British and Irish origins.
That has not stopped the attempt. Stephen Oppenheimer, a medical geneticist at the University of Oxford, says the historians’ account is wrong in almost every detail. In Dr. Oppenheimer’s reconstruction of events, the principal ancestors of today’s British and Irish populations arrived from Spain about 16,000 years ago, speaking a language related to Basque.
The British Isles were unpopulated then, wiped clean of people by glaciers that had smothered northern Europe for about 4,000 years and forced the former inhabitants into southern refuges in Spain and Italy. When the climate warmed and the glaciers retreated, people moved back north. The new arrivals in the British Isles would have found an empty territory, which they could have reached just by walking along the Atlantic coastline, since the English Channel and the Irish Sea were still land.
This new population, who lived by hunting and gathering, survived a sharp cold spell called the Younger Dryas that lasted from 12,300 to 11,000 years ago. Much later, some 6,000 years ago, agriculture finally reached the British Isles from its birthplace in the Near East. Agriculture may have been introduced by people speaking Celtic, in Dr. Oppenheimer’s view. Although the Celtic immigrants may have been few in number, they spread their farming techniques and their language throughout Ireland and the western coast of Britain. Later immigrants arrived from northern Europe had more influence on the eastern and southern coasts. They too spread their language, a branch of German, but these invaders’ numbers were also small compared with the local population.
In all, about three-quarters of the ancestors of today’s British and Irish populations arrived between 15,000 and 7,500 years ago, when rising sea levels split Britain and Ireland from the Continent and from each other, Dr. Oppenheimer calculates in a new book, “The Origins of the British: A Genetic Detective Story” (Carroll & Graf, 2006).
Ireland received the fewest of the subsequent invaders; their DNA makes up about 12 percent of the Irish gene pool, Dr. Oppenheimer estimates. DNA from invaders accounts for 20 percent of the gene pool in Wales, 30 percent in Scotland, and about a third in eastern and southern England.
But no single group of invaders is responsible for more than 5 percent of the current gene pool, Dr. Oppenheimer says on the basis of genetic data. He cites figures from the archaeologist Heinrich Haerke that the Anglo-Saxon invasions that began in the fourth century A.D. added about 250,000 people to a British population of one to two million, an estimate that Dr. Oppenheimer notes is larger than his but considerably less than the substantial replacement of the English population assumed by others. The Norman invasion of 1066 brought not many more than 10,000 people, according to Dr. Haerke.
Other geneticists say Dr. Oppenheimer’s reconstruction is plausible, though some disagree with details. Several said genetic methods did not give precise enough dates to be confident of certain aspects, like when the first settlers arrived.
“Once you have an established population, it is quite difficult to change it very radically,” said Daniel G. Bradley, a geneticist at Trinity College, Dublin. But he said he was “quite agnostic” as to whether the original population became established in Britain and Ireland immediately after the glaciers retreated 16,000 years ago, as Dr. Oppenheimer argues, or more recently, in the Neolithic Age, which began 10,000 years ago.
Bryan Sykes, another Oxford geneticist, said he agreed with Dr. Oppenheimer that the ancestors of “by far the majority of people” were present in the British Isles before the Roman conquest of A.D. 43. “The Saxons, Vikings and Normans had a minor effect, and much less than some of the medieval historical texts would indicate,” he said. His conclusions, based on his own genetic survey and information in his genealogical testing service, Oxford Ancestors, are reported in his new book, “Saxons, Vikings and Celts: The Genetic Roots of Britain and Ireland.”
A different view of the Anglo-Saxon invasions has been developed by Mark Thomas of University College, London. Dr. Thomas and colleagues say the invaders wiped out substantial numbers of the indigenous population, replacing 50 percent to 100 percent of those in central England. Their argument is that the Y chromosomes of English men seem identical to those of people in Norway and the Friesland area of the Netherlands, two regions from which the invaders may have originated.
Dr. Oppenheimer disputes this, saying the similarity between the English and northern European Y chromosomes arises because both regions were repopulated by people from the Iberian refuges after the glaciers retreated.
Dr. Sykes said he agreed with Dr. Oppenheimer on this point, but another geneticist, Christopher Tyler-Smith of the Sanger Centre near Cambridge, said the jury was still out. “There is not yet a consensus view among geneticists, so the genetic story may well change,” he said. As to the identity of the first postglacial settlers, Dr. Tyler-Smith said he “would favor a Neolithic origin for the Y chromosomes, although the evidence is still quite sketchy.”
Dr. Oppenheimer’s population history of the British Isles relies not only on genetic data but also on the dating of language changes by methods developed by geneticists. These are not generally accepted by historical linguists, who long ago developed but largely rejected a dating method known as glottochronology. Geneticists have recently plunged into the field, arguing that linguists have been too pessimistic and that advanced statistical methods developed for dating genes can also be applied to languages.
Dr. Oppenheimer has relied on work by Peter Forster, a geneticist at Anglia Ruskin University, to argue that Celtic is a much more ancient language than supposed, and that Celtic speakers could have brought knowledge of agriculture to Ireland, where it first appeared. He also adopts Dr. Forster’s argument, based on a statistical analysis of vocabulary, that English is an ancient, fourth branch of the Germanic language tree, and was spoken in England before the Roman invasion.
English is usually assumed to have developed in England, from the language of the Angles and Saxons, about 1,500 years ago. But Dr. Forster argues that the Angles and the Saxons were both really Viking peoples who began raiding Britain ahead of the accepted historical schedule. They did not bring their language to England because English, in his view, was already spoken there, probably introduced before the arrival of the Romans by tribes such as the Belgae, whom Caesar describes as being present on both sides of the Channel.
The Belgae perhaps introduced some socially transforming technique, such as iron-working, which led to their language replacing that of the indigenous inhabitants, but Dr. Forster said he had not yet identified any specific innovation from the archaeological record.
Germanic is usually assumed to have split into three branches: West Germanic, which includes German and Dutch; East Germanic, the language of the Goths and Vandals; and North Germanic, consisting of the Scandinavian languages. Dr. Forster’s analysis shows English is not an offshoot of West Germanic, as usually assumed, but is a branch independent of the other three, which also implies a greater antiquity. Germanic split into its four branches some 2,000 to 6,000 years ago, Dr. Forster estimates.
Historians have usually assumed that Celtic was spoken throughout Britain when the Romans arrived. But Dr. Oppenheimer argues that the absence of Celtic place names in England — words for places are particularly durable — makes this unlikely.
If the people of the British Isles hold most of their genetic heritage in common, with their differences consisting only of a regional flavoring of Celtic in the west and of northern European in the east, might that perception draw them together? Geneticists see little prospect that their findings will reduce cultural and political differences. The Celtic cultural myth “is very entrenched and has a lot to do with the Scottish, Welsh and Irish identity; their main identifying feature is that they are not English,” said Dr. Sykes, an Englishman who has traced his Y chromosome and surname to an ancestor who lived in the village of Flockton in Yorkshire in 1286.
Dr. Oppenheimer said genes “have no bearing on cultural history.” There is no significant genetic difference between the people of Northern Ireland, yet they have been fighting with each other for 400 years, he said.
As for his thesis that the British and Irish are genetically much alike, “It would be wonderful if it improved relations, but I somehow think it won’t.”
Copyright 2007 The New York Times Company
Hooked on Storage
March 8, 2007
By SUZANNE GANNON
Gaithersburg, Md.
ON a recent Saturday afternoon Marcus and Imal Wagner stood in a U-Haul storage warehouse here, surrounded by their castoff possessions: a papier-mâché candy dish, LPs by Cream and the Ventures, a computer printer, a ceramic figurine of a gnome atop a turtle, bolts of taffeta from a long-abandoned pillow-making hobby, and stacks of 25-gallon tubs filled with old files and five years’ worth of paperwork.
Ms. Wagner, a 56-year-old book publicist, spotted a van tire wedged amid the jumble, an item that she seemed not to have noticed on previous visits, and gave her husband a knowing look. “I didn’t want to throw it away so I brought it here,” Mr. Wagner, 53, said, a little defensively.
The Wagners have been bringing their things to this storage warehouse rather than discarding them for two years. “It’s very much a part of our house, even though it’s not in the house,” Ms. Wagner said. “It’s like a hidden room.”
They are not the only ones taking this approach to clutter. According to Michael T. Scanlon Jr., president of the Self Storage Association, a trade group, 11 million American households currently rent storage space, an increase of 90 percent since 1995 — even as the size of new American houses has grown and the size of the American family has shrunk.
In the last two years, close to a million more households have joined the ranks of storage renters, and there is now more than two billion square feet of rental storage space in the United States, earning more than $22 billion in gross revenue in 2006.
Storage-space users have traditionally rented for short periods, Mr. Scanlon said, most commonly during life changes like divorce or relocation. But in recent years a new kind of renter has emerged, one who rents for longer periods, sometimes paying thousands of dollars a year, sometimes for units in faraway cities. These new renters seem compelled to keep trading up, from a cozy “personal closet,” say, to a garage-like room, and then to a second unit or even a third. They represent what Diane Piegza, a spokeswoman for Sovran Self Storage, which owns the Uncle Bob’s chain of storage facilities in 22 states, calls “a segment of the population that has truly embedded storage into its lifestyle.”
For many, the appeal of renting storage space is the way it seems to represent the pursuit of simplicity: by transferring excess stuff to a storage unit, people can free their basements, attics and living rooms from years’ worth of clutter, and create the impression of a pared-down life.
“Once you have a space outside of your home, everything inside becomes nice and organized,” said Jon Weisberg, 63, a communications consultant who lives in Salt Lake City and rents storage space to hold his collection of American folk art and antiquarian books. (Like many storage renters, Mr. Weisberg once kept his treasured belongings far outside his home; after he moved to Utah from Manhattan in 2000, it took him a year and a half to transfer everything from his storage space in New Rochelle, N.Y., to one in Salt Lake City.)
Oddly, though, it’s the opposite of neat-and-tidy that seems to be true for many storage-unit renters. With newly available space, they are able not only to avoid getting rid of things but to accumulate even more. Dee Dee Whipple, a homemaker in Northbrook, Ill., was tempted down this road when she rented two units last year while preparing to sell her house after a divorce. Her real estate agent suggested renting the units after taking one look at Ms. Whipple’s home — with its 400 dolls, 46 boxes of Christmas decorations and 6 artificial Christmas trees — and suggesting that prospective buyers might be “overwhelmed.”
One year and $3,000 later, Ms. Whipple, 59, said her units are “packed up to the ceiling” and the vacuum that resulted in her home — which she has yet to put on the market — has been filled with more purchases. She has rented a third unit.
Ms. Whipple is learning something the Wagners discovered: renting storage space can have a gateway effect, with one unit filling up and leading to the need for a second, and so on. They rented their first unit in 2005 and filled it within six months, then added a larger, 10-by-15-foot space just down the hall. They now pay $335 a month for the two, or roughly $4,000 a year, a figure that Ms. Wagner said took her by surprise when her husband recently checked the bills. She said she was seduced by the out-of-sight-out-of-mind aspect of renting storage space, and by the ease of adding a unit — “the more the merrier!” — acknowledging that she was hooked. But she now sees renting storage as “not really a wise decision — it’s probably wiser to eliminate things.”
Many professional organizers, in fact, advise their clients against renting storage space. “I think the easy access does enable them,” said Dana Korey, a professional organizer in Del Mar, Calif., who estimates that nearly half of her clients rent storage units. “We ask people: ‘Do you really need another aromatherapy candle? You could light 10 a night and still have enough for two years.’ ”
Dr. Gregg Jantz, a psychologist and author in Seattle who has treated patients with pathological hoarding issues, said that hoarders, as well as those with less severe cluttering or collecting tendencies, can lose the ability to appraise the worth of things, attaching sentimental value to nearly everything they own. Easy access to storage space, he said, makes the problem worse. “With the availability of storage units, there is the perception that A, I don’t have to throw everything away, and B, I’m supposed to save everything,” he said.
Peter Balis, 42, fell into a version of this syndrome in 2003 when he began what he calls a love-hate relationship with storage. At the time he lived in a loft in Chicago and owned a weekend house on Lake Michigan. When he sold the country place, Mr. Balis moved its contents, including a pair of bent plywood Eames chairs and an 11-foot carved totem his grandparents bought at a temple in India, into storage nearby. “If you’re predisposed to squirreling you have no reason not to put it there,” he said.
A move to Manhattan a few months later to take a job at John Wiley & Sons, a publishing company where he is now the director of online sales, only added to Mr. Balis’s space constraints, so he rented a 10-by-6-foot walk-in unit in Kingston, N.Y., for which he pays $97 a month, as well as a 5-by-5-foot closet at Manhattan Mini Storage, for which he pays $65. Mr. Balis said the Kingston unit contained a combination of items with real value (the chairs, the totem), delusional perceived value (camping equipment) and limited value (an “Eloise” poster he is saving for his niece).
“I’ve visited it only once in three years and it was a total disaster so I just shut the door,” he said. “It was so full I was terrified to go in.”
So why doesn’t he hold a tag sale and clear out the space? Some of the items were destined for a country house that Mr. Balis and an ex-boyfriend were hoping to buy but never did. Giving up the unit, he said, “would mean admitting defeat.”
“I guess I still hope that someday I will have a second home or a larger apartment where these things will get used,” Mr. Balis said. “I’ve put so much money into it at this point, I’ve got to use these things.”
Meanwhile, the storage industry, which has existed for only about 35 years, has found ways to make rented storage space harder to resist. Companies have introduced automatic billing and promotional schemes like U-Haul’s free first month with a truck rental.
And storage warehouses themselves, once little more than metal sheds along the highway that were vulnerable to theft, have become increasingly sophisticated.
“The first generation was garages in a row,” said Clem Teng, a spokesman for Public Storage of Glendale, Calif., which began 34 years ago with a single structure in a remote stretch of El Cajon, Calif. The company now operates more than 2,000 warehouses in 38 states, many of them with climate-controlled units and electronic key gates.
Beth Silver Pilchik jokes that the storage locker she and her husband rent at Manhattan Mini Storage has better security than their Upper East Side apartment. “Some people are astonished that I’m so proud of it,” said Ms. Silver Pilchik, 36, a marketing consultant who admits talking about her storage unit with friends at cocktail parties. “They think we’re funny that we’re spending money to store things.”
On a recent visit to the branch of Manhattan Mini Storage she uses (there are 17 in the borough), Ms. Silver Pilchik demonstrated her prowess at maneuvering the ladder on wheels that she must use to gain access to her possessions. In addition to stemware from her wedding four years ago, the 8-by-4-foot double-wide locker contains luggage, files and items belonging to her year-old son.
“I’m in a sentimental mode,” she said. “It’s about the first everything: his first shoes, his first pacifier.”
Her son’s arrival required that she convert the dining room of her apartment into a bedroom, so Ms. Silver Pilchik off-loaded an armoire and other furnishings to a larger unit at Broadway Self-Storage in Huntington Station, N.Y.; the unit is cater-corner to her parents’ space in the same facility. Together, the Manhattan and the Huntington Station units cost $325 a month, but Ms. Silver Pilchik considers it money well spent. “I don’t think we could live without it,” she said. “We don’t have to fight about things that have to be thrown out.”
While Ms. Silver Pilchik and her husband are of a similar mind when it comes to storage, some family members would prefer to see stored items not just out of the house but out of their loved ones’ lives for good. Ms. Whipple’s 36-year-old son, Clay, has made no secret of his feelings about his mother’s clutter. “My suggestion was, instead of paying money for the storage units, rent an industrial-size Dumpster, park it in the driveway for a couple of months,” and just dump all the stuff in it, Mr. Whipple said.
Such an outcome is unlikely, he knows. Now that his mother has discovered storage, he said, she will probably rent units for years, if not the rest of her life. (Ms. Whipple disagreed and said that once she sold her current home she would find “a new house with a place to put the stuff.”)
What will Mr. Whipple do if and when responsibility for the units and the items inside shifts to him? “I’m going to open them up and say to my sister, Dana, what do you want? Because the rest of it I will pay the storage facility to throw away,” he said.
The Wagners of Gaithersburg, who have two school-age sons, hope to avoid such a situation and plan to empty their two U-Haul storage units themselves when they move back to Iowa this summer. “There’s an end in sight,” Ms. Wagner said in a determined tone. “When we move we will not be using a storage unit.”
Unless, that is, there is not enough time to sort through all the stuff beforehand, she added. “It pains me to say it, but I would want another storage unit.”
Copyright 2007 The New York Times Company
By SUZANNE GANNON
Gaithersburg, Md.
ON a recent Saturday afternoon Marcus and Imal Wagner stood in a U-Haul storage warehouse here, surrounded by their castoff possessions: a papier-mâché candy dish, LPs by Cream and the Ventures, a computer printer, a ceramic figurine of a gnome atop a turtle, bolts of taffeta from a long-abandoned pillow-making hobby, and stacks of 25-gallon tubs filled with old files and five years’ worth of paperwork.
Ms. Wagner, a 56-year-old book publicist, spotted a van tire wedged amid the jumble, an item that she seemed not to have noticed on previous visits, and gave her husband a knowing look. “I didn’t want to throw it away so I brought it here,” Mr. Wagner, 53, said, a little defensively.
The Wagners have been bringing their things to this storage warehouse rather than discarding them for two years. “It’s very much a part of our house, even though it’s not in the house,” Ms. Wagner said. “It’s like a hidden room.”
They are not the only ones taking this approach to clutter. According to Michael T. Scanlon Jr., president of the Self Storage Association, a trade group, 11 million American households currently rent storage space, an increase of 90 percent since 1995 — even as the size of new American houses has grown and the size of the American family has shrunk.
In the last two years, close to a million more households have joined the ranks of storage renters, and there is now more than two billion square feet of rental storage space in the United States, earning more than $22 billion in gross revenue in 2006.
Storage-space users have traditionally rented for short periods, Mr. Scanlon said, most commonly during life changes like divorce or relocation. But in recent years a new kind of renter has emerged, one who rents for longer periods, sometimes paying thousands of dollars a year, sometimes for units in faraway cities. These new renters seem compelled to keep trading up, from a cozy “personal closet,” say, to a garage-like room, and then to a second unit or even a third. They represent what Diane Piegza, a spokeswoman for Sovran Self Storage, which owns the Uncle Bob’s chain of storage facilities in 22 states, calls “a segment of the population that has truly embedded storage into its lifestyle.”
For many, the appeal of renting storage space is the way it seems to represent the pursuit of simplicity: by transferring excess stuff to a storage unit, people can free their basements, attics and living rooms from years’ worth of clutter, and create the impression of a pared-down life.
“Once you have a space outside of your home, everything inside becomes nice and organized,” said Jon Weisberg, 63, a communications consultant who lives in Salt Lake City and rents storage space to hold his collection of American folk art and antiquarian books. (Like many storage renters, Mr. Weisberg once kept his treasured belongings far outside his home; after he moved to Utah from Manhattan in 2000, it took him a year and a half to transfer everything from his storage space in New Rochelle, N.Y., to one in Salt Lake City.)
Oddly, though, it’s the opposite of neat-and-tidy that seems to be true for many storage-unit renters. With newly available space, they are able not only to avoid getting rid of things but to accumulate even more. Dee Dee Whipple, a homemaker in Northbrook, Ill., was tempted down this road when she rented two units last year while preparing to sell her house after a divorce. Her real estate agent suggested renting the units after taking one look at Ms. Whipple’s home — with its 400 dolls, 46 boxes of Christmas decorations and 6 artificial Christmas trees — and suggesting that prospective buyers might be “overwhelmed.”
One year and $3,000 later, Ms. Whipple, 59, said her units are “packed up to the ceiling” and the vacuum that resulted in her home — which she has yet to put on the market — has been filled with more purchases. She has rented a third unit.
Ms. Whipple is learning something the Wagners discovered: renting storage space can have a gateway effect, with one unit filling up and leading to the need for a second, and so on. They rented their first unit in 2005 and filled it within six months, then added a larger, 10-by-15-foot space just down the hall. They now pay $335 a month for the two, or roughly $4,000 a year, a figure that Ms. Wagner said took her by surprise when her husband recently checked the bills. She said she was seduced by the out-of-sight-out-of-mind aspect of renting storage space, and by the ease of adding a unit — “the more the merrier!” — acknowledging that she was hooked. But she now sees renting storage as “not really a wise decision — it’s probably wiser to eliminate things.”
Many professional organizers, in fact, advise their clients against renting storage space. “I think the easy access does enable them,” said Dana Korey, a professional organizer in Del Mar, Calif., who estimates that nearly half of her clients rent storage units. “We ask people: ‘Do you really need another aromatherapy candle? You could light 10 a night and still have enough for two years.’ ”
Dr. Gregg Jantz, a psychologist and author in Seattle who has treated patients with pathological hoarding issues, said that hoarders, as well as those with less severe cluttering or collecting tendencies, can lose the ability to appraise the worth of things, attaching sentimental value to nearly everything they own. Easy access to storage space, he said, makes the problem worse. “With the availability of storage units, there is the perception that A, I don’t have to throw everything away, and B, I’m supposed to save everything,” he said.
Peter Balis, 42, fell into a version of this syndrome in 2003 when he began what he calls a love-hate relationship with storage. At the time he lived in a loft in Chicago and owned a weekend house on Lake Michigan. When he sold the country place, Mr. Balis moved its contents, including a pair of bent plywood Eames chairs and an 11-foot carved totem his grandparents bought at a temple in India, into storage nearby. “If you’re predisposed to squirreling you have no reason not to put it there,” he said.
A move to Manhattan a few months later to take a job at John Wiley & Sons, a publishing company where he is now the director of online sales, only added to Mr. Balis’s space constraints, so he rented a 10-by-6-foot walk-in unit in Kingston, N.Y., for which he pays $97 a month, as well as a 5-by-5-foot closet at Manhattan Mini Storage, for which he pays $65. Mr. Balis said the Kingston unit contained a combination of items with real value (the chairs, the totem), delusional perceived value (camping equipment) and limited value (an “Eloise” poster he is saving for his niece).
“I’ve visited it only once in three years and it was a total disaster so I just shut the door,” he said. “It was so full I was terrified to go in.”
So why doesn’t he hold a tag sale and clear out the space? Some of the items were destined for a country house that Mr. Balis and an ex-boyfriend were hoping to buy but never did. Giving up the unit, he said, “would mean admitting defeat.”
“I guess I still hope that someday I will have a second home or a larger apartment where these things will get used,” Mr. Balis said. “I’ve put so much money into it at this point, I’ve got to use these things.”
Meanwhile, the storage industry, which has existed for only about 35 years, has found ways to make rented storage space harder to resist. Companies have introduced automatic billing and promotional schemes like U-Haul’s free first month with a truck rental.
And storage warehouses themselves, once little more than metal sheds along the highway that were vulnerable to theft, have become increasingly sophisticated.
“The first generation was garages in a row,” said Clem Teng, a spokesman for Public Storage of Glendale, Calif., which began 34 years ago with a single structure in a remote stretch of El Cajon, Calif. The company now operates more than 2,000 warehouses in 38 states, many of them with climate-controlled units and electronic key gates.
Beth Silver Pilchik jokes that the storage locker she and her husband rent at Manhattan Mini Storage has better security than their Upper East Side apartment. “Some people are astonished that I’m so proud of it,” said Ms. Silver Pilchik, 36, a marketing consultant who admits talking about her storage unit with friends at cocktail parties. “They think we’re funny that we’re spending money to store things.”
On a recent visit to the branch of Manhattan Mini Storage she uses (there are 17 in the borough), Ms. Silver Pilchik demonstrated her prowess at maneuvering the ladder on wheels that she must use to gain access to her possessions. In addition to stemware from her wedding four years ago, the 8-by-4-foot double-wide locker contains luggage, files and items belonging to her year-old son.
“I’m in a sentimental mode,” she said. “It’s about the first everything: his first shoes, his first pacifier.”
Her son’s arrival required that she convert the dining room of her apartment into a bedroom, so Ms. Silver Pilchik off-loaded an armoire and other furnishings to a larger unit at Broadway Self-Storage in Huntington Station, N.Y.; the unit is cater-corner to her parents’ space in the same facility. Together, the Manhattan and the Huntington Station units cost $325 a month, but Ms. Silver Pilchik considers it money well spent. “I don’t think we could live without it,” she said. “We don’t have to fight about things that have to be thrown out.”
While Ms. Silver Pilchik and her husband are of a similar mind when it comes to storage, some family members would prefer to see stored items not just out of the house but out of their loved ones’ lives for good. Ms. Whipple’s 36-year-old son, Clay, has made no secret of his feelings about his mother’s clutter. “My suggestion was, instead of paying money for the storage units, rent an industrial-size Dumpster, park it in the driveway for a couple of months,” and just dump all the stuff in it, Mr. Whipple said.
Such an outcome is unlikely, he knows. Now that his mother has discovered storage, he said, she will probably rent units for years, if not the rest of her life. (Ms. Whipple disagreed and said that once she sold her current home she would find “a new house with a place to put the stuff.”)
What will Mr. Whipple do if and when responsibility for the units and the items inside shifts to him? “I’m going to open them up and say to my sister, Dana, what do you want? Because the rest of it I will pay the storage facility to throw away,” he said.
The Wagners of Gaithersburg, who have two school-age sons, hope to avoid such a situation and plan to empty their two U-Haul storage units themselves when they move back to Iowa this summer. “There’s an end in sight,” Ms. Wagner said in a determined tone. “When we move we will not be using a storage unit.”
Unless, that is, there is not enough time to sort through all the stuff beforehand, she added. “It pains me to say it, but I would want another storage unit.”
Copyright 2007 The New York Times Company
Wednesday, March 7, 2007
Jim Clark, MyCFO Inc. & Tax Sheltering
March 6, 2007HOUSE OF 'CARDS'
Fling With Tax Shelters Haunts Silicon Valley
Funded by Tech Barons, MyCFO Inc. Sold Deal
The IRS Later Nullified
By PETER WALDMAN
March 6, 2007; Page A1
John Doerr is the dean of Silicon Valley venture capitalists, one who helped launch tech icons like Google and Sun Microsystems. A billionaire, he works with rock star Bono to fight poverty in Africa and with others to increase aid for education and medical research.
Mr. Doerr is less well known for one investment that didn't pan out. Called myCFO Inc., the firm set out to provide rich people a full menu of financial services, from wealth management to estate planning. It succeeded with only one: tax shelters that helped clients shield hundreds of millions of dollars from taxes. Less than two years after myCFO began selling them in 2000, the Internal Revenue Service said they were bogus.
MORE ON MYCFO
• Tax-Shelter Client of myCFO Goes to Court1
IMPORTANT DOCUMENTS
• Deposition of Kevin McAuliffe2, a former top accountant at myCFO, in which he testifies that he warned his bosses that myCFO was becoming too heavily involved in selling tax shelters. Plus, see emails3 shown as exhibits in the deposition.
• Emails from myCFO board member John Doerr4 to Frank DiFerdinando, the head of myCFO's tax-strategies group. Mr. Doerr was a leading proponent of the group.
• An admission of facts5 by one of the large banks that underwrote myCFO's main tax shelter. In it, the bank admits the deal's purported 30-year loan was a sham and only meant to help clients avoid taxes.
• A document myCFO prepared6 for an informal phone discussion after the IRS cracked down on one of its tax shelters in March 2002.
MyCFO ceased independent operations five years ago, but it still casts a shadow. A bank that underwrote some of its tax deals has admitted that they were shams. Former clients, hit with back-tax bills, are fighting the IRS. Two ex-clients have alleged that myCFO's tax deals were fraudulent.
Two lawyers who worked with myCFO are under tax-fraud indictment for their work on similar tax shelters. The Manhattan U.S. attorney's office, which has charged more than a dozen people in connection with tax shelters, said in a court filing last April that it had "an ongoing criminal investigation" involving "various former employees of myCFO."
The financial backers and board members of myCFO were Silicon Valley royalty. They included James H. Clark, co-founder of Netscape Communications and Silicon Graphics; John Chambers of Cisco Systems Inc.; Thomas Jermoluk, former chairman of Excite@Home; and former Netscape boss James Barksdale. The firm's outside legal counsel was Larry Sonsini, lawyer to Silicon Valley's stars.
The firm was Mr. Clark's idea. Mr. Doerr led its financing and took a leading role on the board. In typical Silicon Valley fashion, board members were closely involved with strategy and operations, according to company documents and legal papers reviewed by The Wall Street Journal. The documents show that directors pushed ahead with the tax-shelter business despite signs that all wasn't right with the product.
Mr. Doerr praised the head of the firm's tax-strategies group in a 2001 email for "not only delivering on your original [business] plan, but going beyond to make up the revenue shortfall from the recurring business." MyCFO "has my full support, and the full support of [my] partners" at Kleiner Perkins Caufield & Byers, the venture-capital firm that financed myCFO, he added.
MyCFO's story shows how the sudden wealth spawned by the technology boom had hidden impacts that still echo in Silicon Valley. "There were 30-year-old clients making hundreds of millions of dollars -- it was intoxicating," says James Phillips, myCFO's former chief investment officer. "The accountants and CPAs wanted their share, too."
SILICON VOLLEY
• The Background: Prominent tech financiers set up myCFO in 1999 to provide financial services to the rich.
• What Went Wrong: Firm morphed into a purveyor of tax shelters, which the IRS in 2002 labeled invalid.
• The Hangover: A bank that worked on myCFO shelters admits they were a sham; prosecutor has said ex-myCFO employees are party to criminal probe.
At the time, tax shelters were a lively business. Dozens of national law and accounting firms sold these strategies -- Byzantine transactions that often involved foreign currencies and offshore middlemen. MyCFO selected a few tax shelters and refined them for a clientele dripping in capital gains.
Some of California's leading industrialists were customers. Ray Irani, chief executive of Occidental Petroleum Corp., did a tax deal through myCFO, company records show. So did Ariba Inc. co-founder Boris Putanec and Val Vaden, co-founder of financier Benchmark Capital.
Mr. Jermoluk, the former Excite@Home chairman, was both a founding financier of myCFO and a shelter customer. For fees of about $2.4 million, he acquired ostensible losses to offset as much as $50 million of taxable income, according to company documents and a deposition by his former accountant, Kevin McAuliffe.
Mr. Jermoluk declined to be interviewed about myCFO, as did Messrs. Doerr and Chambers. Messrs. Clark and Barksdale didn't respond to email and phone requests for interviews. A lawyer for the former directors told a tax client last October that they "categorically denied...misconduct or malfeasance of any sort." The lawyer, David York, predicted myCFO's main tax package ultimately "will survive a substantive tax law analysis" in court.
A spokeswoman for Mr. Sonsini said his law firm did basic legal work for myCFO that didn't include reviewing its tax offerings. Messrs. Vaden and Putanec declined to comment, while Occidental said Dr. Irani wouldn't comment "on what is clearly a personal matter."
MyCFO's main tax shelter, sold to 17 clients, was called Cards, for Custom Adjustable Rate Debt Structure. Each involved an ostensible 30-year bank loan to a foreign party for $50 million to $100 million. MyCFO's client then assumed the loan and, after some complex swapping of collateral, claimed a loss for tax purposes of nearly the full amount of the loan. Others besides myCFO also marketed Cards.
The IRS in March 2002 ruled Cards invalid. Largely as a result, myCFO sold its name and client list and liquidated its tax business.
The IRS said Cards failed a basic test of legitimacy: It lacked any real economic purpose other than to lower taxes. The agency added that clients were never really at risk for the supposed $50 million or more in loans.
Most myCFO shelter clients are challenging the IRS's action, in federal court in San Jose. But two broke ranks and alleged the shelters were fraudulent, in civil racketeering suits they filed against big banks that underwrote their Cards deals. They claim they were misled to believe the shelter's loan structure was actually a viable credit facility. (See adjoining article7.)
From the start, there were internal warnings. Mr. McAuliffe, a former Ernst & Young tax partner who was one of myCFO's first hires, said that when the firm was just gearing up in 1999, some of its accountants wanted to shun tax "elimination" deals. He warned Mr. Jermoluk and Chief Executive Art Shaw that myCFO was relying too heavily on tax shelters for revenue, Mr. McAuliffe said in a 2005 deposition for a tax client's lawsuit in San Francisco Superior Court. But he said the founders were talking about an initial public offering, and his warnings went unheeded amid IPO "fever." Mr. Shaw, CEO of advertising firm Netblue Inc., didn't return calls seeking comment.
MyCFO had obtained the Cards strategy from a San Francisco investment boutique called Chenery Associates, which also provided it to others. Chenery had done a Cards deal for an aircraft-leasing company, which registered it with the IRS as a tax shelter. The IRS requires corporations to register such tax-driven deals. Its rules for when individuals must register a deal they're using as a shelter are less strict.
MyCFO officials said their clients would never accept a transaction they had to register as a tax shelter, Chenery Associates owner Roy Hahn later testified in a deposition for San Francisco Superior Court. A lawyer for Chenery removed the obstacle. He wrote an analysis saying that Cards wasn't a tax shelter under relevant IRS rules.
MORE DOCUMENTS
• A lawsuit filed against Deutsche Bank8 over myCFO's tax shelter
• An arbitrator's ruling9 awarding $23 million to Reese Jones in his claim against what's left of myCFO
• The "fairness opinion,"10 written by an outside financial firm for myCFO, when myCFO's client list and some other assets were sold to Bank of Montreal. It includes a history of the deal, including the troubles myCFO had in finding a buyer because of its tax-shelter involvement.
• Employment agreement11 myCFO signed with Randall Bickham, a former employee of KPMG who was subsequently indicted in New York for federal tax crimes relating to his work at KPMG
• Documents sent to Ray Irani12, chairman and CEO of Occidental Petroleum, after he purchased a myCFO tax shelter
• Deposition of Margaret Thurmond13, a former myCFO CFO, in which she discusses how CEO Art Shaw manipulated finances
• A motion filed by the U.S. Attorney in Manhattan14 to stay court proceedings in San Jose concerning myCFO and the tax shelters. It mentions that some former myCFO employees are party to an "ongoing criminal investigation."
• An early, confidential myCFO business plan15
The lawyer, Graham Taylor, then at LeBoeuf, Lamb, Greene & MacRae, wore multiple hats. He also represented myCFO in refining the tax strategy, court documents show. And when myCFO signed up Cards clients, it arranged for them to hire Mr. Taylor as their lawyer. For fees of roughly $85,000 per client, he supplied many of them with letters saying that if the IRS found their deductions invalid, they shouldn't owe penalties because they had relied on "an opinion from reputable counsel."
That counsel, it turned out, was a co-inventor of Cards, Raymond J. Ruble, then at law firm Brown & Wood. The law firm got $250,000 each time a client used Cards. Chenery paid this out of its share of the tax client's fee.
Chenery also agreed to pay 20% of its own fee into a Ruble family trust, according to court records and Mr. Hahn's testimony.
MyCFO directors had several briefings about tax shelters, minutes of board meetings show. One in mid-2000 led to a marketing delay while the firm's general counsel reviewed the matter. Three months later, the IRS, in connection with a similar shelter, warned that "an artificial loss lacking economic substance is not allowable." Within weeks, myCFO decided to go ahead with marketing Cards.
It quickly signed up 10 clients for fees totaling $16 million. As those deals were closing in late 2000, Mr. Ruble from Brown & Wood emailed myCFO an article in which a prominent tax analyst called Cards a blatant tax dodge. Mr. Ruble said the analyst had "totally missed the boat on business purpose," which he said lay in financing opportunities.
As the tech bubble deflated, myCFO imposed layoffs and spending cuts, but not on the tax-strategies group. MyCFO's growing reliance on tax shelters for revenue was discussed at a board meeting in August 2001. At that meeting, the board's compensation committee, Messrs. Doerr and Clark, approved stock options for 94 employees -- giving a third of them to the firm's top two tax strategists.
One director asked if myCFO would have an obligation to refund clients' fees if the tax deals were unwound. "It was basically, 'Gosh, is this kosher?' " says someone who was there. "Then they read the attorneys' comfort letters and everyone shut up."
Mr. Doerr was a booster for the firm's tax strategists. In response to Mr. Doerr's 2001 email lauding the tax team for its performance -- which he sent on Sept. 11, 31 minutes before the first plane struck the World Trade Center -- the tax team's leader reported landing $4.5 million more in fees. Five days after 9/11, Mr. Doerr replied: "This is AWESOME news, particularly during a week marred by national tragedy.... Please keep me posted."
But some of myCFO's accountants and client-service people were in revolt, according to Mr. McAuliffe's deposition. In late 2001, he and several colleagues refused to sign shelter clients' tax returns until myCFO agreed to indemnify them for any personal liability. One client was claiming a tax loss greater than his net worth. "It was only a matter of time until the IRS came down pretty hard," Mr. McAuliffe testified.
In January 2002, the IRS offered a broad tax-shelter amnesty: It would waive penalties for any taxpayer who owned up to using a questionable shelter.
MyCFO staffers disagreed over what to tell clients about this and whether to discourage them from taking the amnesty. Ultimately, the firm sent out what General Counsel Steve Debenham, in an email about a draft to a colleague, called "a CYA letter," for "cover your a -- ." It said the IRS appeared to be focusing on the packages offered by major accounting firms, which "may be less credibly supported by a substantive economic justification...."
Mr. McAuliffe mocked that distinction in an email to colleagues. "Same law firms, similar or same promoters, same tax effect," he said, wondering if myCFO was "smoking our own dope again?"
He also dismissed the idea that myCFO's clients were penalty-proof for relying on reputable counsel. "You bought your opinion. You bought your comfort-level letter," he said later in his deposition. Mr. Debenham and Mr. McAuliffe both declined to be interviewed.
Two months later, the IRS ruled that Cards was an improper shelter. MyCFO's board discussed the ruling by phone. MyCFO by this time was little more than a tax-shelter brokerage, according to documents prepared for the meeting. If it closed its shelter business, it would forgo $10 million in revenue in the next three months and be in the red.
Instead of closing the tax business, myCFO tried to revive it by hiring a veteran of KPMG, an accounting firm that was especially active in selling tax shelters. The employee, Randall Bickham, brought a pipeline of tax deals worth a projected $7 million in fees.
The board also explored selling the company. MyCFO documents show Deutsche Bank AG, which had worked with myCFO on several Cards deals, expressed interest in acquiring the firm for $200 million to $300 million, but backed away, citing potential tax-shelter liability. Bank of Montreal agreed to buy myCFO for $90 million but it, too, backed out over the same concern, myCFO documents show. In October 2002 Bank of Montreal finally purchased just myCFO's name, client list and some other assets. It paid $30 million, about a third of the sums the Kleiner Perkins founders and others had put in. Bank of Montreal now has a private-banking unit called Harris myCFO Inc., which declined to comment.
Directors assigned the rest of myCFO to a liquidator. They gave Mr. Bickham, the former KPMG man, a $1.4 million contract, paid in advance, to maintain files and assist clients in "controversy issues" with the IRS.
In 2005, Mr. Bickham was among those charged by the Manhattan U.S. attorney with tax evasion and conspiracy to defraud the IRS. The charges relate to work he did while at KPMG. He has pleaded not guilty and declined to comment.
Also charged was Mr. Ruble, the Cards co-inventor. He was cited for tax-shelter work he did for others, mostly KPMG. Mr. Ruble's law firm had fired him, after discovering the deal he had with Chenery to funnel 20% of Chenery's fees into a Ruble family trust.
By that time, Mr. Ruble was at Sidley Austin, which had absorbed Brown & Wood. Sidley Austin and KPMG both faced civil litigation over tax shelters, which they settled last year for $179 million, including legal fees.
Mr. Taylor -- the lawyer who helped myCFO refine the shelters and assisted its shelter clients -- was indicted in a tax-shelter matter in Utah. Both he and Mr. Ruble have pleaded not guilty, and both declined to comment.
Federal prosecutors also investigated a German bank that helped arrange some of myCFO's tax shelters. In a deferred-prosecution deal reached last year, the bank, Bayerische Hypo-und Vereinsbank AG, or HVB, agreed to a $30 million penalty and admitted that the Cards deal contained "fraudulent and illegal elements."
The bank's confession didn't mention myCFO. But it said "all parties involved" knew the Cards credit facility wasn't a legitimate long-term loan and would be unwound in about a year to generate "the phony tax benefits sought." Said HVB, in a Statement of Admitted Facts: "The transactions were prearranged by the promoters... and had no purpose other than generating tax benefits for the clients involved."
Write to Peter Waldman at peter.waldman@wsj.com16
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China: Exports Vs. Social Spending
Photo: Wu Xiaoling, left, central bank deputy governor, is active in foreign exchange matters; Hu Xiaolian is seen as a rising star in financial policy.
March 6, 2007
Dollars to Spare in China’s Trove
By KEITH BRADSHER
HONG KONG, March 3 — In the insular world of China’s central bank they are known as the Three Xiaos, three women with similar names who oversee the greatest fortune ever assembled: China’s more than $1 trillion in foreign exchange reserves.
The Three Xiaos are exceptions in the male-dominated world of Chinese policy making. And after the sharp fall in Chinese stock markets shook financial markets around the world, the three women face enormous challenges, including a potential showdown over government policies, with the meeting beginning March 5 of the National People’s Congress, the Communist Party-controlled national legislature.
Public pressure is mounting on the central bank, the People’s Bank of China. In postings on Internet message boards in China and in conversations among educated urban Chinese, critics suggest that the central bank should earn higher profits from its vast hoard — for instance, by taking more risk and investing in stocks — and use some of it to help a nation where most workers still earn less than a tenth of the wages of the typical American.
Foreign exchange reserves have soared across much of the developing world, in countries as diverse as Brazil, Thailand and India, but particularly in China. The reason lies in powerful currency intervention, as these countries strive to keep their exports competitive in Western markets by curbing the appreciation of their currencies against the dollar.
They have bought vast amounts of dollars from their exporters, giving back local currency in exchange. And then they have struggled with what to do with these dollars.
Most central banks have invested their dollars in American securities, particularly Treasury bonds and notes, but sometimes mortgage-backed securities as well. In recent years, these giant purchases have helped hold down interest rates that American home buyers pay for mortgages and the federal government pays to finance its budget deficits.
If central banks move out of such securities, that could push American interest rates higher. But moving into stocks, which tend to earn higher returns over the long term, poses market risks, as central banks carefully noted recently as the markets fell.
Some of the comments on Chinese Internet boards have been unusually strident. They have criticized the government for helping American taxpayers and home owners by investing hundreds of billions of dollars in Treasury debt and other securities instead of spending the money at home.
“China has huge amounts of foreign reserves; why doesn’t the government put more of it into education?” one posting this winter said.
Doubling the investment return on China’s foreign currency reserves, to 8 percent from 4 percent, would generate enough money to triple the nation’s education budget, said Tao Dong, the chief Asia economist at Credit Suisse. “Enhancing returns on the foreign exchange,” he said, “is natural and expected by the Chinese people.”
Yet spending the United States dollars on education and other domestic programs is not a simple task. The central bank would have to sell some of those dollars to buy the Chinese currency, the yuan, to be able to spend it on schools.
But in buying so many yuan, the central bank would nudge up the currency’s exchange value. That would make Chinese exports more expensive — something the bank has tried to prevent.
On top of that, it has already had to borrow yuan — by issuing bonds — to buy the dollars from exporters, and the bank would struggle to repay debts if it then spent its reserves on social programs.
The Chinese government may be poised to respond to the criticism later this month after it formally sets up a new investment agency, several people close to the government’s planning said.
Having invested for decades in the same Treasury securities that most governments purchase, China is now preparing to begin investing public money in stocks, corporate bonds and even commodities like oil and possibly strategic metals.
“That management has to be extremely professional,” said Rajat M. Nag, managing director general of the Asian Development Bank, alluding to central bank fund managers of numerous countries. “And I don’t think it can be done by bureaucrats.”
Both South Korea, which is preparing to move in the same direction, and China are trying in part to emulate the highly secretive Government Investment Corporation in Singapore. But China faces greater difficulties than Singapore, which has a tradition of highly professional money management and a civil service that is largely free of corruption.
By contrast, President Hu Jintao has identified chronic corruption as the biggest challenge facing China, and government officials tend to have fairly narrow expertise in managing asset portfolios.
The central bank faces a particular challenge in managing the country’s reserves. People close to the State Administration of Foreign Exchange, which is controlled by the central bank and manages the reserves, estimated that it already holds about $100 billion worth of American mortgage-backed securities. That is a somewhat unusual investment choice for a country’s foreign exchange reserves, but it was selected in the hope of achieving better yields than on Treasuries.
None of these mortgage-backed securities are said to be tainted by the subprime securities that have fallen sharply in value, though some bankers worry that troubles in the subprime market could spread to more creditworthy mortgages as well.
The central bank is highly secretive about its holdings. But experts estimate that it has a further $600 billion or so worth of Treasuries that it lends actively to generate profit, as well as at least $200 billion in euro-denominated bonds and the rest in bonds denominated in Japanese yen and other currencies.
State-controlled media in China have reported that a new government investment corporation could be asked to oversee up to $200 billion more, which would amount to roughly 10 months’ trade surpluses this year. Lou Jiwei, the man who is currently vice minister of finance, will most likely head the investment corporation, but no decision has been reached on the relative influence that the central bank and its rival, the finance ministry, would exert over the new agency, people close to the discussions said.
A final decision could be announced as soon as the National People’s Congress meeting, although the result will almost certainly be worked out behind closed doors before being presented to the congress for approval.
Representatives from a long list of the largest American, European and Chinese banks have approached the central bank and the finance ministry in recent months, hoping to win lucrative contracts to help manage the investment corporation funds. The central bank already lets banks manage small chunks of its foreign reserves under contract.
The State Administration of Foreign Exchange has a troubled history. One director in the 1990s, Zhu Xiaohua, was sentenced to 15 years in prison on charges of corruption during subsequent postings as a top bank executive; his wife committed suicide, and he has been released on bail to seek medical treatment.
Mr. Zhu’s successor at the agency, Li Fuxiang, was abruptly hospitalized in 2000 and then died mysteriously when he fell from a seventh-floor hospital window.
The foreign exchange administration has become a quieter place since the Three Xiaos rose to power there, people close to the administration said.
The leader of the three is Wu Xiaoling, 60, who became the administrator in 2000 upon the death of Mr. Li. She has since moved up to become the most senior deputy governor of the central bank, and remains particularly active on issues involving the country’s foreign exchange reserves.
The current administrator, and also a deputy governor of the central bank, is Hu Xiaolian, who turns 49 this year and is a rising star in Chinese financial policy making. The last of the three is Zhang Xiaohui, director general of monetary policy at the central bank.
The State Administration of Foreign Exchange declined to allow interviews. By coincidence, the governor of the central bank is a man who also has Xiao (pronounced SHEEOW) in his name: Zhou Xiaochuan, whom Ms. Wu is a possible candidate to succeed.
The Three Xiaos have very similar backgrounds. All have spent their entire careers working their way up through a succession of postings at the central bank, people who know them said. Ms. Wu and Ms. Hu even did their graduate work at the central bank’s own school, and are said to have been star students.
Their ascendancy in part reflects the departure of many men from the central bank over the last decade, to the point that women now dominate the senior ranks of the institution. Chinese Communist Party officials have insisted that central bank officials be paid no more than civil service wages, so that even fairly senior officials earn as little as $500 a month with minimal benefits.
By contrast, the China Securities Regulatory Commission, the China Banking Regulatory Commission and the big state-owned banks are all permitted to pay rates that are competitive with those in the private sector, with salary and benefits totaling at least $1,000 a month and sometimes $3,000. This has allowed them to lure managers from the central bank, as well as Chinese returning from overseas with doctorates in economics.
Unlike many Chinese government agencies, the central bank no longer owns hotels, restaurants or other businesses, having been forced by the government to divest themselves of them in the late 1990s to prevent conflicts of interest. It is common for officials at other agencies to hold second jobs at companies controlled by their agencies, and to have company cars and plush housing as a result.
The State Administration of Foreign Exchange has now been given permission to pay wages closer to market levels, but the rest of the central bank complex still struggles to hire China’s best and brightest, said Victor Shih, a Chinese banking specialist at Northwestern University.
“The pay issue,” he said, “is huge.”
Copyright 2007 The New York Times Company
Sunday, March 4, 2007
The Central American Connection
Drug smugglers reroute shipments via Central AmericaMost Colombian cocaine entering the U.S. comes through the area, with cartels infiltrating security forces and government agencies.
By Héctor Tobar
Times Staff Writer
March 4, 2007
MANAGUA, NICARAGUA — Central America has become a crucial way station in the billiondollar cocaine business, with traffickers shipping hundreds of tons northward from Colombia along the isthmus and increasingly infiltrating police and government agencies, U.S. and regional sources say.
The recent killings of three Salvadoran legislators in Guatemala underscored the shift, intelligence sources say. The lawmakers were shot and their bodies set ablaze last month, allegedly by a group of Guatemalan policemen working on behalf of Mexican drug traffickers.
All sorts of people have been swept up in the drug trade as the smuggling routes have changed, including impoverished fishermen, small-town mayors, legislators and high-ranking police officials. In years past, the favored route was across the Caribbean to the southeastern United States. Now, with greater Mexican cartel involvement, the cocaine often moves up the coasts of Central America and overland through Mexico.
Although it remains unclear whether the dead Salvadorans had ties to traffickers, other lawmakers from the country have been linked to the trade. Guatemalan officials have said the killings point to widespread infiltration of the country's police force by organized crime.
The four police officers charged in the killings, including the head of Guatemala's organized-crime unit, were later slain in their prison cells, in a stunning raid by armed men who may have entered the facility with the aid of guards and prison officials.
An intelligence official working in the region said the slain police officers worked for a Mexican cartel that ships drugs along the Pacific coast of Central America. The officers were enforcers dedicated to "knocking down" rival traffickers, the source said.
"This is a crime that can best be understood as part of the dynamic that sees drugs flow between Mexico and Colombia," said a second intelligence official, referring to the killing of the legislators. The officials asked not to be named, given the sensitive political nature of the crime — one of the victims was Eduardo Jose D'Aubuisson, the son of the founder of El Salvador's ruling party.
Although drug trafficking has long been common in remote areas of the region, such as the Caribbean coast of Nicaragua, the growing power of Mexican cartels has increased the importance of Central America as a transshipment point.
Smuggling routes across the Caribbean have largely fallen into disuse thanks to U.S. interdiction efforts there, and Colombian drug producers have ceded the bulk of the transportation business to Mexicans.
About 90% of the estimated 780 tons of cocaine entering the United States each year passes through the hands of Mexican drug traffickers, according to U.S. studies. Mexican traffickers see Central America as a natural hub between their Colombian suppliers and the smuggling routes the Mexicans control on the U.S. border.
The "Mexico-Central America corridor is … the predominant transit route for cocaine destined for the United States," U.S. officials wrote in the 2007 National Drug Threat Assessment.
Michael A. Braun, chief of operations for the U.S. Drug Enforcement Administration, said in a 2005 congressional hearing that "the corrupting power of illicit drug trafficking organizations on the governmental institutions of Central America significantly increases the difficulty of successful drug interdiction efforts."
Central America will remain the primary transit zone for U.S.-bound drugs "for the foreseeable future," Braun added.
The growing trade has reached areas of Central America where drug trafficking was rare just a few years ago. Police and military forces there are often undermanned and outgunned.
Nicaragua's small navy, for example, only has enough boats to patrol its coastline 12 days a month, officials say, a fact that helps shape the traffickers' strategy. "They know what our limitations are," said Capt. Roger Gonzalez Diaz of the Nicaraguan navy.
On the Pacific coast, the Nicaraguan navy has no craft larger than 40-foot-long "go fast" boats with outboard motors, vessels nearly identical to those the drug traffickers use. In fact, many of the navy's boats are vessels that were discarded by smugglers, Gonzalez Diaz said.
Operatives of Mexico's Sinaloa cartel arrived on the Pacific coast two years ago, officials with Nicaragua's National Police said.
With their Mexican accents, the men stood out. They were eager to buy old, abandoned farms along the beach. They didn't look like farmers, but they bought several tractors. They collected boats, too, but they didn't look like fishermen.
"The tractors were to build new airstrips and also to rehabilitate old ones," said a Nicaraguan police officer who specializes in drug intelligence.
One of the men was Samuel "Sammy" Gutierrez, a Colombian with Mexican identity documents, police said. He and two brothers from Mazatlan, Jorge and Roberto Garcia Villasenor, were air and sea "transportation specialists," police said.
The drug cartel operatives soon found themselves in a cat-and-mouse game with police leading to a plane crash on a rural highway and the arrest of a Mexican couple with nearly $300,000 in cash at a Managua airport.
"We confiscated three tons of cocaine," said an intelligence official with Nicaragua's national police. "We hit them hard."
Nearly all of the cocaine that enters the United States is produced in Colombia, according to U.S. studies. Most of it enters the U.S. through a two-stage process in which it is offloaded and stored at least once in Mexico or Central America.
Cocaine is shipped out of Colombia by sea and air, usually in amounts of a ton or more, through what U.S. officials call "the transit zone" — the stretch of ocean between Colombia and Mexico. Sometimes the traffickers hopscotch up the coast from Colombia to Panama, Costa Rica and other countries in the "go fast" boats.
Or they may take a more circuitous route in a larger ship that will travel around the Galapagos Islands in the Pacific southwest and later offload to smaller vessels.
Once in Mexico, the drug traffickers benefit from well-traveled smuggling routes protected by corrupt state and local officials, as they move their shipments northward overland to the U.S. border. A war among competing cartels to control those routes, known as "plazas" in Mexico, led to more than 2,000 killings last year.
The various routes through the "transit zone" pass through the beaches of Belize, seaside villages in Honduras and ports along the Pacific coast of Mexico and many other places, according to data from the U.S. government's Joint Interagency Task Force South, based in Florida.
In 2005, U.S. officials discovered, via satellite imagery, an "aircraft graveyard" in the Peten jungle of Guatemala where drug traffickers had disposed of light aircraft that brought shipments from South America. The drugs were eventually smuggled overland into Mexico.
U.S. officials said that Central American organized-crime groups, working with the Mexican and Colombian cartels under a subcontracting system, are reaping huge profits. That money, in turn, is fueling a crime wave, especially in Guatemala and El Salvador.
In El Salvador, sources pointed to a key killing that went largely unnoticed in the local media: the 2005 shooting death of Jose "El Cranky" Cortes outside a San Salvador nightclub.
According to a Salvadoran academic who has studied the drug trade, Cortes controlled the retail drug trade in an urban region of El Salvador and was assassinated for trying to make connections with Colombian suppliers without the permission of other gang leaders.
It was the first time officials had documented contacts between high-level Salvadoran gang leaders and Colombian traffickers, the source said.
Along the impoverished Pacific coast of El Salvador and Guatemala, mayors and other low-level officials in seaside towns find that the sums of money offered by the traffickers are often too tempting to resist.
"This guy tells you that you can make $60,000 easily, very quietly," said one intelligence official who was not authorized to speak publicly.
The same networks that smuggle drugs northward are responsible for shipping several billion dollars in cash southward, usually in $20 bills, DEA officials said. So vast is the money flow that it is routine to arrest couriers carrying $1 million in cash or more in Central America.
The huge sums of money involved in the drug trade have already ensnared top officials in El Salvador.
Last year, William Eliu Martinez, a former Salvadoran congressman, received a 29-year prison sentence from a U.S. judge in Washington after being convicted of smuggling more than 30 tons of cocaine into the United States.
If the privileged can be drawn into the drug trade, then what hope is there that a poorly paid policeman, soldier or sailor can resist the temptation?
Capt. Gonzalez Diaz of the Nicaraguan navy asks himself that question often.
"It's a constant struggle with our personnel," he said. "We tell them, 'Anyone would be tempted if they offered you $500 or $5,000. But for that, you're disgraced…. And if you owe them anything, they'll come after you or your wife and kids.' "
hector.tobar@latimes.com
Special correspondent Alex Renderos contributed to this report from San Salvador.
http://www.latimes.com/news/nationworld/world/la-fg-centam4mar04,0,1943447.story?coll=la-home-headlines
Gangs in Harbor Gateway: How a Community Imploded
L.A. long ignored Harbor Gateway. Now a Latino gang calls the shots.SAM QUINONES
Times Staff Writer
March 4, 2007
CHERYL Green was hardly the first.
Since the 14-year-old was shot to death in December in the forgotten strip of Los Angeles known as Harbor Gateway, she has become a symbol of the region's gang and racial strife.
Yet long before the mayor, police chief and FBI director showed up to decry the violence, the tiny neighborhood lived with it.
For more than a decade, many say, the neighborhood Latino gang — called 204th Street — had been attacking blacks. African Americans had taken to warily surveying their streets for Latinos, and few dared go north of 206th Street, which the gang had set as a boundary for blacks.
In 1997, 11-year-old Marquis Wilbert, an African American youth with no gang affiliation, was shot and killed by a 204th Street gang member on a bicycle.
In September 2001, Robert Hightower, a 19-year-old Pasadena high school senior, was shot to death after hugging his sister, whom he had been visiting. A 204th Street gang member shot him, according to court testimony, because he was upset that a black boxer had beaten a Latino in a prizefight.
In 2003, Eric Butler, 39, was shot to death as he drove from the neighborhood's lone business, the Del Amo Market, which the gang considered to be in its territory. He'd gone there to intervene after gang members began harassing his 14-year-old stepdaughter. She was shot in the back and lives today with a bullet lodged near her spine.
Butler's wife, Madeline Enriquez, organized marches to bring attention to the problem, without success.
Instead, the violence spread.
From 1994 to 2005 in Harbor Gateway, there were nearly five times as many homicides, assaults and other violent crimes by Latinos against blacks as by blacks against Latinos, according to Los Angeles Police Department statistics.
Cheryl's shooting — allegedly by two 204th Street gang members as she and friends talked on a street in broad daylight — underscored a new reality: that since the mid-1990s, according to the L.A. County Human Relations Commission, Latino gangs have become the region's leading perpetrators of violent hate crimes.
"It took this girl's death to show what's going on," said Khalid Shah, director of Stop the Violence, an anti-gang nonprofit group that has worked in Harbor Gateway.
Two weeks after Cheryl's death, the gang allegedly struck again, stabbing 80 times a white man they believed to be a witness to her shooting death. Five gang members were charged last month in his slaying.
None of this makes sense to Cheryl's mother, Charlene Lovett.
"My daughter's dead and I don't know why," Lovett said at her kitchen table after Cheryl's killing. "That's the question I would like answered: Why?"
The answer goes well beyond a single slaying or a single neighborhood. Packed into the 13-block area where Cheryl Green lived and died is a story of many of the forces fueling gang and racial violence in Los Angeles and the region today.
It is a story of civic neglect and the rise of the low-wage economy, of immigration, changes in federal housing policy and the street influence of a prison gang.
But the story begins, as does so much in this city, with real estate development.
From fields to families
Before World War II, the neighborhood was mostly vacant fields.
Then came factories, attracting workers who needed housing. So builders filled those fields with small houses and duplexes.
"This is where the workers lived," said Sharon Wyatt, who moved into the neighborhood with her husband, Jack, a shipyard worker, in 1971. "The contractors didn't even live here. It was the people that built the houses."
Cubans settled nearby in the 1960s, and a wave of Mexican immigrants arrived in the 1970s. Few blacks lived in the area, but on the Wyatts' block of 207th Street were white families like themselves, Latino families, a Middle Eastern man.
Harbor Gateway was like other parts of Los Angeles in many ways. But tucked as it was into a strip that connects the city to the port, it was an afterthought to local politicians consumed with the port, San Pedro and Wilmington. Residents themselves didn't always know to which city they belonged: The neighborhood was in Los Angeles but had a Torrance mailing address.
In the competition for city services, Harbor Gateway usually lost. Wyatt remembers that street sweepers came by maybe once a month. Street lamps didn't arrive until the late 1980s. The area had no park, no school nearby. Los Angeles police, always strapped for officers, patrolled intermittently.
Homeownership anchored the community, Wyatt and others said. Families cleaned in front of their places. People knew each other.
All that changed in the late 1980s. Southern California was absorbing immigrants and refugees from Vietnam, Cambodia, Iran, Mexico and Central America. Demand for housing rose — especially for apartments.
From 1985 to 1989, 187,000 units were built in Los Angeles County — almost 30% more than all those built since, according to the Construction Industry Research Board.
Harbor Gateway was transformed. From 1985 to 1992, city records show, about 75 houses gave way to apartment buildings — adding close to 500 units. The neighborhood gained roughly 1,500 residents — a 65% increase — with no new amenities or open space.
Residents "didn't have the knowledge, or the resources, or the time" to fight it, Wyatt said.
While Torrance made developers add trees, landscaping, open space and enclosed garages, Los Angeles required only sewer and school taxes.
"It was the Wild West," said Ken Sideris, who built more apartments than anyone else in the neighborhood — about 20 buildings. "It was developed wrong. There was no plan, no thought."
By 1992, the real estate boom had ended; recession arrived. Building owners needed tenants. The union jobs that had sustained earlier residents were disappearing.
"For about five years there, everyone on this block was laid off at one time or another," said Sharon Wyatt, whose husband lost his shipyard job.
The people who moved in were cashiers, gardeners, mechanics and swap-meet vendors. Most were Latino immigrants.
Blacks also moved in. The neighborhood's African American population more than doubled, from 313 in 1990 to 835 in 2000.
Many were fleeing the gang war zones of South Los Angeles, Inglewood and Compton in search of affordable housing.
Others came from housing projects, as federal policy shifted and concentrated developments for the poor fell into disfavor. They came with Section 8 vouchers, tickets to subsidized housing, in hand. Many were former residents of Normont Terrace, a housing project two miles from Harbor Gateway that the city's housing authority razed in 1995.
With so many renters and a dearth of city services, conditions in the neighborhood deteriorated. Discarded sofas stayed where tossed for weeks. "The neighborhood got dirtier," Wyatt said.
Landlords reinvested less, and tenants, divided by race, culture and language, no longer knew one another.
Sideris sold his last building in 1993 and hasn't built since.
"I feel bad. I felt the neighborhood could have gone the other way very easily," he said. "Where they have too many apartment units like that, it's unfortunate."
Feeling 'penned in'
In 1994, Toni Bowden moved to 207th Street from Compton with a Section 8 voucher. At the housing office, the neighborhood was listed as Torrance, said Bowden, who is black. "I said, 'Oh, wow, a way out of Compton.' "
Over the next five years, however, Bowden saw numerous shootings. She and other blacks didn't dare walk to Del Amo Market, a mom-and-pop convenience store that had become the gang's chief outpost.
The 204th Street gang had started as a clique years before. However, it had recently split from Tortilla Flats, a larger gang farther east. Asserting their dominance, gang members began attacking blacks.
They shot at Bowden's daughter and her boyfriend as they went to the movies, she said.
"You feel penned in," Bowden said. "You don't have extra money to just jump and move someplace else."
For their part, Latino gang members feared for their turf.
"In jail, people would comment, 'The blacks took over your neighborhood,' " said one area gang member, who asked not to be identified, fearing retaliation from other gang members. "It's embarrassing, because it's true."
Before that, the neighborhood had been "kind of like a little TJ," he said, referring to Tijuana. "People would say, 'Hey, what's up?' or offer us a beer. You got tamales. Drugs. It was a great neighborhood for gang members."
Tensions worsened when a small black gang formed — the 208th Street Crips. The Crip gang's willingness to go to the police with complaints offended the Latino gang's sense of honor.
Blacks were "writing on our walls, throwing bottles at us and telling on us at the same time," said the gang member. The 204th Street gang figured "that's kind of disrespectful … so [we are] going to shoot every black guy up there."
By L.A. standards, the 204th Street gang was small-time, with no more than a few dozen youths. But it was large enough to terrorize a neighborhood.
"We'd call pizza and they didn't want to deliver," said Blanca Hernandez, a resident for more than 30 years. "The mailmen were afraid. Everyone was afraid."
Meanwhile, larger forces were transforming Southern California Latino street gangs, which for years had mostly gotten along with their counterparts in black gangs.
The change "happened almost overnight," remembers LAPD Officer Liavaa Moevao, who was a young Harbor Division gang officer in the area in the early 1990s.
Older 204th Street members began attending meetings held by representatives of the Mexican Mafia prison gang (known as Eme, Spanish for "M"), he said. They reported back "that Eme wants us to get rid of all the black gang members," Moevao said.
Mafia representatives told Latino gangs to stop feuding among themselves and to collect taxes from neighborhood drug dealers on behalf of Eme, according to law enforcement officials and gang members.
Blacks were drug-dealing competition.
Mafia representatives said, " 'Don't let the [blacks] move in,' " recalled Leo Duarte, a recently retired prison-gang investigator and one of the state's leading Eme experts. Across Southern California, "even those gang members who didn't go to the meetings still abided by Eme edicts" because they had to answer to the Mexican Mafia when they went to jail.
In Harbor Gateway, graffiti and racist shootings climbed.
"There was no doubt that there were directives from the Mexican Mafia" coming from prison and at the meetings, said Robert Lara, a Torrance police sergeant who worked gang detail during the mid-1990s.
The 204th Street gang was too small to warrant a lot of Eme attention. But when the gang "lit off a grenade, or burned [a black person's] house down," Mafia representatives "would be like, 'That's what I'm talking about,' " said the gang member.
Residents fight back
In 1997, police, the county Human Relations Commission and neighbors organized to fight the gang and the blight.
The city added bulletproof streetlight covers. Residents repaired holes in fences — escape routes for gang members. Girl Scouts, accompanied by officers, picked up trash and painted over graffiti. More than 100 gang members — black and Latino — were sent to jail for parole or probation violations. Police patrols increased. Violence fell.
But the campaign dissipated, and gang members slowly returned. By 1999, the Latino-on-black violence resumed.
In April, Michael Richardson, a 22-year-old African American, was shot to death by a 204th Street gang member on a bike in front of Toni Bowden's apartment.
Bowden returned to Compton.
Charlene Lovett moved into her place, thinking she was leaving gang violence behind in her West L.A. neighborhood, just as 204th Street gang attacks increased.
By 2001, the 208th Street Crips, never rooted in the area, faded away.
With squad cars again scarce, neighbors stopped reporting shootings and chases. Instead, gang members now patrolled the streets, brazenly circling 207th Street and Harvard Boulevard on bicycles.
Marie Keith, who is black, moved from South Los Angeles with her three daughters in 2000, believing she'd come to Torrance. One day black children playing on the street began screaming that "the 204s were coming."
Keith watched as gang members drove through, shooting. Black youths dived behind walls.
Since then, Keith's children have not been allowed to play in front of their apartment. When she has to travel more than half a block, she drives.
In August 2006, Carl Wagoner, an African American auto-shop owner, was shot in the leg outside his 207th Street apartment. He lost his leg — and his shop — and is now bedridden, said his wife, Dunya.
As the years passed, older members of the 204th Street gang went into semi-retirement. Some moved as far away as San Bernardino and Rancho Cucamonga. They took jobs, bought homes, started families. Yet they returned on weekends to the Del Amo Market and drank beer with the younger members.
"They're keeping that 204th street notion and atmosphere alive," said Dan Vasquez, an LAPD detective who has worked on the gang detail recently.
Renewed attention
Since Cheryl Green's slaying, street sweepers pass through Harbor Gateway regularly.
Police roll by often, the city attorney's office is preparing an injunction against the 204th Street gang and Councilwoman Janice Hahn wants the city to buy land for a community center.
For now, no one hangs out at Del Amo Market.
Liavaa Moevao is back, now the LAPD's senior lead officer for the area. His task is to restore the sense of community that sustained the neighborhood years ago — though he said Harbor Division has half the patrol officers it had in the early 1990s.
Meanwhile, weakened by economics, the neighborhood remains divided by race, language and thug culture.
Or at least, that's how it seems until entering a certain darkened apartment on 207th Street.
One recent afternoon, a television screen lighted the faces of best friends Flavio and Gary, both 12. They were playing an online version of the card game Uno, chatting with opponents from Seattle, Kentucky and New York via video cameras.
Gary is black. Flavio's parents are Mexican. They understand little English and live in the building next door.
Though the two boys can connect to the world, they cannot walk this neighborhood together.
Fear of the 204th Street gang has forced Gary to live most of his life inside this apartment. That's why he is overweight, said his mother and grandmother. The family has several computers, televisions and video-game consoles to keep him and his brothers occupied.
Gary's mother, Lisa, runs inside every time she sees a Latino youth.
Still, in this neighborhood where so much divides blacks and Latinos, this apartment holds a secret: The families rely on each other.
Flavio's mother, Rita, drives the boys to school each morning before heading to her job as a 99 Cents Store cashier. Gary's mother, Lisa, picks them up in the afternoon.
It is a small daily act, born of common necessity — yet one the mothers protect like an orchid.
They declined to be photographed or reveal their last names, preferring that their secret not leave this darkened apartment, where they live like members of an underground resistance.
sam.quinones@latimes.com
Times staff writer Doug Smith and librarian John Tyrrell contributed to this report.
*
(INFOBOX BELOW)
Harbor gateway
Unchecked apartment construction in the 1980s and 1990s transformed the racial dynamics of this isolated 13-block neighborhood, heightening gang tensions. Violent crime committed by Latinos against blacks has become a problem.
Reported violent crimes*
(1994-2005)
Suspect Victim Crimes
Black Black 71
Black Latino 23
Latino Latino 117
Latino Black 111
--
* Includes homicide, manslaughter, assault with a deadly weapon and shooting at a residence or a vehicle.
--
1980 Total population: 2,139
Latino: 53%
White: 39%
Asian: 5%
Black: 3%
--
1990 Total population: 2,945
Latino: 55%
White: 22%
Asian: 12%
Black: 11%
Other 1%
--
2000 Total population: 3,548
Latino: 61%
White: 7%
Asian: 6%
Black: 24%
Other 3%
--
Note: Census Bureau statistics are for the area bounded by 205th Street, Western Avenue, Denker Avenue and Torrance Boulevard Crime statistics are from LAPD reporting district 504. Percentages may not add up to 100% because of rounding.
--
Sources: ESRI, TeleAtlas, Census Bureau, LAPD. Data analysis by Doug Smith and Sandra Poindexter
*
Victims of the violence
Interracial homicides* in Harbor Gateway, 1997-2006
Victim: Marquis "Mark"
Wilbert, 11, African American
Date: March 27, 1997
Shot to death on Harvard Boulevard by a 204th Street gang member riding a bicycle, who was convicted of murder.
---
Victim: Michael Richardson, 22, African American
Date: April 19, 1999
Shot to death on 207th Street by a 204th Street gang member on a bicycle, who was convicted of murder and a hate crime.
---
Victim: Dino Downs, 41, African American
Date: May 21, 2000
Standing outside his house on 208th Street when he was shot to death by two Latino youths, possibly members of the 204th Street gang, who were driving by. Unsolved.
---
Victim: Manuel Flores, 32, Latino
Date: June 2, 1999
Shot to death by a black man on 208th Street. Unsolved.
---
Victim: Mario Cervantes, 18,
Latino
Date: July 22, 2000
A recent 204th Street gang member, he was shot on 206th street by a black member of the 208th Street Crips gang, who was convicted of murder.
---
Victim: Kent Lopez, 20, African American
Date: Aug. 25, 2000
Shot to death during a fight with several 204th Street gang members as he walked to a bus stop. Witnesses testified that the gang members yelled a racial epithet and death threats at Lopez. Two gang members were convicted of murder.
---
Victim: Robert Hightower, 19, African American
Date: Sept. 29, 2001
A Pasadena high school senior, he was visiting his sister when he was shot to death by a 204th Street gang member, who was convicted of murder.
---
Victim: Eric Butler, 39, African American
Date: Oct. 18, 2003
Believed to have been shot to death by 204th Street gang members as he drove from the Del Amo Market, where he'd gone to help his stepdaughter, whom the gang was harassing. Unsolved.
---
Victim: Arturo Ponce, 34, Latino
Date: Dec. 5, 2006
The Mexican immigrant and cook was shot to death in front of his 205th Street apartment as he talked with friends. Witnesses say the shooter, masked and hooded, yelled an anti-Mexican epithet. Unsolved.
---
Victim: Cheryl Green, 14,
African American
Date: Dec. 15, 2006
Killed allegedly by a 204th Street gang member who fired into a group of black youths on Harvard Boulevard. Three others were wounded. Police say the gang member was angry after having a confrontation with another black man outside a nearby store earlier in the day. He and another 204th Street gang member face murder and hate crime charges.
* The list may not be complete. Some cases are unsolved but suspected to be interracial homicides.
Sources: LAPD Harbor Homicide Division; L.A. County coroner.
http://www.latimes.com/news/local/la-me-harbor4mar04,0,5714315.story?coll=la-home-headlines
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