Thursday, October 25, 2007

Shortage of Fire Trucks

State has been slow to boost firefighting capability
Only 19 of 150 promised new firetrucks have been ordered, and new home-building rules won't take effect until January.

By Jordan Rau
Los Angeles Times Staff Writer
October 25, 2007

SACRAMENTO — Although Gov. Arnold Schwarzenegger's administration has improved its readiness for big blazes since the last major round of wildfires hit California in 2003, the state still confronted this week's infernos without all the equipment its experts had advised.

A special panel appointed by Schwarzenegger recommended in 2004 that California buy 150 more firetrucks for emergencies. So far only 19 have been ordered. They are scheduled to arrive in time for next year's fire season.

The state has not replaced its Vietnam-era helicopters, although the Blue Ribbon Fire Commission had warned that many were nearing the end of their operational lives and that the availability of replacements "is diminishing and will soon be exhausted."

All told, "in some areas they have moved forward, but there's still a long way to go," said Mark Ghilarducci, a former emergency services official under Gov. Gray Davis who heads the Western office of James Lee Witt Associates, a crisis consulting firm.

The shape of the state's physical resources has become one of the few flash points in a fire response that has been generally considered well-organized.

Assemblyman Todd Spitzer (R-Orange) complained Tuesday that more tankers and helicopters could have helped contain Orange County fires, saying, "We've all known this day was going to happen." Spitzer did not renew his complaints Wednesday, when he traveled in the fire zone with the governor.

Schwarzenegger dismissed the complaint as "ridiculous."

"We had the aircraft there but they couldn't fly because of the weather conditions, and because of the wind," he said Wednesday.

By all accounts, the state is in a much better position now than in 2003, when firefighters battled flames across Southern California. Schwarzenegger enacted two recommendations of his blue ribbon panel by boosting staffing on each engine to four firefighters in key areas, including San Diego, Riverside and San Bernardino counties, and keeping a core of firefighters on staff all year.

This year Schwarzenegger did not cut the California Department of Forestry and Fire Protection budget, despite big cuts in other departments, noted Terence McHale, a spokesman for the CDF Firefighters, the state union. "He actually augmented it."

Carroll Wills, a spokesman for the California Professional Firefighters union, praised the department, saying, "It took almost six days in 2003 to mobilize the fire resources. Here, it was two days to bring that same volume of resources to bear."

The state has also followed recommendations intended to reduce the amount of flammable material around homes in fire-prone areas. Last year, the state began to require residents to clear brush and flammable materials within 100 feet of their homes. Ruben Grijalva, director of the forestry department, said there have been 50,000 inspections since those standards went into place last year.

But it will take a generation before all homes meet another rule, which takes effect in January, that homes be constructed with fire-resistant materials intended to stop flying embers from setting them ablaze.

Some new developments, such as Stevenson Ranch south of Santa Clarita, that voluntarily adopted those building recommendations weathered this week's blaze particularly well, and fire officials said they plan to study how much of a difference that made.

The gaps in the state's equipment are due to an issue as persistent as wildfires: money. Chronically short of cash, lawmakers are buying the new firetrucks for the state Office of Emergency Services a batch at a time. The purchases have also been slowed by competitive bidding required by law and the fact that each truck is built to order. Each costs about $250,000, for a total of $37.5 million for the lot.

"It's not like going out and buying a Ford truck," said Mike Jarvis, a forestry department spokesman.

In addition, the state has had to replace existing firetrucks that are reaching the end of their lives. Those trucks were not included in the target increase of 150 vehicles.

Bill Campbell, a retired state senator who headed the blue ribbon commission, said the state still needs to reconcile two goals that sometimes conflict: its desire to preserve California's natural surroundings as much as possible and its effort to deprive fires of the fuel that keeps them going.

"We still haven't resolved the battle between the saving of lives and property versus the environmental issues," said Campbell, a Republican who represented Orange County until 1990.

Yet it is far from clear that even if all of the panel's recommendations had been enacted, they would have been enough to overcome the brutal combination of prolonged drought and the increasing intrusion of people into California's wilderness.

"The problem here is we're facing a situation where we have the worst fuel conditions in California history," Grijalva said. "I personally don't believe any amount of resources could have done any better than what we're doing."

But Ghilarducci, the emergency preparedness consultant, said the state should not become complacent about fighting fires.

"The measuring point is going to be: Are we ready for the catastrophic disaster?" he said. "Because I'll tell you a little secret: The earthquake is coming. So we need to be prepared for that one."


Tuesday, October 23, 2007

Greenspan on Dollar Drop

Greenspan Says Dollar Drop May Reflect Falling U.S. Debt Demand

By Kevin Carmichael and Simon Kennedy

Oct. 22 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the dollar's decline may reflect a growing unwillingness among foreigners to buy U.S. securities.

``Obviously there is a limit to the extent that obligations to foreigners can reach,'' Greenspan said in a speech in Washington yesterday. The dollar's decline to its lowest since 1997 may be ``an indication America is approaching this limit.''

Greenspan's warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. stocks, bonds and other financial assets in August. Central banks and private funds are turning to currencies including the euro as financial markets outside the U.S. expand.

Total overseas holdings of U.S. equities, notes and bonds fell a net $69.3 billion in August after an increase of $19.2 billion in July.

The Fed's trade-weighted broad dollar index, a measure of the dollar against the currencies of U.S. trading partners, dropped to 99.49 on Oct. 19, the lowest level since 1997. The U.S. currency today fell to a record against the euro, trading at $1.4327 per euro at 10:15 a.m. in

Greenspan first predicted that investors abroad would tire of financing the U.S. current-account deficit in a Nov. 19, 2004, speech in Frankfurt. ``A diminished appetite for adding to dollar balances must occur at some point,'' Greenspan said as Fed chairman at the European Banking Congress three years ago.

Slipping Share

Greenspan returned to that theme in a London speech in December 2005. After leaving the Fed, he told a conference in Tel Aviv in December that the dollar will ``continue to drift downward'' because it's unlikely that international investors will continue to increase their allocations to the U.S. currency.

The dollar's share of world foreign-exchange reserves has slipped as central banks sought alternatives to the currency in recent years. The dollar's proportion fell to 64.8 percent in June, from 71.8 percent seven years before, International Monetary Fund figures show. The euro jumped almost 8 percentage points, to 25.6 percent.

The liquidity and size of euro-denominated financial markets are approaching those of dollar markets, Bank of International Settlements economists Gabriele Galati and Philip Wooldridge wrote in a paper a year ago.

Ben S. Bernanke, Greenspan's successor, and Treasury Secretary Henry Paulson have repeatedly dismissed concern about international investors selling off their holdings of U.S. Treasury securities. Paulson noted in June that China's investments, the largest after Japan's, amount to about a day's worth of trading in the Treasury market.

`Waiting to Happen'

Greenspan also said yesterday that the August surge in the cost of credit following increased defaults on U.S. subprime mortgages was an "accident waiting to happen,'' given that investors were pricing risk too cheaply. "Something had to give,'' he said. "Had the crisis not been triggered by subprime mortgages it would have erupted in another sector or market.''

The former Fed chief said central banks increasingly appear to have ``lost control'' of market interest rates beyond three to five years of maturity. Before departing the central bank in January 2006, he said the lack of increase in long-term Treasury note yields during a period of rising Fed rates was a "conundrum.''

To contact the reporters on this story: Kevin Carmichael in Washington at

Last Updated: October 22, 2007 00:04 EDT

Mike Davis on 2003 Fires 1

The Perfect Fire
by Mike Davis

Published on Tuesday, October 28, 2003 by

Sunday morning in San Diego. The sun is an eerie orange orb, like the eye of a hideous jack-o-lantern. The fire on the flank of Otay Mountain, which straddles the Mexican border, generates a huge whitish-grey mushroom plume. It is a rather sublime sight, like Vesuvius in eruption. Meanwhile the black sky rains ash from incinerated national forests and dream homes.

It may be the fire of the century in Southern California. By brunch on Sunday eight separate fires were raging out of control, and the two largest had merged into a single forty-mile-long red wall. The megalopolis's emergency resources have been stretched to the breaking point and California's National Guard reinforcements are 10,000 miles away in Iraq. Panic is creeping into the on-the-spot television reports from scores of chaotic fire scenes.

Fourteen deaths have already been reported in San Bernardino and San Diego counties, and nearly 1000 homes have been destroyed. More than 100,000 suburbanites have been evacuated, triple as many as during the great Arizona fire of 2002 or the Canberra (Australia) holocaust last January. Tens of thousands of others have their cars packed with family pets and mementos. We're all waiting to flee. There is no containment, and infernal fire weather is predicted to last through Tuesday.

It is, of course, the right time of the year for the end of the world.

Just before Halloween, the pressure differential between the Colorado Plateau and Southern California begins to generate the infamous Santa Ana winds. A spark in their path becomes a blowtorch.

Exactly a decade ago, between Oct. 26 and Nov. 7, firestorms fanned by Santa Anas destroyed more than a thousand homes in Pasadena, Malibu, and Laguna Beach. In the last century, nearly half the great Southern California fires have occurred in October.

This time climate, ecology, and stupid urbanization have conspired to create the ingredients for one of the most perfect firestorms in history. Experts have seen it coming for months.

First of all, there is an extraordinary supply of perfectly cured, tinder-dry fuel. The weather year, 2001-02, was the driest in the history of Southern California. Here in San Diego we had only 3 inches of rain. (The average is about 11 inches). Then last winter it rained just hard enough to sprout dense thickets of new underbrush (a.k.a. fire starter), all of which have now been desiccated for months.

Meanwhile in the local mountains, an epic drought, which may be an expression of global warming, opened the way to a bark beetle infestation which has already killed or is killing 90% of Southern California's pine forests. Last month, scientists grimly told members of Congress at a special hearing at Lake Arrowhead that "it is too late to save the San Bernardino National Forest." Arrowhead and other famous mountain resorts, they predicted, would soon "look like any treeless suburb of Los Angeles."

These dead forests represent an almost apocalyptic hazard to more than 100,000 mountain and foothill residents, many of whom depend on a single, narrow road for their fire escape. Earlier this year, San Bernardino county officials, despairing of the ability to evacuate all their mountain hamlets by highway, proposed a bizarre last-ditch plan to huddle residents on boats in the middle of Arrowhead and Big Bear lakes.

Now the San Bernardinos are an inferno, along with tens of thousand acres of chaparral-covered hillsides in neighboring counties. As always during Halloween fire seasons, there is hysteria about arson. Invisible hands may have purposely ignited several of the current firestorms. Indeed, in Santa Ana weather like this, one maniac on a motorcycle with a cigarette lighter can burn down half the world.

This is a specter against which grand inquisitors and wars against terrorism are powerless to protect us. Moreover, many fire scientists dismiss "ignition" -- whether natural, accidental, or deliberate -- as a relatively trivial factor in their equations. They study wildfire as an inevitable result of the accumulation of fuel mass. Given fuel, "fire happens."

The best preventive measure, of course, is to return to the native-Californian practice of regular, small-scale burning of old brush and chaparral. This is now textbook policy, but the suburbanization of the fire terrain makes it almost impossible to implement it on any adequate scale. Homeowners despise the temporary pollution of "controlled burns" and local officials fear the legal consequences of escaped fires.

As a result, huge plantations of old, highly flammable brush accumulate along the peripheries and in the interstices of new, sprawled-out suburbs. Since the devastating 1993 fires, tens of thousands of new homes have pushed their way into the furthest recesses of Southern California's coastal and inland fire-belts. Each new homeowner, moreover, expects heroic levels of protection from underfunded county and state fire agencies.

Fire, as a result, is politically ironic. Right now, as I watch San Diego's wealthiest new suburb, Scripps Ranch, in flames, I recall the Schwarzenegger fund-raising parties hosted there a few weeks ago. This was an epicenter of the recent recall and gilded voices roared to the skies against the oppression of an out-of-control public sector. Now Arnold's wealthy supporters are screaming for fire engines, and "big government" is the only thing standing between their $3 million homes and the ash pile.

Halloween fires, of course, burn shacks as well as mansions, but Republicans tend to disproportionately concentrate themselves in the wrong altitudes and ecologies. Indeed it is striking to what extent the current fire map (Rancho Cucamonga, north Fontana, La Verne, Simi Valley, Vista, Ramona, Eucalyptus Hills, Scripps Ranch, and so on) recapitulates geographic patterns of heaviest voter support for the recall.

The fires also cruelly illuminate the new governor's essential dilemma: how to service simultaneous middle-class demands for reduced spending and more public services. The white-flight gated suburbs insist on impossible standards of fire protection, but refuse to pay either higher insurance premiums (fire insurance in California is "cross-subsidized" by all homeowners) or higher property taxes. Even a Hollywood superhero will have difficulty squaring that circle.

Mike Davis is the author of City of Quartz, Ecology of Fear, and most recently, Dead Cities: and Other Tales.

Mike Davis on 2003 Fires 2

NOVEMBER 7 - 13, 2003
Ecology of Fire
Driving the black highways with Mike Davis
by Joshuah Bearman

Suppose the rains didn’t come, she thought . . . And now that men were hunting quail through the brush the hills might burn. There were always more fires in hunting season.

November Grass, by Judy van der Veer, 1940

“This is where we used to drag race,” Mike Davis said, pointing out the blue-collar flatlands of double-wides and modest houses on the streets of El Cajon. Ringing them were small knobby summits sprouting a crown of hilltop trophy homes. “Now they’re putting up all this crap,” he said, gesturing at the McMansions. Davis is at the wheel of his “fascist” black Ford Tundra 4x4, and up ahead, nearing the city of Crest, we can see the path of the Cedar Fire, still burning some 30 miles east.

The quick spell of Halloween rain had passed when I met Davis in San Diego on Saturday, the day the fires were finally slowed by a long-awaited weather shift. The incendiary wind had cooled and swiveled back to prevailing. Davis, who has written extensively about the dangers of our fire ecology, is well-acquainted with the burn area. He grew up in eastern San Diego, spending a lot of time in the backcountry. Watching the fire erupt last week, he realized that the countryside of his youth and his adult fascination with the science and politics of fire had merged in what had become the largest forest fire in the state’s history.

A little further along Interstate 8, some of those McMansions were now piles of ash. The damage worsened in Alpine, the town where Republican Congressman Duncan Hunter’s house had burned to the ground. (Hunter’s district, the 52nd, contains almost all of the Cedar Fire.) Alpine is a small but rapidly growing town in the foothills near the edge of the Cleveland National Forest, a vanguard settlement of one of San Diego’s many suburban tendrils. Twenty-eight miles from San Diego proper, Alpine is close enough for a commute but pastoral and cheap enough to own a nice-sized piece of manifest destiny surrounded by oak and eucalyptus trees and manzanita chaparral.

Which also makes it the vanguard of the “fire-belt frontier,” the developmental sprawl that fire historian Stephen Pyne has called “a lethal mixture of homeowners and brush.” What we saw had clearly been the scene of a fierce struggle between incredible natural savagery and heroic human effort. Some houses were reduced to neat rectangles of foot-high rubble. Others were saved, often at the last minute. You could see where hills were burned bare and black right up to the very walls of the white and cream and ochre palaces roosting on every peak, some of which were still under construction. Davis had been through this area a year earlier with his daughter and a friend. “I showed them all the fuel on the hill and the houses that will burn down,” he said. “And this must have been a hell of a place to fight a fire, with these deep canyons and windy roads. I was on a fire line once, as a teenager, and that was nothing compared to what these guys were up against. This fire front had 200-foot flames, things firefighters had never seen before.”

It was Chapter 3 of Davis’ notorious (and, despite questions about the veracity of his footnotes, clearly sagacious) book Ecology of Fear that foretold of this destruction. Davis described the mounting fire danger that comes with urban development and total fire suppression that leaves homes nestled among vast stores of fuel on the hillsides. “Prescriptive burns are what’s needed,” Davis said, stopping his truck to look at some cars whose aluminum rims had melted into silvery pools. The air was sweetly redolent of burning pine. “It reminds me of camping out here as a kid.”

The biology of chaparral, Davis explained, entails flame. There are many types of chaparral, which is what the Spaniards first called the dense tangle of bushes, scrub oak and manzanita that cover our hills, and they are all so environmentally successful that they quickly crowd out their competitors. Eventually, the chaparral becomes so thick — “Try to bushwhack through it,” Davis said, “and you’ll see what I mean” — that its own seedlings can’t survive, and the aging stands deplete the soil, whither and die, at which point the clock must be reset by combustion. “There is a simple rule in the backcountry: Where there is chaparral, there will be fire.”

But the arrival of luxury homes and subdivisions into this environment has put a stake between this timeless wheel’s spokes. “The landscape is metabolically dependent on frequent, small-scale burning,” Davis said, as we drove past the Viejas Casino, where, the radio assured us, Don Rickles will still be appearing next week. “And when you stop that cycle, you set yourself up for doomsday firestorms.”

Add to that a four-year drought, the bark-beetle infestation, 100-degree heat and the dry Santa Anas blowing in from the Mojave, and you have ideal conditions for pyrogenesis — and the reason why the Cedar Fire went from 1,000 acres to 115,000 acres in half a day.

And yet, the devastation was not complete. The eucalyptus trees, which Davis likens to stacks of napalm, are gone, but many sycamores and tall elms survived. As did the sturdy, drought-tolerant sages of all kinds. And everywhere oak: Davis was excited to see that Descanso and its dense oak forests were spared. Blackened tips of Jeffrey and ponderosa pines rose like incense among singed but healthy Engelmann oaks. “Oaks are the least flammable,” Davis said. “Their acorns need fire to germinate, actually. It takes real firestorm conditions to kill them.” This we did see eventually, on the dolorous road through Cuyamaca, a little town all but burned out of existence. Here were ashen oak stumps and hills that looked like Hiroshima.

Further north, near Julian, the pine forest and oak savannah blends with groves of apple trees whose fruit fills the apple pies for which Julian is famous. Of course, the shops in downtown Julian were still closed, so no pie was to be had. Nor could we go to the soda fountain where Davis got his first fountain drink some 50 years before. But we did, he thought, find his agent’s house, up a windy road outside of town. “If that’s it, she’ll be very excited to hear that it’s still here,” Davis said as nearby, less-fortunate residents surveyed their ruins. In the distance, fire crews — almost eerie figures in safety-orange aramid standing out boldly against the charred background — scoured the deep valleys for live embers.

Which is how 11 firefighters died in this same area in 1956: A tiny remnant fire kicked up and enclosed them in a ravine. Those men are memorialized at the nearby Inajo Monument, a small stone and plaque that itself was surrounded by fire this time around but emerged unscathed. When we reached the monument, two information officers from the Forest Service were there, and one remarked that they’ll be “adding a name to this monument soon,” referring to Steve Rucker, the firefighter who was killed earlier in the week near Julian. Davis agreed, suggesting the monument’s profile should be raised to remind people of the area’s intrinsic fire danger.

What’s frustrating to Davis is that the loss of life out here is avoidable, if only people would rethink the development patterns in Southern California. It’s not impossible: Santa Barbara and Ventura counties, with similar landscape near the Los Padres National Forest, have sensible-growth policies. But this lesson is lost on people like Representative Hunter, who, as usual, have twisted themselves into an audacious intellectual contortionist act in order to blame the fire on a conspiratorial Gray Davis rather than the lack of fire-fighting resources in a county that opposes the taxes that would pay for them. “It’s a form of parasitism, really,” Davis said as we pulled into a bakery that looked like it might be open and selling pies. “This is a culture that wants to live in a known fire ecology but not pay for fire protection. Then, when fire breaks out, state and federal resources get pumped in at an alarming rate because wildfire costs explode as rapidly as the flames. It’s an enormous social cost, a subsidy really, to luxury suburbanization.”

San Diego, Davis noted, is the only urban county without its own fire department. “Instead they have these little fire-protection districts,” he said. “It’s has one of the biggest fire dangers in the country, but they’re operating like volunteer fire departments from the 19th century because after Proposition 13, every bond issue to equip fire departments has been voted down. This is something the firefighters have complained about for years.” Davis also pointed out the retroactive irony of all the “Repeal the Car Tax” bumper stickers you see around San Diego: “That tax is to pay firefighters. It’s what stood between residents and the flames.”

Following a big fire, there are always discussions about potential techno fixes, like more supertanker planes, better foams and incombustible construction. Representative Hunter’s solution, which may have to do with his chairmanship of the House Armed Services Committee, is to militarize firefighting, as he’s done with the border patrol. But what about the root cause: slowing down development?

“Not likely,” Davis said, suggesting I have some pie. “The pull is too strong. The sheer scale of this fire could give a boost to the Rural Lands Initiative, which is an attempt to control growth. But every major fire has been an opportunity to address development, and it never happens. In two weeks, people will say, ‘What fire?’”

A little while later, we stopped on a descending western slope overlooking a wide valley lit golden by the sunset. Where the hills were burned, the soil was already moist and fertile-looking. There will be lush wildflowers there after a few more rains. In the spring, the stumps will grow buds. In a year, the chaparral will return. “This is one of the most beautiful places in Southern California,” said Davis. “And it will all come back.” As will the suburban pioneers, like those of Ramona some miles down the highway, where you can see the inexorable future of Southern California: subdivisions and office parks punching deeper into the countryside. They will be built, and eventually burn, as residential growth solidifies what has become the new urbanized and explosive life cycle of the chaparral. As Davis had put it earlier: “Here, humans and the landscape have co-evolved in a conversation of fire.” And so the dialogue goes on.

Friday, October 19, 2007

Paddleboat Economics

LA City Hall doles out riches, but stiffs the families who won back MacArthur Park

Wednesday, October 17, 2007 - 6:00 pm

At a time of gung-ho city spending — city employees are reaping 23 percent pay hikes, and the budget for Los Angeles has doubled over seven years to a whopping $6.8 billion — bureaucrats have found at least one way to save a buck.

They have torpedoed one of the few wholesome activities available to poorer urban families at Echo Park and MacArthur Park lakes — the popular and historic paddleboats. “Even during the Depression they were running the boats,” cries Isa-Kae Meksin, a retired teacher and Echo Park activist who once ferried her blind students out for fun on the lake. “If they could sustain this during the Depression, why can’t they now? You have no idea how upset the community is about this.”

Boating has added a Norman Rockwell touch to the lakes since before anyone even heard of Norman Rockwell. To many children of immigrant and working-class families, the two parks, within easy view of downtown skyscrapers, are the only places to discover what it’s like to sit in a craft that floats and bobs along the water. “Not having access to the ocean, it’s a chance to have that experience,” says Ludin Chavez, director of the nonprofit community center Collective Space near MacArthur Park. “It’s something different they’ll talk about.”

Ivonna Nanette, who lives two blocks from MacArthur Park, recalls the delight in the eyes of her daughter Noemi, who was 5 the first time she rode the paddleboats last year.

“Riding the boat and feeding the ducks at the same time, that was big for her,” Nanette says. “It’s brought families together to ride the boats. Bus number 20 goes to the beach in Santa Monica, but you don’t get to ride a boat in Santa Monica.”

That feel-good childhood magic apparently matters little to bean counters at City Hall, who shuttered operations just after Labor Day, leaving only pigeons and seagulls to board the pedal-powered craft now marooned at their docks next to locked boathouses. According to Kevin Regan, assistant general manager of the Department of Recreation and Parks, the boats are required to stay afloat entirely through user fees: $10 per hour, or $7 per half hour, for a boat that holds up to four passengers. Since those revenues are not enough to pay for maintenance and staff, including lifeguards on lakes barely deeper than wading pools, the boats end up draining money from other programs in the department’s budget — which is only $163 million, Regan says.

“That program has never broken even, or even come close to it,” he says. “The department’s intent is that we’re done. We’re not going to put the boats back in the water.”

Regan was initially evasive about paddleboat costs — suggesting at one point that a reporter file a Freedom of Information Act request over what is surely one of the most benign expenditures in the entire bureaucracy. He later explained that the parks department took control of the rentals from a concessionaire 20 years ago, and always wanted the boats to be self-supporting. Mayor Antonio Villaraigosa’s bureaucrats, including General Manager Jon Kirk Mukri, decided to slash the program — all to save $95,000 at Echo Park and $43,000 at MacArthur Park.

Outraged residents, who have organized to try to save the boats, insist the money cannot be better spent than at two parks that were infested a dozen years ago with gangsters and drug users. MacArthur Park, in particular, because of its location in a teeming, blue-collar community crowded with illegal immigrants reluctant to deal with authorities, has been difficult to clean up. Homeless men still sleep under blankets while locals sit at concrete tables and play chess, talking in Spanish. Women and children now use the park too, in a precarious balance that neighborhood leaders are trying hard to maintain.

“Is the city, as a matter of priorities, going to support these predominantly Latino and working-class neighborhoods?” asks Cindy Bendat, an attorney and photographer who remembers riding the boats as a child. “When we Google these parks, do we want to find stories about crime and drugs, or do we want to protect something uniquely beautiful in Los Angeles?”

Ultimately, it’s up to Council Members Eric Garcetti, who represents the district that includes Echo Park, and Ed Reyes, who represents MacArthur. Because of L.A.’s highly unusual governance structure, which hands each of 15 elected council members a vast, city-size district of 260,000 people and allows each to rule like a demigod over key decisions on land development and city programs inside their district’s boundaries, nothing can happen without Reyes and Garcetti.

When it comes to big-ticket items, both Garcetti and Reyes have shown themselves able spenders of public loot: Both voted for phased-in 28 percent raises for employees of the Department of Water and Power shortly after the Daily News reported that DWP workers earn an average of $77,000 per year — with 13 percent of these public employees paid more than $100,000 annually.

Furious about the disclosures, the union representing DWP workers unsuccessfully took the Daily News to court several days ago to force them to remove employee names and salaries from the paper’s Web site — even as the DWP got initial approval for steep rate hikes for L.A. residents. The DWP raises are seen as prelude to phased hikes of about 23 percent for more than 20,000 other city workers — even as Villaraigosa admits to a massive spending deficit.

Garcetti has vowed to save the modest paddleboat program. But perhaps fittingly, because of the languid beauty of the two palm-tree-encircled lakes, it’s photographers who are leading the fight on behalf of the boats.

Crusader Martin Cox was the first on board. Cox was raised in Southampton, England, where the Titanic began its maiden voyage. He stood among the weeping thousands as the Queen Mary sailed from Britain for the final time. Fascinated with ships, he runs a Web site devoted to them,, and says he just finished co-writing a history of the Los Angeles Steamship Company that will be published next year.

In June, while strolling in Echo Park, his nautical sensibilities were stirred by a posted notice that the paddleboat operation was being closed down.

“This was stunning news,” Cox says. “I started taking pictures of this social activity that was sort of vanishing before our eyes — an activity that was cross-generational, a family activity that was sort of healthy, that doesn’t involve sugar or TV.

“I did a little bit of research and, as far as I could tell, there had been rental boating of some kind in Echo Park for 111 years. Canoes, rental row boats .?.?. and these paddleboats. There aren’t many things that L.A. can claim to have done for 100 years.”

Cox, Bendat and another photographer, Sara Jane Boyers, spent much of the summer lobbying Los Angeles City Council members — who intervened, but only to keep the boats going through Labor Day — and taking pictures of the boats in what might be their final months. They also arranged a pair of photo exhibitions to call attention to the fight.

Works by 11 different photographers who shot the boats are being displayed all this month at Mama’s Hot Tamales Café, at 2124 West Seventh Street, adjacent to MacArthur Park. A second exhibition, featuring the same photographers but a different selection of photos, is expected to run through November at Downbeat Café, 1202 North Alvarado Street, in Echo Park. An opening reception is planned there for November 3.

“Visually, it’s great,” Boyers says of the scene when families are out boating. She concentrated her own photographic efforts on the interactions of people in an environment of palm trees and distant office towers: elements that remind her of a Seurat pointillist landscape. “People are waving at each other on the boats,” she says. “It was wonderful to catch that energy and emotion.”

Boyers points out that a story in The New Yorker not long ago suggested a strong correlation between the number of women who visit a park and the relative safety of going to that park. While no one would mistake the crowds at MacArthur Park for a meeting of the Jane Austen Society, the point rings true with Sandy Romero, one of the community leaders who has led the restoration of that park through her nonprofit Institute for Urban Research and Development.

Romero, who is the “Mama” of Mama’s Hot Tamales, says she not only has a deep sentimental appreciation for the paddleboats — she rode them as a young girl on family trips downtown — but they are vitally important to keeping families there and in tenuous control of the park.

“They’re a positive activity,” she says of the boats. “The more positive activities we have going on in the park, the more it helps keep away the bad elements.”

“Without a Paddle” Photo Exhibit

Exhibition 1, now underway at Mama’s Hot Tamales Café, 2124 W. Seventh St., downtown.

Exhibition 2 opens Saturday, Nov. 3, 6-8 p.m. at Downbeat Café, 1202 N. Alvarado St., Echo Park.

Featuring the Los Angeles League of Photographers and works by Deborah Arlook, Cindy Bendat, Sara Jane Boyers, Larry Brownstein, Martin Cox, Margery Epstein, Bianca le Mouël, Douglas McCulloh, Ann Mitchell, David Schulman and Don Schwartz.

The Usual Story

From the Los Angeles Times
Gang rivalry grows into race war

Battle over the drug trade has led to escalating violence in Florence-Firestone.

By Sam Quinones

Los Angeles Times Staff Writer; October 18, 2007

As the story goes, the East Coast Crips robbed a Florencia 13 drug connection of a large quantity of dope nearly a decade ago. Since then, the tale of how a black street gang ripped off a Latino rival has taken on mythic proportions.

But to this day police are uncertain if the fabled heist ever occurred.

"You hear so many different variations of this crime," said Terry Burgin, a Los Angeles County Sheriff's Department gang detective. "Who knows what really happened? [But] the effects are tremendous."

Over the years, the two rival gangs have battled over control of the drug trade in Florence-Firestone, an unincorporated neighborhood north of Watts.

The feud has escalated into what many residents call a race war.

It used to be that innocent bystanders were not targeted, said Chris Le Grande, pastor of Great Hope Fellowship in Faith, one of Florence-Firestone's largest black churches. "Now it's deliberate. 'I'm deliberately shooting you because of your color.' "

On Tuesday, the U.S. attorney's office announced a sweeping indictment against more than 60 members of Florencia 13, accusing the Latino gang of waging a violent campaign to drive out African American rivals. Once primarily black, the working class community of 60,000 today is mostly Latino.

But some say that's only part of the truth. The war has two sides, said Robert Ramirez, a Florencia 13 gang member.

"I'm not going to say we're angels, but it's 50-50," he said, as fellow gang members sprayed walls with Florencia graffiti. " 'Any black, shoot on sight?' -- it's not true. Nobody likes a racist person."

The neighborhood saw 41 homicides in 2005, surpassing the homicide rate in some of the nation's most dangerous big cities, authorities said. About half of those killed had no gang affiliation.

Homicides dropped to 19 last year after a major law enforcement crackdown that led to 230 felony arrests and the seizure of 130 weapons. But the level of violence remains high.

Authorities attribute the neighborhood's gang troubles in large part to the huge demographic shift that occurred in this economically depressed community over the last 20 years, tipping the balance of power from black to Latino and turning it into a tinderbox of racial tensions.

That kind of demographic shift has occurred in many parts of Southern California, but Florence-Firestone is one of the places where it has turned violent. The violence threatens an economic revival that has begun to revitalize the neighborhood.

Mexican Mafia strategy

For years, the two rival gangs resisted outside pressures to go to war, according to those active in Florencia in the 1990s.

Like many black and Latino gangs, they ignored each other during the worst gang years of the late '80s and early '90s. Instead, they focused on attacking rivals of their own race.

But during the mid-'90s, the Mexican Mafia prison gang began directing Latino gangs to stop fighting each other, to "tax" drug dealers and to push blacks from their neighborhoods, according to numerous gang members and law enforcement officers.

Florencia, in particular, had warred for years with 38th Street, a Latino gang to the north.

But under the new rules, Florencia was forced to get along with rival Latino gangs and once even played a pickup football game with 38th Street, said one Florencia gang member who requested anonymity out of fear for his safety.

The Mexican Mafia "didn't understand how it worked," he said. "I hate 38th Street. I didn't have no problem with the guys from East Coast because I grew up with them. It's kind of hard to say, 'Now I'm going to. . . kill this black guy just because he's black.' But that's how they wanted to do it."

In 1996 tensions erupted when members of a gang associated with East Coast Crips, known as the 6-5 Hustlers, killed a Florencia member.

After some retaliation, the gangs held a peace summit at Parmelee Elementary School one night, and that "kind of squashed everything," the gang member said.

But the fighting resumed when word, perhaps mythical, spread about the East Coast Crips' drug rip-off of Florencia 13.

Race, gang rivalry and drugs have become impossibly tangled as motives in killings and assaults in the neighborhood, authorities and residents say. The result: a gangland version of racial profiling.

"They just see a young man of the opposite race and they shoot," said Olivia Rosales, a former hate-crime prosecutor, who prosecuted all the East Coast-Florencia murder cases for the last two years. "They don't stop to question whether or not they are a member of the gang."

Of the 20 cases she prosecuted, said Rosales, who now runs the district attorney's Whittier office, "most of the victims have not been members of the rival gang."

Demetrius Perry, 22, was shot to death by Latinos yelling a gang epithet as he played basketball in January at Drew Middle School, witnesses said.

"We used to kick it with" Latinos, said Perry's father, Benny, who is black and grew up in the area. "Now you constantly hear about it: This is their land first and they've come to take it back."

Timothy Slack, who lives a few blocks from Great Hope Fellowship church, said Latino gang members often drive by shooting at blacks. He doesn't allow his kids to go to the store and he never uses alleys anymore.

Slack grew up in Florence-Firestone when it was mostly black and had few Latinos.

Back then, "they were timid," he said. "But as their numbers started getting bigger, then they started trying to be tougher. They started thinking they could demand stuff."

But non-gang-affiliated Latinos have also been killed.

In 2005, Alejandro Barrales was on his way to work at his family's restaurant when he was shot to death allegedly by Crips while in his car at a stop sign.

Gabino Lopez, 52, was killed that year while walking to a mini-market for a beer after work. A youth who reportedly wanted to join the Crips is charged with his killing.

In the neighborhood where Lopez was killed, people no longer sit outside in the evening, said his daughter, Mayra Lopez.

"You never know when you're going to be the next target," she said.

Economy looking up

All of this comes as Florence-Firestone is beginning to rebound from a prolonged economic depression that began with the Watts riots in 1965. For years after, say longtime residents, no new housing or commercial development was built.

Today, a new shopping center is going in at Alameda Street and Florence Avenue, and rows of town houses are rising on Gage Avenue.

But "the gang war puts a damper on everything that you do here," said Joe Titus, 79, who was born in Florence-Firestone and volunteers with several community organizations. "You don't want to go out at night."

Fewer people ride bikes; fewer children play outside after school. Movable basketball stanchions, once ubiquitous in driveways, are gone.

Irv Sitkoff, a local pharmacist, said people of one race complain if his employees attend faster to people of the other race.

"You've got to very careful," he said. "Before, we didn't think about it."

Sitkoff said his pharmacy has sold grim supplies to customers because of neighborhood violence: more colostomy bags, for example.

One Latino mother bought antidepressant medication from him for many months after her son, an innocent bystander, was killed by a black gang, Sitkoff said.

"She didn't talk directly about it, but there's fear," he said. "How could there not be? I have black families who are the same way."

Meanwhile, the exodus continues. More black families depart every year for Palmdale or the Inland Empire. Some cliques of the East Coast Crips in the neighborhood don't exist any more.

One former black gang member said he hasn't left Florence-Firestone because he still has family and property there.

But "it's going to come a time when everybody's going to have to leave," he said. "Everybody's going to have to go.",1,1714434.story?track=rss

Aliso Viejo Racial Lines

Within one city, an enclave is held at a distance

In the Iglesia Park area of Aliso Viejo, language and economic barriers keep residents and their wealthy neighbors from finding common ground.
By Tony Barboza

Los Angeles Times Staff Writer; October 19, 2007

Iglesia Park feels like a neighborhood without a town.

Stuck on the northern tip of master-planned Aliso Viejo and up against the walled-in retirement city of Laguna Woods, the community of 450 one-story duplexes is mostly working-class Latinos, surrounded by the wealthy, white and retired.

When Luisa Perez moved to the neighborhood 10 years ago, she and her husband, José, both Mexican immigrants, were among a handful of Latino newcomers, and they didn't get a warm reception.

One of her white neighbors said they didn't belong and told them to "go to Santa Ana."

Since then, the neighborhood has undergone a huge demographic shift as white residents have given way to Latinos.

The economic disparity and language barrier between residents of Iglesia Park and the rest of Aliso Viejo have kept many residents from feeling a part of the city.

Iglesia Park is the only neighborhood that does not belong to the influential Aliso Viejo Community Assn., because it was not part of the original master-planned development. When Aliso Viejo became Orange County's newest city six years ago, Iglesia Park came with it.

Most of the residents' kids attend public schools in neighboring Laguna Hills. Half their mail still gets addressed to bordering cities, a remnant of the old days. Many of them work at restaurants and stores in wealthier communities nearby that other Aliso Viejo residents patronize. The neighborhood is majority Latino in a city that is almost 80% white.

"There are many things that are out of our reach," said Perez, a preschool teacher and mother of five.

Her family can't afford to pay for Aliso Viejo's soccer leagues, and they balk at the cost of family outings in a city with a median income of nearly $80,000; a family trip to the city's Ice Palace skating rink would run them nearly $100.

The city of 45,000 has worked to claim Iglesia Park as its own, locating its first community center there, and holding bilingual self-help classes for residents. The Boys & Girls Club operates an after-school program for neighborhood youths.

Aliso Viejo Mayor Carmen Cave said the city had made a significant effort to reach out to Iglesia Park. "When we went through the incorporation process, we knew we would need to do some extraordinary outreach," she said. "We knew we would need to make sure to have programs that would make them feel they were part of Aliso Viejo."

But many residents feel left out.

"They just wanted the park," Amanda Gonzalez, a 20-year resident, said of the shady strip of hilly land that holds a playground, baseball diamond, tennis and handball courts that gives the neighborhood its name.

Built in the early 1970s as housing for workers and relatives of seniors living at the massive retirement complex then known as Leisure World, the neighborhood, with its relatively low cost of living and proximity to service jobs, became an anomaly in southern Orange County, where bedroom communities and spacious homes are the norm.

While many families came for the neighborhood's quiet streets, park and affordable housing, some are thinking of leaving now that crime, noise and overcrowding are moving in.

"People know it as the ghetto of Aliso Viejo," Gonzalez said. "The police are here all the time."

Although crime has decreased in the last year, the Sheriff's Department is receiving more calls, a sign that residents are being more watchful, said Sgt. D.J. Haldeman of the Aliso Viejo station.

According to 2000 Census data, the neighborhood population is about 1,700; but residents think it's nearly twice that. Dumpsters are always full, parking is hard to find even though every home has a detached garage, and there are more people on the streets walking and biking.

That frustrates Gonzalez, a Colombian immigrant who came to this country legally and bemoans the fact that many of her neighbors are undocumented.

"I'm cordial, but a lot of my neighbors are illegals and all have several renters living with them," she said.

Some of the remaining whites, such as Sheila LaNier, say the language barrier has prevented them from getting to know many of their new neighbors.

"I don't speak Spanish well, but I've noticed a huge change, and it just doesn't seem as close-knit as it used to be."

Gloria Vega, who rents out two of her three bedrooms, lamented the fact that a once quiet neighborhood has become crowded and noisy, and the park sometimes is used by drinkers and marijuana users.

"When I would tell people I lived in Aliso Viejo, they would think I was rich," she said. "But now all the Americans have left, and now there is trash, beer cans and clothes hanging outside."

When a rash of gang-related graffiti hit the park's tennis and handball courts about two years ago, the city organized a well-attended meeting to inform parents what they could do to stop their kids from getting caught up in gangs.

An artist painted over the graffiti with an idyllic mural made by children's thumbprints, in an effort to beautify the handball court, which had become a canvas for taggers. But that, too, was partially covered with white paint after the graffiti reappeared.

Other efforts to help the neighborhood blend with the city have also been frustrated. Luisa Perez, who works at the community center, learned English by taking community college classes and wanted to help others do the same.

But others have not shown the same enthusiasm, she said. When she tried to organize three-times-a-week English classes, no one came.

Now she is considering moving.

"I moved here because I could walk in the park at midnight," she said. "Now I'm afraid to."

Thursday, October 18, 2007

Crazy Guy at MarketWatch

New 'Disaster Capitalism' economy
Wars, terror, catastrophes are 'IPOs' and 'emerging markets'

By Paul B. Farrell, MarketWatch Oct 15, 2007

ARROYO GRANDE, Calif. (MarketWatch) -- Hot tip: Invest in "Disaster Capitalism." This new investment sector is the core of the emerging "new economy" that generates profits by feeding off other peoples' misery: Wars, terror attacks, natural catastrophes, poverty, trade sanctions, market crashes and all kinds of economic, financial and political disasters.
In this Orwellian future, everything must be seen with new eyes: "Disasters" are "IPOs," opportunities to buy into a new "company." Corporations like Lockheed-Martin are the real "emerging nations" of the world, not some dinky countries. They generate huge profits, grow earnings. And seen through the new rose-colored glasses of "Disaster Capitalism" they are hot investment opportunities.

To more fully grasp this new economy, you must read what may be the most important book on economics in the 21st century, Naomi Klein's "The Shock Doctrine: The Rise of Disaster Capitalism," whose roots trace back the ideas of three 20th century giants:

President Dwight D. Eisenhower, who warned us against the self-perpetuating and ever-expanding economic power of our "military-industrial complex."

Nobel economist Milton Friedman, who said economic change never occurs without a crisis shocking the system; whether the crisis is natural, induced or merely perceived, as with enflaming public fears of war and terror threats.

Economist Joseph Schumpeter, whose saw "creative destruction" as a healthy process by which new technologies and new products made old ones obsolete.

"Disaster Capitalism" is financing a new world economic order says Klein, not just in "the divide between Baghdad's Green and Red zones" but in other disaster zones, from post-tsunami Sri Lanka to post-Katrina New Orleans.

Disasters come in many forms: Weapons destroying power plants and hospitals, nature weakening bridges, hurricanes wiping out towns, ideological conflicts turning Africa's farmlands into deserts, global banking systems favoring investors over public works, shopping malls over schools, sewage treatment and power plants, and so on.

Yes, this is a hot-button political issue. But for the moment, let's put aside partisan politics, which many will find disturbing for the future of America. Let's look at this strictly as investors and briefly consider what may also be a guide for aggressive investors searching for investment opportunities in "Disaster Capitalism." In a brilliant Harper's excerpt from "The Shock Doctrine," Klein makes clear how this new economy is the wave of the future for certain investors:

"Today, global instability does not just benefit a small group of arms dealers; it generates huge profits for the high-tech-homeland-security sector, for heavy construction, for private health-care companies, for the oil and gas sectors -- and, of course, for defense contractors."
Big bucks

This new market is enormous: "Reconstruction is now such a big business that investors greet each new disaster with the excitement of a hot new stock offering: $30 billion for Iraq reconstruction, $13 billion for tsunami reconstruction, $110 billion for New Orleans and the Gulf Coast."

Get it? Disasters are "IPOs!" followed by on-going revenues for "projects" like the Blackwater security contracts and constructing the world's largest embassy in the isolated Baghdad Green Zone.

Think positive: "Disaster Capitalism" played a major role in bringing America's economy out of the 2000-2002 bear-recession: "The scale of the revenues at stake was certainly enough to fuel an economic boom. Lockheed Martin, whose former vice president chaired the Committee for the Liberation of Iraq, which loudly agitated for the invasion, received $25 billion in U.S. government contracts in 2005 alone."

Putting that in perspective, Klein quotes U.S. Rep. Henry Waxman: That sum "exceeded that gross domestic product of 102 countries, including Iceland, Jordan and Costa Rica [and] was also larger than the combined budgets" of the Departments of Interior and Commerce, the SBA and the entire legislature.

"Lockheed itself deserved to be characterized as an emerging market. Companies like Lockheed (LMT) (whose stock price tripled between 2001 and 2005) are a large part of the reason why the U.S. stock market was saved" after 9/11, helping the recovery more than the housing boom did!

Plus energy: "The oil and gas industry is so intimately entwined with the economy of disaster -- both as a root cause behind many disasters and as a beneficiary from them -- that it deserves to treated as an honorary adjunct of the disaster-capitalism complex."

Citing the "outrageous fortunes of the oil sector -- a $40 billion profit in 2006 for ExxonMobil alone (XOM) ... Like the fortunes of corporations linked to defense, heavy construction and homeland security, those of the oil sector improve with every war, terrorist attack and Category 5 hurricane."

How to invest in the new 'Disaster Capitalism'

It's easy to invest in "Disaster Capitalism" and the new economy. See the Spade Defense Index (DXS) of defense, homeland security and aerospace stocks. Klein says it "went up 76% between 2001 and 2006, while the S&P 500 dropped 5%." You can trade the Spade Index as a PowerShare Aerospace and Defense ETF (PPA)
In addition, the Fidelity Select Defense & Aerospace Fund (FSDAX) offers another opportunity. According to Morningstar data, there are similar stocks in both, including: General Dynamics (GD) , Raytheon (RTN) , Rockwell Collins (COL), Boeing (BA) , Harris (HRS) , Northrop Grumman (NOC) and United Technologies (UTX)
"The Shock Doctrine" is one of the best economic book of the 21st century because it reveals in one place the confluence of cultural forces, the restructuring of a world economy as growing populations fight over depleting natural resources and the drifting away of America from representative democracy to a government controlled by multiple, competing, well-financed and shadowy special interests. Here's an overview of trends from the book and related ideas:

1. Free market competes with government

In the past when major catastrophes resulted in economic disruptions and human losses governments responded with "New Deals" and "Marshall Plans," says Klein. Today, "Disaster Capitalism" companies see government agencies (like FEMA) and nonprofits (Red Cross) as "competition" taking away new business. A military draft, for instance, would lower the need for private mercenaries.

2. Privatization of government for the investor class

These new forces are screaming to privatize our economy and government: After the Minneapolis bridge collapse Klein saw many calls for more private toll roads and bridges across America. Same with calls to privatize New York's subways after rain closed them temporarily. Ditto with airports and their security. And in New Orleans, reconstruction moneys rebuilt private schools in upscale areas and neglected infrastructure in poor areas.

3. War generates profits, peace hurts free markets

"Disaster Capitalism" firms need wars to generate profits. And by sidestepping the draft, Iraq became a privatized war employing over 185,000 (20,000 more than the military), including truck drivers, PX clerks and mercenary soldiers. Blackwater was near bankruptcy before the war. Through secret no-bid contracts the U.S. pays for training centers which the companies now own. Peace does not generate disaster profits.

4. Plutocratic government favoring wealthy over masses

"The vast infrastructure of the disaster industry, built up with taxpayer money, is all privately controlled" through special interests favoring the wealth classes during reconstruction. In New Orleans Klein saw the "so-called FEMA-villes: desolate out-of-the-way trailer camps for low-income evacuees [with guards that] treated survivors like criminals;" while the wealthy gated communities quickly received water and power generators, private school and hospital services.

5. Shadow banking system

Private equity firms and hedge funds are making our Federal Reserve Bank less and less relevant. Today a private banking system is emerging nationally and globally that operates in relative secrecy outside the established system and beyond the oversight of securities and banking regulators and the legislature, out in a parallel universe beyond the comprehension of the vast majority of American taxpayers and Main Street investors.

So folks: Is "Disaster Capitalism" merely a hot short-term investment opportunity for you? Or is it a national "crisis," a warning bell, a "shocking" call to rise above euphemisms like "creative destruction," get into action and rein in the "military-industrial complex" mindset that's pushing America into a disastrous, self-destructive future? Tell us.

Structured Investment Vehicles Explained


How London Created a Snarl
In Global Markets SIVs Fueled Debt Boom,
But Now Banks Scramble To Prop Up the Funds


October 18, 2007; Page A1

Years ago, two London bankers left Citigroup Inc. to set up a company specializing in a new kind of investment fund. They named their firm Gordian Knot Ltd., they said, because they liked the legend about Alexander the Great solving a complex knot by simply taking a sword to it.

Now, the U.S. Treasury and the world's biggest banks are grappling with their own baffling knot: how to prevent the unraveling of an entire class of such funds -- called structured investment vehicles -- from turning into a financial and economic disaster.

The industry that grew out of the efforts of the two bankers, Nicholas Sossidis and Stephen Partridge-Hicks, is in trouble. Fears are rife that dozens of huge, structured investment vehicles, or SIVs, many of them affiliated with banks, will be forced to unload billions of dollars of mortgage-backed securities and other assets. Such a fire sale could cripple debt markets that play a crucial role in the global economy by providing financing for everything from company payrolls to mortgage loans.

In recent weeks, bankers and Treasury officials have held a string of urgent meetings to address the problem. They summoned Messrs. Sossidis and Partridge-Hicks because of their expertise in SIVs, which until weeks earlier some of them had never even heard about. Gordian Knot runs the world's biggest such fund, with some $57 billion in assets, from an office in London's ritzy Mayfair district.

The two bankers are part of a small coterie of London bankers who engendered what became a $400 billion industry. The funds boomed because they allowed banks to reap profits from investments in newfangled securities, but without setting aside capital to mitigate the risk.

Now the industry has become a significant threat to the stability of global financial markets. After the recent meetings, Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co. announced an extraordinary effort: They will attempt to raise a fund of as much as $100 billion by the end of the year aimed at supporting an orderly unwinding of many SIVs, with an eye toward restoring investors' confidence in the debt markets that the funds use to raise money. They chose $100 billion as a goal for the superfund based on a back-of-the-envelope calculation -- roughly one-third of the $350 billion in debt issued by SIVs would be coming due in the next six to nine months.

Significant Obstacles

The plan faces significant obstacles. Some bankers have been hesitant to take part on the grounds that it would amount to a private-sector bailout of Citigroup -- an assertion the bank denies. Citigroup is the largest player in the SIV market with seven funds holding about $80 billion in assets. Many investors are skeptical.

"Conceptually it's a good idea, but we prefer higher quality paper," said Chris Vincent, head of William Blair & Co., a Chicago-based firm with $2.5 billion in fixed-income investments. He added that the firm has not been comfortable with SIVs, "and this would be like a super version of one."

The fund's sponsors have countered that it won't be a sweetheart deal for the SIVs: They'll have to pay a fee to take part, accept a discounted price for their assets and help insure investors against losses. The fund has garnered the support of big investors such as Fidelity Investments and banks including Wachovia Corp.

The late 1980s, when the idea for SIVs was born, was a period of sweeping change in the credit markets. The concept of securities backed by home mortgages was evolving, and the junk-bond boom that made Michael Milken famous was going strong.

Mr. Partridge-Hicks, working in London, and Mr. Sossidis, based in New York, were looking for a better way for Citigroup clients -- pension funds and banks -- to profit from the nascent market for securities backed by assets such as commercial mortgages and credit-card receivables.

The two bankers hatched the idea of setting up a fund that would issue short-term commercial paper and medium-term notes to investors, then use the money to buy higher-yielding assets, typically longer-term ones. The bank would profit by collecting fees for operating the fund. The fund's assets would belong to its investors, so they would stay off the bank's balance sheet. SIVs had an advantage over conduits, a similar structure that was already gaining popularity: They didn't require banks to cover fully the fund's debts if the commercial-paper market dried up.

In 1988 and 1989, Messrs. Sossidis and Partridge-Hicks launched the first two such structures for Citigroup, called Alpha Finance Corp. and Beta Finance Corp. Both attracted investors, garnered high credit ratings and generated hefty profits for the bank. In 1993, the two men left Citigroup to form Gordian Knot.

Assets in SIVs ballooned into the hundreds of billions of dollars globally, but the business remained local, dominated by London-based bankers and lawyers, many of whom had some connection to Citigroup. After the departure of Messrs. Sossidis and Partridge-Hicks, Citigroup's London office launched five more SIVs with names such as Centauri and Dorada. Their combined assets reached $100 billion earlier this year. In 1997, two more bankers left Citigroup for Germany's Dresdner Kleinwort to help arrange an SIV called K2 Corp. Citigroup also earned fees by helping other banks arrange SIVs, such as Tango Finance Ltd., which it set up for Dutch bank Rabobank in 2002.

London law firms, too, got into the action. Last year, the London office of Chicago law firm Mayer Brown assisted German bank HSH Nordbank in the creation of an SIV called Carrera Capital Finance Corp.

London, a Small World

Most of the few dozen SIVs, typically registered in offshore havens such as the Cayman Islands, are managed out of London. Most players attribute the city's dominance to the fact that SIVs are extremely complex, often taking as much as a year to set up, so it is difficult for new players to enter. Because the business started in London, most people with the necessary skills and experience are in the United Kingdom, says Geoff Fuller, an attorney with Allen & Overy LLP in London, who has advised Citigroup and other clients on SIVs and other structured-finance products. "It's a small world where people know who their competitors are," says Mr. Fuller.

Mr. Sossidis says that as the SIV market peaked in recent years, many of the new players didn't fully recognize the perils involved in borrowing money short-term and investing it long-term. "These were the last ones to enter, the first ones to exit," he says.

In the wake of the 1998 collapse of hedge fund Long-Term Capital Management, Gordian Knot took precautions to protect itself from being forced to sell its assets if markets turned against it. Among other things, the company got rid of a trigger that would force its flagship Sigma fund to sell if the value of its assets fell. In addition, he says, the firm sought to better match the duration of its assets and liabilities. Analysts now say that veteran organizations such as Gordian Knot should be able to survive the current crisis.

When troubles with subprime mortgage loans in the U.S. sparked a broader credit crisis this summer, SIVs didn't appear to be affected because few had exposure to subprime loans. On July 23, Moody's Investors Service said in a report that SIVs were "an oasis of calm in the subprime maelstrom."

Within days, though, weaknesses began to show in the short-term debt market. In late July, a bank affiliate set up by German bank IKB Deutsche Industriebank ran into trouble. It had relied on extremely short-term financing in the commercial-paper market to finance investments in risky securities backed by subprime loans. A month later, Cheyne Finance, a $6.6 billion SIV operated by a London hedge fund, began liquidating assets to repay debts.

By now, investors in Citigroup's SIVs were growing concerned. Citigroup's London office issued a letter to investors in its seven SIVs saying that its funds were sound. On Sept. 6, the bank took the extraordinary step of stating publicly, through statements to the London Stock Exchange, that its SIVs had little subprime exposure. But Citigroup, too, was selling assets. Today the bank estimates the value of its SIVs at $80 billion, down from nearly $100 billion in August.

Throughout August, U.S. Treasury Secretary Henry Paulson and other top Treasury officials were watching with increasing concern as the commercial-paper market, on which SIVs rely for much of their funding, began showing signs of severe strain. Information from the Treasury's markets room, where staff sit in front of flat-screen monitors scrutinizing market movements, was painting an ominous picture. The difference between yields on Treasury bills, which are considered safe investments, and corporate commercial paper, which companies issue to fund day-to-day expenses, was growing sharply -- a sign that investors were rapidly losing confidence.

Robert Steel, Mr. Paulson's top domestic finance adviser and a former Goldman Sachs Group Inc. executive, learned from colleagues on Wall Street that the crux of the trouble was SIVs. Investors in the commercial-paper market had all but stopped lending to the vehicles. Mr. Steel and others within Treasury began to worry that the bank-affiliated funds would engage in a fire sale of assets, a move that could exacerbate the credit crunch and damp the broader economy. "What you don't want is a disorderly liquidation," Mr. Steel explains.

Dumping of Assets

On Sept. 13, Mr. Steel began phoning Wall Street executives. That Sunday, Sept. 16, about 30 people gathered in a large conference room across the hall from Mr. Paulson's office. The group included executives from Citigroup, Goldman Sachs, Lehman Brothers Holdings Inc., Merrill Lynch & Co., Bank of America, J.P. Morgan Chase, Bear Stearns Cos. and Barclays PLC. As they munched on sandwiches provided by Treasury, a consensus emerged that large-scale dumping of assets was a likely outcome over the next year, people who attended the meeting say.

At first, some bank representatives were hesitant to get involved, saying they didn't see a need to participate if they didn't have exposure to SIVs, according to the people who attended. But Treasury officials stressed that even if the banks didn't have direct exposure to SIV assets, there was a broader risk that would eventually filter down to everyone, including those firms.

At least one bank representative suggested that Treasury step in with some money to help bail out the firms, the people who attended say. Mr. Steel told the group that wasn't an option: Treasury would only back a private-sector, market-based solution. "We bought the sandwiches, and that's it," Mr. Steel told those assembled.

In the room was Nazareth Festekjian, a 15-year Citigroup veteran who runs a group that deals with unusual situations, such as the restructuring of Iraq's debt in 2005. Mr. Festekjian, 46 years old, hadn't known what an SIV was until he received a call several weeks earlier from a government contact asking him to work on a solution.

He and his team came up with the idea to create a fund that could "bridge the gap" in the market by acquiring assets in a way that might give investors more comfort, according to a person familiar with the matter. At the meeting, Mr. Festekjian unveiled his plan, which was printed up in color, says one person who was present.

Backing Away

The following week, the group again gathered in New York. There were fewer bankers, but they were joined by big SIV investors, including Fidelity and Federated Investors Inc., and by Messrs. Sossidis and Partridge-Hicks. SIV managers expressed frustration with investors for backing away from the market, according to two people who attended. Investors complained that the SIVs were not as reliable as they had been billed, one of these people says. Ultimately, all sides settled down and agreed that a solution would be important for the market.

The banks and investors held conference calls every other day until participants agreed on a plan. Richard L. Prager, Bank of America's head of global rates, currencies and commodities, who was considered an experienced but relatively neutral party, has since been leading the campaign to sell the superfund to other banks, investors and SIVs.

The plan still may not come to fruition if not enough banks agree to provide financing, or if SIVs decide that the cost of participation is too high. Some SIVs, including those sponsored by smaller U.S. banks, have started working out their own solutions with investors, and say they don't plan to join the superfund. Architects of the plan could be satisfied if no one at all ended up using the fund, so long as its existence staved off a collapse of the SIV market, according to a person familiar with their thinking.

--Ian McDonald and Craig Karmin contributed to this article.

Write to Carrick Mollenkamp at carrick.mollenkamp@wsj.com4, Deborah Solomon at deborah.solomon@wsj.com5, Robin Sidel at robin.sidel@wsj.com6 and Valerie Bauerlein at valerie.bauerlein@wsj.com7

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Thursday, October 11, 2007

American TV Is Regressive

Is this the new American dream?

By Peter Aspden

Published: September 21 2007 16:57 Financial Times

It’s a line most of us have used, a witty apologia for a sudden, apparently unexplained lapse in cultural standards: “I know it’s bad. But it’s so bad, it’s good.”

I first heard the phrase used about Dallas, the television epic that famously rewrote itself in the mid-1980s by dismissing an entire series as a bad dream. The manoeuvre was so clumsily handled – aficionados note how Pamela Ewing went to bed with short hair and woke up with long – that its very ineptitude acquired a cult following. “I know it is silly. But it’s so silly, it’s brilliant.”

There were comparisons with the short stories of Borges in such trend-setting journals as the Modern Review. The world seemed turned upside down. We knew Dallas was bad but was it so bad it was good? How else to explain that weekly addiction to the small screen, for fear of missing some fresh absurdity in the giddy plot? The more overwrought the twist in the narrative, the more we discussed it. There was no limit. All regard to taste and sobriety of judgment was diverted. The killing of JR made the national news. It seemed important. We knew it wasn’t but happily treated it as if it was.

The lofty view of these developments is that we were embracing the postmodern sensibility, adopting a knowing and ironic stance to culture that enabled us to enjoy the trivial while never losing sight of its slightness. A less generous view is that we all finally surrendered to the flattening, hypnotic effect of popular culture. I remember television before Dallas as being funny, or serious, but not both at the same time. The descent into kitsch of television and popular music meant that we didn’t care about those boundaries any more. We just consumed, and found lazy solace in rubbish by ironising it, in order to appear clever. But we were being stupid.

No matter; the habit has stuck. I confess to having my own weekly so-bad-it’s-good moment, an hour that has become weirdly and depressingly sacrosanct. The crime in question is a programme called Brothers and Sisters, a heady American series about family life that is shortly coming to the end of its first run in the UK, and about to enter its second in the US.

The premise is simple: the travails of a Californian matriarch and her five offspring, who represent a kind of rainbow coalition of modern all-American virtues – ditzy, Republican media star; cute but drug-addled war veteran; openly gay lawyer; monosyllabic businessman; working mother with attitude. As you can imagine, they each have their troubles wrestling their personal baggage on to the wobbly-wheeled luggage trolley of life, but they finally come together because they are a family. (If you ever watch the programme, count the number of mentions of family. Bring a calculator. Subliminal this is not.)

What is extraordinary about the programme is this: no matter how awful are the things that happen to the members of this doughty family, all is resolved, every week, in the last five minutes, to the accompaniment of the gentle minor chords of a soft-rock ballad. The deepest emotional turmoil is healed instantly. Psychological damage that would seem to demand a lifetime of therapy is cured with sticking-plaster homilies. The warm embrace of the family conquers all.

Now you can say that the same thing applied to The Waltons or Little Women or any other sentimental classic – but they weren’t made in 2007. What sets Brothers and Sisters apart is that it knows about family dysfunction; it understands that they fuck you up, your mum and dad. We see it in every episode; but still we must have, as the 40 minutes draw to a close, our happy ending, each week.

This is regressive, not to say reactionary, television. Poor Dallas didn’t know any better. But in the era of The Sopranos, The Wire, Six Feet Under, there is no artistic justification for taking a drama series into such shallow waters. Particularly when its makers are so demonstrably clever. There are good, funny lines in each episode. There are television in-jokes to enjoy: Rob Lowe, whose portrait in the attic must be looking very old indeed, plays an aspiring presidential candidate, which was of course the future predicted for his character in The West Wing.

The cast is not undistinguished – Sally Field emotes like a Fury, Calista Flockhart bumbles engagingly, Rachel Griffiths – the marvellous Brenda from Six Feet Under – wonders whatever happened to scripts in the past two years. There is some effective ensemble comedy. But the emotional infantilism of the series casts its shadow over all its good points. I find it compelling, because it tells us something about our world.

Brothers and Sisters strikes me as the polar opposite, in sensibility, of the plays of Chekhov. There are common primary concerns – chiefly the destructive effects of family intimacy – but opposing treatments of them. In Chekhov, all is latent, unspoken, shrouded in tension and dark moods. If there is underlying conflict between characters, it weighs throughout the work, and beyond. Chekhov’s agonists wonder, and worry, and wait. And through the stagnation, we sense the oncoming rush of social revolution.

What do we sense watching Brothers and Sisters? A society that believes the grand themes of human conflict can be swiftly resolved as long as that basic social unit, the family, sticks together. The country may be at war, society irredeemably divided but, if the family remains intact, all is well.

It all smacks of desperation: the story of a rich, white dynasty in constant flirtation with existential anxiety, but not to the extent that it ever gets hurt or made poor. Is this the new American dream? It’s a rotten one. Give me a nudge when Pammy wakes up.

Wednesday, October 10, 2007

Does Money Influence Economic Policy Debates?

by Dean Baker

Beat the Press usually does not deal with comments in book reviews, but an NYT review of Naomi Klein's new book, The Shock Doctrine: The Rise of Disaster Capital, demands some attention.

The review concludes by dismissing an assertion by Klein that progressive ideas have not lost out in a battle of ideas, but rather in large part they have lost out because the right-wing could finance think tanks that promulgated right-wing views, thereby drowning out those on the left.

This may not be the whole story of U.S. politics in the last three decades, but it is a big part of it. In economic policy debates in which I have been deeply involved, I can think of several occasions in which utter nonsense was treated with great respect by the political and intellectual establishments. This nonsense happened to serve the interest of the wealthy. It is hard to not believe that there was a causal relationship.

The Social Security debate provides the most obvious example. Consider the effort to change the post-retirement indexation formula in the mid-nineties, which had support from the Clinton administration, many prominent members of Congress (Senator Daniel Moynihan led the crusade), and many of the country's most respected economists.

The argument was that the consumer price index (CPI) overstated the true rate of inflation by approximately 1 percentage point, so therefore Social Security benefits to retirees should rise each year by approximately 1 percentage point less than the rate of inflation shown by the CPI, rather than the CPI, as is the case under current law.

While the evidence for their claim was weak as I argued in my book, Getting Prices Right: The Debate Over the Consumer Price Index, there was a more basic issue that there were huge and unavoidable implications of this claim that none of its advocates were willing to accept. Specifically, if their claim was true, then most of the people who would see their benefits cut by the change in the indexation formula had grown up in poverty. Furthermore, the future generations who they wanted to protect by reducing the deficit were actually going to be far richer than we could possibly have imagined.

The logic is simple. If the CPI overstated inflation by 1 percentage point annually, then real incomes had been rising much more rapidly than the official data show. Instead of rising by about 2.0 percent annually over the prior forty years, if inflation had been overstated by 1.0 percentage point, real per capita income had actually risen by 3.0 percent annually. (That's arithmetic - if nominal income had risen by 5.0 percent, and the real inflation rate was 2.0 percent, rather than the 3.0 percent shown by the CPI, then real income rose by 3.0 percent.) If real income had been rising by 3.0 percent instead of 2.0 percent, then we were much poorer 40 years ago relative to the present than the official data show. In fact, if we go back 40 to 50 years with this adjustment, the median family was below the current poverty line.

On the other side, if the yardstick against which we are measuring future income growth is overstating inflation by 1 percentage point annually, then we should adjust upward our projections for future income growth accordingly. This means that our children and grandchildren will be hugely richer than our current projections show - we can't even think of any economic policies that we would expect to lift income growth by a full percentage point.

Anyhow, virtually all the leading lights of the economic profession were prepared to completely ignore the logical implication of their own claim about the CPI in the effort to force a reduction in Social Security benefits. The drive was only halted by the refusal of Richard Gephardt, then the leader of the Democrats in the House, to go along with the scheme. At the time Gephardt was considering a challenge to Vice-President Al Gore for the 2000 Democratic presidential nomination. There could have been no better issue for Gephardt in the Democratic primaries than the defense of Social Security against the guy who cut it. Therefore, the Clinton administration nixed the benefit cut.

Note that all the economists who lined up behind the cut to Social Security are not currently expressing concern about the enormous distortions in our official data that result from the fact that the CPI has not been "fixed." (The CPI overstatement would contaminate all price and quantity data over time.) They also don't adjust for this error in their own work.

The other simple arithmetic problem afflicting elite economists is the projection of stock returns in the context of Social Security and other policy debates. Over the long-term, stock returns are determined by the current price-to-earnings ratios and projections of profit growth. Proponents of Social Security privatization consistently assumed that stocks would provide a real rate of return between 6.5-7.0 percent over the future, in spite of the fact that price to earnings ratios have been far higher in the last decade than their historic average of 14.5 to 1, and future profit growth is projected to be far lower than past profit growth.

Determining rates of return is extremely simple. You just have to add two numbers together: projections for dividend yields and projections of capital gains. Yet, most of the experts on Social Security (including the actuaries in the Social Security Administration) proved themselves incapable of this simple arithmetic, flunking the "No Economist Left Behind Test." They made assertions about the potential rate of return from investing Social Security money in the stock market that were not true. These projections of exaggerated returns of course supported the case for privatizing Social Security.

In these two cases, it is very hard to believe that considerations of money and power did not influence economic positions that were promulgated by many of the country's most highly respected economists. Surely these people know how to do simple arithmetic, but they argued positions that defied arithmetic and logic in order to advance positions favored by the wealthy.

There are many other cases in which it is easy to see the influence of money in economic policy debates. Would we really be arguing whether the U.S. health care system - which costs twice as much per person as the rich country average, yet ranks near the bottom in life expectancy - needs fundamental changes, if not for the influence of powerful interests like the insurance and pharmaceutical industry? Would there be any debate about the merits of special tax breaks to hedge and equity fund managers, if not for the power these people command?

I haven't read Klein's book, so I will not comment on the merits of her overall case, but I don't see how any serious person can dispute the role that money has played in determining policy debates over the last three decades. It is not the whole story (I'm wasting my time if it is), but on this point, Klein is absolutely on the mark in pointing a finger at the evil doers.

Sunday, October 7, 2007

Cutting Support for UC and CSU

Less to bank on at state universities
Educators fear a 2004 funding deal has schools sliding toward mediocrity
By Richard C. Paddock
Los Angeles Times Staff Writer

October 7, 2007

SANTA BARBARA — Library assistant Linda Snook isn't usually someone to stand up in front of hundreds of people and discuss her personal finances. But when the UC Board of Regents met here this summer, she pleaded for help.

Snook told the regents that she makes $26,000 a year working full time at UC Santa Barbara and pays more than half of that in rent. Her supervisors have recommended her for raises, she said, but there is never enough money in the budget. She'd like to enroll in graduate school at UCSB, but, on her pay, that's a distant dream.

"I am barely making it," she told the regents. "We're not paid what the private sector would make. We desperately, desperately need help. Please."

These days, such appeals are commonplace. Students, custodians, campus police, clerical workers, faculty and administrators regularly beseech the regents to give them more money.

But soaring student fees, huge fundraising drives and controversial corporate donations have not made up for a sharp decline in the state's commitment to higher education. UC administrators and faculty fear that waning commitment is eroding the 10-campus system's reputation for excellence and will trigger a slide toward mediocrity. Already, the salaries of professors and workers lag behind comparable institutions while faculty posts remain open and more classes are taught by teaching assistants.

Administrators and faculty also worry that the University of California and the 23-campus California State University will become de facto private institutions, where most of the costs are paid by students.

Officials at UC and CSU say that each institution needs about $1 billion more in annual funding to match their level of quality in 2001, the last time the universities were in relatively good fiscal health.

University leaders say the two public institutions are the state's engine of long-term growth and its main supplier of highly skilled workers. But the universities' importance to state policymakers is declining, at least as measured in tax dollars.

In 1970, the state spent 6.9% of its budget on the University of California. Today it spends 3.2%. In 1965, the state covered 94.4% of a UC student's education. Last year it paid 58.5%.

This year, California will spend an estimated $3.3 billion to operate UC. It will spend three times as much -- $9.9 billion -- to run the state's prisons.

Unlike other state-sponsored programs -- such as health, schools and community colleges -- UC and CSU have no level of state funding guaranteed by law. Will the two huge university systems, with 665,000 students, become the equivalent of private institutions?

"I worry about it every day, because we must continue to look for other sources of support," said UC President Robert C. Dynes. "And the question is, do we end up becoming a private institution to get those resources?"

In May 2004, Dynes and his CSU counterpart, Chancellor Charles Reed, traveled to Sacramento to meet privately with Gov. Arnold Schwarzenegger. The state was facing a $14-billion shortfall and the new governor was threatening the universities with major cutbacks for the third consecutive year.

The two university chiefs struck a deal with the governor: They agreed to slash spending that year by hundreds of millions of dollars in exchange for a funding formula lasting until 2011. Titled the "Higher Education Compact," the agreement calls for modest annual increases in state funds, private fundraising to help pay for basic programs, and large student fee hikes, especially for graduate and professional students.

There was no hearing on the pact; no legislative discussion; no vote. Many UC regents were not told of the deal until it was done. Richard C. Blum, who became the regents' chairman this year, called the lack of disclosure "an error in judgment."

Reed and Dynes, who will step down by June, say the compact stopped the universities' bleeding and gave them fiscal stability. But critics say the pact has left UC and CSU chronically underfunded and locked the universities into a steady decline.

"Bob Dynes and Charlie Reed fundamentally changed the nature of higher education in California without any public debate," said Stanton Glantz, a professor of medicine at UC San Francisco who chaired a faculty committee that analyzed the agreement.

"The effect of the compact is a permanent substantial reduction in the quality of the university."

The compact itself acknowledges that the universities have "significant unmet funding needs. . . and insufficient funding of programs critical to the academic enterprise."

Among its many provisions, the compact set a little-noticed precedent by calling for the use of private fundraising to pay for core university operations. "UC will continue to seek additional private resources and maximize other fund sources available to the University to support basic programs," it says.

Long gone are the days when Californians were willing to pay taxes to build three new UC campuses in a five-year span and subsidize annual student fees of less than $250.

"There is this myth out there that citizens can get better roads, cleaner air, get their garbage picked up twice a week, be protected by police and fire and it won't cost them anything," Reed said. "People have been singing that song for 20 years."

Reed predicts that within five years the state will be spending more on prisons than on UC, CSU and the community colleges combined.

"That will be a real tragedy in this state," he said. "It will send out the signal that California has world-class prisons and second-class universities. If we had better-prepared citizens, a better-prepared workforce, we would have less need for prisons."

When Schwarzenegger took office in November 2003, the state faced a fiscal crisis. At UC, enrollment had risen 18% even as then-Gov. Gray Davis cut its budget by 14%, breaking his own pact with the universities.

To reorganize the state's finances, Schwarzenegger recruited Donna Arduin, an advocate of privatizing government services who had been Florida budget director under Gov. Jeb Bush. As California finance director, she soon became known as Schwarzenegger's "bad cop."

Her budget plan for UC and CSU called for hundreds of millions of dollars in cuts for the third consecutive year, major student fee hikes, a reduction in enrollment and a plan to steer thousands of students to community colleges instead of the universities.

Dynes and Reed quietly began negotiating with the popular Republican governor.

At stake was California's tradition of maintaining low student fees, which have helped keep the universities accessible to the poor and promoted ethnic diversity. CSU has the lowest fees of any public university in the nation, Reed says, and 54% of its students are nonwhite.

Supporters of more privatization argue that the universities' main beneficiaries are the individual students, who greatly increase their earning power by obtaining a degree. But public education advocates argue that the universities provide a major social benefit in preparing California's workforce and developing technology that helps power the economy.

In announcing the compact on May 11, 2004, Schwarzenegger said that he, Dynes and Reed had "found a compromise that will protect the quality of our world-renowned higher-education system."

But much of Arduin's agenda for the universities survived, including more budget cuts, major student fee hikes and shifting freshmen to community colleges.

"Behind the scenes we had great cooperation," recalled Arduin, who left California after 11 months. "The universities were one of the first to the table, and they proposed a comprehensive approach. It was a very amicable agreement among all the parties."

The compact is similar to deals worked out with the previous three governors. But critics accuse Dynes and Reed of undercutting the Legislature and negotiating a bad deal.

Democratic Lt. Gov. John Garamendi, who like Schwarzenegger sits on the governing boards of both institutions, calls the pact a disaster.

"This compact is a formula for the diminution of both UC and CSU," he said. "It's a formula that ratchets down the state's funding."

A study by UC's Academic Senate concluded that during the life of the compact, UC will never return to the spending level of 2001, before the Davis and Schwarzenegger administrations' cuts.

During previous budget cycles, state spending cuts made in bad years were at least partly restored when the economy improved. But critics say the compact has locked in the reduced funding.

At UC, the spending gap means that faculty salaries lag nearly 15% behind comparable institutions, while salaries for campus workers like library assistant Snook trail the market by at least 10%. Needed seismic retrofitting and building improvements are delayed. And fewer top graduate students are choosing to attend UC, a key indicator of a research university's decline.

UC's spending gap is now $1.1 billion, the faculty study found, and will steadily grow for the duration of the compact despite modest increases provided by the agreement.

Similarly, Reed said, CSU faces an annual shortfall of $800 million to $1 billion.

"The compact permanently reduces the fraction of core funds the state provides," UCSB professor Christopher Newfield, chairman of the faculty Senate's planning and budget committee, told the regents in July as he presented the faculty findings.

Private fundraising, he said, cannot offset the loss in public funds. For UC to return to its 2001 spending level without an increase in state funds, he told the regents, would require raising the basic annual undergraduate fee from $6,366 to at least $15,000 in three years, with large increases thereafter.

"We're at a crossroads in public investment," Newfield said in an interview. "California had a good record in the past, but I think we have lost our memory of what we did. We're living on our past investment."

Though defenders of the compact acknowledge the budget gap, they say the universities would be in even worse shape without the pact. Their mantra: The compact sets a floor for state spending, not a ceiling.

In some years, they point out, Sacramento has given the universities more than the compact requires, including last year -- an election year -- when the governor and Legislature absorbed an expected 8% student fee hike.

"I think that the compact is a very good thing," Reed said. "What people don't have a great appreciation for is how the compact has protected UC and CSU from a stability standpoint."

This summer, when Republican legislators proposed cutting higher education below the level of the compact, Schwarzenegger weighed in on the side of the universities. The lawmakers backed off. "Thank goodness for the compact right now," Reed said.

CSU trustee Jeff Bleich agreed that the compact had kept the university from suffering larger cutbacks.

"The reason to do it is to establish some commitment from the governor for a floor," he said. "As long as you believe the governor means what he says, you can have some confidence for planning the growth of these massive institutions."

Under the compact, the need to find new money sources is most evident in UC's professional programs, especially including its renowned law and business schools. After the compact was signed, average fees at UC's 34 professional schools soared 30% in 2004 alone.

"We wound up having to take huge cuts in law and business, and they have been reeling ever since," said Larry Hershman, a former vice president for budget at UC who helped negotiate the compact. "This was the Donna Arduin view, to make these schools self-supporting, the students paying much more and the public paying much less."

Supporters of the fee hikes say that students in law, business and medicine can afford to pay more because they will be able to command large salaries later. They argue that the burden of paying for an education should fall more heavily on students.

Dynes said that some state institutions, such as the University of Michigan and the University of Virginia, have led the way in raising tuition and luring higher-paying students from other states and countries.

"If you look at Michigan and the number of out-of-state students, you realize they have privatized," Dynes said. "It's not a criticism. They have just chosen a different path."

But critics say higher fees deter underprivileged students from applying and make it harder for newly graduated lawyers, doctors or other health professionals to enter a life of public service.

The compact calls on UC to develop multiyear plans for fee hikes at the professional schools that take into account market factors and fees at comparable institutions, including Michigan.

In September, the regents approved a three-year plan to increase fees at the professional schools by 7% to 15% a year. At UC Berkeley's business and law schools, fees will rise to more than $40,000 a year.

Undergraduates have fared better, but have seen fees rise by 90% over the last six years.

Earlier this year, the UC regents and the CSU trustees voted to raise undergraduate fees 7% and graduate fees 10%. Some expressed frustration that they had no choice in the matter.

"Every year when fee increases come up, it's treated as a big crisis, but it's programmed into the compact," Glantz said. "Students are paying more and getting less."

Glantz, a tobacco researcher who has spent years fighting the industry, says UC's need for corporate money has contributed to its reluctance to ban tobacco industry research grants, including $16.6 million that Philip Morris USA is giving to researchers at seven UC campuses.

"People are desperate for cash because the infrastructure of the university is coming unglued as we watch," Glantz said.

Other grants also have stirred controversy, including a $500-million donation by oil giant BP to form a joint UC-BP research laboratory at UC Berkeley to develop biofuels. BP researchers will work alongside UC professors, and the company will have exclusive rights to some of the expected discoveries.

"The compact is driving the UC and CSU systems to seek funds from corporations at an unprecedented rate," said John Simpson, an advocate with the Foundation for Taxpayer and Consumer Rights. "What we are witnessing is the corporate privatization of what was once the nation's greatest public education system."

Educators say that maintaining competitive faculty salaries is the key to preserving the quality of the universities. But during hard times, pay raises have been the first thing to go.

The pay disparity has left UC open to raids by elite private universities. To help shore up the faculty at UC Berkeley, the William and Flora Hewlett Foundation announced in September that it would give the campus $113 million -- the school's largest gift ever -- to endow 100 faculty chairs.

Both UC and CSU have adopted plans to raise salaries to market levels over the next four years.

"The No. 1 goal is to get the faculty more money," said Blum, the regents' chairman, who in August called for overhauling UC's administration in hopes of saving many millions of dollars.

Whether Blum can solve UC's financial problems by restructuring its operations remains to be seen.

Linda Snook, the library assistant, wasn't the only university employee to ask for help at the July meeting in Santa Barbara. Victor Vincent, a custodian at UCLA for 17 years, told the regents: "We can't even afford to send our kids to the university, and we don't understand why you don't understand that. We are suffering, and we need somebody to help us."

William Schlitz, political and communications director for the American Federation of County, State and Municipal Employees, says UC is shifting more of its costs to campus employees, including doubling healthcare fees for some. UCSB, he said, has begun charging custodians who work the midnight shift $150 a month to park in an otherwise empty lot.

"At some point there needs to be a frank discussion: Is this the public's university or not?" Schlitz said. "It's scary. These are great institutions, but it's an uncertain future, and it's an uncertain future for the employees.",0,5052218,full.story?coll=la-home-center