Saturday, April 12, 2008

Underinvestment Kills Firefighter

Fatal blasts are linked to aging infrastructure
By Howard Blume
Los Angeles Times Staff Writer

11:44 PM PDT, March 28, 2008

A blast that killed one firefighter and injured another this week in Westchester was a freak occurrence and indirectly the result of the decaying underground infrastructure, officials said Friday.

Firefighter Brent A. Lovrien, 35, was fatally injured Wednesday when a spark ignited combustible smoke behind an electrical panel door that he was trying to open with a circular saw.

Smoke had migrated into the electrical room from the underground burning of a conduit 200 feet away. When underground pipes fail, it normally causes a power outage, not a dangerous fire, officials said.

Fire officials said Lovrien acted according to policy and had no way of knowing that using the saw could trigger an explosion. Los Angeles Fire Chief Douglas Barry said the policy for handling such situations would be reviewed.

The fatal blast also injured fire Engineer Anthony J. Guzman, 48, who emerged from surgery for multiple fractures in serious but stable condition.

During a 48-hour multi-agency investigation, technicians shut down power to 400 customers in a two-block commercial corridor along Sepulveda Boulevard, near Los Angeles International Airport.

Although officials insisted that another blast was unlikely, the problem at the root of the explosions is hardly uncommon. Threading under the city are 15,000 miles of aging electrical pipe -- much of it about 60 years old or more, said David Nahai, general manager of the city's Department of Water and Power.

The electrical current travels through copper wiring that is wrapped in oil-soaked insulating paper. The entire bundle is encased in lead.

Over decades, that lead casing can develop cracks, causing arcing, said Aram H. Benjamin, the agency's assistant general manager. Workers find the problem, then replace the old pipe with a modern synthetic. About half the underground pipes have been replaced.

In this instance, the arcing ignited the old oiled-soaked paper, which began to burn like a fuse. The fire began just under the corner of Sepulveda and La Tijera boulevards.

The first explosion happened about 2 p.m., blowing the manhole cover outside a Staples store 20 feet, said Battalion Chief John Miller. The second explosion occurred about 16 minutes later -- right above the source of the fire.

Smoke from the fire found its way into a 200-foot conduit that led into the tiny electrical panel room. The room stood behind a two-story office building that houses a credit union and a sandwich shop. By about 2:30 p.m., hazardous-materials specialist Lovrien was on the scene with fellow firefighters from Station 95.

Lovrien saw smoke coming from around the edge of the nearly airtight electrical panel room and, finding the door locked, ran to get the circular saw, said arson investigator Thomas L. Derby.

His composite blade struck the steel lock, throwing off a spark. The ensuing blast threw him back eight feet. He died from blunt-force trauma to the head, probably from the doors blowing off or from the saw, arson investigators said. The La Habra resident was divorced and had no children.

The force threw Guzman about six feet, even though he was standing well behind Lovrien.

"These series of events are very, very unusual," Nahai said.

Present with Nahai, Mayor Antonio Villaraigosa and other officials at a Westchester news conference were comrades of Lovrien, a 13-year veteran whose sunny disposition earned him a matching nickname.

"His nickname is 'Lovey,' and that tells you everything about him," said firefighter Anthony Pacheco, his voice cracking. Just days ago, Lovrien had insisted on working a shift for Pacheco so his colleague could have his birthday off.

howard.blume@latimes.com
http://www.latimes.com/news/local/la-me-explosion29mar29,0,5311983.story
From the Los Angeles Times

Sunday, April 6, 2008

Wal-Mart: Brain-damaged former employee can keep money

Wal-Mart sued Debbie Shank to recoup $470,000 it paid for her medical care
Shank appealed to the U.S. Supreme Court, but the court would not hear the case
On Tuesday, Wal-Mart said it is modifying its health care plan
From Randi Kaye

(CNN) -- A former Wal-Mart employee who suffered severe brain damage in a traffic accident won't have to pay back the company for the cost of her medical care, Wal-Mart told the family Tuesday.

"Occasionally, others help us step back and look at a situation in a different way. This is one of those times," Wal-Mart Executive Vice President Pat Curran said in a letter. "We have all been moved by Ms. Shank's extraordinary situation."

Eight years ago, Debbie Shank was stocking shelves for the retail giant and signed up for Wal-Mart's health and benefits plan.

After a tractor-trailer slammed into her minivan, the 52-year-old mother of three lost much of her short-term memory and was confined to a wheelchair. She now lives in a nursing home.

She also lost her 18-year-old son, Jeremy, who was killed shortly after arriving in Iraq. When Debbie Shank asks family members how her son is doing and they remind her that he's dead, she weeps as if hearing the news for the first time.

Wal-Mart's health care plan lets the retail giant recoup the cost of its expenses if an employee collects damages in a lawsuit. And Wal-Mart set out to do just that after Shank and her husband, Jim, won $1 million after suing the trucking company involved in the wreck. After legal fees, the couple received $417,000.

Wal-Mart sued the Shanks to recoup $470,000 it paid for her medical care. However, a court ruled that the company could only recoup about $275,000 -- the amount that was left in a trust fund for her care.

The Shanks appealed to the U.S. Supreme Court, but the court declined in March to hear the case. CNN told the couple's story last week, prompting thousands of angry blog responses and at least two online petitions to boycott the company.

On Tuesday, Wal-Mart said in a letter to Jim Shank that it is modifying its health care plan to allow "more discretion" in individual cases.Watch Wal-Mart reverse its decision »

"We wanted you to know that Wal-Mart will not seek any reimbursement for the money already spent on Ms. Shank's care, and we will work with you to ensure the remaining amounts in the trust can be used for her ongoing care," Curran said.

"We are sorry for any additional stress this uncertainty has placed on you and your family."

Wal-Mart's reversal came as shock to Shank.

"I thought it was an April Fool's joke," he told CNN.

"I (would) just like to let them know that they did the right thing. I just wish it hadn't taken so long," Shank said. "But I thank them and I hope they come through with all that they said they're going to do.

Find this article at:
http://www.cnn.com/2008/US/law/04/02/walmart.decision/index.html

Thursday, April 3, 2008

Housing Crisis: Let Prices Fall

Let the housing chips fall
The quicker we reach bottom, the quicker we can recover.
By Peter Schiff
From the Los Angeles Times

March 31, 2008

The economic crisis enters a new and more dangerous phase daily, and Americans of all levels of economic sophistication are scrambling to make sense of the myriad remedies and proposals that are springing from Washington.

The Fed has slashed interest rates -- even in the face of inflation and a crashing dollar -- and conjured new mechanisms to inject cash directly into the financial markets, including the bizarre engineering of the Bear Stearns buyout. In addition, legislators and regulators have enacted, or are pushing through, measures that will place a moratorium on home foreclosures, suspend interest rate adjustments and compel Fannie Mae and Freddie Mac to buy more mortgages. Further game-changing proposals are working their way through the think tanks and policy proposal pipelines: loan balance reductions, the suspension of "mark to market" accounting, direct federal mortgage purchases and, most bizarre, the suggestion of a Wall Street Journal columnist that the federal government buy and bulldoze the "least wanted" foreclosed homes.

When lost in the details of these measures, it is easy to miss their unifying goal: pump cash into the market, encourage lenders to keep lending and, ultimately, stop home prices from falling. But try as they might, it won't work.

The government is worried for good reason. The value of the trillions of dollars of mortgage-backed bonds that course through the American financial system is a function of homeowners' capacity -- and willingness -- to repay their mortgages. To an extent not widely understood, this is all tied to home prices.

When prices rise, everybody can repay loans. Price appreciation builds equity, and that allows even overstretched buyers to refinance or sell at a profit -- so mortgage lending becomes nearly risk free. Defaults are rare, but if they do occur, banks reclaim houses worth more than the loan. When prices are falling, this process is reversed and lending to overstretched buyers becomes a losing proposition, no matter how low interest rates drop or how much money the government drops from helicopters. That's why banks have curtailed lending.

The government is trying in vain to get funds flowing again and put a floor under prices. But it's too late. U.S. home prices are like a beach house supported by eight pillars: lax lending standards, low down payments, "teaser" interest rates, widespread real estate speculation, pliant appraisers, willing lenders, easy refinancing and a market for mortgage-backed securities. Knock out even half of these pillars and the house comes crashing down. We've knocked out all of them. Yet everyone hopes that this allegorical house can defy gravity and that bubble-era prices can be sustained in a post-bubble world.

After an unprecedented, unsustainable and irrational home price bubble for most of the current decade, authorities have about as much ability to keep prices from falling as King Canute had in stopping the tide.

At current levels, the average American still can't afford the average house. Despite the creativity of its new policies, Washington can't alter that math. The only mechanism to restore balance and get the credit flowing is for prices to fall steeply to a true market level, and for losses (for consumers and corporations) to be recognized and absorbed.

Anecdotal and statistical evidence supports this. Foreclosed homes at auction quickly find buyers and financing when price declines are severe enough. February's existing home sales figures showed the largest year-over-year price drop on record. And it was also the first month that the number of sales ticked upward in a year.

The quicker home prices find a sustainable bottom, the quicker our economy can truly recover.

Instead, the government is trying to float our allegorical collapsed beach house on a flood tide of new liquidity. But the fixes compound the problem. They're creating runaway inflation, shrinking the value of the dollar -- and heading toward unprecedented government meddling in the marketplace and a diminished sanctity of contracts.

If left unchecked, these policies may save a few mortgage holders and bail out some Wall Street firms, but they'll also wash away the prosperity that Americans have built up over generations.

Peter Schiff is president of Euro Pacific Capital and the author of "Crash Proof: How to Profit From the Coming Economic Collapse."

http://www.latimes.com/news/opinion/commentary/la-oe-schiff31mar31,0,5268536.story

Wednesday, April 2, 2008

Ohio Gov to Keep Higher Ed Plan Intact

From the issue dated April 4, 2008
Ohio's Governor Presses Plan to Overhaul Higher Education

By JJ HERMES

When Ohio's governor took office, just over a year ago, he vowed to make overhauling higher education a top priority.

The situation did not look good: In his view, tuition was rising too fast, and too few of the state's residents held college degrees.

Over the preceding decade, the price tag of a college education in Ohio had increased by an average of 9 percent a year. Barely one in three adults had earned associate degrees or higher.

"It was a totally unacceptable pattern emerging," Gov. Ted Strickland, a Democrat, said in a recent interview.

So now, even as the state faces at least a $733-million deficit, Governor Strickland promises to protect colleges from budget cuts and to hold the line on tuition.

He also seeks broad changes. Like many Rust Belt leaders, who for decades have watched factories close and jobs disappear, Mr. Strickland sees higher education as key to reinventing his state's flagging economy.

He has moved aggressively to reorganize Ohio's colleges and universities, changing how they are governed in ways that he hopes will encourage them to focus more on how they can help Ohio transcend its eroded manufacturing base.

This week the state's higher-education chancellor, whom the governor has put in charge of the overhaul, was scheduled to present a 10-year plan to increase the proportion of residents with college degrees and foster closer collaboration among the colleges.

For now, many college leaders say they are optimistic that their institutions will be well served by Ohio's governor and his long-term plans. But some are hesitant to count on widespread change; they have seen such ambitious proposals before, with only minimal progress.

Oversight by Cabinet

Ohio's Republican-led legislature helped Mr. Strickland take early steps toward his goals when it shook up higher-education governance in March 2007, giving the governor the authority to appoint to his cabinet a chancellor to oversee colleges. Advocates of the change said it would allow the administration to act more aggressively to improve Ohio's institutions.

"When I became governor, I found I had limited ability to affect what was happening in higher education," Governor Strickland says. He sees the new position of chancellor as key to promoting his education agenda.

Before state legislators gave the governor the power to appoint a chancellor, the Ohio Board of Regents, the statewide coordinating board for higher education, tapped Eric D. Fingerhut, a former member of the U.S. House of Representatives and former state senator, for the job. Governor Strickland praised the choice of Mr. Fingerhut, who briefly challenged him in 2006 for the Democratic nomination for governor, and has treated the chancellor as his own appointment.

The cabinet-level position has energized the statewide conversation about overhauling higher education. It also makes Ohio one of only a handful of states — including Colorado, Maryland, Minnesota, and New Mexico — that let their governors directly appoint a chief higher-education official.

Richard Novak, vice president for public-sector programs at the Association of Governing Boards of Universities and Colleges, says other states are changing their laws to allow such appointments. The move, he said, seems to be driven by budget constraints, rising tuition, and growing enrollments.

"There is this sense that we need to initiate change much more quickly than we have in the past," Mr. Novak says.

He agrees that state leaders need to learn to adapt to shifting environments more quickly, but he believes that states should consider using existing structures to bring about change.

"There is the risk that you could align an office of higher education too closely with one political party or individual," Mr. Novak says. "What you may gain in the short term, you might lose in longer-term stability and continuity."

Core Goals

In August, Governor Strickland called on the chancellor to deliver the 10-year plan as a formal proposal. He also ordered the creation of the University System of Ohio, which will oversee the state's 13 public universities, 24 branch campuses, and 23 community colleges.

Mr. Fingerhut says his plan focuses on three core goals: improving the academic quality of the main campuses at state universities, enrolling more nontraditional students, and accelerating college readiness among high-school students.

Among the changes he suggests are moving away from an enrollment-driven formula for distributing state funds, consolidating oversight of the state's adult-education centers, and giving universities that increase the amount of need-based aid they offer more flexibility in setting tuition.

Many of the plan's expected recommendations were promoted earlier by the governor, including a program that would allow high-school seniors to enroll in local, college-level courses without paying tuition. The state already has provided $4-million in grants to school districts to prepare for the program, known as Seniors to Sophomores.

Early drafts of the 10-year plan were circulated to college leaders. The drafts featured proposals for accountability measures to gauge progress in enrolling and graduating more students. While more quantitative oversight might worry some administrators, most college officials in Ohio say they welcome the idea.

"What higher education has lacked and continues to fail at is to develop measurements," says Lloyd A. Jacobs, president of the University of Toledo. "What you can't measure, you can't fix."

Governor Strickland has already set one numerical goal for Ohio colleges. In his first State of the State address, last year, he called on them to graduate an additional 230,000 students over the next 10 years, in part by better utilizing branch campuses and community colleges.

Signals of Support

Ohio's higher-education leaders are optimistic about Mr. Fingerhut's plan, in part because they view it as a signal that the state's leaders have largely adopted the idea that colleges are central to prospects of reviving the state's economy.

That link, however, has been recognized before. In 2003, Mr. Strickland's predecessor, Gov. Bob Taft, a Republican, created a commission on higher education and the economy. The 33-member panel, which included Mr. Fingerhut, released a report in 2004 that urged the state to focus its attention on higher education as a way to revitalize its economy.

But by 2005 that report was essentially being overlooked, and state appropriations for higher education failed to keep pace with inflation. College leaders say they have reason to hope that the outcome will be better this time around.

"What we've seen with Governor Strickland coming in is the amplification of those ideas, with the bipartisan help of the legislature," says Steven Lee Johnson, president of Sinclair Community College.

A key indication to college leaders that Mr. Strickland is truly committed to higher education came this year, he says, when he developed his budget plan. Despite a projected shortfall in revenue, he recommended keeping higher-education funds intact.

He did not recommend any cuts in the nearly $2.38-billion that colleges are receiving from the state this year, an amount that represents a 7.7-percent increase over the previous fiscal year. The governor also proposed continuing to finance a statewide freeze on tuition that has been in effect for two years.

"In my judgment, higher education had been the budget whipping boy for far too long," he says. "It was time to keep faith with higher education."

The governor says Ohio's sagging economy led him to propose closing two psychiatric hospitals and require some state agencies to cut their central-office staffs by 20 percent. "It wasn't that we didn't have to make tough decisions," he says. "But we did that while protecting higher education."

Now Mr. Fingerhut is looking to advance the governor's goals through the 10-year plan, which could still face obstacles despite its apparent momentum.

Even with the governor making higher education a top priority, budget realities still make it difficult for state leaders to finance all of their long-term goals.

But Ohio and its colleges desperately need to focus their higher-education agenda on the broad public good, regardless of budget pressures, says Mr. Jacobs, of Toledo.

"You first think about what this will mean for your grandchildren," he says. "And then you see what will make the finances work."

http://chronicle.com/weekly/v54/i30/30a01501.htm
Section: Money & Management
Volume 54, Issue 30, Page A15
Copyright © 2008 by The Chronicle of Higher Education

Credit Default Swaps Defined

Wednesday, April 2nd, 2008

Credit Default Swaps: A $50 Trillion Problem

By Martin Hutchinson
Contributing Editor

Of all the really bad ideas that have infested the finance business in the last 30 years, the most dangerous is probably the credit default swap (CDS).

CDS is almost a brand new investment vehicle, but the market is already 20 times its size in 2000. The principal amount of CDS outstanding equals $50 trillion, or more than three times the U.S. Gross Domestic Product and bigger than all the U.S. credit markets put together. And the CDS has been a huge source of "financial engineering" profits, both for Wall Street and the hedge fund community over the last few years.

The first true credit default swap was carried out as late as 1995, although various types of credit protection derivatives existed earlier. Its structure is similar to an ordinary interest rate or currency swap transaction, and the CDS market is covered by the International Swaps and Derivatives Association Inc.

Under a CDS, a bank originates loan to a company. A second bank (or other financial institution) can agree to cover the credit risk for the loan, by agreeing to make payment to originating bank if the company defaults on the original loan. The originating bank pays a small insurance premium to the second bank for assuming the risk of the loan.

Typically, payments under a CDS would only be triggered by the company’s failure to pay interest or principal on its debts due to bankruptcy or some other severe liquidity issue. But there are a host of intermediate or special cases that will doubtless provoke lawsuits when something goes wrong (CDS being a new market, it is by no means "recession-proof").

Credit default swaps were sold to the world as hedging transactions. Investors were told that they were simply transfers of risk, so that banks that made loans could transfer credit risks to insurance companies, which did not make loans directly, or to foreign banks that could not easily make loans in the U.S. market.

And if an originating bank sells its loan exposure only once, and sells it to a financial firm of undoubtedly solid credit, the CDS does indeed act as a hedge for the originating bank; it transfers the company’s credit risk from the bank to the financial firm that bought its CDS.

But the product did not work as advertised.

Enter the Traders

Salesmen and traders took over, and expanded the volume far beyond what was required for hedging.

After all, bonuses depend on the volume of business. Therefore, bank traders sold the credit risk of a loan not just once, but as many as 10 times. And they sold it not to solid banks and insurance companies, but to three solid banks, one solid insurance company, three dodgy brokers and three hedge funds. Then the traders went out and sold other CDS products that were not even related to actual loans on the books, but to imaginary indices of credit quality in the "widget" industry.

The credit risk of the system was hugely multiplied.

Instead of one $10 million credit risk loan, there are now ten $10 million credit risks on just one loan.
  • Three on solid banks - but will they stay solid?
  • One on a solid insurance company - probably OK.
  • Three on dodgy brokers - who knows?
  • And three on hedge funds - probably not OK in a real downturn.
The total credit risk in the system has been increased from the original $10 million loan to somewhere between $160 million to 200 million, depending on whether the banks and insurance company are financially solid.

Of course, a lot of those credit risks offset each other, so that if the company that took the loan goes bust, the only risk to the bank that sold all those CDS is to the profits it expected to make. But since it probably hedged those positions against others, if the company does go bust, and dodgy brokers and hedge funds stop paying up, the total losses in the system from that company’s credit risk are likely to be a substantial multiple of the original $10 million loan.

But please don’t think I was exaggerating when I said as many as 10 credit default swaps got sold for each loan.

The U.S. commercial loan market is worth about $5 trillion, yet the volume of CDS outstanding is currently no less than $50 trillion. In other words, a huge number of traders, salesmen and quants have been making money off this product, without any real "hedging" rationale at all.

And it all worked fine while the volume of defaults remained low, which is why the market expanded from $2 trillion to $50 trillion between 2000 and 2007.

A Ballooning Problem

There are two reasons reason why the CDS market has been able to expand so much beyond the size of the underlying debt markets:

Banking regulations and the lack of funding requirements for CDS: Banks are required by law to hold a certain amount of capital for loans they make - about 8 cents for every dollar in principle, but there are a number of loopholes that allow it to be less for certain types of loans. But there are very limited capital requirements for CDS, so banks and other CDS market participants can take on much more credit exposure through CDS than they could directly.
A loan must be funded: If you lend someone some money, you have to borrow it or use your own capital. However, if you take on the exact same risk through a CDS transaction, there is no need to put up any money, provided your counterparty will accept your credit risk.
For both these reasons, hedge funds have been large participants in the CDS market, because through credit default swaps the funds can take on much more risk (and receive much more in premiums) than their modest cash reserves would normally permit.

Big Defaults, Big Trouble

Suddenly home mortgages along with corporate credit and other types of consumer credit are in question and loss rates, which were very low in 2005-06, are soaring.

That spells big trouble for credit default swaps.

If just 10% of CDS underlying risks go bust, somewhere in the financial system there will be $5 trillion in losses.

Yes, there could well be $5 trillion of profits elsewhere in the system, because derivative transactions theoretically balance out. But once defaults start piling up, it’s possible that many of those losses will become real, while the profits simply won’t.

For example, hedge funds that have offered credit protection on risks far in excess of their current capital will quickly be unable to pay claims. Their counterparties will suffer unexpected losses, even though they thought they were protected by a CDS.

There are two sources of likely loss on CDS:

Default by the underlying borrowers, the companies that originally took out the loans.
And default by the banks or other financial firms that bought the credit default swap - counterparties in the endless chain of banks, insurance companies, hedge funds and general riff-raff that have done these deals.

Since the total outstanding balance of the CDS market is $50 trillion, compared with the entire U.S. home mortgage market at about $11 trillion and the subprime part of that market at only $1 trillion, you can see why people are worried.

American International Group Inc. (AIG), the insurance company, lost $7 billion on its CDS portfolio in its fiscal quarter ended November 30, and that was on "super senior" CDS. The losses on this type of investment vehicle can get very big, very quickly. And since CDS are so new, they’re completely untested in a real economic downturn.

The annual cost of credit default swaps based on the Markit CDS Investment Grade North America Index, which had bottomed out at 29 basis points (0.29%) in February 2007, soared to 220 basis points at the time of the Bear Stearns Cos. Inc. (BSC) bailout. The index was recently trading at 147.5 basis points, a significant improvement due to the U.S. Federal Reserve orchestrated rescue of Bear Stearns.

But Bear Stearns CDS were recently trading at 330 basis points, despite the guarantee of its obligations by the first-class credit of acquirer JPMorgan Chase & Co. (JPM), which means that investors are still wary.

If the CDS market itself thinks things are about to go wrong, they almost certainly are.

As Oliver Hardy used to say to Stan Laurel: "Another fine mess you got us into!"