Sunday, March 30, 2008

Gangs on Drew Street II

Outside the law
L.A.'s once-peaceful Drew Street has become a crime fortress, where family bonds thwart police efforts to stop the violence.
y Sam Quinones
Los Angeles Times Staff Writer

March 30, 2008

The brick house with the enormous black satellite dish in the driveway sits empty now, the tenants evicted. The building is fenced, its windows are boarded and a For Sale sign hangs outside.

Last year, the Los Angeles city attorney's office sued to close the house at 3304 Drew St. in Glassell Park as a public nuisance. Authorities are now seeking to demolish it.

For more than a decade, the Satellite House, as it's known in the neighborhood, was the center of the drug trade on two-block Drew Street, where dealers and gang members have operated with near-impunity for years, police said.

During at least two raids at the house since 2002, according to court documents, officers found guns and drugs as well as surveillance cameras, laser trip wires and a shrine to Jesus Malverde, the Mexican folk hero who has become drug smugglers' unofficial patron saint.

Occupying the house until recently was Maria "Chata" Leon and her family.

An illegal immigrant and mother of 13, Leon has a lengthy arrest record and three convictions for drug-related crimes -- for which she's served no prison time, according to court documents. She declined to be interviewed for this story.

Police said Leon, 44, and her extended family were deeply involved in the drug trade that has made Drew Street among L.A.'s most notorious.

The neighborhood came to the attention of most people only after undercover police officers got into a shootout there last month with gang members who had allegedly killed a man in another Northeast Los Angeles neighborhood. But police had long had Drew Street on their radar.

It is "hands down the worst area of Northeast Division," said LAPD Officer Steve Aguilar, who has patrolled the street for five years. "I've worked two other divisions and even in South-Central. This is worse."

The Leons -- and members of several other immigrant families on Drew Street whom authorities have charged with criminal acts -- hail from the town of Tlalchapa in the state of Guerrero, which has a reputation as one of Mexico's most violent regions. Police estimate that dozens of members of these extended families belong to the Avenues gang.

"It's been a safety net for them to rely on each other -- brothers, cousins and all," said LAPD Lt. Robert Lopez. "The likelihood of someone within your family ratting you out is really low."

Drew Street's Tlalchapa contingent began arriving in the 1970s, some lured by the promise of jobs at the Van de Kamp canned-food factory a few blocks away, residents and former factory workers said.

"We created a little Guerrero up there," said Robesbier Aguirre, who worked as foreman at the now-shuttered plant. Aguirre and others said his family was not part of the criminal activity on Drew Street and left when it got bad.

Poverty sent many Tlalchapans to the U.S. looking for work. But so did the violence stemming from the local drug trade and deadly family feuds, authorities and former residents said.

One place people from Tlalchapa landed was Drew Street. The early arrivals lived mostly in peace, said Epifanio Serrato, Tlalchapa's mayor, who met his wife on Drew Street when he lived there in the early 1970s before returning to Mexico.

"The first of us there had no problems," Serrato said. But as their numbers grew, the area's white residents began selling to developers, he said.

The number of apartment buildings doubled. City records show that from 1984 to 1992, builders razed 30 single-family houses and erected apartment complexes in their place, adding 480 units to the 12-square-block neighborhood -- between the Glendale Freeway and Forest Lawn Memorial-Park -- that includes Drew Street.

Living conditions began to resemble those of many public housing projects, particularly on Drew Street, where the concentration of apartments was the greatest. Poor people crowded into the long, tall buildings, which were hard for police to patrol and easy for criminals to hide in. Parked cars packed the streets, providing gang members a line of armored defense.

Tlalchapans moved into many of the new apartments, said former Drew Street residents. As they did, neighbors said, fights, parties and heavy drinking became more common. Minor disputes escalated into gunplay.

"There wasn't a weekend you didn't hear gunshots in the air," said one neighbor, who bought a house on the block more than 20 years ago.

By the early 1990s, some immigrant families who initially came to escape violence in Guerrero began to leave.

"People with aspirations didn't want to be there," said one former resident.

Another resident who left was Aguirre's brother Flocelo, also a onetime foreman at the Van de Kamp factory, who feared that his sons would end up dead or in jail. He moved his family to Dalton, Ga., where carpet factories have attracted Tlalchapans from Drew Street.

As more Tlalchapans arrived on Drew Street, "it was the law of the revolver," Flocelo Aguirre said. "By 1990, you couldn't live there anymore."

A string of arrests

Still, many Tlalchapans stayed. One of them, police said, was Maria Leon. She was 21 and destitute when she showed up in 1985, according to those who knew her.

By then the Van de Kamp factory was slowly shutting down, so Leon took menial work elsewhere, residents said. Later, she told a judge that she sold gold jewelry door-to-door.

She was arrested at least 14 times dating to 1985, according to court records. But she never seemed to spend much time in jail.

In 1992 Leon was arrested twice on Drew Street on suspicion of possession of drugs for sale, including PCP and marijuana, according to police records. She was not charged.

In 1994, Leon was arrested for narcotics possession, police records show. She was given diversion and the case was dismissed. The next year, she was sentenced to jail and probation for selling drugs.

Over the years, Leon had 13 children with five men, according to court records. Several of her sons are documented gang members, according to police. One of Leon's sons, Daniel, was killed last month in the shootout on Drew Street after allegedly firing an AK-47 at officers.

The family ties on Drew Street, along with the poverty and overcrowding, have made it hard for police to penetrate, authorities said. Police report having seen lookouts standing atop apartment buildings, watching for cops or rival gang members, ready to whistle or chirp their Nextels in warning.

In one 2002 raid at the Leon house, Glendale police arrested Maria Leon and found cocaine, marijuana, a Tec-9 assault weapon, ammunition, a small explosive, packaging material and a cellphone that kept ringing with customers' drug orders, according to court records. Inside were six children under 10 years old, including Maria Leon's youngest child, a 3-month-old boy.

An older son, Jose Leon, pleaded guilty to possession of drugs for sale in connection with the case and was sentenced to four years in prison.

Maria Leon pleaded guilty to child endangerment and possession of an assault weapon and was sentenced to six years and eight months for child endangerment. She was given credit for 259 days served and turned over to federal immigration authorities in May 2003. She was deemed a "deportable alien," but it's unclear if she was deported. A spokeswoman for U.S. Immigration and Customs Enforcement declined to comment on her case, citing privacy laws.

One of Leon's sons, Francisco Real, was convicted in 2002 of immigrant smuggling, according to court records. Three other convicted drug dealers with close ties to the Leons also have been arrested on suspicion of immigrant smuggling, authorities said.

Trying to make a dent

Police task forces, gang sweeps, arrests -- even a 2002 gang injunction -- have done little to break the bonds of family and culture that breed criminal activity on Drew Street, officials said.

"We've really put a lot of focus on trying to build a community there," said Councilman Eric Garcetti, whose district includes the street.

But Drew Street renters come and go. Landlords say they often can't find reputable tenants to fill their units.

The city said that "I'm not supposed to have gangs out in the yard" in front of the apartment building, according to one landlord who requested anonymity, fearing reprisal. "I'm the one who is supposed to go and chase them out? I don't think so."

Finding a witness to testify is almost impossible, police said. So gang members are rarely charged with violent felonies. Without witnesses, police must rely on cases they can make themselves, usually for narcotics possession.

Other government efforts to crack down on criminal activity on Drew Street have been frustrated.

In 2002, the city built Juntos Park on the street; the park, which cost $6 million, has since become another spot for drug dealing, neighbors said.

Last year, the city installed surveillance cameras without bulletproof glass. Gang members shot them out the first night.

"Now we have to put in cameras to monitor the installation of cameras," Garcetti said.

Prisoners in their homes

Drew Street today remains a drug marketplace, police said. But there have been some changes over the years.

In 1998, the city down-zoned the area to prevent more apartment construction. A Neighborhood Watch group recently formed, though it meets in secret.

Maria Leon and her family have moved to a two-story house in a new subdivision in Victorville. But police believe the family remains a force in the street's drug trade.

In Tlalchapa, 2,000 miles away, Drew Street is so notorious that it's called el barrio bajo -- "the low neighborhood."

Nearby, some homeowners said they feel imprisoned in tidy, graffiti-free homes they've tried unsuccessfully to sell.

"We don't let the kids play in the front," said one resident, who did not want to be identified. "The drug dealers are so common they're part of the scenery. We need something permanent done. We're barely surviving here.",1,5416732.story

Saturday, March 29, 2008

Pakistan's fired chief justice is freed

New Prime Minister Yousuf Raza Gillani makes it his first act. The jurist had defied Musharraf.
By Laura King
Los Angeles Times Staff Writer

March 25, 2008

ISLAMABAD, PAKISTAN — Deposed Chief Justice Iftikhar Mohammed Chaudhry, an icon of resistance to the rule of Pakistani President Pervez Musharraf, emerged late Monday from nearly five months of house arrest. His release was the first act of a Benazir Bhutto loyalist elected prime minister hours earlier.

It was the latest tumultuous twist in a Pakistani political saga that over the last year has seen the fall from grace of the U.S.-backed Musharraf, the Dec. 27 assassination of Bhutto and the triumph of her party in February's parliamentary elections.

Yousuf Raza Gillani, picked as prime minister by Bhutto's Pakistan People's Party and its main coalition partner over the weekend, won an overwhelming endorsement by parliament. Addressing lawmakers, he declared he was ordering the release of Chaudhry and other detained judges.

Gillani's confirmation was a highly emotional moment for Bhutto's followers, who had hoped last year when she returned from exile to lead her party in elections that she would claim the post. Her 19-year-old son, Bilawal Bhutto Zardari, wept as he watched the vote tally from the gallery. Moments later, he pumped Gillani's hand, smiling through his tears.

The new prime minister was to sign an executive order freeing the judges today after his formal swearing-in, but joyous supporters of Chaudhry weren't waiting for that.

With police looking on but not intervening, hundreds of his backers breached police barricades and mobbed the residence where Chaudhry had been under house arrest since Nov. 3, when Musharraf declared martial law and fired dozens of judges in part to avoid a legal challenge to his own election.

After hours of cheering and chanting by the crowd in his frontyard, Chaudhry emerged onto the villa's balcony surrounded by his beaming family, briefly thanking pro-democracy activists who had fought for months for his freedom.

"We believe in the rule of law," he told supporters, who danced and waved flags and portraits of him.

Municipal authorities said Chaudhry and other deposed judges were free as of Monday night to move about as they wished, but the former chief justice did not immediately leave his compound or mingle with the crowd. Judiciary colleagues said he would comport himself with caution -- refraining, for example, from leading a march to the high court to demand reinstatement, a possibility raised earlier by backers.

"He is very much conscious of the dignity of his office," said leading lawyers activist Athar Minallah. He said Chaudhry and the other deposed judges would wait for parliament to act on their reinstatement.

The new ruling coalition has said it will move within 30 days to restore the previous judiciary -- a step that would represent a sharp new challenge to Musharraf and one that could prompt his resignation.

The former general, who seized power in a 1999 coup, imposed a six-week state of emergency late last year and ousted dozens of judges as the Supreme Court was poised to rule on the validity of his election by the previous parliament. It was thought that the ruling would go against him.

The parliament's lopsided 264-42 vote Monday endorsing Gillani as prime minister was seen as a barometer of broad sentiment against Musharraf, who has been a key U.S. ally in the fight against Al Qaeda and the Taliban.

Bhutto's party and another opposition party, the Pakistan Muslim League-N, led by former Prime Minister Nawaz Sharif, have formed a new ruling coalition that has expressed determination to relegate Musharraf to the sidelines, if not oust him.

After the vote tally was read out, pandemonium erupted in the parliament chamber. Lawmakers broke into cheers and shouts of "Long live Bhutto!" It took Gillani a full 10 minutes to make his way to the podium, mobbed by well-wishers who shook his hand and embraced him.

"It is because of the martyrdom of Benazir Bhutto that democracy is being restored," Gillani told the parliament. "It is a historic event."

Musharraf's party put up a candidate for prime minister, Chaudhry Pervez Elahi, but it was considered a token gesture as the parliament is dominated by the opposition.

Gillani, a former assembly speaker, spent nearly five years in jail under Musharraf, refusing to make a deal with the government to get out of prison. Many believed that the corruption charges against him were politically motivated.

Aides said Gillani would begin selecting his Cabinet ministers as soon as he was sworn in.

The firing and imprisonment of dozens of judges were one of the key factors that turned public opinion against Musharraf. Most of those jailed have since been freed, but Chaudhry and his family, including a disabled 8-year-old son, had been detained in his home since the night he was deposed.

Outside Chaudhry's home, the celebrations continued into the night. Dozens of police officers, who in past months had beaten and tear-gassed protesters who tried to approach the residence, sat by the side of the road, some resting their heads against their riot shields.

"We knew, without question, that this day would come," said lawyer Saeed Mehmood, who jumped in his car and drove to Chaudhry's home in the capital from neighboring Rawalpindi as soon as he heard Gillani declare that the judges would be freed.

Despite the lateness of the hour, Abdul Saeed, an office worker, arrived with his three small children in tow, together with three little nieces, waiting to catch a glimpse of Chaudhry.

"This is a historic moment for Pakistan," he said, tousling his son's hair. "I wanted them to see this, and remember what democracy can do.",1,2347767.story

Monday, March 24, 2008

Even Currency Traders Are Scared

Dollar's Moves Force Whispers of `I' Word; G-7 Frets (Update3)
By Gavin Finch

March 24 (Bloomberg) -- For the first time in 13 years, people who trade currencies say confidence in the markets to determine exchange rates is dwindling.

The crisis that may bring the so-called Group of Seven nations to coordinated intervention is the result of a sinking U.S. economy, the weakest dollar since 1971 and the biggest currency fluctuations this decade.

``The risks of coordinated intervention are going to increase in the second quarter for sure as the dollar weakens further,'' said Mitul Kotecha, head of foreign-exchange research in London at Calyon. The firm is the securities unit of Credit Agricole SA, France's second-biggest bank.

Even with the latest gain against the euro, strategists at Deutsche Bank AG in Frankfurt, the world's biggest currency trader, say the dollar is likely to fall to $1.60 versus Europe's common currency, from $1.5428 as of 7:49 a.m. in New York, because of a recession. Royal Bank of Scotland Group Plc, the fourth-largest trader, says the risk of intervention is increasing and ``would become severe'' if the dollar depreciates below $1.60.

``The strength of the recent euro-dollar rally came as a surprise to many people, and such swift moves certainly raise the specter of coordinated central bank intervention,'' said Hans-Guenter Redeker, global head of currency strategy in London at BNP Paribas SA, the most accurate forecaster in a 2007 Bloomberg survey. ``As volatility rises, the likelihood of such an intervention increases.''

`Disorderly Movements'

After the Federal Reserve's U.S. Trade Weighted Major Currency Dollar Index declined to 69.2631 on March 18, the lowest in 37 years, Redeker said he sees parallels between now and 1995. That was last time central banks stepped in to arrest a slide in the greenback by purchasing and selling currencies to influence exchange rates.

The most obvious is implied volatility on options for the dollar, which rose to 14.5 percent last week, the same as in 1995 and up from the low this year of 9.62 percent on Feb. 26. Morgan Stanley is on ``intervention watch,'' Stephen Jen, the New York-based firm's head of foreign exchange research, said March 14.

The G-7, which comprises the U.S., U.K., Canada, Japan, Germany, France and Italy, said Feb. 9 that ``excess volatility and disorderly movements in exchange rates are undesirable.'' The group next meets April 12-13 in Washington.

Volkswagen Avoids U.S.

Finance ministers and central banks object to rising volatility because it complicates the assessment of economies, interferes with monetary policy and gives companies little time to adjust by cutting costs.

Peter Loescher, the chief executive officer of Siemens AG, Europe's largest engineering company, said March 4 the current level of the euro is ``not easy'' for the Munich-based company. Wolfsburg, Germany-based Volkswagen AG, Europe's largest carmaker, said March 3 that it won't sell its new Scirocco sports hatchback in the U.S. because of the dollar's decline.

The slump has accelerated since February, raising concern that international investors will avoid U.S. financial assets, making it harder for the Treasury to fund a growing budget deficit. Net sales of U.S. stocks and bonds by private foreign investors totaled $38.2 billion in January, the most since September, the Treasury Department said March 17.

While the dollar rose last week against the euro for the first time since the period ended Feb. 7, increasing 1.44 percent to $1.5448, it has fallen from $1.4365 on Jan. 22. It was little changed versus the yen, ending at 99.46. The dollar is below 100 yen for the first time since 1995 and last traded at 99.80 yen.

Watch the Yuan

For clues to when officials may intervene, watch the euro's performance against the yuan, Adrian Schmidt, senior currency strategist in London at Royal Bank, said in a March 17 research report. The yuan fell to 11.2639 per euro last week, approaching its record low of 11.3076 in December 2004.

If the euro reaches a new high, ``the probability of coordinated intervention'' on the dollar ``certainly increases,'' Schmidt wrote. The bank's analysis also shows the dollar is as weak now versus the euro as it was at the end of 2004.

The comparison to 2004 is important, Royal Bank says, because central banks cut back on their euro-denominated reserves after a big increase in the fourth quarter of 2004 and a rally in Europe's common currency, setting the stage for the dollar to appreciate.

Dollar Benefits

International Monetary Fund data show that official foreign exchange reserves denominated in the euro rose 0.9 percentage point in the final three months of 2004 to 26.4 percent. By the end of 2005, it fell to 24.1 percent, while the percentage for the dollar rose to 66.9 percent from 65.8 percent. The U.S. Dollar Index surged 12.8 percent that year, the biggest gain since it rose 13 percent in 1997.

An effort to boost the dollar may not be imminent, according to Mansoor Mohi-Uddin, head of currency strategy at Zurich-based UBS AG, Europe's biggest bank.

The depreciating dollar has made U.S. goods cheaper to foreigners. Exports climbed to a record $148.2 billion in January, the Commerce Department said March 11. A strong euro may help the European Central Bank contain inflation, which is at a 14-year high. And the yen is still about 40 percent weaker than its 1995 peak on a trade-weighted basis.

``America, Japan and Europe all still have good reasons for now to eschew intervention,'' Mohi-Uddin said in a research report dated March 18.

Stepping Up Rhetoric

The G-7 may find it politically difficult to support the dollar after lobbying China since 2000 to stop meddling in the foreign-exchange markets. China controls the yuan by buying foreign currency to limit the dollar's rise, a strategy which has led to accusations from the European Union and U.S. that it's keeping the currency undervalued.

``We've had four years of G-7 policy makers encouraging China to intervene less, so its going to be a bit difficult for them to intervene themselves,'' said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc., the most profitable securities firm.

Policy makers have stepped up their rhetoric to break the dollar's slide. ECB President Jean-Claude Trichet said March 10 he's ``concerned'' by the euro's climb against the dollar, while European leaders meeting at an EU summit in Brussels on March 14 said ``disorderly'' currency moves are ``unwelcome.'' Japan's Finance Minister Fukushiro Nukaga said March 18 the dollar's 9 percent decline in the previous four weeks was ``excessive.''

Supporting the Euro

``I'm worried about the talk we continue to hear from European and Japanese politicians which suggests that they are becoming increasingly concerned about the impact the weak dollar is having on their economies,'' said Simon Derrick, head of currency strategy at Bank of New York Mellon Corp. in London. ``We may be heading toward coordinated intervention.''

The G-7 hasn't acted together since September 2000, when they supported the euro after it dropped as low as 82.30 cents. The last time there was any action on the dollar was when it sank as low as 79.75 yen in 1995, sparking an 81 percent gain against Japan's currency the next three years.

The slumping dollar forced the Bank of Israel to buy foreign currency for the first time since 1997, it said March 13, causing the shekel to pull back from an 11-year high. Brazil's government imposed a tax on foreigners' purchases of local debt after the real appreciated 62 percent the past three years.

South Korean authorities will take preemptive measures if necessary to counter any ``drastic'' movements in the won, Vice Finance Minister Choi Joong Kyung said March 19.

To contact the reporter on this story: Gavin Finch in London at

Sunday, March 23, 2008

LA Language Barriers Faced in Healthcare

Study highlights language barriers faced in healthcare
Limited English skills of many in L.A. County can impede access to healthcare. Activists say delays, misdiagnoses and unnecessary procedures can result when patients are not provided interpreters.

By Teresa Watanabe
Los Angeles Times Staff Writer

March 21, 2008

Edna Gutierrez said she was biopsied for cancer on the wrong breast.

Martha Castro recalled helplessly watching her daughter's uncontrollable seizures, unable to understand the doctor's English.

And Lian Zhen Li, suffering from excruciating abdominal pain that turned out to be ovarian cancer, said Los Angeles County hospital staff told her to come back with someone who could interpret for her.

The three Southern California immigrants reflect the widespread problem -- and the potentially devastating consequences -- of language barriers in healthcare. The problem's massive scope was illuminated Thursday, when the Asian Pacific American Legal Center in Los Angeles released a new study documenting the language barriers faced by nearly one in three Los Angeles County residents, or 2.5 million people.

The data, based on the 2000 census, show that most of residents in five of the county's eight service planning areas -- which are used to plan and deliver health and social services -- speak a language other than English at home. The top languages spoken are Spanish, Chinese, Tagalog, Korean, Armenian, Vietnamese, Persian, Japanese and Russian.

The largest number of limited-English speakers are in the San Gabriel Valley, totaling 482,310, including roughly 200,000 Mexicans and 100,000 Chinese. In the metro Los Angeles area, which includes downtown and other core areas of the city, the primary language spoken by 70% of residents is not English and 43% reported speaking limited English, the county's highest rate.

Despite the broad need -- and federal legal requirements for language assistance -- immigrant advocates said Thursday that scores of patients still fall through the cracks. The result is delayed care, misdiagnoses and unnecessary procedures leading in some cases to death, advocates said.

"We want to shine a spotlight on how large a problem this is," said Karin Wang, the Asian Pacific center's vice president of programs. "We don't want language to be the reason people don't get quality healthcare."

Miya Iwataki, director of diversity programs for the county Department of Health Services, said the language needs in the county's four public hospitals were "overwhelming." In 2006, 49% of the system's 3.9 million patient visits involved people with limited English skills who primarily spoke one of 98 languages. Spanish speakers accounted for 1.9 million visits, followed by 17,000 visits by Korean speakers.

But Iwataki said county language services have improved in the last year. This year, nine full-time healthcare interpreters will be hired for the first time for the hospitals.

In addition, the county expanded its video medical interpretation system to all four hospitals this year. The system, which was introduced at Rancho Los Amigos Rehabilitation Center in Downey last year, uses video-conferencing technology to connect doctors and patients with an interpreter network that offers assistance in Armenian, Russian, Korean, Spanish, Mandarin and Cantonese.

County hospitals also use a phone-in interpreter system. But that system is flawed, according to Wingshan Lo of the Asian Pacific center. Lo said she tested the system last year and was hooked up to a language assistance center whose staffer did not understand the Cantonese she was speaking.

In addition, immigrant advocates said many hospital staff are not aware that healthcare providers who receive federal funding are legally required to offer language assistance, regardless of the patients' immigration status. PALS for Health, a Los Angeles nonprofit organization that provides language assistance, gets several complaints every month about healthcare providers who tell patients they need to find their own interpreters, according to Marchela Iahdjian of the organization.

Iwataki agreed that more needs to be done but said impending budget cuts could make that difficult.

"We are struggling to do our best with very limited resources, but we're not giving up," she said.

The case of Li, the Chinese native with ovarian cancer, illustrates the plight faced by many immigrants. Li, 62, is a naturalized U.S. citizen but said she has long lived in an isolated ethnic enclave in Alhambra. Too busy to take English classes, she was an around-the-clock personal assistant to a Chinese senior citizen for several years, then worked 15-hour days at a Chinese restaurant. She watches Chinese TV and shops at Chinese stores.

Li said she never needed English -- until her abdomen suddenly began swelling painfully in June 2005 and her Chinese doctor referred her to County-USC Medical Center. There, she couldn't communicate with the doctors. "I was petrified by my inability to communicate," Li said. "I thought I was going to die. I wondered: Who is going to help me?"

Li said she wandered into the hospital waiting room and randomly asked an Asian-looking patient if she could speak Chinese. Luckily for her, the patient could -- and referred Li to the PALS for Health group, which sent a trained healthcare interpreter with her to future appointments. Although initially told that she had only a month to live, she said her cancer has stopped spreading after surgery and chemotherapy.

Immigrant advocates urged the county to provide more English-language classes and interpretation services.

"There's no excuse not to provide these services," said Doreena P. Wong, staff attorney with the National Health Law Program. "People's lives are at stake."

Friday, March 21, 2008

Iraq Price Tag for California

War's price tag
The Iraq conflict will raid our wallets for years to come, with California taking a huge hit.

by Linda J. Bilmes and Joseph Stiglitz

March 16, 2008

The war in Iraq, which will enter its sixth year this week, is turning out to be the most expensive conflict since World War II, and the cost will fall especially hard on Californians.

By the end of 2008, the federal government will have spent more than $800 billion on combat operations in Iraq and Afghanistan (government accounts make it hard to separate the two). On top of that comes a mountain of future costs: caring for war veterans (to date, more than 1.6 million troops have been deployed), replacing the military hardware that is being used and worn out in Iraq and paying interest on the enormous sums of money we've borrowed to finance the war.

All told, we estimate that the cost of the war will easily reach $3 trillion in today's money. This number assumes that the U.S. begins a pullback from Iraq after the election in November but retains a small presence there for the next decade.

Californians are going to face a disproportionate share of the bill for three reasons. First, California's population is among the youngest in the U.S., with 26% under 18 (compared with 24% nationwide). Because of irresponsible fiscal policy (cutting taxes for the rich while a war is in progress and borrowing the money to pay for the conflict), the burden of paying for this costly adventure has been shifted to these younger Americans. The Iraq war is the first time since the Revolutionary War that we have borrowed from overseas to finance war spending (the colonists borrowed from France). The next generation will be paying all the interest on the money we have borrowed, including the 40% of it that comes from Middle Eastern countries, China and other foreign lenders. It will also be forced to confront the $9-trillion national debt, which has risen by 12% as a result of the war.

On top of servicing huge war debts, America's children will also have to pick up the tab for the rising cost of veterans' care. The intensity of the combat over the last five years and the high injury rates mean that close to half the current service personnel in Iraq and Afghanistan are likely to qualify for long-term disability compensation. The cost generally peaks many years after combat has ended -- claims from World War II veterans, for instance, peaked in 1993. We will also need to provide a lifetime of medical care for many of the 70,000 men and women in the armed services who have been wounded in combat, injured in accidents or airlifted out of the region for emergency medical care, plus temporary care for an additional 250,000 returning troops who are seeking treatment for hearing loss, joint pain, post-traumatic stress disorder or other conditions at veterans medical facilities.

The 1991 Persian Gulf War lasted only a month, but the federal government pays out $4.3 billion a year in disability compensation to Gulf War veterans. If the Iraq war follows the same pattern, we can expect that the next generation of Americans will eventually spend $600 billion to look after the Iraq and Afghanistan veterans.

The second reason California will pay a disproportionate share for the war is because its residents are so rich. California already contributes a disproportionate share of federal taxes -- more than 14% of the total last year from a state that makes up only 12% of the nation's population. The tax burden is especially high in the Bay Area, greater Los Angeles and San Diego, places where individual taxpayers pay some of the highest total federal taxes, according to a recent study of 3,000 counties across the country. The average household in San Francisco is already paying $36,409 annually in federal taxes (combining income tax, payroll tax, excise tax, estate tax and corporate tax) -- the second-highest federal tax burden in the United States.

This means that Californians are already paying more to support the war effort than most Americans. Expect that burden to get considerably larger no matter what happens to incomes in the years ahead.

Third, the standard of living of car-dependent Californians is being hit especially hard by a steep increase in oil prices that are the result, at least in part, of the war in Iraq. It is easy to forget that oil prices were at $25 a barrel when the war began in March 2003. True, a lot of the increase has been driven by sharply higher demand from Asia and by a chronic shortage of refining capacity. But futures markets had predicted that oil prices would remain stable despite rising demand. Most experts blame at least some portion of the skyrocketing price of oil on the drop in supply caused by the instability in the Middle East.

In our book, we attribute just $5 to $10 of the increase in the cost of a barrel of oil directly to Iraq. But even this modest price increase accounts for a transfer of $300 billion to $800 billion from the pocketbooks of U.S. consumers to the oil-producing countries.

A few Californians may benefit from the war if they work for defense contractors, which have been among the major beneficiaries of the conflict. But overall, the war has not stimulated the economy because so much of our spending on Iraq has been devoted to employing subcontractors from countries such as the Philippines and Nepal, and paying for food, laundry, local transportation and cleaning services for troops in the field. This kind of expenditure benefits the U.S. economy very little.

Meanwhile, the war has taken a heavy toll on our military. Sixty percent of military officers above the rank of major now say that our forces are weaker than they were five years ago, according to a recent survey of 3,000 active and retired military officers commissioned by the Center for a New American Security. And 42% went further -- agreeing that the war in Iraq "has broken the U.S. military." The war has forced the Army, in order to meet basic recruiting targets, to lower standards for physical fitness, health and education and to turn a blind eye to criminal records. It may take decades for the military to recover to its prewar state of readiness, and once again, the next generation of Californians will be paying a big share of this effort.

Beyond that, the ongoing cost of the war has made it more difficult for the federal government to pay for roads, schools, medical research and aid to local communities. And then there is the opportunity cost: The money spent on the war could have fixed Social Security for the next 75 years or provided health insurance to all U.S. children.

In California, with its fast-growing and diverse population, the opportunity costs are especially painful. Over the next two decades, greater Los Angeles needs to invest $20 billion in bus and rail and $150 billion for transportation generally, according to the draft Los Angeles County MTA plan for 2008. The bustling Port of Los Angeles and the Port of Long Beach require an infusion of $3 billion for vital environmental and security improvements, according to a recent statement from the Long Beach and Los Angeles boards of harbor commissioners. They are proposing to increase cargo fees yet again to raise revenue.

But as we enter the sixth year of combat, the "burn rate" for each month we continue in Iraq is $12 billion -- with the full cost (including paying for veterans and replenishing equipment) easily double that.

We're already committed to a tremendous amount of spending in the decades ahead to pay for this war. There's little or nothing we can do to avoid those costs. All we can do at this point to keep them from rising further is to withdraw our troops from Iraq as soon as is reasonably possible.

Linda J. Bilmes, a lecturer on public finance at Harvard University's Kennedy School of Government, is a former assistant secretary of Commerce. Joseph Stiglitz, a professor at Columbia University, is a former chief economist of the World Bank and winner of the 2001 Nobel Prize in economics. They are the coauthors of "The Three Trillion Dollar War: The True Cost of the Iraq Conflict.",0,7877358.story
From the Los Angeles Times

Your Iraq Money

The Money
by Adam Shatz
LRB 6 March 2008

Shortly before the invasion of Iraq, George Bush’s economic adviser, Larry Lindsey, estimated that the war would cost $200 billion. ‘Baloney,’ Donald Rumsfeld fumed, offering a figure of $50-60 billion, some of which he said would be supplied by America’s friends. Andrew Natsios, the head of the Agency for International Development, told Ted Koppel on Nightline that postwar Iraq could be rebuilt for $1.7 billion. Koppel was astonished: ‘No more than that?’ ‘For the reconstruction,’ Natsios replied. ‘And then there’s $700 million in the supplemental budget for humanitarian relief, which we don’t competitively bid because it’s charities that get that money.’ According to Paul Wolfowitz, the reconstruction would be financed by increased oil revenue in Iraq. The war had nothing to do with oil, of course, but the country’s vast reserves happily ensured that postwar ‘nation-building’ would be cheap, if not free.

The Iraq war has been expensive – very expensive. In the ‘best-case’ scenario, Joseph Stiglitz and Linda Bilmes report in The Three Trillion Dollar War, it will cost over $2 trillion; their ‘realistic-moderate’ estimate rises to almost $5 trillion.[*] And that’s just the cost to the United States. Gordon Brown reserved £1 billion for the war. Britain has now spent more than £5 billion on ‘direct operating expenditures’ in Iraq, and Stiglitz and Bilmes predict that by 2010 the cost of the war will exceed £20 billion. Some of this money has come from a Special Reserve, whose funds the Ministry of Defence can ‘draw down’ in consultation with the Treasury, without parliamentary approval. This arrangement, Stiglitz and Bilmes remark, makes the British system of accounting ‘particularly opaque’.

The Three Trillion Dollar War began two years ago as a research paper. Stiglitz and Bilmes originally proposed a figure of $1-2 trillion, but now believe they were optimistic. The expenditure on direct military operations alone has been extraordinarily high – higher than in Vietnam and more than double the cost in Korea. Congress has provided the American military in Iraq with $634 billion, but this figure overlooks a number of ‘hidden’ costs. On the American side alone, 4000 soldiers have been killed, almost 70,000 have returned home wounded, injured or ill from Iraq and Afghanistan, tens of thousands have been diagnosed with post-traumatic stress disorder, some reduced to a ‘persistent vegetative state’ by ‘traumatic brain injury’, others suffering from ‘polytrauma’, a ferocious complex of symptoms usually caused by booby-trapped mines and other roadside explosive devices.

The human cost of the war also exacts a quantifiable financial toll. Take lifetime veteran benefits, which were not included in the $800 billion Congress has apportioned for Iraq and Afghanistan: that’s another $285 billion. Then there is the cost of care for those with physical and psychological injuries. According to Stiglitz and Bilmes, even if US troop levels fall to 55,000 non-combat soldiers by 2012 and injury rates drop by 50 per cent, the combined ‘medical, disability and social security disability costs’ will be roughly $400 billion. If those troops aren’t withdrawn, the price rises by $300 billion.

The US government isn’t keen on providing benefits to veterans – or, for that matter, to the families of dead soldiers. In January 2005 David Chu, under secretary of defense for personnel and readiness, told the Wall Street Journal that benefits were becoming ‘hurtful. They are taking away from the nation’s ability to defend itself.’ The US doesn’t make it easy for veterans to collect. Once they apply to the Veterans Benefits Administration, they face an intimidating amount of paperwork, the loss of their military income and an average wait of six months for their claim to be processed – from 99 days in Salt Lake City to 237 in Honolulu. (If a claim is rejected, an appeal takes two years to process.) The money that severely disabled veterans receive from the Department of Veterans Affairs and Social Security doesn’t begin to cover their care, a ‘social cost’ that someone else has to bear.

Soldiers injured in battle have also been chased by the Pentagon for ‘payment of non-existent military debts’: Stiglitz and Bilmes cite the case of an Army Reserve staff sergeant who, after returning from Iraq with his right leg cut off at the knee, was ‘forced to spend eighteen months disputing an erroneously recorded debt of $2231’. This vigilance is especially striking when you consider that the Pentagon recently failed its financial audit for the tenth year in a row – and that the US government isn’t even spending its own money on the war. As Stiglitz and Bilmes point out, the war has been ‘financed entirely by borrowing’, since Bush has refused to raise taxes and has actually reduced those on the rich. That money – almost a trillion dollars so far, a tenth of the national deficit – will have to be paid back with interest: ‘There are three amounts to consider: interest we have already paid on money we have already borrowed; interest we will have to pay in the future on what has already been borrowed; and interest payments on future borrowings.’

In addition, according to Stiglitz and Bilmes, the direct cost to the world economy of higher oil prices (from $25 a barrel to $90) is approximately $1.1 trillion – a ‘moderate estimate’ – and ‘the meter is still ticking.’ Britain may have been spared Bush’s ‘policy of fiscal profligacy’, but the increased oil bill alone will cost it more than £3 billion by 2010.

The hardest figure to establish is the cost to Iraq. It doesn’t help that the country is governed – if that is the word – by what Ed Harriman described in the LRB (6 September 2007) as ‘the most corrupt regime in the Middle East’. Nor does it help that the US refuses to count Iraqi casualties, except those who die fighting alongside Coalition troops (7697 at the end of 2007, almost twice the number of Americans killed). What we do know is that Iraq has experienced the largest forced migration in the region since 1948, and that its refugees are now adding to the budgetary strains on other governments, mostly in Arab countries like Jordan and Syria. The US has allowed only a couple of thousand of Iraqis to settle within its borders, on the grounds that the people they’ve ‘liberated’ might pose a threat to national security. Besides, they will be needed to rebuild their own country, even if it exists in name only.


* The Three Trillion Dollar War: The True Cost of the Iraq Conflict (Allen Lane, 311 pp., £20, February, 978 1 846 14128 7).

From the LRB letters page: [ 20 March 2008 ] George Josephs.

Adam Shatz is an editor at the London Review.

Media Overlook Fed Bailout in Plain View

by Dean Baker

Can't the media find any economists who don't think that handing hundreds of billions of taxpayer dollars to the big banks and the incredibly rich people who own and manage them is a good idea? Apparently not, given the coverage so far to the Fed's proposal to lend $200 billion to the banks using mortgage backed securities as collateral.

The workings of the Fed and the financial markets can appear complicated, so let's simplify matters a bit to make it more clear what is going on here. Suppose that it was suddenly discovered that much of the wealth held by the country's leading financial institutions was in fact counterfeit. Instead of having hundreds of billions of dollars of real currency in their vaults, institutions like Citigroup, Merrill Lynch, and Bears Stearns actually had hundreds of billions of dollars of counterfeit currency. Suppose further that the public did not know exactly who held what in terms of counterfeit currency, only that all of them had a lot of it. (The point here is that these banks hold mortgage backed securities, many of which are only worth a fraction of their face value, and therefore can be viewed as the equivalent of counterfeit currency.)

In such circumstances, investors would be very reluctant to accept the credit of any of the major financial institutions. They couldn't know whether most of their assets were in fact counterfeit, and they were dealing with a bankrupt institution, or whether the counterfeit currency was only a limited share of the wealth, which would not jeopardize the institution's ability to meet its obligations.

This is in fact the credit squeeze that we've have recently witnessed. The spread between the interest rates on a wide variety of assets and the interest rate on safe assets (U.S. government debt) has soared. As a result, the Fed's effort to stimulate the economy, by lowering the federal funds rate, has been largely unsuccessful because other interest rates have remained high.

In response to this situation the Fed today announced that it would lend $200 billion to banks and other financial firms, accepting mortgage backed securities as collateral. This is effectively the same as saying that the Fed is going to lend money to banks and accept the counterfeit currency as collateral, treating it just as though it were real money.

The intended effect of this policy is to convince other investors that the counterfeit currency is in fact real currency, or at the very least that there is a really huge sucker out there (the Fed) which is prepared to treat the counterfeit currency as real currency.

So how does this story play out? Well, insofar as the Fed is successful, the counterfeit currency retains its value for a while longer. This allows Citigroup, Merrill Lynch, Bears Stearns and the rest of the big boys more time to dump their counterfeit currency on suckers who haven't figured out how the game is played.

It is possible that they won't be able to find enough suckers, in which case these banks will end up defaulting on their loans and the Fed (i.e. the government ) has lost tens or hundreds of billions dollars paying good money for counterfeit currency. Alternatively, perhaps the big boys are successful and can offload enough of their counterfeit money to restore themselves to solvency before the music stops. Then the Fed is repaid, but the counterfeit money now sits in the hands of other, less informed, or less inside, investors.

Either way, this is a policy of dubious merit. Why wouldn't we want the banks to be forced to come clean and eat their losses? This is always the policy that the economists advocate when the parties in question are not the big New York banks. Does anyone remember the East Asian financial crisis when the media was full of condemnations of crony capitalism and the IMF insisted imposed stringent conditions on South Korea, Thailand, and Indonesia as a condition of getting bailed out? At that time, everyone insisted on transparency. Aren't there any economists who still have this perspective? If so, why aren't their views appearing anywhere in the news?

There is one other issue that is extremely important that has been completely omitted from the media's discussion of the Fed's actions. There are people who have shorted the counterfeit notes (mortgage backed securities and related assets) because they recognized that these assets were in fact going to lose much of their value. While these short sellers were trying to make money, they were actually performing a valuable public service. They were pushing down the price of these assets towards their true level. If we had many such short sellers in the market we would not have seen the housing bubble grow to such dangerous proportions. The same holds true of the stock bubble.

However, if the Fed acts to sustain bubbles even after they have started to collapse under the pressure of their own weight, it makes it far more risky for short sellers. This means that even investors who realize that Citigroup has nothing but counterfeit currency will be reluctant to short its stock or other assets supported by counterfeit currency. As a result we can expect to see even bigger more dangerous bubbles in the future.

This is not a pretty story and there are economists who can make this point. The media should be talking to them, not just the cheerleaders for the housing bubble.

--Dean Baker

Are University Systems a Good Idea?

From the issue dated February 15, 2008 (Chronicle of Higher Education

Life was simple before World War II. After that, we had systems.
— Rear Admiral Grace Murray Hopper

Physicians and biologists speak of "systems biology" and engineers of "systems engineering." The idea is integration. If you manipulate a patient's potassium level, you had better worry about the impact on other organs and bodily functions. If you want a more powerful heater in your car, you should think about the whole electrical system.

In higher education, the term obfuscates as much as it enlightens. There are many different types of college and university systems in our country — sometimes even within the same state.

The system-level office of academic affairs in California, for example, plays a greater role in faculty appointments, promotions, and compensation than that office does in other systems. Some systems centralize legal services, facilities construction, and budget preparation, while others do not. Meanwhile, research on the subject is anemic, largely consisting of factoids organized by state. Few, if any, studies have evaluated whether our systems as they operate today are actually a good idea.

We know that higher-education systems are phenomena of roughly the last 50 years. There were state boards of regents as early as the 18th century and branch campuses of state universities by the late 19th century, but the idea of a "rational system" for higher education emerged after World War I. Frustrated state policy makers thought that public universities were not taking advantage of coordinated planning opportunities and economies of scale, and that they spoke to legislators with too many voices. After World War II, the movement toward organized systems gained further momentum as states established campuses in underserved areas to meet the growing demand for higher education.

The turning point was the creation of the 1960 Master Plan for Higher Education in California, with its tiering of graduate, undergraduate, and community-college educational opportunities. Following the success of the University of California, a movement toward systems washed across the country. Every legislator and chamber of commerce leader, so it seemed, wanted to create a Berkeley in his backyard. Sometimes campuses were planned and created to populate the system. At other times, as in my home state of Texas, pre-existing institutions were cobbled together with new campuses to create systems that were more a result of happenstance and politics than the orderly integration of complementary institutions.

Part of the effort involved what has become known as "branding." Bringing institutions into the fold identified them with flagship universities that had built splendid reputations. Systems were also supposed to help colleges share resources and increase coordination. In addition, they had the potential to improve quality across a range of institutions and to strengthen political support.

In some cases, the systems resulted in better-coordinated degree programs and improved educational standards. But usually California was emulated in form, not substance. For example, California gave its central system office extensive authority over facilities, faculty hiring and promotion, budgets, and more. Many other states adopted similar structures but continued the old patterns, such as making appropriations directly to individual campuses and decentralizing decision making.

What's more, the food fight over legislative appropriations and other scarce resources did not disappear. The flagships felt threatened by the wannabes and their advocates. The up-and-coming institutions complained that they were not securing the resources to catch up. Rather than generating more political support, the addition of new campuses often amplified local and regional conflicts.

Indeed, in the rush to create new systems, legislatures had often not sufficiently grappled with critical questions: Is a campus better off standing alone or as part of a network? Are system bureaucracies just one more impediment to progress, or can they be beneficial? Which businesses, if you will, should systems be in, and which should they abandon?

The fundamental question is the one that I asked myself in 2003 after I became chancellor of the University of Texas system: Can the operations of a system truly add value to the work of the campuses? I have found that the answer lies in three related propositions:

1. Systems usually contribute more to emerging institutions than they do to flagships. System people are no smarter or more experienced than those at the campuses, and usually there are fewer of them. They are also farther from the campuses and less knowledgeable about local circumstances. That said, flagship institutions generally have the knowledge and capacity to make and carry out most of their own decisions, as approved by their boards. In contrast, emerging institutions often lack the personnel, programs, and experience of the flagships and may look to the system for assistance on academic-program development, fund raising, capital planning, and other matters.

One caveat: Everyone, or nearly everyone, has a boss. Legislatures, subject to the limits of their state constitutions, have broad authority over higher-education policies, as do governing boards. All public universities should follow those policies, whether related to academic programs or not — even if people on the campuses think they are misguided. System administrators may be chosen to compel compliance with such policies, irrespective of each campus's administrative capabilities. They might be required, for example, to monitor and set targets to improve graduation rates — a matter of considerable concern to governing boards and elected leaders.

2. A system's role should expand when it comes to broad organizational issues that concern the entire enterprise. While system officials should usually leave teaching and scholarship to each institution, even the most mature and capable campuses can sometimes benefit from support in certain management areas. For example, a robust accountability system, overseen from the center, is part and parcel of an efficient administration. Similarly, a system may be better positioned, as an entity external to the campus, to investigate allegations of impropriety, like the recent student-loan controversies involving inappropriate relationships between financial-aid offices and lenders.

Systems can also act as honest brokers, encouraging cooperation and collaboration among their campuses. Left to its own inclination, each campus would have its own computer backup facility. It would order all of its supplies. It would have its own technology-transfer office. Significant economies of scale can be found in several areas, like sharing electronic library databases or using uniform definitions of accounts and other common standards to assess financial performance.

In our system, for example, three campuses share a technology-transfer office; a group of universities has adopted one software system for tracking registration, financial aid, and other student matters; and our academic-health campuses jointly purchase equipment and supplies. We project those steps will save $250-million over the next decade.

A university system can also invest in certain priorities and measure the impact of those investments. Besides our accountability system, we require each campus to assess and compare student learning. In recent years, we have also allocated $100-million for faculty start-up packages, primarily for equipment and facilities renovations to our campuses, as a means of attracting and retaining outstanding professors — and a way to gauge how well each institution is doing so.

The system can also speak as one voice to gain support among legislators, other policy makers, and the public. In Texas we produced a privately financed 13-part series that aired on public television, depicting how public universities help solve critical social, economic, environmental, and health problems.

3. A system that adds value will differentiate its services among institutions. Although multicampus collaborations can provide substantial savings, complete centralization would backfire — especially in a highly heterogeneous system of many campuses with various missions and resources. What is helpful to emerging campuses is often more of a hindrance to established, first-tier universities and medical centers. One size does not fit all.

Fund-raising operations, for example, are as highly differentiated as the campuses themselves. Some are in need of significant consulting services. Campuses take advantage of system services in areas such as reorganizing their personnel and operations to build a stronger capacity for fund raising, recruiting development professionals, and handling other basic growth areas. Such services are in high demand by smaller and midsize campuses. Larger campuses with mature operations prefer to have assistance in professional-development opportunities, financial support, the loosening of traditional policy restrictions, and other areas that will allow them to become more nimble and innovative in their approaches to secure more donations. The system's focus should be on providing genuine help and not adding cost and complexity.

The promise that higher-education systems would completely resolve the messy interplay among colleges, and between them and political leaders, has largely gone unfulfilled. But systems can be useful if system and campus leaders, and their governing boards, are willing to allocate authority in ways that add value to carefully delineated activities. Perhaps Larry Faulkner, a former president of the University of Texas at Austin put it best: System administrators should recognize that a system office is not a university, and campus presidents should recognize that theirs is not the only college in the system.

Mark G. Yudof is chancellor of the University of Texas system.

Is the Public Research University Dead?

January 11, 2002

Public colleges and universities have raised tuition this year at the highest rates in eight years, according to the most recent annual College Board survey -- ratcheting up fees by an average of 7.7 percent, or more than twice the rate of inflation. Most observers point to the faltering economy as the major reason for the increases, as public institutions have sought to offset drops in state support. More recently, the attacks of September 11 have compounded pre-existing economic difficulties.

Indeed, the National Conference of State Legislatures has reported that 43 states are experiencing revenue shortfalls and more than half are considering budget cuts. And at least nine governors have warned universities to expect midyear rescissions in their state appropriations.

For public research universities, those developments represent only the deepening of a long-term and structural trend toward relatively less state support. Even in the past few years, when state budgets were expanding, public research universities made little headway against the legacy of previous lean years. Thus, regardless of the economy, in the foreseeable future, students at public research universities will have to pay more of their own educational costs, and the role of such institutions will fundamentally change.

More than a century ago, state governments and public research universities developed an extraordinary compact. In return for financial support from taxpayers, universities agreed to keep tuition low and provide access for students from a broad range of economic backgrounds, train graduate and professional students, promote arts and culture, help solve problems in the community, and perform groundbreaking research.

Yet over the past 25 years, that agreement has withered, leaving public research institutions in a purgatory of insufficient resources and declining competitiveness. The gap between professors' salaries at public and private universities, for example, has grown from $1,400 in 1980 to $22,100 today. As a result, public institutions find it increasingly difficult to compete for the best faculty members who, in turn, attract the brightest students and significant research dollars.

Demographic changes lie at the heart of public research universities' predicament. Over the past 40 years, the proportion of American family households with children has declined from almost one-half to one-third. The country's aging population appears more interested in issues like health care and public safety than higher education. While higher education's share of average state spending fell 14 percent from 1986 to 1996, Medicaid's share nearly doubled. The funds allocated to correctional facilities grew by more than 25 percent.

Observers may note that, over the past 25 years, state support for higher education has generally kept up with inflation, as measured by the consumer price index. But public research universities are extraordinarily labor and technology-intensive enterprises; to attract top talent and stay on the cutting edge, they must invest and spend significantly more than the inflation rate.

Meanwhile, as state support for higher education has declined relative to other public services, the value of education to students has increased substantially. After adjusting for inflation, a male college graduate today makes an average of $32,000 more each year than a high-school graduate, compared with a $15,000 gap in 1975. Over a lifetime, a person with a bachelor's degree will earn an average of $1-million more than a high-school graduate; a professional degree widens the differential to $3-million. With the wage premium rising, education is increasingly seen as a private, rather than a public, good.

Given that reality, both federal and state policy makers are asking students to shoulder a larger share of their higher-education expenses. Already students at public research universities are paying more; at the University of Minnesota, for example, their tuition covers nearly two-thirds of the direct cost of instruction, compared with the one-third that their peers paid 25 years ago. In the same vein, elected officials prefer market accountability -- with institutions competing with each other for students -- rather than traditional public oversight to ensure quality. And rather than provide operational support to universities, they encourage universities to charge higher tuition, then favor giving direct aid to students in the form of scholarships and tax benefits to help make that tuition affordable.

As state support erodes, flagship research universities face other challenges. Many local businesses now operate more globally and are less oriented toward state or regional concerns. In addition, businesses are creating their own educational programs, such as Motorola University or Dell University, to focus on specific work-force needs.

Moreover, increased enrollment in higher education over the past 30 years, and the growth of regional universities within states to meet that demand, has further diluted state support. Although such institutions often have limited research capacities, their emergence has sharpened competition for state dollars.

Where will such trends lead? The 21st century will see the evolution of a hybrid public research university, one with roots in both the public and private spheres. That new hybrid will confront significant new challenges.

The first will be to convince the public and decision makers -- governors, legislators, and regents -- that tuition must increase significantly to keep public research universities viable and competitive with private research universities. Raising tuition further will be anathema to many students, who are already paying a larger part of their instruction costs. University advocates will have to demonstrate that it is "worth it" -- to their regional economy and society, as well as to students -- to charge more in order to support a high-quality research institution. To do so, and to maintain the tradition of public universities, they will have to ensure access for low-income and historically disadvantaged students through expanded institutional student-aid and scholarship programs. That, in turn, will require public universities to accelerate their efforts to garner philanthropic dollars, as well as to secure stronger political support for government initiatives that give financial aid and tax benefits to students.

The continuing need to provide public goods will be another challenge. Especially at land-grant institutions, students and parents may question using tuition dollars to pay for extension services and other outreach activities that don't directly improve students' education. Also, what can be done about professional-degree programs that usually cost far more money than tuition will ever generate -- for example, those in medicine, dentistry, and veterinary science? Public universities may have to explore new partnerships with private foundations and organizations, charge fees for traditionally free programs, and call for more direct, earmarked state support.

The hybrid university also faces a philosophical tug of war: To compete in the market, it will have to operate more efficiently and radically improve student services. But to remain a great learning institution, it will have to continue to nurture learning for its own sake, transmit cultural values, encourage civic understanding, and foster other less quantifiable and profitable -- but still valuable -- features of the university.

The author William Arthur Ward once said, "The pessimist complains about the wind; the optimist expects it to change; and the realist adjusts the sails." Unfortunately, we at public research universities and our supporters have fallen into a pattern of blaming the circumstances of the day -- this year's economy, the current legislature or governor, or the media -- for our dwindling share of state resources, rather than focusing on our future over the long haul. Keeping public research universities relevant and thriving will be no easy task, and we should start by recognizing that the long-term political winds have shifted.

Mark G. Yudof is the president of the University of Minnesota.

Touring L.A.'s growth in a fury

Steve Lopez

March 19, 2008

Ordinarily I don't get carsick, but Zev Yaroslavsky was behind the wheel, and the L.A. County supervisor was in a lather as he zoomed from one neighborhood to another.

Hollywood, Encino, Sherman Oaks, Studio City and Mid-City all went by in a flash.

"Look at this," he said, turning off Wilshire Boulevard and shooting up La Brea. The one-story buildings are likely to become four- or five-story buildings if City Hall planners keep giving developers everything they want, Yaroslavsky griped.

"What is the reason?" he asked incredulously, pointing out a view of the Hollywood Hills that would be obliterated. "What is the reason?"

He'd already told me the reason earlier, when he gave me a quick primer in his living room.

"The planners in this city are bamboozling people, including some of the members of City Council," he said, tossing one cluster bomb after another on an otherwise quiet Sunday morning.

He drew diagrams on my note pad, explained how protections against overdevelopment are being plundered, charged that claims of new affordable housing are bogus and predicted that quiet neighborhoods of single-family homes will be thrown into permanent shadows by towering behemoths.

It's an apocalyptic view, but is he right that city officials have handed over control to developers?

Zev is an ambitious guy, after all. Might this criticism be the start of a run for mayor as the crowd-pleasing populist who speaks up for beleaguered citizens?

City Councilwoman Wendy Greuel, who represents a part of the San Fernando Valley that Zev pointed to as ripe for abuse by developers, thinks some of Yaroslavsky's concerns are valid, but she disagreed with the notion that city officials are not listening to residents and trying to protect their interests.

Don't worry, she said, trying to reassure me that Zev and the rest of us don't have to worry about developers pulling the strings at City Hall.

Don't worry? With all their talk of "infill" and creating a denser core, city officials have done little to allay the fears of those who believe, as Yaroslavsky does, that developers are enjoying one heck of an orgy these days and that it's now easier than ever to get approval for larger buildings and fewer parking spaces.

Hundreds of residents showed up three weeks ago at a meeting to register complaints about seven proposed mega-projects in the North Hollywood/Universal City area. And even city Planning Commission President Jane Ellison Usher has warned that the density-promoting housing rules approved by the city in February are "ripe for litigation."

Yaroslavsky said planners are using a "one size fits all" philosophy that ignores the uniqueness of each neighborhood. He wasn't even aware this was happening until an 86-year-old neighbor named Sam Frank called two years ago to say the height limit was about to be doubled on a two-story section of La Brea just a block to the east of him, robbing homeowners of sunlight and privacy.

Yaroslavsky told Frank he must be wrong, because a 45-foot height limit was in force. But he later learned that the property owner had applied to switch from commercial zoning to what's called RAS, or Residential and Accessory Services.

That would mean ground-floor businesses with residences upstairs, lots more traffic and the height limit could shoot up to 75 feet. The owner has since agreed to a 50-foot height limit, and the project is still being reviewed.

Frank is determined to keep fighting. "We were here first," Frank told me, saying that he's lived in his duplex for 48 years. "You can't run roughshod over the citizenry."

But the city is sure trying to, Yaroslavsky says. At La Brea and Willoughby, he pointed to the old Channel 13 building and said: "There's a proposal to double or even triple the height, with neighbors up in arms."

He cruised through the area near 6th Street and Detroit, home to some gorgeous two- and three-story apartment buildings that he feared could get bulldozed. Under the so-called density bonus in a recently approved city ordinance, new buildings can be 35% larger than currently allowed if as little as 11% of the new units are "affordable."

But this isn't really about affordable housing, Yaroslavsky said, it's about throwing bones to developers. He used a project on Sepulveda in Westwood to make his point. There, he said, 31 rent-controlled apartments were approved for demolition to make way for 59 condos, five of which will be "affordable." That's "a net loss of affordable housing," Yaroslavsky snarled.

As a councilman many years ago, Yaroslavsky created more than a few enemies of his own for not stopping rampant development in his Westside district. Some still hold him responsible for the traffic-generating Westside Pavilion, the Fox studios expansion on Pico and his supporting role in derailing a Westside subway plan.

There were no protections in place at the time, Yaroslavsky argues, and there was only so much he could do. But he takes credit for following up with some of the zoning restrictions that are now being lifted.

In Encino, the supervisor showed me a six-story building on Ventura that was built in the 1980s and ruined the ambience of the residential homes behind it, homes that were later bulldozed. That kind of outrage led to a density-limiting measure, Proposition U, pushed by Yaroslavsky and approved by voters in 1987.

Now, the supervisor said, Proposition U is being eviscerated.

Yaroslavsky agreed that if population growth projections are to be believed, a lot more housing will be needed in years to come. But what's being planned is way too expensive for most of that new population, he said, and there won't be nearly enough new transportation services to prevent even worse traffic.

"There are places in the city where density is more appropriate, and places in the city where density is less appropriate," said Yaroslavsky, showing me an example of the former along Riverside Drive just north of the Ventura Freeway in the Valley.

We drove along a commercial stretch of smallish buildings that could go much higher and include businesses and apartments or condos without affecting single-family neighborhoods, he said.

There are spots like that throughout the city, he said, and that's where to grow.

Pay attention, he warned. The look and feel of the city could become drastically transformed for the worse if people don't wake up, keep an eye on their neighborhood and shake a fist at City Hall.

And by the way, if anyone at City Hall has an issue with how Zev and his colleagues at the county handle development matters, you know where to reach me.,1,6011126.column
From the Los Angeles Times

LA Rejects Massive Development

L.A. City Council rejects massive Las Lomas development
In a split vote, the panel halts its review of the 5,553-home project near the 5 and 14 freeways. Some council members fear a lawsuit.

By David Zahniser
Los Angeles Times Staff Writer

1:11 PM PDT, March 20, 2008

A divided Los Angeles City Council voted Wednesday to halt its review of the 5,553-home Las Lomas project, dealing what could well be a fatal blow to the mega-development planned for north Los Angeles County.

"This project would have put 15,000 cars a day in an already heavily impacted area," said City Councilman Greig Smith, who represents the northwest San Fernando Valley. "The people of L.A. said we can't take that anymore. We're tired of it."
Las Lomas project: An article in Thursday's Section A about the Las Lomas housing development identified Santa Clarita resident Diane Trautman as a city councilwoman. She is a candidate for City Council.
The 10-5 vote, which instructed the Planning Department to stop processing the application, represented a huge victory for Smith, who had argued that the council had no need to review a project that would flood the region with traffic and yet is outside city limits.

The decision also reflected the heightened anxiety over growth and traffic felt by some of the city's elected officials, who almost never issue an outright rejection of a development proposal.

For weeks, Las Lomas Land Co. had been waging an uphill battle to keep the project viable, arguing that Los Angeles should process an environmental impact report and then annex the firm's land from unincorporated Los Angeles County. The company said it had spent $20 million since 2002 trying to get its project approved.

In many ways, Los Angeles had been the development's last resort.

The site, just north of where the Golden State Freeway intersects the 14, is in territory represented by Los Angeles County Supervisor Mike Antonovich, who opposed the project. Much of it borders Santa Clarita, which also had fought the project.

That left Los Angeles, where Smith introduced a proposal last month to stop all work on the project, partly to avoid wasting the Planning Department's time over the next two years.

Even Las Lomas' defenders on the council said they did not like the proposal, which would have placed a small city on a chaparral-covered hillside. But they argued that the city already had made a promise to review it -- and that stopping would leave Los Angeles vulnerable in court.

"Our city attorney has said that if we fail to move forward, he believes we are in great jeopardy of being sued," said Councilman Richard Alarcon, whose San Fernando Valley district borders the Las Lomas site.

Alarcon, along with Councilmen Ed Reyes, Jose Huizar, Herb Wesson and Bernard C. Parks, voted to keep the project alive.

Wednesday's vote delivered the council's most direct repudiation of a major developer since 2003, when it sued to stop the 3,050-home Ahmanson Ranch development in Ventura County that was ultimately dropped.

Within the city's borders, the council in recent years has approved more than 5,800 homes at Playa Vista, just north of Westchester, and more than 2,500 homes in Hollywood in separate projects on or near Sunset Boulevard, Hollywood Boulevard and Vine Street.

The next major residential project to reach Los Angeles officials will be Ponte Vista, a 1,950-home subdivision planned in San Pedro, which could receive a Planning Commission review by late summer. A 2,900-home development planned for Universal City could receive its first public hearing by the end of the year.

Dan Palmer, president of Las Lomas Land Co., said he has not decided on his next move.

But he voiced disappointment with the council's decision, saying his company had worked hard to make Las Lomas environmentally sound and in keeping with the city's strategy of "smart growth" -- building greater density along transit corridors and filling in gaps in existing urban areas.

"We believe that Las Lomas is a fine project providing many benefits to the community," he said.

Opponents had a dramatically different view, saying Las Lomas represented more urban sprawl, albeit on especially steep terrain.

"A proposal to build a mini-city on the side of a mountain in the middle of a wildlife corridor doesn't begin to meet the definition of smart growth," said Santa Clarita City Councilwoman Diane Trautman.

Trautman said she believes the council's decision effectively kills Las Lomas. Still, she said, her city's position on Las Lomas does not necessarily mean that Santa Clarita would oppose other developments planned for the Santa Clarita Valley. That list includes the upcoming Vista Canyon Ranch, which would have up to 1,600 homes.

Santa Clarita played a significant role in the Las Lomas fight, retaining veteran lobbyist Steve Afriat to make its case in Los Angeles. Las Lomas relied on several lobbying firms, including one headed by Fernando Guerra, a Loyola Marymount University professor, and Weston Benshoof, a law firm that has aggressively raised money for council members over the last year.

Weston Benshoof was a co-host of fundraisers last year for Alarcon, Wesson, Parks, Huizar and Reyes -- all of whom sided with Las Lomas -- as well as council members Janice Hahn, Tom LaBonge and Bill Rosendahl. The firm also held events for City Atty. Rocky Delgadillo's officeholder account and anti-recall effort.

In the weeks leading up to the vote, the City Hall maneuvering over Las Lomas intensified, with Alarcon and Smith each seeking the upper hand.

When Smith wrote his proposal for killing the project, he handed a copy to Alarcon on the council floor. Before Smith had finished gathering signatures for the motion, an Alarcon aide had faxed the motion to alert the Las Lomas Land Co. Alarcon said his aide was wrong in doing so. "It would have been in the public record anyway," he said.

Alarcon's biggest boost came in December, when Delgadillo's office issued a legal opinion stating that the city should continue processing the Las Lomas application, because the Planning Department had been handling the case for years.

That confidential opinion fell into the hands of neighborhood council leaders, who immediately posted it on their website. Alarcon demanded an investigation into the source of the leak.

Smith called for a criminal investigation to determine if Las Lomas had behaved fraudulently when representing itself as the owner of the land. While Smith pointed out that some of the site is owned by a Van Nuys resident, Las Lomas said it had an option to buy the land -- and had behaved properly.

To strengthen his case against the project, Smith hired a onetime lawyer for Los Angeles County who advised the agency that approves annexations. And on Wednesday, Smith tried to sway his colleagues against Las Lomas by pointing out other Delgadillo legal opinions that turned out to be wrong.

Smith reminded Rosendahl that the city attorney's office was wrong in a case involving Lincoln Place, a complex in Venice where hundreds of tenants were evicted.

He also reminded Alarcon that Delgadillo had advised the council not to pursue Proposition R, the 2006 ballot measure that weakened term limits and allowed Alarcon to return to City Hall.

"Mr. Alarcon, you wouldn't be here today if we had listened to the city attorney," Smith said.,1,4042623.story

Times staff writer Ann Simmons contributed to this report.

Green Gov Hugs Toll Road, Hits Its Opponents

Schwarzenegger drops parks appointees
The governor doesn't reappoint his brother-in-law, Bobby Shriver, and fellow actor Clint Eastwood after they opposed a toll road plan.

By Michael Rothfeld
Los Angeles Times Staff Writer

March 21, 2008

SACRAMENTO — Gov. Arnold Schwarzenegger has dropped his brother-in-law, Bobby Shriver, and fellow action hero Clint Eastwood from the state parks commission after their vigorous opposition helped derail a plan for a toll road through San Onofre State Beach in San Diego County.

The decision not to renew the commissioners' terms, which expired last week, surprised observers and sent a strong signal that the governor expects loyalty from political appointees.

"This is a warning shot from the governor's office to all of his appointees: Do what I say, no matter how stupid it is," said Joel Reynolds, a senior attorney for the Natural Resources Defense Council in Los Angeles. "And I know of no project more destructive to the California coast than this toll road project."

Shriver, a Santa Monica City Council member and environmentalist who is the brother of California First Lady Maria Shriver, said he received a telephone call Monday from an aide to the governor saying he would not be reappointed.

Shriver and Eastwood had been appointed to the State Park and Recreation Commission under former Gov. Gray Davis and were previously reappointed by Schwarzenegger. A 60-day extension of their terms expired last week.

In an interview, Shriver said he and Eastwood had sought to remain on the board, where they were chairman and vice chairman, respectively, and that their removal would have "a chilling effect" on political appointees.

Eastwood could not be reached for comment. The governor's office confirmed that he would not be reappointed.

Although the board had no power to quash the Foothill South toll road project, it passed a resolution in November 2005 opposing it and joined a lawsuit pending in state court.

Last month, the California Coastal Commission, including some other Schwarzenegger appointees, defied the governor and voted to reject the toll road.

After learning that he would not be reappointed, Shriver spoke to his brother-in-law and had "a spirited disagreement" on the issue.

"It's a public-protection commission," Shriver said. "There are jobs that politicians appoint people to that they are not then supposed to do whatever a politician wants."

He added, "A big road in a park is a hard sell."

Asked about the toll road Thursday at a public event in Anaheim, Schwarzenegger reiterated his support for a project that is touted by supporters as a means to relieve traffic congestion in Orange County.

"I know the environmentalists are sensitive about it, and they say it is going through a park, but the road has to go through somewhere," Schwarzenegger said. "We can't stop progress."

Aaron McLear, a spokesman for Schwarzenegger, said the toll road issue did not precipitate the governor's decision not to reappoint his relative and the fellow actor. He said the governor wanted new appointees, though none have been chosen.

"The governor believes that both Mr. Shriver and Mr. Eastwood did an outstanding job, and he's grateful for their service," McLear said.

Shriver and Eastwood join a list of other spurned appointees.

Bilenda Harris-Ritter, a former member of the state Board of Parole Hearings, said she received a call from a member of the governor's office a little more than a year ago asking her to resign, six months after she had been appointed. No explanation was given, she said.

The call coincided with an Internet campaign from a crime victims group asking the governor's office to remove her for granting parole to too many prisoners.

Harris-Ritter, a lawyer whose parents were murdered in 1981, is an advocate for victims and said she had followed the law in giving parole.

"When people get yanked off suddenly in situations where it appears it's just because somebody in the governor's office doesn't like the fact that they're following the law, or a particular vote, that hurts the impression that the governor's office is being run professionally," Harris-Ritter said.

In June, the chairman of the state's Air Resources Board, Robert F. Sawyer, was fired by Schwarzenegger for pushing for antipollution measures beyond what the governor's office wanted, Sawyer said. The executive director, Catherine Witherspoon, quit in the aftermath.

In September, R. Judd Hanna quit the Fish and Game Commission at the request of an aide to the governor, after Republican lawmakers urged his ouster because he had sought to ban lead bullets in condor territory.

McLear said the governor's appointees take many actions that probably go against his wishes.

"I think it is far-fetched to suggest that there is a pattern of him removing people or not appointing people to boards or commissions simply because they don't agree with him," McLear said.

Caryl O. Hart, a member of the state parks commission from Sebastopol, lamented losing Shriver and Eastwood, who have been strong advocates of parks, at a time when the governor has proposed to drastically cut the parks budget.

"It isn't only this amusing thing about the Terminator," she said.,1,741591.story

US - Japan Crash Parallels

'Mr. Yen' sees U.S. policy makers as behind the curve
Former Japan official Sakakibara says American authorities need to rapidly infuse a significant amount of public money to stem the financial crisis.

By Bruce Wallace
Los Angeles Times Staff Writer

March 20, 2008

TOKYO — He was known as "Mr. Yen." As Japan's deputy minister of finance for international affairs in the late 1990s, Eisuke Sakakibara had a stomach-turning insider's view of an economic meltdown.

With Japan's economy crushed by the collapse of a financial bubble, he became the champion of the low-yen policy. By intervening in currency markets to depress the yen's value, the aim was to help marquee exporters such as Sony Corp. and Toyota Motor Corp. lower the cost of their goods abroad and generate more sales, thereby kick-starting a recovery.

A professor at Tokyo's Waseda University, Sakakibara thinks the U.S. faces its worst financial crisis since World War II. In an interview, Sakakibara discussed the similarities between Japan's 1990s collapse and the current U.S. situation, offering advice on how Americans might avoid a similar long-term nightmare.

Many people have drawn a parallel between conditions in the U.S. today and the implosion of the Japanese bubble in the 1990s. Do you agree with the comparison?

Yes. There are differences, but essentially they both began as non-performing asset problems in the mortgage sector. Japanese financial turmoil in the '90s started in the mortgage sector and spread to commercial banks and security firms. This is pretty much what is happening in the U.S.

Given your experience with this kind of crisis, what is the greatest danger facing American policymakers?

You tend to implement policies piece by piece, and you tend to be behind the curve. In financial markets, things spread very rapidly. So you have to overtake the speed of the markets, especially in a crisis when the speed really accelerates. In hindsight, we were always behind the curve. And although it may look like American authorities are moving very fast, they are also behind the curve.

When it comes to bailing out the financial services industry, have we passed the point of worrying about "moral hazard"-- that is, whether a rescue lets bad performers off the hook and encourages more risky behavior?

If you insist on moral hazard, you have to let all those financial institutions go down. That will eventually develop into systemic risk. You have to protect the financial markets at some point. The U.S. has come to the stage where authorities have to defend the financial system as a whole.

So a taxpayer bailout is inevitable?

I think it's inevitable. In Japan, in the end, authorities had to do that. There was very strong resistance here as well, both from [parliament] and the general public. The American situation is very similar: There will be resistance from Congress and from the American people, because people, whether in Japan or the United States, simply don't like the banks. They are the institution that lends you an umbrella when the weather's fine and won't lend it to you when it's raining. But eventually we had to overcome that.

Could U.S. real estate go into the kind of prolonged decline that happened in Japan?

It's possible. Sure, some kind of rapid reconstruction is also possible, but it's possible that the U.S. may repeat what we experienced in the '90s.

With the benefit of hindsight, what advice would you offer American authorities in trying to contain this crisis?

Infuse public money as quickly as possible, in a very significant amount. How you do that depends upon the specific situation. Our political situation was quite different. Our financial markets are different. You have to do it in your own way. But the important thing is to do it very quickly and to do it in a very significant amount. Don't put in public money bit by bit. A huge infusion at first.

In Japan, the worry now is a sharply rising yen; the dollar is now worth less than 100 yen. How strong will the yen get?

In real terms, the yen is still really cheap. Even at 99 or 100 yen to the dollar, it is equivalent to something like 130 yen 10 years ago because during the last decade, the inflation rate in Japan has been on average a little bit below zero, and the U.S. rate has been above 2%. The yen will probably reach the level of 90 very quickly and could even break 90 by the end of the year. Some people say it could hit 70.

Does Japan's government have a breaking point at which it will intervene to depress the yen to help the exporters who drive the Japanese economy?

The days of Japanese authorities aiming for a weak currency are over. I think Japanese finance ministers should start to say that a strong yen is in Japan's national interest. Ten years ago, I was trying to depreciate the currency. At that time, it was necessary. But there's been a paradigm shift. Look at energy prices. Look at commodity prices. A strong yen helps Japan buy them more cheaply.

Japanese exports could compete at a reasonable strong yen level. Their profits will be reduced at first, but it's a one-time shift. Sony, Toyota and Matsushita could still compete with [a yen of] 80 to 85 [to the dollar]. And 80 to 85 would help Japanese consumers greatly in terms of energy and food prices.

I'm just beginning to hold that view. And it's a minority view. But times have changed. We need to shift our mentality.,1,6006345.story

Tuesday, March 18, 2008

Fall of Bear Stearns

The Week That Shook Wall Street:
Inside the Demise of Bear Stearns


Wall Street Journal March 18, 2008; Page A1

The past six days have shaken American capitalism.

Between Tuesday, when financial markets began turning against Bear Stearns Cos., and Sunday night, when the bank disappeared into the arms of J.P. Morgan Chase & Co., Washington policy makers, federal regulators and Wall Street bankers struggled to keep the trouble from tanking financial markets and exacerbating the country's deep economic uncertainty.

The mood changed daily, as did the apparent scope of the problem. On Friday, Treasury Secretary Henry Paulson thought markets would be calmed by the announcement that the Federal Reserve had agreed to help bail out Bear Stearns. President Bush gave a reassuring speech that day about the fundamental soundness of the U.S. economy. By Saturday, however, Mr. Paulson had become convinced that a definitive agreement to sell Bear Stearns had to be inked before markets opened yesterday.

Bear Stearns's board of directors was whipsawed by the rapidly unfolding events, in particular by the pressure from Washington to clinch a deal, says one person familiar with their deliberations.

"We thought they gave us 28 days," this person says, in reference to the terms of the Fed's bailout financing. "Then they gave us 24 hours."

In the end, Washington more or less threw its rule book out the window. The Fed, which has been at the forefront of the government response, made a number of unprecedented moves. Among other things, it agreed to temporarily remove from circulation a big chunk of difficult-to-trade securities and to offer direct loans to Wall Street investment banks for the first time.

The terms of the Bear Stearns sale contained some highly unusual features. For one, J.P. Morgan retains the option to purchase Bear's valuable headquarters building in midtown Manhattan, even if Bear's board recommends a rival offer. Also, the Fed has taken responsibility for $30 billion in hard-to-trade securities on Bear Stearns's books, with potential for both profit and loss.

The question now looming over the transaction: Has the government set a precedent for propping up failing financial institutions at a time when its more traditional tools don't appear to be working? Cutting interest rates -- which the Fed is expected to do again today, by between a half percentage point and a full point -- hasn't yet done much to loosen capital markets gummed up by piles of bad debt.

Even though the transaction ultimately could leave taxpayers on the hook for losses, the political response so far has been fairly positive. "When you're looking into the abyss, you don't quibble over details," said New York Democratic Senator Charles Schumer.

Tuesday, March 11

From the earliest days of the financial crisis that began last year, the Federal Reserve had been working on contingency plans to lend to investment banks. Such firms regularly asked for government help to finance their large inventories of securities such as mortgage-backed bonds. They hoped to get the same favorable terms the Fed also gave to banks that borrow from its "discount window." But the Fed is barred from making such loans to firms that aren't banks, except by invoking a special clause which it hadn't used to lend money since the Great Depression. Officials worried that the drama surrounding a decision to do something for the first time since the 1930s could be damaging to confidence.

On Tuesday, officials unveiled what they thought came close: a promise to lend up to $200 billion in Treasury bonds to investment banks for 28 days. In return, the Treasury would get securities backed by home mortgages, whose uncertain values helped spark the current crisis, and other hard-to-trade collateral. The first swap was scheduled for March 27. At first, the firms were elated.

That same day, the market began turning on Bear Stearns. Phones were ringing off the hook at rival firms such as Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group. Clients of those firms were growing worried about trades they had entered into with Bear Stearns -- about whether Bear Stearns would be able to make good on its obligations. The clients asked the other investment banks whether they would be willing to take the clients' places in the trades. But credit officers at Goldman, Morgan Stanley and others -- worried themselves about Bear Stearns's condition -- began to say no.

At Bear Stearns, Chief Financial Officer Samuel Molinaro, along with company lawyers and Treasurer Robert Upton, were trying to make sense of the situation. They felt comfortable with their capital base of roughly $17 billion and were looking forward to reporting Bear Stearns's first-quarter earnings, which had been respectable amid the market carnage.

One theory began developing internally: Hedge funds with short positions on Bear -- bets that the company's stock would fall -- were trying to speed the decline by spreading negative rumors.

For the first part of the week, Chief Executive Officer Alan Schwartz was out of pocket. Although Bear Stearns had been struggling with mortgage-related losses and problems in its wealth-management unit, Mr. Schwartz was hosting a Bear Stearns media conference in Palm Beach, Fla. On Wednesday morning, he left the conference briefly to do an interview with CNBC in an effort to deflect rumors about liquidity issues at the firm.


On Thursday evening, after customers had continued to pull their money out of Bear Stearns, the bank reached out to J. P. Morgan, looking to discuss ways the Wall Street giant could help ease Bear's cash crunch.

By then, Bear Stearns's cash position had dwindled to just $2 billion. In a conference call at 7:30 p.m., officials at Bear Stearns and the Securities and Exchange Commission told Fed and Treasury officials that the firm saw little option other than to file for bankruptcy protection the next morning.

Bear Stearns's hope was that the Fed would make a loan from its discount window to provide several weeks of breathing room. That, the firm hoped, would perhaps halt a run on the bank by allowing it to swap bonds for the cash necessary to return to customers.

The Fed's standard preference in dealing with a troubled institution is to first seek a private-sector solution, such as a sale or financing agreement. But the possibility of a bankruptcy filing Friday morning created a hard deadline.

A trigger point was looming for Bear Stearns in the so-called repo market, where banks and securities firms extend and receive short-term loans, typically made overnight and backed by securities. At 7:30 a.m., Bear Stearns would have to begin paying back some of its billions of dollars in repo borrowings. If the firm didn't repay the money on time, its creditors could start selling the collateral Bear had pledged to them. The implications went well beyond Bear Stearns: If other investors questioned the safety of loans they made in the repo market, they could start to withhold funds from other investment banks and companies.

The $4.5 trillion repo market isn't a newfangled innovation like subprime-backed collateralized debt obligations. It is a decades-old, plain-vanilla market critical to the smooth functioning of capital markets. A default by a major counterparty would have been unprecedented, and could have had unpredictable consequences for the entire market.

Federal Reserve Bank of New York President Timothy Geithner worked into the night, grabbing just two hours of sleep near the bank's downtown Manhattan headquarters. His staff spent the night going over Bear's books and talking to potential suitors including J. P. Morgan. The hard reality was that even interested buyers said they needed more time to go over the company.

The pace and complexity of events left Bear's board of directors groping for answers. "It was a traumatic experience," says one person who participated. Sleep deprivation set in, with some of the hundreds of attorneys and bankers sleeping only a few hours during a 72-hour sprint. Dress was casual, with neckties quickly shorn.


At 5 a.m. Friday, Mr. Geithner, Mr. Paulson and Federal Reserve Chairman Ben Bernanke, calling in from home, joined a conference call to debate whether Bear should be allowed to fail or whether the Fed should lend it enough money to get through the weekend. At 7 a.m. they settled on the lifeline option. Mr. Bernanke assembled the Fed's other three available governors to vote for the loan, the first time since the Depression the Fed would use its extraordinary authority to lend to nonbanks.

The Fed announced that it would lend Bear money, through J.P. Morgan, for up to 28 days to get the venerable investment bank through its cash crunch. At 9 a.m., Mr. Geithner, Mr. Paulson and aides addressed a conference call of bond dealers and bankers. Mr. Paulson took the lead, saying the dealer community had "a stake" in the overall deal working out.

But the markets didn't take well to the news that a major investment bank was on the brink of failure. Stocks sank. Other investment banks were seeing lenders turn cautious. Fed officials led by Bill Dudley, head of open-market operations, began planning a more direct response: opening the discount window to all investment banks, a request the Fed had resisted for months.

J.P. Morgan's effort to buy Bear kicked into high gear on Friday afternoon, just hours after the big bank and the Fed had provided Bear with the 28-day lifeline. Steve Black, co-head of J.P. Morgan's investment bank, returned early from vacation in the Caribbean, spearheading the bank's efforts with his J.P. Morgan counterpart in London, Bill Winters.

Mr. Black's role was pivotal. He was a longtime associate of J.P. Morgan Chief Executive James Dimon. And Mr. Black had a long relationship with Bear's CEO, Mr. Schwartz, dating back to the 1970s, when the two were fraternity brothers at Duke University.

J.P. Morgan bankers were broken into some 16 teams -- all with specific due-diligence assignments. Some focused on Bear's prime-brokerage business, which was attractive to J.P. Morgan. Others concentrated on technical operations, commodities, and the like.

As some Fed staffers worked from a conference room on Bear's 12th floor, Federal Reserve officials insisted that the firm complete a deal that weekend. Officials made it clear the loan was only for the short term to ensure a deal got done as quickly as possible. Their priority was that Bear's counterparties -- the parties that stood on the other side of its trades -- would be able to arrive at work Monday knowing their contracts were good, minimizing the risk of a generalized flight from the markets.

Treasury Secretary Paulson knew that the day's work wouldn't be enough to keep Bear afloat over the long term. Still, Mr. Paulson, a former Goldman Sachs chief executive and the administration's point man for financial markets, thought Bear Stearns would survive through the weekend.


That illusion was shattered Saturday morning, when Mr. Paulson was deluged by calls to his home from bank chief executives. They told him they worried the run on Bear would spread to other financial institutions. After several such calls, Mr. Paulson realized the Fed and Treasury had to get the J.P. Morgan deal done before the markets in Asia opened on late Sunday, New York time.

"It was just clear that this franchise was going to unravel if the deal wasn't done by the end of the weekend," Mr. Paulson said in an interview yesterday.

A year ago, Mr. Paulson wouldn't have considered Bear Stearns big enough that its collapse would present a threat to the U.S. financial system. But confidence in the economy and financial sector are so shaky now that he had no doubt that the Fed and government had to act to prevent its bankruptcy, according to a senior Treasury official.

At 8 a.m. Saturday, the J.P. Morgan bankers assembled to receive instructions in the bank's executive offices, located on the 8th floor of its Park Avenue headquarters. One hour later, they headed down the street to Bear Stearns's headquarters to pore over Bear's books. Due diligence had begun.

Back at J.P. Morgan's headquarters, top executives set up war rooms on the executive floor, commandeering offices of colleagues who weren't directly involved in the negotiations. Bankers darted in and out of offices searching for the top brass, who were also moving from room to room. Mr. Dimon, wearing slacks and a dark sweater, urged the bankers to stay calm and focused. "Everyone take a deep breath," he said at one point.

By 7:30 p.m., hunger pangs had taken hold. Someone ordered Chinese food. A security guard lay out a buffet spread.

That evening, Mr. Black got on the phone to Mr. Schwartz, Bear Stearns's CEO. J.P. Morgan would be willing to buy Bear Stearns, subject to the conclusion of due diligence, he told Mr. Schwartz. The J.P. Morgan executives didn't set a specific price, instead providing a dollars-per-share range, according to people familiar with the matter. At the high end was a figure in the low double digits, these people say.

By 1 a.m., the bankers headed home for a few hours of sleep.


Early the next morning, Messrs. Dimon and Black and other top executives sat around a conference-room table to discuss the situation. One by one, they began expressing concern about the speed at which the situation was progressing. They weren't comfortable with the level of due diligence being conducted. Were there more problems hidden deep in Bear's balance sheet that they hadn't found yet? Would market turmoil result in more problems? Was J.P. Morgan really willing to take such a risk without full information?

"Things didn't firm up -- they got more shaky," according to one person familiar with the meeting.

Finally, they came to a conclusion. J.P. Morgan wouldn't buy Bear Stearns on its own. The bank needed help before it would do the deal.

Mr. Paulson was frequently on the phone with Bear and J. P. Morgan executives, negotiating the details of the deal, the senior Treasury official said. Initially, Morgan wanted to pick off select parts of Bear, but Mr. Paulson insisted that it take the entire Bear portfolio, the official said.

This was no normal negotiation, says one person involved in the matter. Instead of two parties, there were three, this person explains, the third being the government. It is unclear what explicit requests were made by the Fed or Treasury. But the deal now in place has a number of features that are highly unusual, according to people who worked on the transaction.

In addition to its option to purchase Bear's headquarters building, J.P. Morgan has the option to purchase just under 20% of Bear Stearns's shares at a price of $2 each. That feature gives J.P. Morgan an ability to largely block a rival offer, says a person with knowledge of the contract.

The deal also is highly "locked up," meaning that J.P. Morgan cannot walk, even if there is a heavy deterioration in Bear's business or future prospects. Bear Stearns holders can, of course, vote the deal down. But the effect that would have on J.P. Morgan's ongoing managerial oversight and the Fed's guarantees is largely unknown.

"We're in hyperspace," says one person who worked on the deal. All these matters are very likely to be litigated in court eventually, this person adds.

The Fed spent the weekend putting together a plan to be announced Sunday evening, regardless of the outcome of Bear's negotiations, that would enable all Wall Street banks to borrow from the central bank. Mr. Bernanke called the Fed's five governors together for a vote Sunday afternoon. All five voted in favor, using for the second time since Friday the Fed's authority to lend to nonbanks.

The steps were announced at the same time the Fed agreed to lend $30 billion to J.P. Morgan to complete its acquisition of Bear Stearns. The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns. If the assets decline in value, the Fed -- and therefore the U.S. taxpayer -- will bear the cost.

Aware of the potential political backlash, Fed and Treasury officials briefed Democrats throughout the weekend. Events moved so fast that there was little time for much substantive outreach. Mr. Bernanke spoke with Massachusetts Democrat and House Financial Services Committee Chairman Barney Frank on Friday. Fed staffers emailed updates to Mr. Frank's office on Sunday.

"I believe this is the right action that was taken over the weekend," said Senate Banking Committee Chairman Christopher Dodd of Connecticut, a Democrat, who spoke with Messrs. Bernanke and Paulson on Sunday during deliberations. "To allow this to go into bankruptcy, I think, would have [created] some systemic problems that would have been massive."

--Dennis K. Berman, Damian Paletta and Sarah Lueck contributed to this article.

Write to Robin Sidel at robin.sidel@wsj.com18, Greg Ip at greg.ip@wsj.com19, Michael M. Phillips at michael.phillips@wsj.com20 and Kate Kelly at kate.kelly@wsj.com21

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