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Economy & Politics: Shock, sadness and anger over South Korean ex-president’s death

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What’s News

M O N D AY, M AY 2 5 , 2 0 0 9

EUROPE

europe.WSJ.com

EU’s appetite for Russia gas seen waning

Brawl rocks Sikh temple in Vienna 7

TNK-BP could name a new acting CEO this week, and an option under consideration is to appoint one of the oil venture’s Russian billionaire shareholders to the position. Page 7 n British Airways reported an annual loss amid weak demand and higher fuel costs. The U.K. flag carrier scrapped its dividend and didn’t give a forecast. Page 3

By Guy Chazan

n The SEC imposed tough rules on securities trading by its staff following a probe into dealings of two veteran enforcement lawyers. Page 22 n Morgan Stanley will raise base salaries for most top officers to compensate for limits on bonuses. Page 20 n Horst Köhler won a second term as German president, in a boost for Merkel’s hopes for a new government. Page 2 n Unemployment in Russia reached its highest level this decade amid lower oil prices and the global crisis. Page 2 n GM received $4 billion in U.S. aid as part of its plan to pay suppliers and dealers before a June deadline. Page 4 n Auto lender GMAC said it needs to cut $1 billion in costs, or 20% of its expenses, by the end of the year. Page 4 n Segro approached Brixton about buying the troubled U.K. property firm. Page 5 n Venezuela will pay $1.05 billion for the local unit of Spain’s Banco Santander, in the latest nationalization by President Chávez. Page 19 n PetroChina agreed to buy a $1 billion stake in oil refiner Singapore Petroleum as China extends its reach in natural resources. Page 25 n The U.S. dollar’s retreat may broaden this week if the Fed increases its buying of Treasury securities. Page 19 n The U.S. said the number of high-profile attacks in Iraq has declined this year. Page 9 n Pakistan’s army said it had made gains in the main Swat town, but Taliban are digging in for a long fight. Page 11 n The U.S. concluded North Korean leader Kim Jong Il has initiated a political transition in which his brother-in-law and a son are key players. Page 9 n “The White Ribbon” directed by Michael Haneke won the top prize at the Cannes Film Festival.

Editorial&Opinion

Property games The Olympic Committee ignores Russian violations in Sochi. Page 15 Breaking news at europe.WSJ.com

Agence-France Presse

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VO L . X X V I I N O . 7 7

MASS MELEE: Austrian police secure the area in Vienna-Rudolfsheim on Sunday. At least 16 worshippers were wounded when rival religious groups clashed at a prayer meeting, police said. Page 2.

Immigrant offspring quit France for home By Sebastian Moffett PARIS—Nawal El Kahlaoui grewup near Paris as the daughter of a mechanic who left Morocco to seek a better life in France. But after finishing her university studies here, Ms. Kahlaoui moved back to Morocco to find work. “I love Morocco, as the country gave me a chance,” says the 35-year-old retail consultant in Casablanca. “It’s a land of opportunity.” A growing number of welleducated French people of immigrant backgrounds are returning to their parents’ homelands. There are no official figures on the number of “returnees,” and government officials, scholars and employ-

ment agencies say the number is small. Still, this gradual U-turn reflects a relative decline in the desirability of life in parts of Europe, compared with some developing countries. Mass immigration to France started in the 1960s, as the economy grew strongly, creating jobs. In addition to migrants from southern Europe, workers came from France’s former colonies, in particular Algeria, Morocco and Tunisia. As France’s economy slowed in subsequent decades, however, unemployment rose, and hasn’t dipped below 7% for the past quarter of a century. In recent years, the jobless rate for immigrants has been Please turn to page 31

The latest round of pipeline politics between Moscow and the European Union masks a new reality: Changes under way in Europe are likely to damp the Continent’s appetite for Russian gas, weakening Russia’s vaunted status as an energy superpower. Russian and EU leaders met Friday in the eastern Russian city of Khabarovsk to heal a relationship badly damaged by the January cutoff of Russian gas that left thousands of people in Eastern Europe shivering in their homes. The EU sought assurances this would never happen again. Russia refused to provide any. Instead, President Dmitry Medvedev said Moscow doubted that transit state Ukraine had enough money to pay for the gas Russia supplies, hinting at more disruptions. But behind the bravado, Russia is worried. Europe’s economic slowdown has led to a collapse in demand for natural gas, while January’s crisis has triggered a new push by EU states to find alternatives to Russian imports. Added to that, many industry analysts are revising down their long-term projections for natural-gas use in Europe,

with far-reaching implications for Russia’s resourcebased economy. “The days of high growth rates for European gas consumption are surely over,” Bernhard Reutersberg, chief executive of German energy company E.ON Ruhrgas AG, told a conference in Berlin last week. Such pronouncements strike a chill in the Kremlin. OAO Gazprom, the state-run gas export monopoly, is Russia’s largest company and its export revenues account for about a tenth of gross domestic product. Over the past 10 years, it has become a symbol of Russia’s growing self-confidence and international clout. As oil and gas prices rose, Gazprom’s ambitions grew. It talked of increasing its share of the European gas market from 25% to a third by 2015. Last summer, it said it would be the world’s most valuable company by 2015, with a capitalization of $1 trillion. But as recession demolished Europe’s appetite for gas, Gazprom’s fortunes turned. IHS Global Insight says it expects gas demand in Europe to fall nearly 10% this year. Gazprom has responded by slashing production: Output fell 28% in April, to the lowest level in a decade. Gazprom’s market cap is now Please turn to page 31

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2 M ON DAY, MAY 25, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

LEADING THE NEWS

Köhler wins German presidency Re-election boosts Merkel’s hopes for new coalition BERLIN—German President Horst Köhler won a second five-year term, a victory that gave a symbolic lift to Chancellor Angela Merkel’s hopes of forming a center-right government after a national election this September. Mr. Köhler, a former head of the International Monetary Fund and a member of Ms. Merkel’s conservative Christian Democrats, secured the required majority by a single vote in the first round of voting by a special parliamentary assembly Saturday. That was enough to see off a challenge from center-left Social Democrat, Gesine Schwan, who was bidding to become Germany’s first female president. Ms. Merkel said she was “very glad” about Mr. Köhler’s swift victory. “We think he is the president Germany needs in this situation,” she added. The 66-year-old Mr. Köhler won 613 votes in the 1,224-member parliamentary assembly, made up of lower-house lawmakers and dele-

Reuters

ASSOCIATED PRESS

German President Horst Köhler on Saturday attended a concert at the Brandenburg Gate in Berlin with his political ally Chancellor Angela Merkel.

gates nominated by state legislatures. Ms. Schwan, who had hoped to force further rounds of voting, received 503 votes. The presidency is supposed to be above the political fray and carries little real power, but Ms. Schwan’s challenge shook up the usually genteel election process. The vote came before Ms. Merkel and Social Democrat Frank-Walter Steinmeier, her government’s foreign minister, face off in a Sept. 27 national election in which both hope

to end their tense “grand coalition” of Germany’s biggest parties. As opposition leader, Ms. Merkel installed Mr. Köhler in 2004 with the help of the pro-business Free Democrats, her preferred future coalition partner. They backed Mr. Köhler’s re-election, along with a smaller center-right group. Ms. Merkel and the Free Democrats’ leader, Guido Westerwelle, appeared together to congratulate Mr. Köhler. “Every election has its own dy-

namics, but it is no secret that we are working to achieve a majority together,” Ms. Merkel said. “Today we achieved what we wanted together.” Senior conservative ally Horst Seehofer described the outcome as “a clear signal” for a center-right victory later this year. Still, Ms. Merkel failed to secure such a victory in 2005, a year after Mr. Köhler was first elected. Mr. Köhler often has positioned himself as an outsider to Germany’s political elite. He occasionally has refused to sign bills into law because of constitutional concerns, and he recently warned politicians against using the crisis as a “backdrop for posturing.” A Köhler defeat would have been embarrassing for Ms. Merkel but risky for the Social Democrats, with polls showing overwhelming public support for the incumbent. Ms. Schwan, who lost to Mr. Köhler in 2004, hoped to secure the opposition Left Party’s support and peel off center-right delegates in later rounds of voting by the sometimes unpredictable assembly. The Left Party’s long-shot candidate, television actor Peter Sodann, won 91 votes on Saturday. Far-right candidate Frank Rennicke won four votes, and there were 10 abstentions.

Religious brawl rocks Sikh temple in Vienna A WSJ NEWS ROUNDUP

At least 16 worshippers were wounded at a Sikh temple in Vienna on Sunday when religious groups clashed, with some people brandishing knives and a gun, police and witnesses said. Hours later, a related clash erupted in northern India as protesters set fire to vehicles and erected barricades. A police spokeswoman said the Vienna melee began after an argument broke out in the temple in the Vienna-Rudolfsheim area, the Austrian capital’s 15th district. Witnesses said several bearded and turbaned men, some carrying knives and a gun, attacked the preacher. The perpetrators were fun-

damentalist Sikhs from a higher caste at another temple, who accused the preacher of being disrespectful with the Holy Book, they said. The police spokeswoman said an estimated 150 to 300 congregation members defended the preacher. The temple is run by followers of Shri Guru Ravidas, a 14th-century founder of a Sikh sect called Dera Sach Khand, which comprises mostly Dalits, a historically disadvantaged caste known as “untouchables.” Police spokesman Michael Takacs said six people were in serious condition, including four who were “definitely perpetrators.” The most serious wounds were caused by gunshots to the abdomen and

head. More people may have been slightly hurt and run out of the temple before police arrived, he said, noting that the scene was “like a battlefield.” “Everybody was praying, and then it started with knives and a pistol,” said witness Nermal Singh, his shirt bloodied and his head bandaged from what he said was a knife wound. Mohinder Ram, 72 years old, a worshipper who said he had attended services at the temple for decades, said, “I heard four to five shots” in the temple and “people started screaming. Children were crying as they ran out.” He said “people were hit and stabbed with knives. … It was like war. There was lots of

INDEX TO BUSINESSES This index of businesses mentioned in today’s issue of The Wall Street Journal Europe is intended to include all significant references to companies. First reference to these companies appear in boldface type in all articles except those on page one and the editorial pages. Altria Group ................31 American Express........20 American International Group ..................20,21 Angang Steel ..............24 Bain ...............................3 Banco Santander (Spain) ..................................19 Bank of America.....20,21

BHP Billiton .................24 Blackstone Group ..........4 Boeing ...........................6 BP ..................................7 British Airways ............3 British American Tobacco ....................31 Brixton ..........................5 Canon Inc. ...................24

THE WALL STREET JOURNAL EUROPE (ISSN 0921-99) Boulevard Brand Whitlock 87, 1200 Brussels, Belgium Telephone: 32 2 741 1211 Fax: 32 2 741 1600 SUBSCRIPTIONS, inquiries and address changes to: Telephone: +44 (0) 207 309 7799 Calling time from 8am to 5.30pm GMT E-mail: WSJUK@dowjones.com Website: www.services.wsje.com Advertising Sales worldwide through Dow Jones International. Frankfurt: 49 69 971428 0; London: 44 207 842 9600; Paris: 33 1 40 17 17 01 Printed in Belgium by Concentra Media N.V. Printed in Germany by Dogan Media Group / Hürriyet A.S. Branch Germany. Printed in Switzerland by Zehnder Print AG Wil. Printed in the United Kingdom by Newsfax International Ltd., London. Printed in Italy by Telestampa Centro Italia s.r.l. Printed in Spain by Bermont S.A. Printed in Ireland by Midland Web Printing Ltd. Printed in Israel by The Jerusalem Post Group. Printed in Turkey by GLOBUS Dünya BasInevi. Registered as a newspaper at the Post Office. Trademarks appearing herein are used under license from Dow Jones & Co. © 2008 Dow Jones & Company All rights reserved. Editeur responsable: Daniel Hertzberg M-17936-2003

Capital One Financial ..21 Cargill ...........................19 Cathay Real Estate Development ...........24 Chevron ........................25 China National Offshore Oil .............................25 China Petroleum & Chemical ...................25 Chrysler .........................4 Citigroup ......................21 Continental Airlines ......6 Cougar Biotechnology .20 Delta Air Lines .............6 Deutsche Bank........23,25 E*Trade Financial ..........7 E.ON Ruhrgas ...............1 eBay ..............................7 Elpida Memory ............24 Exxon Mobil ................25 Farglory Land Development ...........24 FedEx .............................6 Fiat .................................4 Ford Motor ....................4 Galaxy Entertainment Group ..........................7

Gazprom .........................1 General Electric ...........21 General Motors..............4 Gianni Versace ..............3 GMAC ............................4 Goldman Sachs Group.23 Gulfstream International Group .........................6 HSBC Holdings ............21 Iberia Líneas Aéreas de España .......................3 ICICI Bank ....................24 J.C. Penney ..................21 JFE Holdings ...............24 Johnson & Johnson ....20 J.P. Morgan Chase ......21 Keppel .........................25 Kirin Holdings ...............7 Larsen & Toubro ..........24 Las Vegas Sands .........7 Lorillard........................31 Lowe’s .........................21 L’Oreal ............................7 Matsumotokiyoshi Holdings .....................9 Melco Crown Entertainment ...........7

Mobile TeleSystems .....7 Morgan Stanley ...........20 Nippon Steel ................24 PetroChina ..................25 Pfizer............................19 Posco ...........................24 Reliance Industries .....24 Reynolds American .....31 Rio Tinto .....................24 San Miguel.....................7 Sears Holdings ...........20 Segro .............................5 Seijo ...............................9 Singapore Petroleum ..25 SK Telecom ...................7 Skandinaviska Enskilda Banken .....................23 Target ..........................21 Techint .........................20 Temasek Holdings .......25 3M ..................................9 TNK-BP ..........................7 UAL ................................6 Uni-Charm ......................9 United Parcel Service ...6 Vodafone Group ............7

blood everywhere.” Four ambulances and three medical helicopters transported the victims to the hospital from the temple, and police cordoned off the area. Bernhard Segal of Vienna medical services said that one of the more seriously wounded had to be resuscitated several times at the scene. In India later, fighting between mainstream Sikhs and followers of the guru broke out in the northern city of Jalandhar, in what people there described as an apparent reaction to the Vienna melee. Protesters set fire to vehicles and erected several roadblocks across Jalandhar. Sikhs make up less than 2% of India’s 1.1 billion people, the vast majority of whom are Hindus. While there are disagreements between the Deras and Sikh religious authorities, violent clashes are rare. —The Associated Press contributed to this article.

Unemployment in Russia rises, retail sales slide By Lidia Kelly MOSCOW—Russian unemployment has reached its highest level this decade as thrift replaces a culture of consumer spending, official data released Friday showed. The number of unemployed in Russia rose to 7.7 million in April, or 10.2% of the total labor force of 75.2 million, data from the Federal Statistics Service, or Rosstat, showed. Around 3 million workers have lost their jobs since late summer. Russia’s economy has been dragged down by lower oil prices and decreased access to short-term capital.

Some officials have warned that the crisis may last longer than expected. Prime Minister Vladimir Putin and other Kremlin officials have repeatedly said that Russia’s economic slowdown will be short-lived and that gross domestic product may begin to rise again next year. Some officials, however, including Finance Minister Alexei Kudrin, have warned on numerous occasions that even though oil prices are rising and the ruble has regained some relative stability, the crisis may last longer than expected. Friday official data showed retail sales fell 5.3% in April on the year— the third monthly decline in a row after nine consecutive years of robust growth. This suggests that Russian consumers—once known for their exuberant spending—are becoming increasingly frugal. Earlier last week, new figures showed industrial production in April dropped 17% from a year earlier. “There is no doubt that Russia is mired in a deep recession,” Neil Shearing, an emerging-market economist with Capital Economics in London said. A sustained recovery in the economy “is dependent on a recovery in capital inflows, the restoration of credit flows and a pickup in external demand,” he said. He forecasts the Russian economy will shrink as much as 10% this year.

INDEX TO PEOPLE This index lists the names of businesspeople and government regulators who receive significant mention in today's Journal.

1

Arnold, David .................. 7 Beck, Allegra Versace .... 3 Bornemann, Hans-Olov . 23 Botha, Andre ................. 11 Brown, Robert ................. 6 Carter, Adam Augustine ...................................... 22 Chae Su-chan ................. 8 Chammah, Walid .......... 20 Combias, James ............ 20 Creed, Mark ................... 24 Di Risio, Giancarlo .......... 3 Domotorffy, Katinka .... 23 Drake, Robert .................. 7 Drollas, Leo .................. 19 Dudley, Robert ............... 7 Feigenwinter, Jeff ........ 20 Garnick, Murray ............ 31 Gentry, Glenn ................ 22 Gorman, James ............. 20

For more people in the news, visit CareerJournal.com/WhosNews Hackett, David ............... 6 Halff, Antoine .............. 20 Hamilton, Milo .............. 24 Hammer, Robert ........... 21 Hasegawa, Naomi ......... 25 Hausman, Eric ............... 21 Julius, Paul .................... 29 Kelleher, Colm ............... 20 Kim Ki-jung .................... 8 King, Parker ................... 19 Landry, Steven J. ............ 4 Lewenza, Ken .................. 4 Liddy, Edward ........... 20,21 Lui, Francis ..................... 7 Lynch, Gary .................... 20 Mack, John ................... 20 Marshall, Christopher .... 4 Maurer, Craig ................ 21 McGinley, Nancy ........... 22

Medvedev, Alexander ... 31 Nakano, Hideki .............. 25 Nides, Thomas .............. 20 Noël, Pierre .................. 31 O’Brien, Mike ................ 23 Orr, Clinton .................... 23 Reutersberg, Bernhard .. 1 Roth, Thomas ............... 20 Scoville, Jack ................ 24 Semnani, Khosrow ....... 11 Stern, Jonathan ............ 31 Su Shulin ....................... 25 Summers, Tim ................ 7 Versace, Donatella ......... 3 Versace, Santo ................ 3 Walsh, Willie .................. 3 Williams, Keith ............... 3 Woo, David .................... 20 Yun, Eugene ................... 8 Zhang Jianhua .............. 25 Zwinger, Jeremy ........... 24


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 3

LEADING THE NEWS

British Airways swings to loss on weak demand By Kaveri Niththyananthan U.K. flag carrier British Airways PLC on Friday posted a full-year loss driven by weak demand and higher fuel costs, and Chief Executive Willie Walsh warned that he sees no signs the market is recovering. The airline scrapped its dividend after reporting a loss of £375 million ($596.5 million) for the 12 months ended March 31, compared with a profit of £712 million a year earlier. The loss came as passenger and cargo volumes slumped and fuel costs rose 45% to £3 billion. The airline said it would cut

Versace board prepares for exit of chief executive

costs further and take an additional which now employs about 40,000 4% of capacity out of the market this people, has already shed 2,500 jobs winter by grounding 16 planes. It ex- since last summer and is offering all pects to reduce fuel costs by staff unpaid leave as well as some £400 million. part-time work. “The prolonged nature To help contain costs, of the global downturn Mr. Walsh and Finance Dimakes this the harshest rector Keith Williams said trading environment we Friday that they will work have ever faced and, with for no pay in July. no immediate improve“I want everyone seriment visible, market condiously to consider these options remain challenging,” tions. Personally, I don’t Mr. Walsh said. want extra leave or to work Mr. Walsh told reportpart-time. But I certainly ers the airline wouldn’t want to make a contribugive a forecast because of tion in recognition of the market uncertainty. In extremely challenging posiWillie Walsh early March, the airline tion we face. This is no said that it expected revenue to de- stunt. I don’t easily give up anything cline 5% in the year ending March 31, I have earned,” said Mr. Walsh, who 2010. earns £735,000 a year. Mr. Williams The CEO said further job cuts is paid £440,000 a year. should be expected. The airline, British Airways’ expansion plans

Lower altitude British Airways net profit/loss, in millions of British pounds £750 500 250 0 –250 –500

FY ’05

’06

’07

’08

’09

Note: For fiscal years ended March 31 Source: the company

also remain stalled. It said its merger talks with Spain’s Iberia Líneas Aéreas de España SA, which have been in progress for almost a

Bloomberg News

Higher fuel costs add to pressures; slack market is seen

year, will still take several months to conclude. —Steve McGrath contributed to this article.

emirates.com

By Stacy Meichtry

ROME—Italian fashion house Gianni Versace SpA has called a board meeting for Monday, when directors will discuss the expected departure of its chief executive, according to people familiar with the matter. Versace Chief Executive Giancarlo Di Risio will discuss his intentions with the Versace family in the meeting in Milan and could formally tender his resignation in the days that follow, said people familiar with the matter. The board is also expected to review the findings of a restructuring plan drawn up by an external consultancy, they said. According to people familiar with the matter, designer Donatella Versace, who owns 20% of the fashion house, will be joined at the meeting by her brother Santo Versace, who holds a 30% stake in the firm. Ms. Versace’s 22-year-old daughter, Allegra Versace Beck, who holds a 50% stake, is studying for college exams in the U.S. and won’t attend the meeting, one of the people familiar with the matter said. However, two legal representatives of Ms. Beck who sit on the Versace board will be present, the person said. Challenges are acute for familyowned luxury-goods companies that lack the scale and financial muscle of publicly traded rivals to ride out the financial crisis. As profits slide, family owners have begun to question the strategies of executives who were hired to boost growth during healthier times for the luxury market. Mr. Di Risio and Ms. Versace have been at odds for months over what measures the Milan-based fashion house should adopt to navigate the global economic downturn, according to the people familiar with the matter. Mr. Di Risio has pushed Ms. Versace to simplify her designs so the house can sell clothes and accessories at lower prices, one of the people familiar with the matter said. The two have also clashed over how to cut costs for some promotional events, the people said. Two months ago, the company tapped consultancy Bain & Co. to draw up a restructuring plan for the house that will be presented to the board Monday, the people said. Bain didn’t return phone calls seeking comment.

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4 M ON DAY, MAY 25, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

CORPORATE NEWS

GM gets $4 billion in U.S. aid Funds are for dealers and suppliers; Canadian auto union agrees to wage concessions General Motors Corp. on Friday said it received $4 billion in U.S. aid, $1.4 billion more than it had originally requested, as part of its plan to pay suppliers and dealers before a June deadline. The auto maker, already subsisting on $15.4 billion in government loans, previously had asked the Treasury for an additional $2.6 billion before June 1 and $9 billion after that date for working-capital needs. Separately, GM reached a tentative cost-cutting deal with the Canadian Auto Workers union Friday that, along with a similar agreement from GM’s major U.S. union, paves the way for an expected bankruptcy filing as soon as next week. The union deals, which must be ratified by workers, came amid signs of progress Friday on a sale of the auto maker’s European operations. GM is unlikely to consider a Chinese auto maker’s interest in its Opel unit because talks with others are well along, said a person familiar with the matter. The auto maker is eager to wrap up cost cuts that would allow it to execute a quick bankruptcy restructuring. GM, in a statement, said the request reflects “updated timing of when certain expenses would be incurred” and not additional funding.

Bloomberg News

By Sharon Terlep And Norihiko Shirouzu

General Motors took more U.S. aid as it tackled labor-cost cutting and brand sales efforts in advance of a June deadline. Above, its Detroit headquarters last month.

The company’s shares fell 26% in heavy volume Friday to $1.43 in 4 p.m. composite trading on the New York Stock Exchange. The labor agreements leave unsecured bondholders as the major impediment to any fast exit from bankruptcy. Bondholders have opposed a plan to pay them 10% of GM’s equity. In Friday’s deal the CAW agreed to freeze wages, increase employees’ share of medical costs and bar pension rises until 2015. Thursday, the United Auto Workers union

agreed to similar concessions for GM’s U.S. workers. CAW President Ken Lewenza said Friday that a bankruptcy filing by GM is now “very likely.” GM still hopes for an out-of-court restructuring but wouldn’t try to void the deal in bankruptcy court, Mr. Lewenza said. The Canadian government followed President Barack Obama in shooting down an earlier round of concessions and demanding deeper cuts as a condition of its support. Mr. Lewenza said the government

agreed to the deal late Thursday. “The consequences of saying no would have been disastrous,” Mr. Lewenza said. “Government support comes with a price. And, for us, that price is a growing list of demands.” Workers were expected to vote on the contract Sunday and Monday. Mr. Lewenza said the deal will save GM $8,600 Canadian dollars (US$7,555) per member over the life of the contract. In another development, Ford Motor Co. said it would extend to June 26 the deadline for its hourly workers to accept buyouts. The deadline was Friday. The extension could be a sign Ford hasn’t achieved a desired level of acceptances. Separately, GM signaled it was unlikely to consider a Chinese auto maker’s interest in Opel, according to a person familiar with the matter. A letter expressing interest in the operation was received Thursday. It didn’t include a specific offer, that person said. He declined to identify the auto maker. GM has bids from three parties and considers the process too far along to reopen, the person said. Italy’s Fiat SpA submitted a formal offer for Opel and Vauxhall. It plans to integrate GM’s European, Latin American and South African operations into a global alliance with its own auto unit and Chrysler.

Obama’s fuel rules risk complicating rescues By Neil King Jr. WASHINGTON—The Obama administration’s push to boost fuel-efficiency standards could complicate its bid to revive two of the country’s largest auto makers, making the task both riskier and more costly. Under a plan announced last week, the administration intends to impose rules mandating that U.S. car makers raise overall fuel economy to 35.5 miles per gallon (15 kilometers per liter) by 2016, up from about 25 mpg. Pulling that off could be particularly hard for General Motors Corp. and Chrysler LLC, the two companies the administration is trying to save. Both have for years drawn most of their profits from large sport-utility vehicles and pickup trucks, while having less success marketing the sort of cars envisioned under the stricter efficiency rules.

In the short term, GM and Chrysler need to generate cash flow by building and selling many more of the comparatively fuel-thirsty vehicles—pickups such as the Chevrolet Silverado and Dodge Ram, and family haulers such as the Chrysler minivan and Chevrolet Traverse. Meeting the administration’s goals for more-efficient fleets will cost GM, Chrysler and other auto makers substantial sums. GM warned last month in a government filing that the tightened standards—then meant to take effect in 2020, instead of 2016—could significantly disrupt its operations, leading it to cut sales of its more profitable models and ramp up production of hybrid and electric cars. GM said in the same filing that complying with the new standards would cost the U.S. auto industry at least $100 billion. Obama aides say there is no con-

flict between the administration’s dual role as both a major investor in GM and Chrysler, and a regulator of the industry. Retooling to meet the new standards will be expensive, Obama aides acknowledge. The Energy Department plans to grant $25 billion in loan guarantees to support moreefficient cars, including hybrids and electrics. The climate bill now in the House would double that amount to $50 billion, a provision the White House supports. The White House insists that the more-efficient technologies will add no more than $1,300 to the price of a car by 2016. Analysts at the auto research firm Edmunds. com dispute that math, pointing out that within similar models today, an extra 10 miles per gallon in added mileage can add well over $2,200 to the price. The same analysts also pointed

out Thursday that a discrepancy exists between the fuel-efficiency numbers put out by the administration— known as the corporate average fuel economy, or CAFE—and the numbers issued by the Environmental Protection Agency. The difference could be confusing for consumers as they try to figure out whether new models meet the government’s aspirations. Under the CAFE numbers, car fleets are supposed to average 39 mpg in 2016. But that is comparable to 29 mpg under the EPA figures consumers will find on the stickers affixed to new models.

WSJ.com Online today

Neil King discusses the Obama administration’s competing efforts to both regulate and boost the auto industry, at WSJ.com/Video

GMAC says it needs $1 billion in cost cuts this year By Aparajita Saha-Bubna And Dan Fitzpatrick GMAC LLC has told employees it needs to cut $1 billion in costs, or 20% of its expenses, by year’s end, as the auto lender hopes a restructuring will get it through the crisis and return it to profitability, said people familiar with the matter. Leading the effort is Christopher Marshall, brought in this past week as a senior adviser to GMAC Chief Executive Al de Molina. The 49-yearold Mr. Marshall is well-known on

Wall Street, most recently as a senior adviser with private-equity firm Blackstone Group. The cost-cutting effort could fundamentally reshape Detroit-based GMAC, the lending affiliate of General Motors Corp., and test a culture heavily influenced by GM. Mr. Marshall is being asked to examine every part of the business, looking at possible structural changes and asset sales, as well as ways to make the lender more efficient. The effort to reduce expenses at GMAC follows a separate $1 billion restructuring

last year of its mortgage unit, Residential Capital LLC. GMAC converted to a bank holding company last year as it accepted federal bailout funds and recently announced a new name for its online bank, Ally Bank. GMAC suffered a net loss of $675 million in the first quarter, widening from a $589 million loss a year earlier. The U.S. Treasury Department confirmed Thursday it will inject $7.5 billion in GMAC, which needs to figure out by June 8 how it will fill an $11.5 billion equity hole. The Trea-

sury investment includes $4 billion earmarked for loans to Chrysler LLC dealers and consumers. The remaining $3.5 billion will go to strength GMAC’s capital position. The Treasury also said it would swap $884 million of its existing preferred-stock investment for common stock, giving the government a 35.4% equity stake in the lender. This stake could increase to more than half if GMAC, amid potential mounting losses and meager capital levels, was to convert the government’s investments into common equity.

Chrysler dealers are likely to face a difficult battle By Alex P. Kellogg DETROIT—The move by Chrysler LLC to eliminate about a quarter of its dealerships through a bankruptcy-court filing is running into opposition from lawmakers and franchise owners, but the objections are unlikely to derail the company’s efforts to put dealers out of business in the coming weeks. A number of members of Congress voiced concern over the closures. Wednesday, Sen. John D. Rockefeller IV (D., W. Va.), wrote to Chrysler, General Motors Corp. and the Treasury Department, saying the time frame for dealership closures in Chrysler’s case is “egregious.” Sen. Kay Bailey Hutchinson (R., Texas), introduced a proposal Thursday to give dealers at least 60 days before they shut down, instead of the 30 or so planned by Chrysler. As part of its reorganization in bankruptcy court, Chrysler last week named 789 dealers that it wants to drop from its network of about 3,200 stores. It told the court it wants those dealers to stop selling its cars and trucks by about June 9. GM said it plans to get rid of roughly 1,100 dealers, a move that suggests the auto maker is likely to file for bankruptcy-court protection on or after June 1. So far, two groups representing about 350 dealers have filed objections to Chrysler’s move. A Chrysler executive on Thursday defended the auto maker’s decision, arguing that if the company didn’t sell most of its assets to Fiat SpA as planned, all of its remaining dealers would go out of business. “The auto industry cannot support the number of dealers in the marketplace,” said Steven J. Landry, Chrysler’s marketing chief. Legal experts said Chrysler dealers face an uphill battle because bankruptcy laws generally give courts wide latitude to tear up contracts such as dealer licenses. As a result, many dealers are choosing not to join the battle in bankruptcy court, concluding the legal costs would be high and the chances of winning slim. “The dealers I’ve spoken to… don’t think it’s worth their time,” said Scott Silverman of McCarter & English LLP in Boston. He had expected some dealers to hire him to fight for survival. But “the few dealers that we are working with right now aren’t even sure they want to be saved,” Mr. Silverman said. Mr. Silverman and other attorneys working with dealers said many of their clients are focusing on landing other franchises or selling or making some other use of the land where their stores are located. Bob Archer owns three Chrysler franchises in metropolitan Houston that are supposed to close, and his brother Jim Archer Jr. owns a fourth, which is also on the closures list. But while Bob Archer is among the dealers who are objecting to Chrysler’s move, his brother has decided not to fight in court. Jim Archer said that if the other dealers prevail in bankruptcy court, he would benefit even if he isn’t actively involved. Jim Archer’s dealership once employed 80 people, but now he is down to just four staffers, along with $8 million in vehicles in his inventory.


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 5

CORPORATE NEWS

U.K. property firm weighs move to buy smaller, ailing rival By Anita Likus And Jonathan Buck LONDON—U.K. industrial property developer and investor Segro PLC said it has made a preliminary approach to buy troubled Brixton PLC in a potential all-share deal. Segro, which has a market capitalization of £1.47 billion ($2.33 billion), said Friday that any offer would be in the form of its shares, but reserved the right to introduce other payment options. Shares in the much-smaller Brixton have lost about four-fifths of their value over the past 12 months amid a selloff in the U.K. property market and concerns about its financing. Its shares soared 24% Friday to 61.75 pence. Brixton said earlier Friday that it was in talks with a few parties that could lead to possible offers

for the company. It said the discussions were at an early stage and there could be no certainty that any offer would be made. Selling the company might be the only option for Brixton’s shareholders because it is expected to breach its debt covenants at the June 30 valuation unless it raises £250 million in new equity and sells

Selling the company might be the only option for Brixton’s shareholders. more assets. Debt covenants are terms written into bank documents specifying minimum levels of cash and interest coverage and maximum levels of debt and capital expenditure. A breach can constitute a default. While the tie-up would make sense strategically, Segro doesn’t have sufficient funds to deal with

the combined debt of both companies, industry experts said. Segro’s debt stood at £2.53 billion as of March 31, but the company said in April it had reduced it to £2.03 billion following a rights issue. Brixton reported £862.2 million of net debt as of the end of last year. The companies’ operations complement each other. Segro provides industrial space and offices across Europe, while Brixton focuses on industrial space and warehouses and operates only in the U.K. Brixton owns nearly 1.8 million square meters of U.K. industrial and warehouse property. Of that amount, 72%, by value, is located around Heathrow Airport and the nearby Park Royal area, where land supply is constrained. Brixton’s wholly owned portfolio is valued at £1.6 billion and it has about £650 million of debt approaching maturity. Its most pressing repayments are a £275 million bond and a £370 million bank facility, which mature by the end of 2010. The company sold four industrial units for £70.25 million earlier

Brixton

Segro approaches Brixton over a buyout

Brixton PLC’s double-decker X2 warehouse. The company owns nearly 1.8 million square meters of U.K. industrial and warehouse property.

this month at 19% below book value, but industry experts warned that the company would have to sell some prime properties to raise enough cash. Brixton said its board continued to consider options to provide addi-

tional financial flexibility. Those options include a restructuring of the company’s debt arrangements, a potential equity raising and further asset disposals. —Ainsley Thomson contributed to this article.

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6 MONDAY, MAY 25, 2009

T H E WA L L ST R E E T J O U R NA L .

CORPORATE NEWS

FedEx labor bill moves ahead Measure would ease unionization effort; threat to plane orders

By Andy Pasztor And Susan Carey

Associated Press

By Alex Roth The U.S. House of Representatives approved a bill that would make it easier to unionize FedEx Corp. workers, prompting the company to renew its threat to hold off buyingbillions of dollars of new planes if the bill becomes law. Supporters of the bill, including the Teamsters and FedEx’s biggest rival, United Parcel Service Inc., applauded Thursday’s vote. But the measure faces a difficult climb in the Senate. A similar bill passed the House in 2007 but died in the Senate. The vote represents the latest chapter in a battle over whether some 100,000 FedEx Express drivers and other employees should remain governed by the federal Railway Labor Act, written decades ago to limit strikes at railroads and airline companies. The House bill would remove the drivers from the jurisdiction of the Railway Labor Act and place the drivers under the National Labor Relations Act, which allows unions to organize companies on a location-by-location bases. Unlike FedEx Express, UPS, which is unionized, is governed by the National Labor Relations Act. The reason is a quirk of history; FedEx was initially formed as an air-

U.S. airline that trained pilots is accused of lapses

U.S. lawmakers advanced a bill that would make it easier to unionize FedEx workers. Rosa Santiago sorts packages at a New York facility last December.

line and UPS was initially formed as a trucking company. Today, both companies operate their own airlines and fleet of trucks. UPS argues that the current law places it at a competitive disadvantage. The current House bill was supported by the Teamsters and cosponsored by House Transportation Committee Chairman James Oberstar, a union ally. “Employees performing the same functions in the same jobs in the same industry but at different companies should be covered under the same labor law,” said Malcolm Berkley, a spokesman for the Atlantabased package delivery company.

In March, FedEx threatened to cancel as many as 30 new orders for Boeing Co. cargo planes if the bill becomes law. FedEx spokesman Maury Lane on Thursday called the bill a “legislative bailout” for “profit-laden UPS.” Mr. Lane also reiterated that if the bill becomes law, FedEx “will not purchase the additional 30 planes due to economic uncertainty that it could create in our business model.” The U.S. Senate has yet to introduce its own version of the bill. The provision concerning FedEx and UPS is part of a larger bill that would authorize $70 billion for the Federal Aviation Administration over the next four years.

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An airline that has trained many of the U.S.’s commuter pilots—including the captain of the Continental Connection flight that crashed near Buffalo, N.Y., in February— faces a possible $1.3 million government penalty for alleged crew scheduling and maintenance violations. The Federal Aviation Administration accuses Gulfstream International Airlines Inc. of faulty record keeping and substandard aircraft maintenance. Congressional investigators, who conducted their own probe into the airline, allege the company falsified flight time records and forced crews to fly more hours than federal rules permit. The carrier, and its affiliate, Gulfstream Training Academy, provided training and initial airline experience to Marvin Renslow, the captain of Continental Connection Flight 3407. Fifty people died in the Feb. 12 crash of the plane. The FAA has notified Gulfstream that it could face the penalty, giving Gulfstream 30 days to respondto the allegations, according to a filing Gulfstream made with the Securities and Exchange Commission earlier this month. After that period, the FAA will decide whether to assess the penalty. Robert Brown, chief financial officer of Gulfstream International Group Inc., the parent company of both the airline and the training academy, said Thursday that the company intends to submit evidence refuting the alleged FAA infractions. He said the company would offer additional information to demonstrate that no violations occurred. Mr. Brown declined to comment further and referred questions to the company’s chief executive, David Hackett, who didn’t return calls. Capt. Renslow had flunked a number of proficiency checks as a private pilot and while training at Gulfstream, and he failed at least one other flight test while he was at Colgan Air Inc., the airline that operated Flight 3407, according to the National Transportation Safety Board. Investigators say all of the plane’s systems appeared to have been functioning well and that the crash was the result of pilot error. They are examining whether Capt. Renslow was adequately trained on emergency equipment installed to protect against an aerodynamic stall on the Bombardier Q400 turboprop plane, according to testimony. Pilots in the two previous fatal U.S. commuter crashes—both caused by pilot error—also spent time at either Gulfstream International Airlines or Gulfstream’s training operations, according to reports by the NTSB. The FAA said Gulfstream Academy relinquished its certificate as an FAA-approved flight training school May 12, the day the NTSB opened a public hearing on the Buffalo crash. Not having the certificate limits the type of training the academy can offer. The proposed FAA penalty and other troubles confronting Gulfstream, of Fort Lauderdale, Fla., reflect broader concerns about the safety of commuter airlines, which account for 51% of all commercial U.S. flights. Gulfstream International’s shares Thursday were up 2.1% to close at $2.90 on the American Stock Exchange. The shares are up 93% for the year to date.

Major carriers increasingly rely on commuter airlines to ferry passengers to airline hubs from smaller cities. Regulators and federal safety experts are examining whether pilots at some of these commuter carriers receive sufficient training. They are scrutinizing whether independent training institutes such as Gulfstream Academy produce pilots with sufficient skill and experience to fly the growing number of turboprops and jets at these smaller airlines. Some of the questions about Gulfstream go to the heart of another safety concern: pilot fatigue. Gulfstream, which primarily serves Florida and the Bahamas, and some routes throughCleveland,fliesroutesforContinental Airlines Inc., UAL Corp.’s United Airlines and Delta Air Lines Inc.’s Northwest Airlines unit. According to congressional investigators, the FAA’s probe of Gulfstream Airlines was touched off last summer by pilots who claimed they had been fired or threatened after they raised safety concerns about flight schedules that exceeded the maximum number of hours allowed by federal regulations.

Gulfstream could face a $1.3 million penalty for alleged violations of U.S. rules. Some pilots claimed they had been punished for refusing to fly substandard aircraft, including planes allegedly dispatched in stormy weather with inoperative systems such as weather radar, according to congressionalinvestigators.TheHouseTransportation and Infrastructure Committee, according to one of these investigators, began looking into the allegations after some of the pilots said their previous efforts to raise the issue with the FAA’s office responsible for investigating socalled whistle-blower complaints had stalled. House investigators interviewed witnesses, who claim that Gulfstream engaged in systematic falsification of records to cover up flight schedules that exceeded maximum hours allowed under federal rules. One retired Gulfstream official, according to a House investigator, alleged that when pilots were asked to fly trips that they believed would put them in violation of federal rules, airline schedulers routinely used a second set of flight-schedule books to hide the excess flight hours. The House committee raised the issue with the FAA last summer in response to pilots’ concerns that their allegations had not been properly vetted by the FAA, according to congressional investigators. In response to questions from The Wall Street Journal on Thursday, the FAA said the alleged crew overscheduling stemmed from a failure to accurately transfer data from manually generated aircraft logbook records to an electronic recordkeeping system. “The discrepancies resulted in scheduling crew members in excess of daily and weekly flight-time limitations,” according to an FAA release. An agency spokeswoman said, “We didn’t find any evidence of deliberate action” to falsify records.


T H E WA L L ST R E E T J O U R NA L .

CORPORATE NEWS

GLOBAL BUSINESS BRIEFS

Galaxy is hoarding its cash Macau market share shrinks, but revenue rose 10% in quarter

Bloomberg News

Galaxy’s StarWorld Hotel and Casino holds a 13% share of Macau’s gambling market. The company is Macau’s No. 4 gaming concern in terms of market share.

Mr. Lui said he turned down pitches from bankers for aggressive expansion plans at the height of the boom and now says 2008’s trouble may have been a “blessing in disguise,” paving the way for more sustainable long-term growth in Macau. Galaxy’s main StarWorld Hotel and Casino has seen its share of Macau’s gambling market shrink, Mr. Lui said, and it now stands at about 13%. But revenue is improving: The casino’s take rose 10% to HK$1.93 billion in the first quarter from a year earlier. “We made a conscious decision to slow it down,” said Robert Drake, Galaxy’s chief financial officer. “We want to see the market absorb the new capacity, and to do it profitably.” Macau’s gambling sector as a whole has done well this year on the stock market, but Galaxy has done even better, with its share price more than doubling this

year. On Friday, the shares fell 7.8% to close at HK$2.25 amid profit-taking. A big test for Macau’s market comes next week, when Melco Crown Entertainment Ltd.—a joint venture of gambling heirs Lawrence Ho and James Packer— opens City of Dreams in Macau’s Cotai area. City of Dreams, the only casino to open in Macau this year, sits across the street from Sands’ Venetian Macao and near Galaxy’s Cotai project. Mr. Lui said his own Cotai project, the Galaxy Macau hotel-resort, could be ready to go late next year, but said Galaxy is prepared to put the project on hold if the market doesn't stage a full recovery. “We’re very fortunate to be in the cash position that we’re in,” Mr. Drake said. He said Galaxy has no immediate plans to seek financing, saying it is well-capitalized enough to weather the current storm.

TNK-BP CEO search intensifies The search for a new chief executive for TNK-BP Ltd., BP PLC’s Russian oil venture, is heating up and one of the possibilities under consideration would be to name one of TNK-BP’s Russian billionaire shareholders as acting chief, according to people close to the company. By Gregory L. White in Moscow and Guy Chazan and Alexander Kolyandr in London

Under an agreement reached last year to resolve a bitter conflict at the 50-50 joint venture, the British giant and its Russian partners agreed to appoint an independent CEO to succeed Robert Dudley, a BP veteran who fled Russia under pressure last summer. But the search took longer than expected after talks with the preferred candidate broke down over compensation. In the interim, Tim Summers, a former BP executive who had been chief operating officer at TNK-BP, was serving as acting CEO. But Mr. Summers’ current contract expires June 1 and both BP and the Russian shareholders have said they want a permanent executive in place as soon as possible. A decision could come as early as this week, people close to the company said. “A company of this size can’t continue to function without an inde-

OAO Mobile TeleSystems

E*Trade Financial Corp.

Operator reports a loss amid ruble’s depreciation

E*Trade Financial Corp. once was an online broker with an affiliated bank. Now, at the request of U.S. banking regulators, the broker is becoming a subsidiary of the bank. The Office of Thrift Supervision has requested the change, which E*Trade said it is undertaking, in order for earnings from the brokerage unit to support E*Trade’s bank unit. E*Trade disclosed the request on May 8, and ratings firms have recently mentioned it as a factor in downgrading the company’s credit ratings. The New York company has set aside billions of dollars to offset losses from bad loans in its bank’s mortgage portfolio. E*Trade applied for an $800 million investment from the Treasury Department’s Troubled Asset Relief Program, but has yet to receive approval. The OTS, E*Trade’s primary banking regulator, also has told the company it needs to raise capital.

OAO Mobile TeleSystems, Russia’s most widely used mobile operator, Friday reported its first quarterly loss as a publicly listed company after depreciation of the ruble reduced revenue, which is reported in dollars, and raised the book value of its debt. The operator, which has 93 million subscribers, reported a net loss of $57.7 million for the first quarter, compared with a net profit of $610.2 million a year earlier. The results were hit by a foreign-exchange loss of $462.4 million reflecting the increase in the book value of foreign-denominated debt. Revenue fell 24% to $1.81 billion, and rose only slightly in ruble terms, as the contraction of the Russian economy held back growth in phone traffic.

By Jonathan Cheng And Peter Stein HONG KONG—Even as some of its high-profile rivals struggle, Galaxy Entertainment Group Ltd. executives believe the casino operator has the financial breathing space to wait out uncertainties in the Asian gambling capital of Macau. In an interview, Galaxy Vice Chairman Francis Lui cited the Hong Kong-traded company’s buyback of US$223 million of debt at roughly 50 cents on the dollar, its cost-cutting efforts and its decision to slow construction of a new showpiece casino project. Galaxy, the No. 4 gaming concern in Macau by market share, now sits on about HK$5 billion, or US$645 million, in cash. “Before, it was about expanding at all costs, and that meant a lot of overinvesting,” Mr. Lui said Friday. In 2004, Macau had 450 gaming tables, and at its peak last year that number had risen tenfold, he said. “The growth was not sustainable, and an adjustment should be expected,” he said. Two big stumbling blocks last year got in the way of Macau’s growth. Mainland China tightened visa approvals, cutting into the territory’s biggest source of traffic. Shortly afterward, the global financial crisis went into overdrive. Las Vegas Sands Corp. shook up the market when it opened its massive Venetian Macao casino and resort two years ago, and it has since put the expansion of the resort on hold.

M ONDAY, M AY 25, 2009 7

pendent CEO,” said a person close to the Russian shareholders. “We’re six months into this temporary arrangement and there’s no light at the end of the tunnel.” People close to both sides said the discussions are cooperative, without any sign of the tensions that marred the relationship between BP and its Russian partners during the conflict last year. If BP and its Russian partners can’t agree on a new CEO soon, they are considering extending Mr. Summers as acting CEO or possibly appointing another top executive at

Under the TNK-BP agreement, BP nominates CEO candidates. the company as acting CEO, people close to both sides said. A potential candidate is Viktor Vekselberg, who now heads TNK-BP’s natural-gas business and owns the Renova industrial group. Along with Mikhail Fridman of the Alfa Group and Len Blavatnik of Access Industries, Mr. Vekselberg is one of TNK-BP’s Russian shareholders. Mr. Vekselberg couldn’t be

reached for comment Sunday. “If he’s just going to be an interim CEO, we don’t mind,” said a person close to BP. “But it’s not our preferred solution.” Last year, BP officials had criticized the management roles of Mr. Vekselberg and German Khan, another Russian shareholder, saying they undermined governance at TNK-BP. “Maybe this will accelerate BP’s search,” said the person close to the Russian shareholders, of the possibility of Mr. Vekselberg’s appointment. “It’s only reasonable for the other shareholder to appoint their representative for the next three to six months while we complete the search.” Under the terms of the TNK-BP shareholder agreement, BP nominates CEO candidates, subject to approval by both shareholders. A person close to the British company said that after months of making little progress on the search, BP has proposed a new candidate this week. He is Pavel Skitovich, formerly CEO of Russian gold miner OAO Polyus Gold and a longtime executive at the Interros industrial group in Russia. He couldn’t be reached for comment late Sunday. A person close to the Russian shareholders said they were still studying his candidacy.

eBay Inc. A British court on Friday ruled that eBay Inc. isn’t liable for bogus beauty products sold on its Web site, dealing a blow to cosmetics company L’Oreal SA’s campaign against the online auction giant. L’Oreal claims there is an increasing volume of counterfeit goods being sold on eBay. The online auctioneer said negotiations between the companies on the issue broke down because L’Oreal was being unreasonable. Justice Richard David Arnold ruled in London’s High Court that eBay Europe wasn’t liable for trademark infringements committed by its users. EBay said in a statement that the British ruling was “a victory for consumers and the thousands of entrepreneurs who sell legitimate goods on eBay every day.” L’Oreal said it is satisfied with the U.K. judgment, noting the court agreed with its view that eBay could do more to prevent trademark infringement.

Vodafone Group PLC Vodafone Group PLC has lost a U.K. tax-avoidance case in the Court of Appeal that could cost it as much as £2.2 billion ($3.5 billion), although the company can still apply to the House of Lords to appeal the decision. The appeal, brought by Her Majesty’s Revenue & Customs after Vodafone won a High Court ruling last July, relates to the payment of taxes on one of the company’s Luxembourg subsidiaries. The ruling Friday means HMRC’s inquiry into Vodafone’s relevant tax returns can go ahead. In its most recent annual report, Vodafone said it had set aside about £2.2 billion for tax liabilities and interest that could arise from the case. This amount is expected to have increased slightly because of the interest payments. The company expects to appeal its case to the House of Lords.

SK Telecom Co. SK Telecom Co. said its board approved the purchase of a leased line business from an affiliate for 892.85 billion won ($717.1 million) and the assumption of 627.8 billion won of debt. SK Telecom, South Korea’s largest mobile-phone carrier, has for years leased SK Networks Co.’s lines, which connect switchboards to base stations, to ensure network capacity for its mobile-phone service. SK Telecom said it expects the purchase to slash that leased-line expense. The company said it has paid SK Networks about 300 billion won annually for the leased lines since 2002, accounting for roughly 71% of its total network rental cost. In a separate filing, the company also said its board has agreed to take part in the capital increase of SK Broadband Co., which is 43.4%-owned by SK Telecom, and approved subscribing to as much as 300 billion won of new shares of SK Broadband. SK Broadband said Thursday it will raise capital by issuing 60 million common shares via a rights offer. —Compiled from staff and wire service reports.

Science Journal

The physical mind A researcher studies how Einstein’s brain shaped his insights > Page 29

Kirin Holdings Co. Kirin Holdings Co. completed the acquisition of a 48.3% stake in San Miguel Corp.’s brewery business in the Philippines for 79.2 billion yen ($835.3 million). The Japanese beer and soft-drink maker executed the acquisition in tranches over April and May. Kirin also completed the sale of all 19.9% of the outstanding shares it held in San Miguel Corp. to Q-Tech Alliance Holdings for 79.2 billion yen. San Miguel Brewery Inc. is the largest producer of beer in the Philippines, with a total market share of about 93%. Kirin also has the option of a six-month period of exclusive negotiation for San Miguel Corp.’s overseas beer business.

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8 M ON DAY, MAY 25, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

ECONOMY & POLITICS

Ex-leader’s death divides South Korea Mourning gives way to political backlash as nation reacts to apparent suicide of former President Roh Moo-Hyun By Evan Ramstad And SungHa Park

Associated Press

SEOUL—Former South Korean President Roh Moo-hyun committed suicide on Saturday, sowing shock, sadness and anger among his supporters and the prospect of new political upheaval for his successor, President Lee Myung-bak. Thousands of people visited a community center Sunday in Mr. Roh’s hometown to lay flowers on an altar, a traditional Korean mourning practice. Similar altars were set up in train stations, temples and civic buildings around the country. Mr. Roh, 62 years old, jumped from a 30-meter cliff near his home in Gimhae, along the country’s south coast, early Saturday morning, police and aides said. In a note composed an hour earlier, he wrote of despair about the impact of an unfolding bribery investigation. Police said they determined there was no Mourners holding flowers wait Sunday to participate in a service for Roh Moo-hyun near the former South Korean wrongdoing in the death. Views on suicide are complex in president’s house in Gimhae. Thousands of people came to pay their respects after his death on Saturday. South Korea, with some people considering it a shameful act and others a heroic one. And not all members of base—progressive-nationalist par- Korean government, it could grow ers turned away mourners they conthe public were ready to mourn Mr. ties, politicians and supporters—at into broader protests and turmoil sidered unfriendly. Roh, because of the divisive way he the bribery investigation. that would distract the country just The rebuffed visitors included practiced politics in a career spent Over the past two months, prose- as it is turning the corner on the glo- the man Mr. Roh defeated to become challenging the country’s cutors examined $6 million bal economic crisis. president in 2002; the speaker of political and business esin payments to members of “Politically, I think we’re heading the National Assembly; and Prime tablishments. Mr. Roh’s family by a busi- into a very sensitive time,” says Eu- Minister Han Seung-soo, South Ko“He never intended to nessman whose companies gene Yun, a private equity fund man- rea’s senior statesman who served be the president for all, so prospered during Mr. Roh’s ager who was an adviser to Mr. Roh presidents of both major parties. the reaction of the Korean time in office. They ques- during his 2002 campaign. “PresiLate Sunday, aides to Mr. Lee people to his death is tioned Mr. Roh on April 30, dent Lee has a very, very difficult sit- were trying to schedule a time for split,” said Chae Su-chan, but hadn’t charged him at uation to manage. It’s going to test him to visit Mr. Roh’s family, but an economist and former the time of his death. his political skills to the maximum.” none had been arranged. Mr. Roh’s lawmaker who advised Mr. The investigation of Mr. Little of the political politesse family agreed to a state-assisted Roh on U.S. relations. “It Roh will now be closed, pros- that’s common in other countries af- public funeral, likely to occur on Friwas his choice. It was his ecutors said, but it was un- ter the death of a leader was evident day. style.” clear what would happen in South Korea this weekend. Sup“Unfortunately, I assume there Roh Moo-hyun The unique circumwith the rest of the case. porters of Mr. Roh issued news re- will be huge protests by the end of stances have produced a If the anger among Mr. leases denouncing Mr. Lee and pros- the funeral period,” said Kim Kivolatile moment for the nation. The Roh’s supporters is handled poorly ecutors. Memorial sites were fes- jung, political scientist at Yonsei Uniimmediate impact is likely to be a by Mr. Lee and the conservative tooned with political banners and, versity in Seoul. “It will be another lashing out by Mr. Roh’s political party that now controls the South at the main site in Gimhae, support- big incident to polarize the public.”

Mr. Roh was a self-taught lawyer who built a reputation as a humanrights attorney defending student activists who fought for democracy in the 1980s. His election was seen as the ascendancy of a new generation, and he filled his administration with former activists. Mr. Roh was the country’s fourth president after the adoption of a democratic constitution in 1987. He presided over a period of strong growth, and extended his predecessor’s efforts to reach out to North Korea, climaxing with a summit with leader Kim Jong Il. Mr. Roh’s death is likely to fuel long-term debate about three powerful institutions that he spent much of his life trying to reshape and that turned on him in the end of his career: South Korea’s political parties, justice system and news media. During his tenure as president from 2003 to 2008, Mr. Roh severed connections between the executive branch and prosecutors and gave judges more authority, though he stopped short of creating grand juries to check the power of prosecutors. He also tried but failed to break the cartel-like, uncompetitive behavior of news organizations and reporters. As the bribery investigation unfolded, prosecutors leaked damaging details to reporters, virtually trying Mr. Roh in the media rather than in court, a practice that’s become common in high-profile cases in the country. Park Kyung-joo, a Seoul resident on her way to a memorial for Mr. Roh Sunday, said she barely trusted the justice system and resented the treatment Mr. Roh received in recent weeks. “When he was in office, I was sometimes disappointed at him,” Ms. Park said. “But now I think there must have been a reason that he did things the way he did.”

BY A WSJ STAFF REPORTER

Myanmar’s military rulers on Friday alleged that the American man who illegally swam across a Yangon lake to visit pro-democracy leader Aung San Suu Kyi was working to embarrass the regime and undermine its relations with the West. American Army veteran John Yettaw triggered a fresh trial for Ms. Suu Kyi this month after swimming to the house where Ms. Suu Kyi has been detained. The court formally charged Ms. Suu Kyi and her two female housemates for violating her house arrest under a draconian security law. “Are you guilty?” the presiding judge, U Thaung Nyunt, asked Ms. Suu Kyi on Friday. “No, because I did not commit any crime,” she replied, according to her lawyer Nyan Win. The court is expected to hear from more prosecution witnesses on Monday, according to Reuters News Service. Ms. Suu Kyi’s lawyers will also submit a list of defense witnesses for the trial, which the lawyers said could run two more weeks. Mr. Yettaw also pleaded not guilty to breaking the same law, immigration violations and a charge of

illegal swimming. A conviction could result in a fiveyear prison sentence for Ms. Suu Kyi, who won a Nobel Prize in 1991 for organizing peaceful resistance to Myanmar’s military regime. She was placed under house arrest without trial six years ago. For two days, Mr. Yettaw stayed at the house where Ms. Suu Kyi has been detained for years. Authorities fished him out of the lake as he tried to leave, and charged Ms. Suu Kyi with breaking the terms of her house arrest by allowing him to stay after he said he was exhausted. Ms. Suu Kyi’s lawyers and supporters say Mr. Yettaw wasn’t invited and has caused the dissident more legal trouble just as her current period of house arrest is about to expire on May 27. Ms. Suu Kyi, 63 years old, and two assistants who legally reside with her went on trial Monday along with Mr. Yettaw. The 53-year-old from Falcon, Mo., last week told the court he dreamed someone would try to kill Ms. Suu Kyi, and wanted to warn her. The Myanmar junta offered a different explanation. The state-controlled New Light of Myanmar

Associated Press

Myanmar charges Suu Kyi with violating house arrest

American John Yettaw is shown being questioned at a police station in Yangon, Myanmar, in this handout photo from the Myanmar News Agency from May 13. Myanmar alleged Mr. Yettaw was working to embarrass the military regime.

newspaper on Friday reported that the country’s foreign minister on May 18 told his Japanese counterpart to say that antigovernment activists inside and outside Myanmar had orchestrated Mr. Yettaw’s nighttime swim to force a crackdown on Ms. Suu Kyi. Myanmar’s Foreign Minister U Nyan Win said major economies such as Japan, the U.S. and European Union had earlier been review-

ing their policies of isolating Myanmar. “It was likely this incident was trumped up to intensify international pressure on Myanmar by internal and external antigovernment elements who do not wish to see the positive changes in those countries’ policies toward Myanmar,” the New Light of Myanmar reported him as saying. The paper reported that Japan’s Foreign Minister Hirofumi Nakasone

called U Nyan Win to register his concern about the way Ms. Suu Kyi was being treated. A representative at the Japanese foreign ministry declined to comment on the conversation. If Ms. Suu Kyi is found guilty, as some observers say they believe is likely, she would effectively be prevented from playing a role in elections the military plans for 2010. —News services contributed to this article.


T H E WA L L ST R E E T J O U R NA L .

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ECONOMY & POLITICS

New Pyongyang power structure? U.S. concludes Kim has set in motion a political transition The Barack Obama administration has concluded that North Korean leader Kim Jong Il, still recovering from an August stroke, has initiated a political transition inside his reclusive state in which his brother-in-law and third son are emerging as major players in a newly assertive power structure. By Jay Solomon, Evan Ramstad and Peter Spiegel

Kim Jong Il, center, visits a North Korean air force unit in a photo released by state media; at right, a picture thought to be of his son, Kim Jong Un, at the age of 11.

cal instability. Senior U.S. officials stress that they remain open to holding bilateral talks with North Korea. But they are also developing mechanisms to further undercut North Korea’s economy, and particularly its weapons trade, if Mr. Kim doesn’t come back to the negotiating table. “It’s very clear that the North Koreans want to pick a fight,” said Gary Samore, President Obama’s coordinator for weapons of mass destruction policy, this month. “They want to kill the six-party talks” focused on Pyongyang’s nuclear program. U.S. officials have been closely watching the unfolding drama in North Korea since Mr. Kim became sick in August, while also acknowledging their limited access to information about the secretive country. Secretary of State Hillary Clinton openly discussed the uncertainty about Mr. Kim’s grip on power for the first time during a visit to Asia in February. A big sign of change in North Korea came last month when Jang Seong Taek, the husband of Kim Jong Il’s younger sister, took a position on North Korea’s National Defense Commission. The National Defense Commission, which Kim Jong Il chairs, is North Korea’s most powerful institutional body and combines leaders from the military and the Korean Workers’ Party. Now, Mr. Jang is seen as positioned to potentially take power himself if Mr. Kim’s health fades in the near-term. Longer term, he could guide one of Mr. Kim’s three sons to a position of supreme leadership. U.S. and South Korea officials increasingly describe Mr. Jang as a “regent” entrusted by Kim Jong Il to safeguard

Reuters (2)

This political shift in Pyongyang, senior U.S. officials say, has contributed to North Korea practicing an increasingly aggressive foreign policy. North Korea withdrew from diplomacy aimed at ending its nuclearweapons program shortly after Mr. Kim’s believed stroke. And on April 5, the nation test-fired a three-stage rocket, underlining concerns that North Korea is trying to develop a ballistic missile that can carry nuclear warheads. Leading U.S. officials are now publicly voicing their belief that Pyongyang will conduct its second nuclear test in the coming months. U.S. officials say Washington hasn’t faced such uncertainty in North Korea in 15 years, when Kim Jong Il succeeded his father following a fatal heart attack. But even then, Washington at least had a clear sense of the transition line as Kim Il Sung had clearly anointed his son. Today, say current and former U.S. officials, the exact succession line remains unclear and Pyongyang appears to be reverting to a hard line on national-security issues as the North Korean elite jockeys for power. “We don’t know if it’s a new leadership right now, but they’re clearly looking at contingencies,” said a top U.S. official working on North Korea. “It complicates how they view the world.” The Obama administration has been focused on the deteriorating security situation in Pakistan and Afghanistan since taking office, as well as on Iran’s continued efforts to develop nuclear technologies. But the uncertainties about Pyongyang’s political transition, U.S. officials say, are emerging as a significant concern. So far, the Obama administration has responded cautiously to North Korea’s moves on the nuclear issue and its test-launch last month of a multistage rocket, in part, because of concerns about Pyongyang’s politi-

his family’s interests. “Clearly he played a major role over the course of the last year or so during the health issue,” said a senior U.S. defense official monitoring North Korea. “Kim Jong Il has never wanted someone to come to the fore previously.” Mr. Jang’s growing power has surprised many North Korea analysts because of the up-and-down nature of his career. Mr. Jang met Kim Jong Il’s sister, Kim Kyung Hee, at a Pyongyang university in the late 1960s but was subsequently banished to Moscow by North Korean leader Kim Il Sung. The elder Kim apparently opposed Mr. Jang’s union with his daughter before consenting in 1972. But since Kim Jong Il’s return to public life after his stroke, Mr. Jang repeatedly has been seen standing at the dictator’s side in photos and videos distributed by state media. Mr. Jang’s appearance “is a signal from Kim Jong Il that he has a plan for succession,” said Dennis Wilder, who served as President George W. Bush’s top Asia adviser until January. “Kim needs a regent to guide the process.” North Korean state media formally announced Mr. Jang’s appointment. Pyongyang has denied Mr. Kim has experienced any health problems and said North Korea has been the victim of Western propaganda. U.S. diplomats and intelligence officials also increasingly believe

Kim Jong Il’s third son, Kim Jong Un, is emerging as a possible successor to his father. South Korean and Japanese media have widely reported the younger Kim has also been named to the National Defense Commission, though U.S. offficials stress they haven’t confirmed this. Still, U.S. officials said they increasingly view Kim Jong Un as an important player in North Korea’s power equation. The 26-year-old has emerged as a stronger contender than either of his brothers. Kim Jong Nam, Kim Jong Il’s eldest son, was widely discredited in 2001 when he was detained in Japan for traveling on a forged Dominican Republic passport in a bid to visit Tokyo Disneyland. The middle son, Kim Young Chol, has been described as frail and unlikely to possess the stature to lead. Kim Jong Il seems to view Kim Jong Un as the most like him in views and values, said the senior U.S. defense official. The younger son’s mother, Ko Yong Hee, who died in a 2004 car crash, is also believed to be Kim Jong Il’s favorite of his three wives. Kim Jong Un fascinates North Korea analysts as he studied at an international school in Bern, Switzerland and is reported to be a fan of Western pop stars. “Kim Jong Il was very insular, but now you have this fellow who’s exposed to the West,” said Victor Cha, a North Korea specialist who also served in the second Bush administration. “How could this impact North Korea? It’s unknown.” Pyongyang’s political transition has led North Korea to tighten its grip within the secretive nation, say U.S. officials. North Korean authorities detained and are trying two U.S. journalists on spy charges. North Korea also has expelled South Korean business executives from a jointly developed industrial park. U.S. officials say they have maintained some low-level communication with North Korean diplomats through Pyongyang’s United Nations mission in New York. But Mr. Obama’s chief envoy on North Korea, Stephen Bosworth, has been rebuffed in his efforts to visit Pyongyang. And even diplomats from traditional North Korea allies, such as Russia, haven’t been granted meetings with senior North Koreans in recent months. U.S. and South Korean officials said it is possible North Korea may never agree to return to the international diplomatic process. One South Korean official said that if Pyongyang tests another missile, “the reaction would be strong enough to send lessons to the North.”

In Iraq, significant attacks are declining By Gina Chon BAGHDAD—Although a recent surge in violence has claimed the lives of almost 300 Iraqis in recent weeks, the U.S. military said on Sunday that the number of high-profile attacks has fallen more than 50% so far in May from April. U.S. military spokesman Maj. Gen. David Perkins said there had been 13 significant attacks in Iraq this month as of Saturday compared with 28 during the whole of April. The number of mass casualties this month as of Saturday is down 58%

from the equivalent period last year. Gen. Perkins also said that as U.S. combat forces prepare to withdraw from Iraqi cities by June 30, Iraqi and U.S. security forces are working to ensure the transition is as smooth as possible and to avoid a spike in violence. In addition, the Iraqi government could ask the U.S. for assistance past the June 30 deadline in line with a security agreement signed last year, Gen. Perkins said. That means American forces could still patrol urban areas and have temporary lodging there if that

were deemed necessary. Iraqi military spokesman Maj. Gen. Qasim Atta said there are clear signs that security is improving, including the planned opening of a main road from the Green Zone to the rest of Baghdad. Citing a rocket attack in the heavily fortified Green Zone on Friday evening that killed at least one American contractor, Gen. Atta said that while insurgents and other violent groups aren’t defeated, this time the Iraqi security forces were on the offensive instead of the defensive. The security forces’ capabili-

ties have grown to the extent that they are pursuing insurgents in proactive operations instead of just reacting as they had in the past, he said. Gen. Atta said that at the height of Iraq’s violence, Baghdad suffered at least 400 violent incidents a week, but the number now has fallen to about 20 to 25 attacks a week. He also said that recent attacks aimed at reigniting sectarian violence have failed, and that there have been no retaliatory acts for bombings that targeted Shiite populations in recent weeks..

As flu spreads, Japan is facing a mask shortage By Juro Osawa

TOKYO—Japanese makers of surgical masks say that despite increasing production, they can’t keep up with demand amid the spread of the A/H1N1 flu virus. Japan had confirmed 289 cases of the A/H1N1 flu as of Friday, according to the health ministry. Of those, 285 were in western Japan, where the country’s first domestic infection was confirmed earlier this month. Tokyo found its first case of the flu Wednesday and now has three confirmed cases. “We are receiving inquiries from municipal governments all over Japan, informing us of a mask shortage,” said Ryosuke Ikemi, managing director at the Japan Hygiene Products Industry Association, a trade group. The group said a production boost doesn’t immediately increase supply, because it can take as many as 10 days for masks produced in China to arrive, clear customs and reach retailers. No other countries have reported similar shortages. In the U.S., which has registered more than 5,700 cases of the flu, Minnesotabased 3M Co. has increased production of masks known as N95 respirators, said spokeswoman Jacqueline Berry. Stores may periodically run out, she said, but the masks are generally available. The Centers for Disease Control and Prevention in the U.S. says evidence that masks control the spread of flu among people is “extremely limited.” Still, the CDC suggests individuals consider wearing the masks in certain high-risk situations, such as caring for a family member with a respiratory infection in an area where the spread of the A/H1N1 flu has been confirmed. The World Health Organization has said that other preventive measures may be more important than wearing a mask. These include refraining from touching the mouth and nose, frequently washing hands and avoiding crowds. Surgical masks aren’t an uncommon sight in Japan’s cities, where commuters and office workers often wear masks during winter months and hay fever season in February and March. But May is usually a quiet month for makers and sellers of masks. In the past few weeks, at Matsumotokiyoshi Holdings Co., Japan’s biggest drug-store chain, mask sales have skyrocketed. A spokesman said the retailer built a system for stockpiling masks after the birdflu outbreak in recent years, but it is struggling to catch up with the current surge in demand. Seijo Corp., which operates 276 drug stores mainly in Tokyo and the surrounding region, said mask sales this month so far are 10 times the company’s usual figures. One Seijo store in central Tokyo has limited purchases to two packages per customer since early May. At mask maker Uni-Charm Corp., which produces its masks in Japan, factories are operating around the clock. Uni-Charm shares have gained 8% since April 27, following the flu outbreak. Chugai Pharmaceutical Co., which sells flu remedy Tamiflu in Japan, has jumped 10% over the same period. The Nikkei 225 Stock Average, meanwhile, added 5.9%. —Jacob Goldstein in New York contributed to this article.


10 M ON DAY, MAY 2 5, 2 0 0 9

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ECONOMY & POLITICS

Lebanese election draws American visitors BEIRUT—U.S. Vice President Joe Biden visited Lebanon Friday in the home stretch of a political campaign pitting a Western-backed coalition against a bloc led by Hezbollah. Mr. Biden’s trip follows last month’s stopover by Secretary of State Hillary Clinton. The visit underscores the regional stakes in Lebanon’s parliamentary elections scheduled for June 7. The vote, to determine who has the upper hand in forming the next

political stalemate between Lebanon’s Western-leaning government and an opposition umbrella spearheaded by Hezbollah. The muscleflexing forced the government into a series of political concessions, including granting the opposition veto power. Lebanon’s 128 parliamentary seats—which are all up for election in June—and its top government posts are allocated along sectarian lines. That limits the power of any one group, including Hezbollah and its allies, no matter who wins next month. Big decisions must be made by consensus. Lebanon’s president, Mr. Suleiman, is a popular former army commander largely seen as independent. Still, any gains by Hezbollah, which Washington and Israel designate a terrorist group, could cause

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regional concern. They could also jeopardize U.S. assistance to Lebanon. Washington has doled out significant aid in recent years, including hundreds of millions of dollars in security-related assistance. Mr. Biden said Friday that future U.S. aid to Lebanon will be based on the policies of the new government. Sunni districts are largely expected to vote for the pro-West bloc, called the March 14 movement. Shiite districts are expected to vote for Hezbollah or its allies. The March 14 movement holds 70 seats in Parliament. The opposition has 58; of those, 14 are Hezbollah. Hezbollah and its partners appear to have all but locked up the vote in southern Lebanon. The group’s yellow flags and campaign posters plaster the region’s roads and towns. That has meant much of the campaigning is aimed at Christian districts, such as Batroun, an affluent, hilly enclave of apartment buildings. The district has two seats, both of which must be held by Maronite Christians, who make up 70% of the district’s 58,000 registered voters. Mr. Harb says he thinks he is ahead, but acknowledges it’s a close race with his opponent—Lebanon’s telecommunications minister and a political ally of Hezbollah. “We accept the possibility” of defeat, he says. Independent polls are rare here, making it difficult to gauge voter sentiment. Complicating matters, voting across Lebanon often hinges more on clan and family loyalties than campaign issues or candidates’ positions. That means districts can become divided early on, analysts say. Swing voters can represent as little as 8% of most districts’ electorate “because we have a lot of extremists,” says Rabih Haber, a political pollster who does work for the March 14 movement. “It’s a very close race,” he says. Lebanon has long served as a proxy battleground for bigger regional players, who have for decades pumped in cash, guns and fighters. In the current election, both sides have accused the other of using funding from overseas to finance campaigns. In Kfar Kila, a Hezbollah stronghold along the Israeli border in the south, a large Iranian flag flutters above a plaque thanking Tehran for funding a newly paved road. —Mohammed Aly Sergie in Riyadh contributed to this article.

Mixed ballot Lebanon allots parliamentary seats by sect. The breakdown:

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Christian: 64

By Chip Cummins And Nada Raad

government, is the first election Hezbollah, a Shiite political and since a Qatari-brokered deal last military group backed by Iran and year ended a political stalemate be- Syria, accused Washington of intertween the two sides. The race is ex- fering. “The U.S. high interest in Lebapected to come down to a handful of non triggers strong doubts over the battleground districts. reasons behind it,” the group A strong showing by said in a statement Friday. Hezbollah and its allies The two high-ranking visits could be interpreted “constitute explicit medacross the region as furdling in Lebanese affairs.” ther encroachment by Iran Mr. Biden said he didn’t and its proxies. Israel and come to take sides. But after many Western-allied Arab meeting with President states have grown increasMichel Suleiman, he told reingly concerned about Tehporters he would “urge ran’s influence. those who think about “We are part of the big standing with the spoilers game,” says Boutros Harb, of peace not to miss this opJoseph Biden a member of parliament portunity to walk away for the West-leaning bloc. Mr. Harb from the spoilers.” is seeking to keep his seat in the In May 2008, Hezbollah’s militia closely fought Christian district of briefly seized swaths of Beirut, durBatroun, a Beirut suburb. ing the final throes of an 18-month

Muslim: 64

U.S. seeks to counter Hezbollah’s influence through June 7 polls

Maronite

34

Greek Orthodox Greek Catholic Armenian Orthodox Other

14

Sunni

27

Shiite

27

Druze

8

Alawite

2

Source: Lebanon Ministry of the Interior

8 5 3


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M ONDAY, M AY 25, 2009 11

ECONOMY & POLITICS

Congo goes farming—for farmers Country’s land plan is cultivating interest from South Africans

By Niraj Sheth And Paul Beckett

500 miles

CHAD

NIGERIA

500 km

C.A.R.

SUDAN

CAMEROON

GABON

REPUBLIC OF THE CONGO

UGANDA

Brazzaville DEM. REP. TANZANIA OF THE MALAWI CONGO ANGOLA

ZAMBIA ZIMB.

NAMIBIA

MOZ.

BOTSWANA

Pretoria Atlantic O cean

SOUTH AFRICA

SWAZ. LESOTHO Indian O cean

Michael Allen for The Wall Street Journal

By Michael Allen The Republic of the Congo isn’t exactly a hospitable place: Twothirds of its people are crammed into sweltering cities, and it’s still struggling to get back on its feet after five years of civil conflict. Plus, it rains a lot. But for a growing number of South African farmers, it’s the Promised Land. They’re scrambling to get on board an ambitious venture to reclaim farmland in Congo’s interior and help relieve that country of a reliance on food imports. Already some 70 farmers have booked a Congo tour and more than 3,000 have expressed interest, said Agri-SA, the South African farming group organizing the venture. Fueling the mania were early reports the Congo was prepared to set aside 10 million hectares (about 25 million acres) of rent-free land. That turns out to be an exaggeration. “That’s a stupid number,” said Rigobert Maboundou, Congo’s agriculture minister. “The amount of cultivatable land in Congo amounts to only eight million hectares. …If we gave them 10 million hectares, it would mean there is nothing left for anyone else, and we have a very big number of subsistence farmers.” Still, he acknowledges negotiations are proceeding. According to a draft memorandum of understand-

Andre Botha, at right, is organizing a Congo visit for South African farmers. Here, he talks with two workers at a South African ranch he manages for an American company.

ing, Congo is willing to sign longterm leases and provide tax breaks and waivers on duties of imported supplies for approved projects. The South Africans in turn would build infrastructure, employ locals and instruct them in modern farming techniques. People familiar with the matter say the initial focus will be on restarting state-owned farms abandoned in 1992. Congo, like much of sub-Saharan Africa, could use the help. Less than 25% of the continent’s arable land is cultivated. Africa’s use of fertilizer is only 2% of the world average. As much as 70% of production comes from small farmers, who typically lack access to financing for seeds and equipment. The Republic of the Congo, a former French colony bordering the larger Democratic Republic of the Congo, gets most of its income from oil. Despite heavy rainfall and fertile soil, only about 2% of its land is farmed. It imports nearly all of its food, largely from France. Earlier this year, Congo President Denis Sassou-Nguesso approached South Africa’s envoy about encouraging South African farmers to invest in Congo, according to Agri-SA. South African commercial farm-

ers, mostly the descendants of Dutch and French pioneers who began settling the continent’s southern tip centuries ago, are renowned for their ability to coax food out of African soil. Eager for their expertise and capital, African countries from Ghana to Nigeria have offered them incentives to set up shop. South African farmers have turned Mozambique into a banana powerhouse. Zambia became self-sufficient in maize after welcoming farmers from Zimbabwe and from South Africa. Such programs can be controversial, touching on sensitive issues of race, colonialism and land tenure. Agri-SA is addressing the concerns with a multiethnic expedition. “The farmers going to the Congo aren’t just white farmers,” said Andre Botha, who leads the initiative. “There’s black farmers going with us...white commercial farmers...colored commercial farmers...Indian commercial farmers—going to the Congo as South African farmers.” During a recent tour of farmland east of Johannesburg, Mr. Botha fielded phone calls from people interested in the project. One, a mechanical engineer of Indian origin who grows hydroponic tomatoes, all but signed up to go on the spot.

“You’re the guy for us,” Mr. Botha said cheerfully. Also part of the caravan is a Salt Lake City firm called S.K. Hart that has already bought a farm in South Africa, now managed by Mr. Botha. The company is looking to expand in Congo, said owner Khosrow Semnani, who previously owned a Utah radioactive-waste-disposal company called Envirocare. Some South African farmers are skeptical the venture will get off the ground and they say that, if it does, investors will be vulnerable to land invasions and political instability. “Nobody around here is going,” said Lionel Hartman, a farmer in Levubu, in the northern part of South Africa. “They’re not stupid.” The group says there are treaties to protect their investments. And in any case, most plan to keep their South African farms and view this move as a savvy diversification. Theo de Jager, a farmer and realestate agent from Tzaneen, South Africa, has already visited and says he has picked out plots for himself and some friends. He hopes to start palmoil, timber and cattle operations. “It’s uninhabited. There’s water in abundance and two summers,” he said. “I thought of Congo as one big jungle, but most of it is savannah and grasslands.”

Pakistani army declares gains in Swat town By Zahid Hussain ISLAMABAD—Pakistani security forces on Sunday seized control of a large part of Mingora, the main town of Swat valley, fighting their way street by street, the army said, as the battle to regain control of Pakistan’s northwest from the Taliban reached a crucial phase. Special forces commandos were still battling some 300 militants entrenched in deserted buildings in Mingora’s central commercial district, which has been heavily mined by the insurgents, the army said.

India’s premier appoints allies to new cabinet

The situation was particularly precarious for some 20,000 residents who were still trapped in the town. They have run out of food and can’t get out because of the fighting, said a resident who escaped a few days ago. Maj. Gen. Athar Abbas, Pakistan’s chief military spokesman, said the operation in Mingora was likely to be slow because security forces wanted to avoid civilian casualties. He said he feared militants could use civilians as “human shields.” At least 10 militants and three soldiers were killed in the fighting Sunday, he said. The military’s reports

couldn’t be independently verified. “The pace of the operation will be painfully slow,” Gen. Abbas said. “So be patient, but the operation has started and we are going to take it to a logical conclusion.” The Taliban have dug in for a long fight with aid from allies in neighboring Afghanistan, according to a letter shown by military officials to reporters in Swat last week. The letter appeared to be a pledge of moral and financial support by Mullah Omar, the supreme commander of the Afghan Taliban militia. “The hard-core militants would never surrender,” Maj.

Gen. Sajjad Ghani, commander of Pakistani troops in northern Swat said on Friday. “We have to eliminate them.” Since the collapse a few weeks ago of a peace deal that had given the Taliban control of the scenic valley north of Islamabad, the militants and Pakistani troops have been engaged in fierce fighting that has caused a massive refugee crisis, forcing about two million people to flee their homes. On Friday, the United Nations issued an appeal for a total of $543 million in humanitarian aid to help the refugees.

NEW DELHI—Indian Prime Minister Manmohan Singh was sworn in for another term Friday, and on Saturday named Congress Party officials to major Cabinet posts. Mr. Singh, 76 years old, said his priority in the face of the global recession will be India’s economy. The “first task is to restore the economy and its growth momentum,” Mr. Singh said after the ceremony, according to the Associated Press. Pranab Mukherjee was named finance minister, and he said Saturday that the new government would move quickly to address economic issues with a view to restoring the country’s high growth rate. Mr. Mukherjee held both the finance and foreign portfolios in the closing months of the last government. Palaniappan Chidambaram was named home minister, a post he held at the end of the last administration. The appointments come after Congress emerged as the largest single party in an election count May 16 that put it in a commanding position to form the next government. Mr. Mukherjee takes the helm of India’s economy as its once-hot growth has slowed and as it is struggling to resist the recessionary forces sweeping in from across the globe. The economy is expected to grow approximately 6% this year, making it one of the world’s most robust in the global downturn, but that’s still below the 9% growth that had propelled the world’s largest democracy in the past few years. Mr. Mukherjee, 73, is a longtime party strategist whose first tenure in a Congress cabinet came in the same role in the early 1980s. In successive governments, he has headed the ministries of commerce and industry, external affairs and defense. Mr. Chidambaram, 63, served as finance minister in the first four years of the departing Congress administration before taking up the home-ministry portfolio following November’s terror attacks in Mumbai. Congress party stalwart S.M. Krishna, a former chief minister of the southern state of Karnataka, home to India’s tech capital Bangalore, was named foreign minister. The government also named A.K. Antony, 68, defense minister, the same post he held at the end of the last administration. Two allies, Mamata Banerjee and Sharad Pawar, were sworn in as ministers. Ms. Banerjee’s Trinamool Congress party won handily in West Bengal state, once a stronghold of leftist parties. She will be railways minister. Mr. Pawar’s Nationalist Congress Party helped Congress defeat a range of right-wing parties in Maharashtra state; he will be agriculture minister. Other appointments are expected next week. Friday’s swearing-in ceremony didn’t include Rahul Gandhi, heir of the Nehru-Gandhi dynasty and son of Congress President Sonia Gandhi. Mr. Gandhi is unlikely to join the cabinet. He is likely to continue building the party’s corps of young politicians while influencing policy behind the scenes, a Congress official said.


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Stabilization seen at Fed Vice chairman says rate increases aren’t coming anytime soon By Tom Barkley WASHINGTON—Federal Reserve Vice Chairman Donald Kohn said Saturday that the U.S. economy might be showing some signs of stabilization, but that rate increases won’t be coming anytime soon given the expected weakness of the eventual recovery. “In my view, the economy is only now beginning to show signs that it might be stabilizing, and the upturn,

when it begins, is likely to be gradual amid the balance-sheet repair of financial intermediaries and households,” Mr. Kohn said in prepared remarks to a conference at Princeton University in New Jersey. His views seem slightly less upbeat than those provided by the Fed staff during the April 28-29 meeting of the policy-making Federal Open Market Committee, which noted “some tentative evidence that the pace of contraction in real Donald economic activity was starting to diminish.” Mr. Kohn also reiterated the FOMC’s stance that the federal-

funds rate will likely remain in a rangearoundzeroforanextendedperiod. “As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal-funds rate,” he said. Still, he cited some “preliminary evidence” suggesting the Fed’s program to buy up to $1.75 trillion in securities has helped hold down longer-term interest rates. Mr. Kohn defended such nontraditional measures as Kohn “necessary to avert a far worse economic outcome,” and said they are consistent with traditional monetary policy goals.

Free credits to coal producers draw fire By Rebecca Smith State utility regulators and consumer advocates are urging the U.S. Congress to eliminate a provision in the pending climate-change bill that gives free emission allowances to certain companies that burn coal to make electricity. The Waxman-Markey bill, which cleared a key House committee Thursday, would give as much as 5% of initial credits to merchant coal generators and 30% to electric utilities when a cap-and-trade program is scheduled to begin in 2012.

Unlike utilities, whose prices are controlled, merchant coal generators sell electricity to other companies at market prices. Utilities are expected to use their credits to cover their own emissions, or sell the credits and use the money to hold down consumer energy costs. But there’s no guarantee unregulated coal generators would use their credits to reduce electricity prices, which would ultimately benefit consumers. In the past few days, state regulators have urged bill authors to re-

direct to utilities all of the credits earmarked for merchant coal generators. The National Association of Regulatory Utility Commissioners, in a letter, wrote the congressmen that giving credits to the coal generators “will only lead to windfall profits.” Generators disagree that credits could result in windfall profits. The credits will cover only half the emissions they are expected to produce by generating electricity with coal, and they will likely have to buy the other half of the credits they need.

CAPITAL

n

DAVID WESSEL

A cap-and-trade giveaway yields little revenue—or help for climate P resident Barack Obama was emphatic during his campaign and after his election: The best way to fight climate change is to cap carbon emissions and auction off tradable permits to emit carbon. “If you’re giving away carbon permits for free, then basically you’re not really pricing the thing and it doesn’t work—or people can game the system in so many ways that it’s not creating the incentive structures that we’re looking for,” he told the Business Roundtable in March. His budget director, Peter Orszag, was blunter: “If you didn’t auction the permit, it would represent the largest corporate welfare program that has ever been enacted in the history of the United States,” he told the House Budget Committee in March. Last week, Rep. Henry Waxman’s House Energy and Commerce Committee passed a climatechange bill that gives away 85% of the emission permits until 2026. President Obama applauded, calling the bill “a historic leap.” Huh? The point of climate-change legislation is to raise the price of activities that emit carbon so consumers and businesses engage in fewer of them, and favor alternatives that contribute less to climate change. Taxing carbon is one way to do that, but it’s unpopular. Cap-and-trade became the politicians’ favorite alternative because it accomplished what a carbon tax would, without an explicit tax. Auctioning off the permits, economists advised, was the most efficient way to allocate the rights, steer at least some of the money raised toward research and development, and compensate lower-income consumers for higher energy prices. Under the House bill, only 15% of the emission permits will be auctioned initially. The rest of the permits will be given away—2% to oil refiners, 5% to free-standing “merchant” coal plants, 9% to regulated natural-gas distributors, and so on. As Europe’s experiment with cap-and-trade demonstrated, giving away permits can fatten polluters’ profits without protecting consumers from higher prices. “How one gives them away, what restrictions are on that gift, makes all the difference in the world for the economic effects,” said Douglas Elmendorf, director of the Congressional Budget Office.

In other words, Congress will put strings on the gifts. And then things get complicated. Giving away allowances yields windfall profits—unless the government controls prices, as it does with electric utilities. The bill gives 30% of the permits to utilities that buy electricity from power plants and then sell that power to consumers. Congress is counting on state regulators to make utilities pass the benefits of free emission permits along to consumers. That eliminates the windfallprofits problem, but creates another one. Remember, if electricity prices don’t rise, households won’t conserve and carbon emissions won’t be reduced. So emissions elsewhere in the economy will have to be reduced to meet the national cap on carbon. How? By boosting prices for carbon-heavy activities besides electricity production. Can you say “gasoline”?

W

axman defenders hope state regulators will allow electricity prices to rise so people use less, and then give a quarterly or annual rebate. But Robert Stavins, a Harvard University economist, warns: “The political instinct is not to compensate, but to insulate consumers” from price increases. That’s a mistake. Unregulated industries are different. Producers will charge what the market will bear, whether they pay for permits or get them for nothing. Congress, for good reason, worried about boosting the costs for American factories that compete with factories in countries that don’t require producers to buy emission permits. The Waxman bill gives such producers 15% of the permits, and more permits if they increase production in the U.S. That reduces the temptation to move production abroad but blunts the incentive to reduce pollution. Among the arguments for giving away permits, two have merit. One, allocation rules can be crafted to award free permits to protect parts of the country that otherwise would see very steep increases in energy prices from a carbon cap, such as those that rely on coal. Two, this approach may be the only politically possible way to get any cap on carbon emissions through Congress. But at some point, like it or not, the federal government will need more revenue. Giving away emission permits instead of auctioning them crosses one big potential source of revenue off the list.

Politics of climate change Proposed allocation of emission allowances under House cap-and-trade bill: Auction Give away

Aid for low, moderateincome families, 15% Other

Regulated electric utilities, 30%

6.5% Renewables, research and development,

16%

Coal, 5%

Oil refiners, 2% Source: House Energy & Commerce Committee

Energy-intensive, trade-exposed industries

15%

Natural gas, home heating oil,

10.5%


MONDAY, MAY 25, 2009

EDITORIALS & OPINION

THE WALL STREET JO URNAL.

13

Review & Outlook

Bush’s Gitmo Vindication

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resident Obama delivered a Guantanamo closed in a year. But now major speech Thursday on the Virginia Democrat opposes closing how he intends to prosecute Gitmo anytime soon while observing to the war on terror (or whatever ABC’s George Stephanopoulos last it’s now called), and in particu- week that “We spend hundreds of millar his desire to close the detention facili- lions of dollars building an appropriate ties at Guantanamo Bay. As rhetoric, his facility with all security precautions in remarks were at pains to declare a bold Guantanamo to try these cases. There new moral direction. On substance, how- are cases against international law.” ever, the speech and other events last That was the Bush Administration’s week look more like a vindication of the point all along. Mr. Obama, for his part, past seven years. still wants Gitmo closed, The President’s speech Obama still and he cited South Carolina came after both houses of Republican Lindsey GraCongress had denied his hasn’t said ham in saying that the idea funding requests to shut where the that the detainees could not down Guantanamo and relocate some of the most worst terrorists be securely held in the U.S. was “not rational.” Appardangerous prisoners to the will go. ently also irrational is FBI U.S. The 90-6 vote in the Director Robert Mueller, Senate was especially notable because all but a half-dozen Demo- who last week told Congress that bringcrats opposed their own President, on ing the detainees even to U.S. prisons that high-minded principle known as raised serious concerns, “from providing financing, radicalizing others, [to] not-in-my-backyard. So, to the idea that isolated Alcatraz the potential for individuals undertakIsland could serve as one possible loca- ing attacks in the United States.” Yet for all of his attacks on the Bush Adtion, California’s Dianne Feinstein says it is a historic landmark and instead sug- ministration, which he accused of makgests a prison in another state. But the ing “decisions based upon fear rather most state-of-the-art “supermax” than foresight,” Mr. Obama stuck with his prison in America is in Colorado, and predecessor’s support for military comthis week that state’s new Democratic missions, adding some procedural bells Senator, Michael Bennet, vetoed that and whistles as political cover to justify idea; as it happens, he’s running for elec- his past opposition. For the record: Both the left and right, from the ACLU to Dick tion in 2010. Then there is the voluble Jim Webb, Cheney, now agree that the President has who in January said Mr. Obama had of- all but embraced the Bush policy. Mr. Obama also pledged to release at fered a reasonable timeline in ordering

least 50 detainees to other countries— about one-tenth the number released under President Bush—and added that the Administration was in “ongoing discussions” to transfer them. Good luck with that: The Europeans who were so robustly against Gitmo in the Bush years have suddenly discovered its detainees are dangerous. Meanwhile, the countries that might take them, such as Yemen, can’t be trusted to prevent them from returning to the battlefield, where they can kill Americans again. The President will also seek to try some of the detainees in federal courts, citing the recent case of al Qaeda sleeper Ali al-Marri who last month pleaded guilty to Barack Obama one count of conspiracy and may be sentenced to a mere 15 years, and possibly much less, in a civilian prison. But what the al-Marri prosecution—and the soft plea bargain—really shows is how hard it is to convict terrorists in civilian courts when much of the evidence against them is either classified or wasn’t gathered on the battlefield at the time of capture. Mr. Obama’s most remarkable Gitmo sleight-of-hand was on the matter of how to handle the hard cases, those who Mr. Obama said “cannot be prosecuted yet who pose a clear danger to the American people.” After acknowledging this was “the toughest issue we will face”

and pledging that he would not “release individuals who endanger the American people,” the President proposed . . . well, he didn’t really say what he’d do, except that whatever it is must be “defensible and lawful.” No wonder the ACLU is in a tizzy. Which brings us back to Guantanamo. The President went out of his way to insist that its existence “likely created more terrorists around the world than it ever detained,” albeit without offering any evidence, and that it “has weakened American security,” again based only on assertion. What is a plain fact is that in the seven-plus years that Gitmo has been in operation the American homeland has not been attacked. It is also a plain fact—and one the President acknowledged—that many of the detainees previously released, often under intense pressure from Mr. Obama’s anti-antiterror allies, have returned to careers as Taliban commanders and al Qaeda “emirs.” The New York Times reported Thursday on an undisclosed Pentagon report that no fewer than one in seven detainees released from Gitmo have returned to jihad. Mr. Obama called all of this a “mess” that he had inherited, but in truth the mess is of his own haphazard design. He’s the one who announced the end of Guantanamo without any plan for what to do with, or where to put, KSM and other killers. Now he’s found that his erstwhile allies in Congress and Europe want nothing to do with them. Tell us again why Gitmo should be closed?

Memorial Day Makeover

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ot dogs, potato chips, soda and beer are staples of the traditional Memorial Day cookout, but Washington wants to redesign the menu. Just in time for the neighborhood block party, the Obama Administration and Senate Finance Committee are signalling a change in Americans’ diet. President Obama has named Thomas Frieden, the New York City health commissioner who championed a ban on artificial trans fats, as the new director of the Centers for Disease Control and Prevention. Dr. Frieden’s campaign forced McDonald’s to change the way it cooks french fries—you may have noticed the taste—and he has lately called for all restaurants to use less salt. Let’s hope he spends at least some of his time considering flu pandemics and bioterrorism.

Is government to be the servant of In any case, when Dr. Frieden arrives in Washington, he’ll find an ally in the people, or their (thigh)master? Mr. Michael Jacobson, head of the Naderite Jacobson’s view of the role of governCenter for Science in the Public Interest. ment was illuminated by his gripe that Mr. Jacobson has made a career attack- since 1991 beer has been taxed at a flat ing ethnic restaurants, fast-food chains $18 per barrel. “Since then, inflation has and grocery manufacturers for alleg- robbed the Treasury of more than onethird the value of the edly unhealthy fare. While taxes,” he said. he may be the last guy you’d The committee staff was want at your barbecue, Mr. Congress has an eye on the apparently listening, beJacobson was recently an cause a Senate Finance rehonored guest at Senate FiAmerican port released this week nance. At a hearing to brainholiday menu. listed a federal beer tax instorm on ways to pay for crease and a new levy on Mr. Obama’s new healthcare entitlement, Mr. Jacobson recom- soft drinks among the options for financmended that Congress enact a 50% re- ing new health-care spending. In sum, duction in the salt content of America’s Washington looks set to provide Amerifood supply, a tax of up to one cent per cans with a host of new incentives to enounce on soft drinks, and a tripling of joy grilled veggies and a refreshing glass the federal excise tax on beer, to roughly of water at their next cookout. This doesn’t mean that the feds are 16 cents a can.

taking all the fun out of the weekend when Americans rightly honor those who have sacrificed their lives in war. After all, many Americans tune in each year to watch the Indianapolis 500 auto race, and the sport is sure to win new suburban fans now that Detroit has been ordered to make more fuel-efficient cars. We can only imagine the thrill of hearing the high-pitched whine of hybrid engines as low-emission vehicles achieve speeds exceeding 80 miles per hour. Though perhaps “the greatest spectacle in racing” will soon be presenting itself as “a sustainable activity, when appropriately balanced with carbon offsets.”

Pepper . . . and Salt THE WALL STREET JOURNAL

The Other Interrogation Memos

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resident Obama spoke at length Thursday about balancing national security with legal protections, and intelligence secrecy with the need for accountable leadership. But on at least one point, he has the ability to please everyone: Release the still-secret memos that discuss the results of enhanced interrogation against al Qaeda detainees. Mr. Obama has already released the

memos that set the legal limits on interrogation, to much fanfare and (in our case) dismay. But he still refuses to release the memos that former Vice President Dick Cheney and others claim will show that interrogation yielded valuable intelligence that saved American lives. The CIA recently turned down Mr. Cheney’s formal request to declassify those memos, but the ultimate declassification authority rests with the President.

Mr. Obama has said he’s read the memos and found the evidence of intelligence success to be ambiguous. Fair enough. Let the American people see the evidence and judge for themselves. If Mr. Cheney is exaggerating this antiterror success, we should know. The fact that the Administration won’t release the memos, and won’t explain why it won’t release them, suggests that Mr. Cheney is telling the truth.

“Hey, where’s my red one?”


14

MONDAY, MAY 25, 2009

EDITORIALS & OPINION

THE WALL STREET JO URNAL.

The Journal Interview with Richard Fisher / By Mary Anastasia O’Grady 7

Don’t Monetize the Debt

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Han Nationalism Since the Tiananmen Square massacre in 1989, China’s leadership has modernized the country’s economy but also its authoritarianism, say Perry Link and Joshua Kurlantzick. And because the system’s flaws are as glaring as its resilience, its challenge to democracy is a crisis in the original sense of the word—the course of events could turn either way, they argue. For this and other commentary from around the world, please turn to our free opinion Web site.

tion on the horizon. But inflation and bubble trouble almost always get going before they are recognized. Moreover, the Fed has to pay attention to the 1978 Full Employment and Balanced Growth Act—a.k.a. Humphrey-Hawkins—and employment is a lagging indicator of economic activity. This could create a Fed bias in favor of inflating. So I push him again. “I want to make sure that your readers understand that I don’t know a single person on the FOMC who is rooting for inflation or who is tolerant of inflation.” The committee knows very well, he assures me, that “you cannot have sustainable employment growth without price stability. And by price stability I mean that we cannot tolerate deflation or the ravages of inflation.” Mr. Fisher defends the Fed’s actions that were designed to “stabilize the financial system as it literally fell apart and prevent the economy from imploding.” Yet he

recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. Does Mr. Fisher have any thoughts about that? This is nothing new, he points out, briefly reviewing the history of the political struggle over monetary policy in the U.S. “The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street. “Now we have this great populist fervor and the banks are arguing for Main Street, largely. I have heard these arguments before and studied the history. I am not losing a lot of sleep over it,” he says with a defiant Texas twang that I had not previously detected. “I don’t think that it’d be the best signal to send to the market right now that you want to totally politicize the process.” Speaking of which, Texas bankers don’t have much good to say about the Troubled Asset Relief Program (TARP), according to Mr. Fisher. “Its been complicated by the politics because you have a special investigator, special prosecutor, and all I can tell you is that in my district here most of the people who wanted in on the TARP no longer want in on the TARP.” i

Ismael Roldan

up sharply despite Fed intentions to bring DALLAS—From his perch high atop the down mortgage rates, I’ve flown to Dallas palatial Dallas Federal Reserve Bank, overto see what he’s thinking now. looking what he calls “the most modern, Regarding what caused the credit bubefficient city in America,” Richard Fisher ble, he repeats his assertion about the says he is always on the lookout for rising Fed’s role: “It is human instinct when rates prices. But that’s not what’s worrying the are low and the yield curve is flat to reach bank’s president right now. for greater risk and enhanced yield and reHis bigger concern these days would seem to be what he calls “the perception of turns.” (Later, he adds that this is not to cast aspersions on former Fed Chairman risk” that has been created by the Fed’s Alan Greenspan and reminds me that these purchases of Treasury bonds, mortgagedecisions are made by the FOMC.) backed securities and Fannie Mae paper. “The second thing is that the regulators Mr. Fisher acknowledges that events in didn’t do their job, including the Federal the financial markets last year required Reserve.” To this he adds some unusual Fed action in what he calls unusual circumthe commercial lending marThe Dallas stances, including “the fruits ket. But he says the longertailwinds of globalizaterm debt, particularly the Federal Reserve and tion, billions of people added Treasurys, is making invespresident on to the labor supply, new factors nervous. The looming tories and productivity comchallenge, he says, is to reasinflation and ing from places it had never sure markets that the Fed is central bank come from before.” And finot going to be “the handnally, he says, there was the maiden” to fiscal profligacy. independence. ‘mathematization’ of risk.” “I think the trick here is to asInstitutions were “building sist the functioning of the pririsk models” and relying heavily on “quant vate markets without signaling in any way, jocks” when “in the end there can be no shape or form that the Federal Reserve substitute for good judgment.” will be party to monetizing fiscal largess, What about another group of alleged deficits or the stimulus program.” culprits: the government-anointed rating The very fact that a Fed regional bank agencies? Mr. Fisher doesn’t mince words. president has to raise this issue is not very comforting. It conjures up images of Argen- “I served on corporate boards. The way rating agencies worked is that they were paid tina. And as Mr. Fisher explains, he’s not by the people they rated. I saw that from the only one worrying about it. He has just the inside.” He says he also saw this “inherreturned from a trip to China, where “seent conflict of interest” as a fund manager. nior officials of the Chinese government “I never paid attention to the rating agengrill[ed] me about whether or not we are cies. If you relied on them you got . . . you going to monetize the actions of our legisknow,” he says, sparing me the gory delature.” He adds, “I must have been asked tails. “You did your own analysis. What is about that a hundred times in China.” clear is that rating agencies always change A native of Los Angeles who grew up in something after it is obvious to everyone Mexico, Mr. Fisher was educated at Harelse. That’s why we never relied on them.” vard, Oxford and Stanford. He spent his earliest days in government at Jimmy Cart- That’s a bit disconcerting since the Fed still uses these same agencies in managing er’s Treasury. He says that taught him a its own portfolio. life-long lesson about inflation. It was “inI wonder whether the same bubble-proflation that destroyed that presidency,” he ducing Fed errors aren’t being repeated says. He adds that he learned a lot from now as Washington scrambles to avoid a then Fed Chairman Paul Volcker, who had sustained economic downturn. to “break [inflation’s] back.” He surprises me by siding with the deMr. Fisher has led the Dallas Fed since flation hawks. “I don’t think that’s the risk 2005 and has developed a reputation as right now.” Why? One factor influencing the Federal Open Market Committee’s his view is the Dallas Fed’s “trim (FOMC) lead inflation worrywart. In Sepmean calculation,” which looks at tember he told a New York audience that price changes of more than 180 “rates held too low, for too long during the previous Fed regime were an accomplice to items and excludes the extremes. Dallas researchers have found [the] reckless behavior” that brought that “the price increases are less about the economic troubles we are now and less. Ex-energy, ex-food, exliving through. He also warned that the tobacco you’ve got some mild deflation Treasury’s $700 billion plan to buy toxic here and no inflation in the [broader] headassets from financial institutions would be line index.” “one more straw on the back of the frightfully encumbered camel that is the federal i i i government ledger.” Mr. Fisher says he also has a group of In a speech at the Kennedy School of about 50 CEOs around the U.S. and the Government in February, he wrung his world that he calls on, all off the record, hands about “the very deep hole [our politi- before almost every FOMC meeting. “I cal leaders] have dug in incurring undon’t impart any information, I just listen funded liabilities of retirement and healthcarefully to what they are seeing through care obligations” that “we at the Dallas their own eyes. And that gives me a sense Fed believe total over $99 trillion.” In of what’s happening on the ground, you March, he is believed to have vociferously might say on Main Street as opposed to objected in closed-door FOMC meetings to Wall Street.” the proposal to buy U.S. Treasury bonds. It’s good to know that a guy so obSo with long-term Treasury yields moving sessed with price stability doesn’t see infla-

admits that there is unfinished work. Policy makers have to be “always mindful that whatever you put in, you are going to have to take out at some point. And also be mindful that there are these perceptions [about the possibility of monetizing the debt], which is why I have been sensitive about the issue of purchasing Treasurys.” He returns to events on his recent trip to Asia, which besides China included stops in Japan, Hong Kong, Singapore and Korea. “I wasn’t asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States. That seems to be the issue people are most worried about.” As I listen I am reminded that it’s not just the Asians who have expressed concern. In his Kennedy School speech, Mr. Fisher himself fretted about the U.S. fiscal picture. He acknowledges that he has raised the issue “ad nauseam” and doesn’t apologize. “Throughout history,” he says, “what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen. That’s when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can’t run away from it.” Voices like Mr. Fisher’s can be a problem for the politicians, which may be why

i

i

At heart, Mr. Fisher says he is an advocate for letting markets clear on their own. “You know that I am a big believer in Schumpeter’s creative destruction,” he says referring to the term coined by the late Austrian economist. “The destructive part is always painful, politically messy, it hurts like hell but you hopefully will allow the adjustments to be made so that the creative part can take place.” Texas went through that process in the 1980s, he says, and came back stronger. This is doubtless why, with Washington taking on a larger role in the American economy every day, the worries linger. On the wall behind his desk is a 1907 gouache painting by Antonio De Simone of the American steam sailing vessel Varuna plowing through stormy seas. Just like most everything else on the walls, bookshelves and table tops around his office—and even the dollar-sign cuff links he wears to work—it represents something. He says that he has had this painting behind his desk for the past 30 years as a reminder of the importance of purpose and duty in rough seas. “The ship,” he explains, “has to maintain its integrity.” What is more, “no mathematical model can steer you through the kind of seas in that picture there. In the end someone has the wheel.” He adds: “On monetary policy it’s the Federal Reserve.” Ms. O’Grady writes the Journal’s Americas column.

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MONDAY, MAY 25, 2009

EDITORIALS & OPINION

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15

Don’t Trample the Olympic Ideals in Russia By Jane Buchanan “We are not against the Olympics, but why should the Olympics violate our rights? Can you tell the International Olympic Committee that I am Russian, I am not against the Olympics? They are taking our property for a temporary parking lot. There is no information. No one will answer us. We wait for answers and we worry.” —A Sochi resident facing Olympicsdriven eviction from her home, April 24, 2009 MOSCOW—A delegation of the International Olympic Committee has just visited Sochi, the Russian Black Sea resort town and future Olympic host city, to assess the status of preparations for the 2014 Winter Games. Jean-Claude Killy, the three-time Olympic skiing champion who chairs the International Olympic Committee’s coordination for the Sochi Games, spoke glowingly of the Sochi authorities’ “open and constructive” attitude. “The Russian diamond is shining more and more with each passing day,” Mr. Killy gushed. Many Sochi residents would disagree. The Russian government faces an Olympian task in preparing for the 2014 Games. The major construction has yet to begin. But early trends for human rights and property rights in Sochi are anything but reassuring. In recent interviews with Human Rights Watch, a number of Sochi residents told of police interference with their right to peacefully express their views and of efforts to expropriate their land without receiving adequate information or compensation. Many Sochi residents spoke of their frustration with the lack of transparency around the planning for and construction

One woman in her 50s described her of Olympic venues and related infrastrucsituation with desperation. “They told me ture as well as their desire to be heard they are taking my home to build a tempoby International Olympic officials. On rary parking facility,” she said. Her family May 14, the second day of the IOC’s visit, has lived and farmed fruit groves there a handful of Sochi residents attempted to for decades—and the street she lives on peacefully express their concerns outside is not part of the land parcel designated of the sanatorium where the IOC press for Olympic facilities. Yet 17 families have conference was taking place. The police already received eviction notices. She and quickly intervened, tearing up posters her neighbors have jointly written to fedthat demonstrators hadn’t even managed eral and local officials, including Presito unfold and detaining a small group for dent Dmitri Medvedev and Prime Minisseveral hours. Seven people were ter Vladimir Putin. The recharged with illegally orgasponse, from the local prosenizing a demonstration. cutor’s office, was that 119 To Sochi residents, this The 2014 homes on the street would feels like déjà vu. During the Games risk be expropriated. last official IOC visit, in There is no doubt that the April 2008, a group of Sochi being marred government has the right to residents gathered peaceby Moscow’s expropriate land that is fully with posters, hoping to needed for the Games. But attract the attention of the assault on it exercises that right, IOC delegation that was inproperty rights when it must do so in a way that specting proposed construction sites nearby. Police and free speech. doesn’t trammel the rights of those concerned. Everyone used force to break up the has a right to a home and to demonstration. The impresa livelihood; to a fair hearing and to prosion left by that event is tangible: the test what they feel is injustice. But too ofnumber of demonstrators this year was ten, government appears to be insensitive considerably lower. to these needs. But leadership from the IOC is needed One property owner told Human in Sochi. Despite the fact that the 2014 Rights Watch that she had, at considerGames will indelibly change the face of Soable expense, converted her home to a prichi and permanently affect the lives of vate hotel to support her family, includmany residents, Russian officials have not always informed the public clearly and con- ing her elderly parents and young grandchildren. An appraiser assessed her sistently about its plans or taken into achome’s value but, in the owner’s view, did count community concerns. not take into account the property’s abilIn some expropriation cases, local offiity to generate income or its valuable cials have not established a clear process proximity to the sea. She has not been alto inform the residents about which proplowed to challenge the appraisal. She said erty will be expropriated, when the exprothat when she resisted signing the agreepriation will occur, or how compensation ment to the expropriation, a local official will be established. As a result, many famitried to intimidate her, saying “we’ll lies have already been living with anxiety throw you out of here no matter what.” and uncertainty for months.

“Human dignity” is at the center of the Olympic charter, but human-rights problems from forced evictions to migrant labor and press abuses marred the 2008 Beijing Games. Russia’s Olympic obligations extend beyond erecting stadiums and staging ceremonies. Just as important as infrastructure is ensuring that rights abuses will not taint Russia’s Olympic glory. The IOC should visibly demonstrate a commitment to transparency by providing an opportunity for people affected by the Olympic construction to meet with Olympic officials to voice their concerns. Just as it now seeks to address environmental concerns related to the construction of venues, the IOC should take up the gathering negative impact of the Games on Sochi’s human-rights climate—what could be termed the “human environment” for the Games—at the Copenhagen Olympic Congress this October. Since most of the construction has not yet begun, there is still time and opportunity to address these problems. In addition, Olympic sponsors—who literally pay for the Games—should use their financial leverage to ensure the Sochi Games are not tainted. At a minimum, they could encourage the IOC to pay close attention to the potential for human-rights abuses in the lead up to the Games. There is still time for the Russian government and the International Olympic Committee to learn the lessons from Beijing and set out clear requirements to guarantee rights protections for Sochi’s residents. Unless they do so soon, some residents of Sochi who want to share in their country’s Olympic dream will not be able to do so. Ms. Buchanan is a researcher for Human Rights Watch.

No More Mumbais By Matthew Kaminski

Indo-Pakistani war in 62 years a desirable goal. Hoping to spark one, a Punjabi group called Lashkar-e-Taiba launched the terrorist attack on Mumbai in November. At least 173 people died. India’s response was restrained. But next time? “One of my worst nightmares is a repeat of Mumbai,” Adm. Michael Mullen, chairman of the U.S. Joint Chiefs of Staff, said during a visit to New Delhi last month. The Indians know as well as anyone that Pakistani military intelligence, or ISI, helped bankroll Lashkar, the Taliban and other extremist groups. To this day they are con-

Associated Press

what? If you’re Washington, you brace for a pre-emptive strike by India or better yet coordinate with it. Islamist insurgencies in Afghanistan Compounding concerns are what Inand, cue really scary music, Pakistan preocdian and U.S. officials believe are ongoing cupy Washington. But let’s not forget that the elephant—what else?—in this neighbor- Pakistani efforts to enlarge and modernize its nuclear arsenal, inhood is India. cluding by developing plutoOnce, India was part of South Asia nium warheads, as well as the problem. François Mitto improve delivery systerrand’s old line about can’t afford tems. The Chinese, who wanting to keep two Geranother big share Islamabad’s dislike of manys after the Cold War India, “help us upgrade,” got morphed in India into a terror attack. says a Pakistani official. revealing quip, “We like PaThat only serves to heighten kistan so much we’d like to have five or six of them.” Those attitudes Indian anxieties. The Taliban insurare fading. “A stable, unitary Pakistan is gency in Pakistan’s in our interest,” says G. Parthasarathy, western tribal regions former Indian ambassador to Pakistan. spills over into AfghanAnd a Pakistan torn apart from the inistan and puts a chunk side is an existential threat to a new Inof Pakistan beyond Isdia defined by an economic awakening lamabad’s writ. The inand with a recently forged alliance with surgents recently came the U.S. within 60 miles of the Though Pakistan barely figured in the capital before the Pakiparliamentary campaign, the incumbent stani military counterCongress-led alliance emerged last week offensive this month. with a strong mandate and the same But potentially more pounding foreign-policy headache as the worrisome are signs of Obama administration—how to save Pakiradicalization in the stan from itself. India’s election result Punjab. Contagion in gives President Barack Obama a pretext this traditionally modto drop his strange reluctance thus far to erate and most popuengage New Delhi, which got on famously lous Pakistani province with his predecessor. After all, most of could encircle Islamathe worst-case scenarios in Pakistan (inbad and bring instabilcluding nuclear war) involve South Asia’s ity to India’s borders. leading power. It also may mark the Start with Pakistan’s nukes. From the moment when an ideoIndian vantage point, Pakistani assurances, logical Islamist uprising, predominantly echoed by U.S. leaders, about the security among the Pashtun minority in the unof the arsenal are worth little to nothing. ruly tribal regions, mutates into a Imagine the Taliban, another extremist broader challenge to Pakistan’s social orgroup or rogue elements in the Pakistani der. For any Pakistani revolutionary, Inmilitary get their hands on one or more of dia is a convenient enemy and a fifth the country’s nearly 100 warheads. Then

sidered “strategic assets” in certain Pakistani quarters. Without saying so, the U.S. will have to be an intermediary. With Indians, American officials insist the Mumbai attacks woke Pakistani leaders up to the

true threat of extremism—in particular Nawaz Sharif, the former prime minister who controls the Punjab. India still distrusts him for past ties to Islamists. President Asif Ali Zardari may be politically weak, but the U.S. points out that India won’t get a friendlier Pakistani leader. In a recent interview with me and a couple other reporters in Islamabad, Mr. Zardari called problems with India “a land dispute” over Kashmir, implying it was less immediate or serious than the “ideological threat” from the Islamists in Pakistan’s western regions. Team Obama wants India to draw down along the frontier to give Pakistan’s military cover to shift forces westward against the Taliban. Back have come lectures from Indians about Pakistan’s superior force strength on the border. India won’t take orders from Washington lightly. The U.S. has to play a balancing act and start with relatively easy stuff, such as promoting talks to ease commercial ties between India and Pakistan. New Delhi and Islamabad could be encouraged to reopen a back channel to discuss Kashmir and “comprehensive peace.” None of this will be easy. But the solution to the Obama administration’s so-called “AfPak” problem runs through India. Mr. Kaminski is a member of the Journal’s editorial board.


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NEWS IN DEPTH

Getty Images

U.S. slugs it out with the Taliban in toughest Afghan ghost town

N A WAR OVER hearts and minds, Now Zad has neither. Abandoned by its residents, this mud-brick ghost town is a corner of Afghanistan that might be forever Flanders. There are no schools being painted, no roads paved, no clinics built. There is no Afghan army, no Afghan government at all. In Now Zad, there is just one company of U.S. Marines slugging it out across no man’s land with equally determined militants. From their entrenched lines, neither side is strong enough to prevail. On patrol this month, Sgt. Tucker Strom, a 26-year-old squad leader from Tallahassee, Fla., lifted his head just high enough above a mud wall to glimpse the Taliban front line across 500 meters of neglected pomegranate orchards. “They’re right there,” Sgt. Strom told a newly arrived Marine. “This is what it turns into—us watching them, them watching us.” Helmand is one of the toughest provinces for the U.S.-led coalition, home of the insurgency’s twin foundations: Pashtun and poppy. And Now Zad is arguably one of the toughest, and most unusual, towns in Helmand. For the U.S., it is a prize too valuable to lose, not valuable enough to win. Senior commanders have already turned down one Marine request to dispatch a 1,000-man battalion to the town, preferring to concentrate forces in areas with more

I

Battle shows how limited troop numbers hurt the war, and why Washington is shifting strategy By Michael M. Phillips in Now Zad, Afghanistan hearts and more minds. Yet the military says keeping a lone company in Now Zad “fixes” the insurgent force in place, even if outright victory isn’t possible. “Whatever we take, we do not want to cede back to the Taliban,” British Brig. Gen. David Hook, the coalition’s deputy commander for operations in southern Afghanistan, said during a brief visit to Now Zad this month. “What kind of message would it send?” The inability of the Marines to dominate the area is an extreme example of how limited troop numbers, especially in the country’s strategically vital south, have hampered the U.S. ability to eradicate the Taliban threat. The U.S. and NATO-led coalition has easily defeated the Taliban in battle, but struggled to prevent insurgents returning to towns and villages across the country. As part of U.S. President Barack Obama’s Afghan “surge,” the military has ordered 21,000 new troops to Afghanistan, bringing the total to around 60,000. The beefed-up force is a central element of the military’s new

counterinsurgency strategy for Afghanistan, which aims to replicate the successes of the Bush surge in Iraq, in particular the way it was able to both “clear” important areas of insurgents and “hold” the territory long enough for the government to solidify its position. The strategic shift gelled earlier this month when Defense Secretary Robert Gates asked for the resignation of Gen. David McKiernan, the Pentagon’s top general in Afghanistan, in a bid to further instill counterinsurgency tactics throughout the war. The successor, Lt. Gen. Stanley McChrystal, is a former Green Beret who recently commanded the military’s secretive special operations forces in Iraq. Still, the new approach won’t bring enough troops to put overwhelming force into every hotspot, suggesting that Now Zad and other pockets won’t see relief any time soon. Afghanistan’s terrain, replete with inaccessible valleys and remote villages, exacerbates the shortfall. “We’re still only at half of what we had in

Iraq,” says Col. Greg Julian, the military’s chief spokesman in Afghanistan. “In counterinsurgency doctrine, it should really be a 10-to-one ratio of population [to troops], and we’re nowhere near that.” Soon after the fall of the Taliban regime in 2001, charities from the United Nations and European Union installed clean-water wells and a mother-child health clinic in Now Zad. But by 2007, fighting between insurgents and small British and Gurkha contingents prompted the estimated 10,000 to 30,000 residents to flee. An Estonian force joined the British before a company of U.S. Marines arrived last year. None was big enough to clear the town of insurgents. The Marines here now, Lima Co. of 3rd Battalion, 8th Regiment, number fewer than 300 men and are currently training their replacements. Being a sideshow to the main effort has meant a daily routine of dangerous patrols through a no man’s land littered with land mines, all the while accepting the fact that at best they will go home next month with a tie. Matthew Nolen, a 27-year-old Navy corpsman from Memphis, Tenn., insists that each man on his patrols carry two Velcro tourniquets. The assumption is that if a Marine steps on a mine, he will likely lose both legs at once, and the corpsman will have two arterial bleeds to stem. Some infantrymen wear tour-


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 S1

BU L LET I N

MAY 2009

THE BOOM IN ONLINE DATING AGENCIES FOR THE RICH

wealthbulletin.com thbulletin tin.com

INSIDE

Europe’s top 10 listed family groups ■P Page 9

Plus... Ri Rising stars: top advisers aged under 40 ■ Page 12

Nouveau poor face trials of friendship ■ Page 4

 

Lessons from advisers to the super-rich

Hedge fund opportunities ■ Page 10

Madeira an unlikely tax haven ■ Page 4

■ NOT-FOR-PROFIT GALLERIES ■ DISTRESSED DEBT PLAY ■ PHILANTHROPY SERVICES ■ SPECIAL SUPPLEMENT


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T H E WA L L ST R E E T J O U R NA L .


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 S3

Agenda MAY 2009

FROM THE EDITOR

Family affairs

Contents

DATING

Money can buy you love

AGENDA

Page 4

By Tara Loader Wilkinson

Few people will ever be wealthy enough to require (or afford) the services of a family office, but the approach they take to wealth management contains valuable lessons. It can be summed up as a three-point plan for avoiding the feeling that your advisers are taking you for a ride. Make sure the advice you get is independent – or at least understand where conflicts of interest arise; demand a transparent and detailed analysis of fees you are being charged; and use asset allocation to aim for consistent returns rather than being seduced by market fads. It may sound basic, but the best advice usually is. It is remarkable that such a straightforward approach to preserving and growing wealth is usually reserved only for or the superrich. But it is starting to trickle down to the mainstream, where, ere, given the disillusionment felt by many clients, demand for truly independent endent wealth advice is set to expand rapidly. Evidence of this will be revealed next month when Dow Jones es ‘Wealth Management After The e Crunch’ research is published. We gathered views from clients, advisers sers and intermediaries to envisage age how the industry might reinvent vent itself. Visit wealthbulletin. n. com to find out more. James Rutter

Managing editor James Rutter +44 20 7426 3328

Advertising sales Richard Lennon +44 20 7426 3305

Executive editor Mike Foster +44 20 7426 3315

Wealth Bulletin is published by eFinancial News Ltd, a Dow Jones company ©2009

Editorial director wealth-bulletin. com David Bain Senior reporter Tara Loader Wilkinson

Stapleton House, 29-33 Scrutton St, London, United Kingdom EC2A 4HU +44 20 7426 3333

Art Director/ Cover photography Abi Hardwick Cover model Eve McDonagh Chief Sub-editor Peter Lane

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SOCIAL DILEMMAS FOR THE NOUVEAU POOR / MADEIRA’S TAX ATTRACTION

I

t seems being g single and rich is no longer as attractive as it once was. as. The recession has prompted a surge in n registrations to online ne dating sites aimed at the wealthy. Seventy Thirty, a European online introduction agency for millionaires, illionaires, has seen en its membership hip grow by 27.5% % in the past six months, hs to about 10,000, according to chief executive Susie Ambrose.

Applicants must provide documented proof they have assets of £1m (€1.1m) or more and the highest band of membership costs £60,000 a year. “People are readdressing their priorities in life,” says Heather Heber-Percy, founder and chief executive of County Register, a UK matchmaking service for the wealthy that has seen membership grow by 50% year on year to 3,000. “Memberships

COVER STORY

Page 5 THE INSIDER’S GUIDE TO FAMILY OFFICES have soared h soar d because becaus of the re recession – in hard times time you need share eed someo someone to sh your problems with. probl with Divorcee sign-ups have also increased increased,” she adds. Sara, a 35-year-o 35-year-old multi-millionaire chief executive of a management consultancy firm, fir is a recent member mem of Seventy Th Thirty. She says: “I’ve never wanted to be dependent on o anyone else. But when your friends are all getting married marr and your clubbing d days are over, you wake u up and realise maybe you y do want someone, aand finding them is prob probably not ass easy e s ass you ou thought.”

“IN HARD TIMES YOU NEED SOMEONE TO SHARE YOUR PROBLEMS WITH” She says she recently met a 38-year-old financier through the website and the relationship has “fasttracked” – management consultancy speak for “love’s first bloom”. Ambrose expects some of her clients will

be b unable bl to t renew their th i membership, having lost their millionaire status. “But there’s no need to lower the bar,” she says. “There will always be wealthy people who need our services.”

MEN WANTED Unlike Seventy Thirty, County Register is open to people in any wealth bracket, providing they can afford the annual fees of between £4,500 and £10,000. HeberPercy says the agency is woefully undermanned in the 30s and 40s age bracket, with women outnumbering men by a ratio of six-to-one. By contrast, two thirds of the members at Seventy Thirty are men. The big question is how successful these websites are in matching clients with the partner of their dreams. Seventy Thirty’s Ambrose says that at the £60,000-a-year band of annual membership, which gets you a personal matchmaking service with daily reviews, the agency boasts a success rate of 85% in respect of meeting clients’ objectives. Which suggests that while money can’t buy you love, it certainly helps. WB

Page 7 THE MULTIFAMILY OFFICE MAP

Page 8 FAMILY VALUES BACK IN VOGUE

COMMENT

Page 10 JP MORGAN BETS ON CREDIT / PHILANTHROPY / SMALL IS BEAUTIFUL

ADVISERS

Page 11 RENAISSANCE FOR FUNDS OF HEDGE FUNDS

PEOPLE

Page 12 RISING STARS OF THE WEALTH INDUSTRY / NOT-FOR-PROFIT ART GALLERIES

MAY 2009

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Agenda SOCIETY

How to lose money and alienate people By Helen Kirwan-Taylor

A

t the opening of a smart art gallery in London’s West End, an old friend visiting from San Francisco sauntered over to a highflying Italian banker she hadn’t seen in years and remarked loudly: “Come on now, Luigi, how many paintings are you buying this time?” Then she turned white. She had forgotten that Luigi, used to flaunting his wealth at public functions, was among the worst hit by the collapse of US investment bank Lehman Brothers last year. Not only was he unemployed

but his polo lifestyle had come an abrupt end. Unable to think of a witty riposte, Luigi hurriedly left the functions.

DILEMMA The social dilemma is clear for all to see. If you run with the fast crowd then stumble and fall, do you hobble along as though nothing has happened (and buy a painting you can’t afford), or do you quit the race? For those who have seen multiples of zeros wiped off their worth, simple activities such as going out to dinner act with friends can become a problem. wi

“IT’S ABSOLUTELY TRUE THAT WHEN A MAN LOSES HIS MONEY, HE LOSES SOME OF HIS FRIENDS TOO”

Madeira scores on tax By Tara Loader Wilkinson

M

adeira, the Portuguese island best known for its rich flora and fauna and as the birthplace of world footballer of the year, Cristiano Ronaldo, may soon be making a name for itself as a tax haven. Entrepreneurs in the UK who are threatening to quit the country as

S4

MAY 2009

a result of the latest no tax changes Ro nal do targeting wealthy business owners are considering Madeira as a destination, alongside more predictable offshore centres such as Switzerland and the Channel Islands. As well as a balmy climate, the island boasts an attractive 3% corporation tax and a double tax treaty between Portugal and the UK. Trevor Nicholson, a director at HSBC private bank, says: “The impracticality of moving countries is not justifiable for many of the UK’s wealthy. Instead, we’re getting a growing number of queries about the ia ist Cr

DESTINATION

Martin Lewis, founder of UK website MoneySavingExpert.com, says: “As we work up the wealth ladder, we establish patterns of behaviour. There’s a real pressure to conform to what your friends do. It’s very hard, when you’ve been used to doing something, to say, ‘I can’t afford it’. It’s easier not to go out at all.” Peter Wiman, a Stockholm-based venture capital investor, says: “We have an expression in Sweden that equal children play best.” Wiman has seen friends lose their jobs and their glamorous lifestyles. “It’s much easier to deal with someone who was always struggling. In those cases, you do the inviting or you pick up the bill. But when it’s someone who once shared a chalet or stayed in the same hotels, it can be tricky. It’s absolutely true that when a man loses his money, he loses some of his friends too.” The rules of reciprocity are well established. If, for example, you can’t host a shoot, you stop being invited to others’ shoots. Wiman says: “We all know that most social activities among the wealthy have very little to do with friendship. It’s all about status.” The other truth is that people don’t like to be reminded of loss: they fear it might rub off. A once-casual question, such as: “Are you going to Martin’s 40th birthday party in Morocco?” can become downright cruel.

“THERE IS NO TAX ON DIVIDENDS AND PERSONAL AND CORPORATION TAX IS LOW”

But does this mean you do not ask or do you dodge the issue by avoiding the friend? Wiman says: “With close friends, you might carry the financial burden for a while, in this case offer to pay for their flights. But with the next tier down, I fear the pattern would be avoidance.” The response largely comes down to how the person reacts to their new circumstances. Theodore Soutzos, a consultant psychiatrist, says: "We judge ourselves largely by how we measure up to peers and colleagues. Sometimes the common thread is culture and religion, sometimes it’s financial status. How you respond to new circumstances is about how you perceive yourself. If you judge yourself by what you can afford relative to your friends, flying with NetJet or holidays in St Tropez, then you rapidly become dissimilar. You won’t feel part of the pack.” Happiness researchers have discovered that being a little bit better off than the neighbours is what makes us most content. Andrew Oswald, professor of economics at Warwick University, says: “Human beings have to look over their shoulder before they decide how happy they feel.” Self selection means old friendships fall by the wayside and new ones are developed. One may covet the friendship of the still-wealthy, but the company of the less well-off is likely to be more comfortable. WB

possibility of basing a small part of the business in Maderia, where there is no tax on dividends and personal and corporation tax is low.” Madeira’s regime applies to new companies licensed and established in its International Business Centre to 2020. Companies also get exemption from withholding taxes on the distribution of dividends, royalties and interest payments. Nicholson says owners of hedge funds and property companies are particularly interested in Madeira’s tax benefits. High-profile hedge fund manager Crispin Odey and private equity boss Guy Hands recently added their voices to the chorus of wealthy business people threatening to leave the UK. WB

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T H E WA L L ST R E E T J O U R NA L .

COVER STORY

M ONDAY, M AY 25, 2009 S5

The

AT THE TOP OF EUROPE'S WEALTH PYRAMID SIT THE FAMILY OFFICES THAT ADVISE THE SUPER-RICH. THEIR APPROACH IS BASED ON INDEPENDENCE, TRANSPARENCY AND SAVVY ASSET ALLOCATION. AND THERE ARE LESSONS FOR INVESTORS OF ANY SIZE

INSIDER'S

BY JAMES RUTTER

guide to

family

offices

W

hile the wealth management industry nurses a hangover from the end of the creditfuelled boom, the discreet offices that manage the financial affairs of Europe’s wealthiest families are enjoying a surge in popularity. The multifamily offices that have mushroomed in London and Switzerland over the past decade report a stream of enquiries from ultra-wealthy clients alienated by mainstream wealth managers and private banks. Markus Stadlmann, head of HQ Trust in Frankfurt, a multifamily office established by the descendants of BMW founder Harald Quandt, says: “We’ve had increasing interest simply because the financial and economic crisis has initiated within a number of wealthy families a discussion about how they should go forward.”

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Guy Paterson, chief executive of Unigestion’s family investment office, says: “Families who have suffered private banking relationships over the years are asking themselves why?” Europe’s richest dynasties, such as biotech company owners the Bertarellis and the Rausings, of packaging giant Tetra Pak fame, often prefer to operate their own investment offices, but those with merely tens or hundreds of millions are increasingly favouring private investment offices which cater for a small number of like-minded families. continued on page 6

MAY 2009

5


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Cover story Going

MULTIFAMILY OFFICES

PERFORMANCE Research conducted by Dow Jones Wealth Bulletin and The Wall Street Journal Europe, to be published next month, shows a large divergence of opinion between how professional wealth managers felt they performed during the credit crunch and what their clients think. While the wealth managers believe they acquitted themselves well, many clients feel they were poorly served and are reviewing their relationships as a result. The success of multifamily offices at the top end of the market may hold the secret to reinventing the industry. The abiding problem with wealth management is the conflict of interest facing most advisers: they are supposed to advise clients on what is best for them in the long run but are incentivised in the near term to sell financial products. While these interests may converge, frequently they do not. A research paper published in March for the UK’s Centre for Economic Policy Research highlighted the problem. Andreas Hackethal and Michalis Haliassos, from the Goethe University Frankfurt and Tullio Jappelli from the University of Naples, analysed more than five years of data from a German discount brokerage that gave clients the option of managing portfolios on their own or with the help of an independent financial adviser. They found that clients who used an adviser tended to have lower returns and take a greater degree of investment risk than those who made decisions on their own. Scepticism over the value and independence of advice permeates the wealth management market. Multifamily offices claim to overcome

6 MAY 2009

ic a

solo

lli are Ernesto Bert

And the attributes that are attracting the super-rich to these boutique operations – namely independent advice, transparent fees and consistent investment returns – are trickling down to less wealthy clients. Graham Harvey, a director at wealth consultancy Scorpio Partnership, says: “Think of the aviation industry. Services that were only in first class 10 years ago can now be found in economy.” William Drake, co-founder of Lord North Street, a London-based multifamily investment office where clients need at least £25m (€28m) in liquid assets, says: “If the way we’re looking at investments is right, why isn’t it right for smaller clients as well?” The growing sense of dissatisfaction among clients of mainstream wealth managers makes his question more pertinent.

this by being wholly independent of product providers and having transparent fees. Of course, it is easy to claim independence but tricky to deliver. Harvey says: “The idea of independence that so many family offices emphasise is often difficult to actualise.” For Stadlmann at HQ Trust, the imperative for family offices is that Ernesto Bertarelli has Kedge they act solely as Capital; Hans Rausing buyers and never has Alta Advisers; Alicia as sellers of Koplowitz has Omega products. “To be Capital. Admission to an organisation the top tier of Europe’s that really wealth club virtually serves families requires setting up well requires your own family independence investment office. from “There is a vanity ut na intermediaries, like factor,” says a banker who o d n © mo banks,” he says. deals with family offices. The waters are “Someone wants to be able to muddied, however, by family stand on the quarterdeck of their offices that expand to offer standalone yacht off Portofino and say their investment products or even banking family office is doing this or that.” services, and by the numerous private But the financial crisis has banks and wealth managers that also made some question the price of have so-called family their vanity. While a single family office divisions. Steen office delivers full control and Ehlern at Ferguson confidentiality, the running Partners costs can be significant. Family Office The banker says: says: “Many “Some single family investment offices are closing. An companies office doesn’t have to be claiming to be profitable but it has to family offices achieve what it was set are nothing up for.” more than hedge Wealth industry sources funds and asset suggest some single family managers looking offices posted particularly for clients and assets.” poor investment returns last year, Al ici a Ko plowitz

continued from page 5

FEES Whatever claims of independence a wealth manager may make, the truth is only revealed by dissecting the fees they charge. Drake says: “Only one question really gets to the heart of the issue: how are you paid?” At Lord North Street, the answer is through a flat fee in basis points, or fractions of a percent, depending on the size of the portfolio. Drake says: “We have absolutely no inhouse funds or products and have a method of charging that leaves us neutral, regardless of the strategy we choose. The flat basis point charge is every penny we will get, ever.” This approach is favoured by many multifamily offices. They also emphasise that any “retrocessions” they receive from product providers – kickbacks paid for investing in a particular fund – will be passed on to clients, something that seldom happens in mainstream wealth management. For family offices that offer varied advisory, consultancy or concierge services, another option is to charge

often due to illiquid or distressed private equity and hedge fund investments. Mark Nixon, head of the family office team at Merrill Lynch global wealth management, says: “The costs of running a single family office will probably go up and there is likely to be a migration of smaller offices to larger multifamily offices.”

“THERE IS A VANITY FACTOR. SOMEONE WANTS TO BE ABLE TO STAND ON THE QUARTERDECK OF THEIR YACHT OFF PORTOFINO AND SAY THEIR FAMILY OFFICE IS DOING THIS OR THAT”

clients for time, much as a lawyer would. Andrew Rodger, a director at Stonehage, which has 1,000 families and €20bn ($27.3bn) of assets on its books, says investments form only a part of a service which covers all areas of technical, legal, financial and strategic advice a wealthy family might need. He says: “The family office advisory work is charged on a time basis or we sometimes agree a fixed fee. We don’t charge a percentage of assets unless and until our investment team is given a specific portfolio to oversee.” The third, and most controversial option, is to include some form of performance-related fee. Global Wealth Management, a Geneva-based family office which manages $2bn (€1.5bn) for 25 families, prefers this approach. Peter Sartogo, managing partner, says: “We wanted to be perceived as entrepreneurs for entrepreneurial clients. They like the fact our interests are aligned. It is like sharing a passion.”

INCENTIVE But others suggest performance fees reintroduce the risk of conflicted interests which the family office structure is meant to overcome. Drake says: “Performance fees create an incentive to take risk with clients’ money.” HQ Trust also believes in performance-based fees, says Stadlmann, but goes to great lengths to ensure the interests of all parties are aligned. He says: “When we make an investment, the Harald Quandt family, the third-party family and the managers all co-invest. The Quandts are invested in everything as are the management, although other families will not make all the same investments. A fixed fee covers the running costs of the business and we only get more if we meet the objectives of the third-party families.” The proof that independence and transparent fees work comes only through performance figures. As with most wealth managers, multifamily offices are generally reluctant to divulge returns, claiming the bespoke nature of their portfolios means averages are misleading. The anecdotal evidence suggests the best-performing offices delivered positive returns last year while the worst saw negative returns in the low teens in percentage point terms. At the lower end, at least, this is not much different from the mainstream wealth industry. The private client index compiled by Asset Risk Consultants, which tracks the performance of 35 UK-based wealth managers, returned -12.4% for balanced sterling portfolios last year, although dollar returns were lower at -19%. Nevertheless, Unigestion’s Paterson says: “2008 was a wonderful year

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T H E WA L L ST R E E T J O U R NA L .

for multifamily offices in general in terms of differentiation because it was the first year for a while in which it was easy to spot the difference. Our client portfolios significantly outperformed the private banks and we were able to avoid all the nasty elephant traps.” Paterson says most of his clients saw their portfolios deliver singledigit losses in percentage terms, while the best-performing client portfolios were “up significantly”. Sartogo at Global Wealth Management says families with conservative, capital preservation strategies finished last year flat, while those with aggressive mandates were down considerably. Luis Palacios, founder of Elystone Capital, says his clients were down by about 10% last year. At HQ Trust, Stadlmann says negative returns were in the low teens: “It was nothing to cheer about but was within the range we consider acceptable given the investment approach we take.” Listed funds run by Sand Aire, a London-based multifamily office, showed negative returns of between 14.7% and 21.7% last year, according to publicly available figures – although the funds reflect only a portion of clients’ assets. On average, it seems likely multifamily offices easily outperformed the broader wealth management industry. But Harvey says returns tell only part of the story. He says: “Multifamily offices have been winners from the financial crisis not because they are multifamily offices but because they are independent advisers. Rather than a flight to quality, there is a flight to advice with clients happy to pay for what they believe to be independent.” WB

“MULTIFAMILY OFFICES HAVE BEEN WINNERS FROM THE FINANCIAL CRISIS WITH CLIENTS HAPPY TO PAY FOR WHAT THEY BELIEVE TO BE INDEPENDENT ADVICE”

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Defining a multifamily office is tricky. The purists will say it must provide all the services a family might expect of their own private office, from managing investments to coordinating tax and legal advice, property management, travel, security and interior design arrangements. Few, however, do the lot. Andrew Rod dger, Rodger, head of the fam mily family office at Stoneh hage, Stonehage, says: “We are not not aware of many multifamily offic ces offices that offer a full, multi-

BELGIUM Praxis FRANCE FinanciereFinanciere-MJ

For the masses You no longer need to be part of the jet set to invest alongside some of Europe’s wealthiest families. Iveagh, a multifamily investment office founded by a branch of the Guinness brewing dynasty, last year launched a fund, Iveagh Wealth, open to anyone with £50,000 or more to invest. It has raised more than £50m since September and is adding a Swiss franc share class to the existing sterling, euro and dollar classes. While the move appears to turn Iveagh from an independent adviser to a product seller, Chris Wylie, head of private clients, stresses that the public fund uses exactly the same asset allocation approach as the bespoke portfolios the firm manage for wealthy families, including

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AUSTRIA Seyer & Partner Partn Independent winner: Jorge Lorenzo of Spain celebrates victory in the Japanese motorcycle Grand Prix

Edward, Earl of Iveagh and his relations, who have all their financial assets with the firm. Wylie says: “They’re not hedging their bets.” As with many multifamily offices, the investment approach emphasises picking the right asset classes at the right times, rather than choosing the best fund managers. John Ricciardi, head of asset allocation at Iveagh, says: “All the evidence shows 90% of returns are delivered by asset allocation.” Performance so far has been impressive, with the fund returning -2.1% last year. However, the fees are far more in tune with the investment industry than multifamily offices, with a 1.5% annual management charge and a performance fee of 10% above a hurdle.

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LUXEMBOURG Quilvest Bemberg family office branched out in into banking banking.

disciplinary service.” Stonehage claims to be among the minority of full service firms, as does London-based Sand Aire. Joan Major, a director at Sand Aire, says: “We aspire to clients feeling this is their single family office.” At the other end of the spectrum is Lord North Street which styles itself as a private investment office. Co-founder Adam Wethered says: “We didn’t feel

there was a gap in the market for noninvestment activities.” Some multifamily offices do not even offer investments, concentrating instead on consolidating reports from other service providers and monitoring their performance. Scorpio Partnership estimates there are about 100 independent multifamily offices in Europe, defined as those not affiliated to a bank or mainstream wealth manager. Our table lists the most prominent.

Ferguson Partners Specialises in bespoke co-investments, consultancy and networking.

Iveagh See panel (left).

Guggenheim Famous US family office has operations in Geneva and London. Arlan Also has independent advisory for lesswealthy clients. Ramella FO

GERMANY HQ Trust SWITZERLAND Global Wealth Mngmt Has merchant bank and corporate governance arms. Private Client Partners Headed by Andreas Bodenmann and Andreas Limburg.

Kehrli & Zehnder NETHERLANDS Commenda FO Administrative focus. UK Sand Aire Founded by the Scott family. Stonehage Stanhope Capital Five founding families. Bessemer Trust of the US owns a stake.

Fleming Family & Partners Manages €5bn with a hedge fund management offshoot. Elystone Capital Backed by Francesco Trapani, chief executive of luxury goods firm Bulgari. Capital Generation Partners Set up by Khaled Said, son of Syrian-born billionaire Wafic Said. Lord North Street MaxCap Partners Founded by financier Michael George. Nean Wealth Advisers Run by ex-private banker, Simon Evans. Unigestion

KEY: Full-service family office Investment Wealth Consultancy Concierge Consolidated structuring reporting/monitoring Source: Company Websites

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T H E WA L L ST R E E T J O U R NA L .

Cover story BUSINESS

Family



back n

vogue

By James Rutter

A

mid the hand-wringing and soul-searching as European policymakers count the cost of the financial crisis and attempt to chart a course to recovery, one sector of the economy has been largely overlooked: family businesses. While it has been a rough ride for Europe’s top family companies, they have fared better than the market at large. Credit Suisse’s index of listed companies in which families have substantial shareholdings is 4.1% ahead of the MSCI World equities index since the start of last year. Wealth Bulletin’s second annual ranking of Europe’s top 10 listed family businesses, compiled by Credit Suisse, shows the best performers have delivered impressive share price gains over five years despite the recent precipitous declines in equities. Germany’s SolarWorld, headed by founder Frank Asbeck, tops the ranking for the second year. New entrants include French internet services provider Iliad and 200-year-old Portuguese retail group Jerónimo Martins. Michael O’Sullivan, head of global asset allocation at Credit Suisse’s private banking business in London, says: “The characteristics of the family business model offer other companies, but also policymakers,

8 MAY 2009

a good reference point as they look to pick up the pieces from the credit crisis. Family businesses also capture the ethos of the post-credit crisis world – the collective over the individual, long-term over short-term decision-making, low leverage-over financial engineering and stability over volatility.” Joachim Schwass, a professor specialising in family business at the IMD business school in Lausanne, also sees the changed business landscape as benefiting family firms. He says: “Greater cynicism over the activities of public companies is a great opportunity for family businesses. They have a values-based approach and mean it. That is working in their favour.”

BUFFETT One man who needs no convincing of the merits of family businesses is Warren Buffett, chairman of Berkshire Hathaway. Dubbed the Sage of Omaha for his far-sighted investing, Buffett suffered along with many others last year making, by his own admission, some “dumb” investments. Yet he remains an avid suitor of family-run companies. When he took a four-city tour of Europe a year ago he was looking specifically for established, family-

“GREATER CYNICISM OVER THE ACTIVITIES OF PUBLIC COMPANIES IS A GREAT OPPORTUNITY FOR FAMILY BUSINESSES. THEY HAVE A VALUES-BASED APPROACH AND MEAN IT”

owned businesses to add to Berkshir Berkshire Hathaway’s portfolio. In his annual letter to shareholders in February, Buffett wrote: “Our long-avowed goal is to be the buyer of choice for businesses – particularly those built and owned by families.” Deals have yet to follow from his European trip. But as Angelo Moratti, president of family-run Italian oil refining company Saras and Buffett’s guide on the tour, told Bloomberg at the time: “They may not be ready to sell now, but they may be ready in five years.”

TOUGH QUESTIONS Some may be ready much sooner. The tumultuous 12 months since Buffett toured Europe have forced many families to question their commitment to being long-term business owners. Grant Gordon, chief executive of the UK’s Institute for Family Business, which represents 120 companies with a combined turnover of £29bn (€32bn), says: “The crisis has created pressure to ask tough questions. Previously, it was easy for inactive shareholders to sit back and wait for their dividend cheque to arrive on their doormat twice a year. Now they have to ask themselves: do we want to continue as a family having all our eggs in one basket? Do we all as shareholders buy into the vision we have as family business owners?”

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Karina Challons, a director at HSBC Private Bank, suggests some entrepreneurs who were confident of selling their businesses are facing an uncomfortable period. She says: “Deals that were almost signed and sealed have fallen by the wayside. But some owners are not prepared to accept significantly less than the business was worth last year, even though the figure was probably based on fresh air.” With company valuations depressed, and private equity firms chastened by the credit crunch, Gordon expects to see few outright sales of established family businesses. He says: “The question is not so much around whether or not to exit, but around which of the owners are genuinely committed to the business. That may mean realigning the ownership structure and finding mechanisms to trade shares within the family.”

WEALTH The financial crisis has nevertheless been a shocking experience for many family business owners. Luis Palacios, founder of multifamily office Elystone Capital, which has a group of European entrepreneurs as clients, says: “Some have had to think the previously unthinkable: that their business could disappear. They have weathered the storm but as a result are much more focused on preserving their personal wealth and making sure they have planned for future generations.” Challons agrees: “Families are putting aside pockets of money to

Europe's top 10 listed family businesses Best performers over five years*

FAMILY BUSINESS VALUE 120

Source Credit Suisse

110

1 2 3 4 5 6 7 8 9 10

(1) SolarWorld

100

Est: 1998 Business type: Solar energy Return: 1441% The Asbeck family, headed by founder and chairman Frank, owns 25% of Germany’s fourth largest energy company.

90 80

CS family index

70

MSCI World

60

(2) Eramet

50 40 Index = 100 at 29/01/07 Jan 07

M ONDAY, M AY 25, 2009 S9

Jul 07

Jan 08

Jul 08

Jan 09

cover them in the worst of times. They are not quite putting it under the mattress but making sure it is as safe as possible. They regard their risks as being in the business.” Schwass has also observed a change in mindset among family business owners when it comes to their personal wealth. “The vast majority are very critical of the banks they traditionally trusted to preserve and grow their wealth, but there is blame on both sides. Advisers and families were perhaps not focused enough on preservation; the growth paradigm became ingrained. That has now changed.” What remains, however, is the sense of perspective that multigeneration family businesses can bring to the current crisis. Schwass says: “I’ve been dealing with three family businesses where the senior members are in their 90s. They’ve seen it all before. For them, this is just another blip.” WB

Est: 1880 Business type: Mining Return: 286% The Duval family owns 37% of the French nickel miner originally controlled by the Rothschilds.

(NEW) Iliad

Est: 1993 Business type: Internet service provider Return: 282% Colourful founder, Xavier Niel, keeps a tight grip on the French internet services company, with a 65.5% shareholding.

(4) Ubisoft Entertainment

Est: 1986 Business type: Online entertainment Return: 188% Five Guillemot brothers founded the French computer games company and the family retains a near 11% stake.

(NEW) Antofagasta

Est: 1888 Business type: Mining Return: 173% London-listed mining conglomerate controlled by Chile’s Luksic family. Jean-Paul Luksic, 44, is executive chairman.

(NEW) Alfa Laval Est: 1883 Business type: Engineering Return: 157% Part of the empire of Sweden’s Rausing dynasty. Privately-held family company Tetra Laval owns 18.4% of Alfa Laval.

(NEW) Software

Wealth management after the crunch Research and rankings by Dow Jones www.wealthbulletin.com/wealthmanagementafterthecrunch09

Supported by:

Est: 1969 Business type: Business software provider Return: 147% Founder Peter Schnell owns 29.3% through the Software AG Foundation. This year he received Germany’s order of merit.

(NEW) Jeronimo Martins Est: 1792 Business type: Food distribution and manufacturing Return: 139% Portuguese company controlled by the Soares dos Santos family, headed by company chairman, Alexandre.

(5) Sonova Holding Est: 1947 Business type: Hearing healthcare Return: 136% Andreas and Hans-Ueli Rihs, sons of founder Ernst, own 11% and 9% respectively of the Swiss hearing-aids company.

(NEW) Ratos

Est: 1792 Business type: Private equity Return: 128% Descendants of founders Ragnar and Torsten Sőderberg own 20% directly and 17% through family foundations.

*Share price performance five years to March 25

www.wealth-bulletin.com

SOURCE: CREDIT SUISSE

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T H E WA L L ST R E E T J O U R NA L .

Comment PROCREDIT

Waving or drowning?

By Mike Foster

I

t was US investment bank JP Morgan that in the mid-1990s brought the world the credit default swap – a derivative which, in theory, insured bond investors against companies going bust. A decade and a credit crunch later, JP Morgan’s private banking arm has been among the first to start buying higher risk debt for its wealthy clients, in the fourth quarter of last year. The move was significant, given the bank’s record in credit markets. By inventing default swaps it lit the touchpaper that caused the explosion in credit derivatives. This ultimately blew up the global economy, but JP Morgan avoided the credit-related excesses that brought down other banks. It bought Bear Stearns on the cheap last year, when the credit crunch started to become a crisis, and its private bank attracted billions in new money as clients fled less stable rivals. Roberta Gamba, head of portfolio construction in Europe, the Middle East and Africa at JP Morgan Private Bank, says the signal to start buying riskier debt was the failure of investment bank Lehman Brothers last September. “From that point, we took the view no more banks would be allowed to fail,” she says.

BOLD MOVE Gamba decided to take her biggest ever bet on credit rated below AA quality. She says: “We have gone to 18% against a normal exposure of 9% for higher risk credit, including distressed debt, commercial mortgages and funds managed by third parties. We have been able to secure an average yield of 15% by buying debt at a sizeable discount to its face value.” It was a bold move for a private bank, given the prevailing mood of risk aversion, but plenty of other wealth managers have followed FIND INVESTMENT STRATEGIES @

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10 MAY 2009

by tipping corporate bonds. More worrying is the eagerness of some to return to the practices that marked the prelapsarian days of easy credit. According to Robert Taylor, chief executive of Kleinwort Benson, some banks are encouraging clients to use gearing again to buy high-yielding products. Debt originators report growing demand for bonds from companies with credit ratings as low as BBB (one notch above junk status). Commentator Michael Lewitt of adviser Harch Capital is irked by bankers reverting to type. He says: “Business leaders are more focused on figuring out how to extract their personal pound of flesh from the system than preventing g their own short-term greed eed from placing the system at risk again.”

ECONOMICS CS

Small is ful beautiful By Thierry Mallerett

T

o understand why so many wealth owners are leaving large private banks to join much smaller institutions, you need look no further than two potent, and interlinked, bits of economic theory. One is the so-called principal/ agent problem, the other is the information asymmetry that results. The principal/agent problem is at the heart of the many conflicts of interest that permeate the financial industry. A principal (the wealthowner) hires an agent (the private bank) to act on his or her behalf. But the principal has no real way of ensuring that the interest of the agent is aligned with her own. Information asymmetry assumes that the agent has information that will not be used in the best interest of the principal. This problem is rendered more acute by the fact the agent

They should bear in min mind that Gamba’s bet is based on improved im market liquidity, not economic econo recovery, prompting a lowe lowering of credit spreads – the price above a government borrowing costs cos that companies have to pay for d debt. Corporate bonds have rallied ra in recent weeks and investo investors who failed to act as early as Gamba Gam have probably missed their chan chance of gains, although yields on riskier d debt remain attractive compared with ccash. It can be argued the late latest attempts to reflate the economy are no n different to similar actions by former Federal Greenspan, Reserve chairman Alan Gre except in terms of scale. that those Gamba is concerned tha proclaiming recovery are getting carried away. She remains cautious on prospects going out to next year, with an equity weighting of 29% against a norm of 40%. Jeremy Grantham, top strategist with asset manager GMO, says: “A large rally is likely to prove a last hurrah…a codicil on the great bullishness we have had since the early 1990s. WB

“A LARGE RALLY IS LIKELY TO PROVE A LAST HURRAH… A CODICIL ON THE GREAT BULLISHNESS G WE HAVE HAD SINCE W THE EARLY 1990S” TH

almost never bears the risk of the principal. This creates an incentive to hide the true risks from the client. The long-term interest of the principal (the preservation of their wealth), may be sacrificed for a short-term gain for the agent (a bonus or a commission).

CO-INVESTMENT Some private banks offer protection against the principal/agent problem and asymmetric information by taking the form of a partnership with unlimited liability and charging a higher price for their services. But the only way to ensure the interests of the principal and the agent are aligned is for the agent to co-invest alongside their clients: an approach only smaller boutiques, such as family offices, tend to follow. Being small is no guarantee of a defence against the principal/agent problem – plenty of family offices were investors in Bernard Madoff’s ponzi hedge funds. It is, however, reasonable to assume that the stronger the connection between principal and agent, the greater the level of transparency, which is ultimately the best protection against the risk of asymmetric information. WB

PHILANTHROPY

Give and you shall receive By Tara Loader Wilkinson

W

ith many wealthy individuals nursing losses on their investment portfolios it might seem an inappropriate time to raise the idea of giving away money. But several private banks are putting more emphasis on philanthropy, despite the economic downturn prompting a decline in charitable giving. Emma Turner, the recently appointed head of philanthropy at Barclays Wealth, says the rationale is to broaden and deepen relationships with clients. “Clients are pleasantly surprised when their relationship manager has something to talk about other than personal finance. But how you broach the subject is key. You don’t want to put people on the defensive,” she says. Barclays offers philanthropy advice for free and Turner says there is plenty of interest, particularly from wealthy parents who do not want to pass on their entire fortune to their children. Other UK private banks expanding their philanthropy services include JP Morgan, Kleinwort Benson and SG Hambros.

NO STRINGS Coutts set up a three-strong philanthropy team four years ago, headed by Mark Evans, and is unusual in charging extra for advice. Evans says wealthy entrepreneurs tend to be the most receptive clients. “Inherited wealth comes with its obligations – one doesn’t feel free to give it away to whichever charity one pleases,” he says. “Self-made money has no strings attached.” Karin Jestin, head of philanthropy at Lombard Odier, a Swiss private bank, says that while donations to charities are down overall, many of her wealthier clients are maintaining their giving. “In these difficult times there is a heightened sense of responsibility to give,” she says. Lombard Odier hopes to hire more staff to its four-person team in response to growing demand. Other large wealth managers do not share this enthusiasm for philanthropy. Goldman Sachs has not replaced Turner since she left for Barclays Wealth at the end of last year. Morgan Stanley has no plans to expand its philanthropy service and Merrill Lynch says it does not intend to offer specialist advice in Europe. WB

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M ONDAY, M AY 25, 2009 S11

Agenda HEDGE FUNDS

Renaissance for funds of funds exposed by crisis By James Rutter

S

ome investors might feel Banque Privée Edmond de Rothschild has a lot to answer for. The Swiss-based private bank, part of the Rothschild family empire, launched the world’s first fund of hedge funds 40 years ago to pool investments from its wealthy clients in a portfolio of hedge funds. In recent years, funds of hedge funds became a cornerstone of many wealthy individuals’ portfolios. While credit was easy and hedge funds delivered the absolute returns they promised, it was a highly profitable business for fund providers and a decent enough bet for investors. But last year the promised absolute returns became a distant dream for most investors. Moreover, the diversification across different funds that was meant to reduce risk instead exposed fault lines in due diligence as funds of hedge funds were revealed as investors in Bernard Madoff’s fictional portfolios. Others were caught out by fund blow-ups and failures. Investors who rushed to withdraw their money found some fund of funds managers putting up gates to prevent them exiting, claiming they didn’t have the cash to pay redemptions and would be forced to sell positions at huge discounts. In the aftermath of last year’s carnage, it is unsurprising to find Alexandre Col, head of investment funds at Edmond de Rothschild, extolling the virtues of funds of hedge funds. He says: “Returns over the last 40 years show that it has always been useful to have an allocation to funds of hedge funds in a portfolio.” Banque Privée Edmond de Rothschild, which has €8.4bn ($6.5bn) in its LCF Prifund range, has for many years regarded a 30% allocation to the sector as sensible which, concedes Col, is “at the high end”.

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Last year, its flagship uncorrelated fund returned –15.7%, less than half the loss of most equity markets and better than the performance of the average single manager hedge fund but still a long way from positive territory. Col says: “The biggest mistake today would be to allocate your portfolio based on what happened in September, October and November last year. That was a very specific time.” Nevertheless, he accepts many investors who suffered large losses last year will not be returning any time soon. A recent study by Bank of New York Mellon and research firm Casey Quirk estimated that high net worth individuals accounted for 80% of hedge fund redemptions last year. Col expects institutions to be bigger sellers this year. “A lot of private clients arrived too late and have lost money recently. They generally

LCF PRIFUND PERFORMANCE (%) FUND ’08 UNCORRELATED -16.8 VOLATILITY -26.7 EUROPA -21.9 TRADERS -12.7 EMERGING MKTS -38 DIVERSIFIED -19.4

Q1 2.3 0.7 3.1 -0.5 0.1 0.1

Source: Banque Privée Edmond de Rothschild

acted more quickly than pension funds and have already redeemed whereas institutions were slower to sell because of the committee decision-making process.” While Edmond de Rothschild suffered redemptions last year, it had enough liquidity to pay investors on demand, avoiding side pockets (arrangements struck with individual investors outside the terms offered to others), suspensions and gates.

CHANGE The crisis has, however, prompted a change in Col’s approach. Previously, he believed in having between 40 and 50 funds in a portfolio – quite a lot by some standards. The spread provided liquidity, mitigated risk and enabled investments in numerous niche strategies that could deliver good performance but only for smaller amounts. “Currently I think the opposite and we are much more concentrated, because the world has changed,” he says. He has half the number of managers because niche strategies are illiquid and he regards smaller funds as more risky. He also expects some of the most lucrative investment opportunities, particularly relating to distressed assets, to only be available to larger funds. There is also a good chance the next year or two will be lucrative ones for the hedge funds that survived the credit crunch. Research from Citi Private Bank shows hedge fund returns tend to be strong in the two years following a quarter of severe market stress. The average annual return for the Hedge Fund Research composite in the two years following the third quarter of 1998, when Russia defaulted on its debts, was 24%, according to Citi. Fewer funds, and less competition from the proprietary trading desks of investment banks, should help boost returns. Of the strategies run by Banque Privée Edmond de Rothschild, Col expects the uncorrelated and long-short equity funds to perform best this year. “The trends aren’t there for the macro funds and commodities trading advisers. Most of the big moves in interest rates and currencies have already happened. This year we are back to a stock-picking, trading approach, with short-term, sector views being rewarded.” WB

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T H E WA L L ST R E E T J O U R NA L .

People WEALTHBULLETIN.COM

ADRIAN KÜNZI, managing partner, Wegelin & Co, St Gallen

Rising stars in Europe’s wealth industry i ünz Adrian K

or the second year, WealthBulletin.com asked readers to nominate rising stars in European wealth management aged under 40. Below are the top five from the list we have compiled. To see the rest, go to www. wealthbulletin.com

BORIS COLLARDI, chief executive, Bank Julius Baer, Zurich Last year’s top rising star, Collardi, 34, has continued his ascent. Promoted to chief executive of Bank Julius Baer in March, Collardi has one of the most important jobs in Swiss private banking. Colleagues say the former Credit Suisse manager has top class business management skills, but is also an excellent builder of client relationships – a rare combination in private banking. As chief operating officer for Bank Julius Baer, Collardi was known for his tight control of costs, a skill he has been quick to put to work as chief executive.

TIFFANY TROXEL, Tiff any Troxel

senior financial adviser, Merrill Lynch Global Wealth Management, London

Troxel, 33, was recruited by Merrill Lynch in March to work with ultra-high net worth clients and is seen by contemporaries as one of the top relationship managers in Europe. She joined Merrill Lynch after six years at UBS, where she was one of the few advisers to be awarded the “UBS Circle of Excellence” three times, an annual award which recognises the top advisers globally. Troxel has the academic credentials to back her relationship management skills, with degrees from Harvard and Oxford. FIND INVESTMENT STRATEGIES @

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MAY 2009

Courtesy the artist and Parasol unit

Künzi, 36, is one of the youngest unlimited liability partners of a Swiss private bank. An alumnus of Goldman Sachs, Künzi is viewed among his contemporaries as a rising star in Swiss banking, destined for great things. Now in charge of Wegelin’s business in Geneva and Lausanne, Künzi has spent more than 13 years at the St Gallen-based bank that has seen strong growth in the past 18 months.

By David Bain

F

The Procession, 2005 Thomas Hirschhorn, ©The artist

ONE OF THE YOUNGEST UNLIMITED LIABILITY PARTNERS OF A SWISS PRIVATE BANK, CONTEMPORARIES SAY KUNZI IS DESTINED FOR GREAT THINGS

Not-for-profit galleries nurture new talent Ben Wright

The relationship between wealth and art, or patron and artist, is an ancient one. It has been given a contemporary twist by the rise of not-for-profit galleries, which add a dash of philanthropy to the mix to help struggling artists. Calvert 22, which opened this month, is London’s latest not-for-profit gallery, specialising in Russian and eastern European contemporary art. It is the brainchild of Nonna Materkova, a native of St Petersburg who has lived in the UK since the 1990s running Roslink, a corporate finance firm specialising in Russia.

Materkova says the gallery’s charitable aims have helped smooth the path to launch. “I have no doubt the amazing amount of goodwill and help this project has received is at least partially because it is not a commercial venture.” She suggests Calvert 22’s not-forprofit status has also helped attract highprofile curators such as David Thorp, who curated its launch show. There has been a proliferation of notfor-profit galleries opening in London in recent years. Raven Row is financed by Alex Sainsbury, a scion of the supermarket dynasty. The Zabludowicz Collection of contemporary art, funded by Finnish billionaire Poju Zabludowicz, is housed at the 176 gallery in north London.

Parasol unit claims to be London’s first not-for-profit gallery, having been launched in 2005 by Ziba de Weck, the wife of Pierre de Weck, the global head of private wealth management at Deutsche Bank. She says: “These private undertakings are all slightly different. Crucially, I am not using Parasol to display my own collection.”

RISK A curator by training, De Weck says not-for-profit galleries will become more important as the recession hits the art market. With commercial galleries tightening their purse strings, they may stop taking risks on unproven art school graduates, leaving not-for-profit galleries as one of the few platforms for emerging talent.

MARC PICTET,

BIANCA WATTS,

chief executive, Bank Pictet, Luxembourg

executive director, Morgan Stanley Private Wealth Management, London

Bearing the family name of arguably Switzerland’s most-revered private bank might be a burden to some, but Marc Pictet, 36, could be the latest in the dynasty to rise to the top. Pictet heads a team of more than 300 private bankers and support staff for the bank in Luxembourg, regarded as a training ground for partnership. Swiss law requires a family member to be a senior partner if a bank wants to use a family name as its brand.

At only 31, Watts is one of the youngest – and most dynamic – in this year’s rising stars. Promoted last year to executive director, Watts runs a London-based team advising ultra-high net worth individuals and families across Europe and the Middle East. WB

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M ONDAY, M AY 25, 2009 17

niquets loose around their ankles, like bracelets, so they can get at them quickly. “It’s not for me,” said Sgt. Roy Taylor, a 23-year-old squad leader from New Orleans. “It’s for the guy next to me.” The Marines maintain two fortified positions in Now Zad. First Platoon mans an outpost atop ANP Hill, named for the Afghan National Police unit that is supposed to be here but isn’t. The position provides covering fire for two improvised helicopter landing pads, otherwise exposed on the dusty flatlands. On the round hilltop is a c-shaped trench. The Marines live in bunkers built into the sides of the trench, buffered by sandbags and dirt walls. Some are big enough for three or four men; some are little more than crypts with space for a single cot. None is high enough to stand up in. “What we’re doing is denying the enemy’s ability to operate in Now Zad,” said the platoon commander, 2nd Lt. John Langer, a 23-year-old from Dallas. “It’s a waiting game,” he said. “As long as we stay here, they’ll know somebody is watching.” On rare occasions, the lieutenant’s platoon patrols through a nearby village where some former Now Zad residents have taken refuge. The Marines don’t visit too often, however. They know that the Taliban will punish villagers who accept U.S. radios or food aid. It wouldn’t be a problem if the Marines had enough troops to leave a permanent presence in the village, but they don’t. Below the hill is Lima Co.’s main base, surrounded by razor wire and giant barriers filled with dirt and rock. The camp abuts the town itself and the guard towers look onto ghostly streets. “I guess way back in the day this used to be a thriving town,” said Lance Cpl. Raymond Cardona, 20, from Ormond Beach, Fla., sharpening his fighting knife recently in a guard post built on the ruins of a small store. He and Lance Cpl. Daniel Wescovich manned a machine-gun-like grenade launcher that can spew explosives into Now Zad at a rate of hundreds per minute. In the street below, sheet-metal shutters creaked and wooden doors rattled in abandoned storefronts, their facades divoted by bullets. Black-blue swallows dodged among swaying strips of awning. Electric poles stood, leaned or reclined, their wires drooping to the streets. Lance Cpl. Cardona pointed across the street to a forlorn mud building with a blue sign crudely depicting a cut-away drawing of a molar. The sign identified it as the workplace of Dr. Mohamad Zaher Zahin. “That there was a dentist’s office,” Lance Cpl. Cardona said. “Down on the hardball is a doctor’s office.” On a map tacked to the plywood wall, Lance Cpl. Wescovich, a 20-year-old rifleman from Long Beach, Miss., traced the insurgents’ L-shaped front lines. To the east, he

Getty Images (2)

NEWS IN DEPTH

Lance Cpl. Daniel Wescovich, top photo, with his squad from the 3rd Battalion, 8th Regiment. U.S. Marines, above, fire mortars on Taliban positions on April 3 in Now Zad. A Marine, opposite page, patrols a road in Now Zad on April 1. As part of U.S. President Barack Obama’s Afghan ‘surge,’ the military has ordered 21,000 new troops to Afghanistan, bringing the total to around 60,000.

place to place, emerging under buildings to surprise Marine patrols and plant mines. Before coming to Now Zad, Sgt. Eric Droste, 23, of Fort Dodge, Iowa, watched a televised version of Stephen Ambrose’s World War II history “Band of Brothers,” in which German troops were on one side of a river, Americans on the other. He wondered what such a war would be like. Now he knows. “We could go over there and fight, but it wouldn’t do us any good, because we couldn’t

For the Marines here now, being a sideshow to the main effort has meant a daily routine of dangerous patrols through a no man’s land littered with land mines. pointed to a wide swath of dried riverbed running along the edge of the town, a route the insurgents use to move weapons, money and men. “They own the eastern wadi,” he said. “But the central wadi is pretty much neutral now,” he added cheerfully. To the north he picked out a thin strip of road nicknamed Pakistani Alley, for the foreign fighters thought to man it. The Marines once found 20 mines in a small field that way. “That place scares the [expletive] out of me,” said Lance Cpl. Cardona. “I compare it to playing Minesweeper”—a computer game—“on ‘extremely difficult.’ ” The insurgent positions are in buildings and bunkers, too, the Marines say, or among trees edging the eastern wadi. The militants use ancient irrigation tunnels to move from

hold the ground,” said Sgt. Droste. In April, the Marines bombarded the insurgent front line. Jets dropped bombs and attack helicopters fired rockets into mud buildings. From their base, the Marines sent mortars arcing into insurgent fortifications. The attack succeeded in pushing back the front line by a few hundred meters and creating a larger buffer around the U.S. positions, the Marines say. They also believed it killed a substantial number of fighters. Afghanistan won’t see the bulk of the surge troops until later this summer. But the military is already putting its new strategy to the test in the provinces around Kabul. Early this year, a 3,500-man infantry brigade arrived in Wardak and Logar Provinces, two places where the coalition had had a relatively small

footprint in 2008. The early results appear promising. The additional troops have allowed commanders to clear insurgents from several valleys and towns. In their place are joint U.S.-Afghan forces. The goal is to assure locals who side with the government they won’t be left to the mercies of vengeful returning insurgents. Commanders say they don’t have enough troops to guard every valley and have to pick targets in the hope that word of their successes creates a chain reaction in areas where they don’t have the manpower to set up permanent outposts. Another fear is that the new troops are simply pushing insurgents from one valley to the next. Since the bombing raids in Now Zad, the number of ambushes and attacks on the Marine bases has diminished substantially, although commanders worry that the local insurgents are simply taking a break to harvest opium poppies, earn some money to buy more weapons and prepare for more fighting. “I think they’re happy with a stalemate, as long as we don’t mess with their main supply route, the eastern wadi,” Sgt. Strom told the new Marine, watching the tree line that edges the riverbed. Day and night, the Marines send patrols into the town, orchards and fields, trying to catch insurgents off-guard or provoke them into a full-on firefight. Now they are teaching the incoming unit, Golf Co., 2nd Battalion, 3rd Marines, the survival tips they have picked up. Sgt. Jasen Wrubel, 25, of Roseville, Mich., guided a new man through empty homes and empty stores, finding traces of the insurgents. At one house Sgt. Wrubel observed that someone had placed a burlap bag on top of a door, apparently to keep it from slamming loudly.

He once ran across an Arabic-brand cigarette. “The guy has been to Iraq,” he speculated. At another house the Marines tore a poster off a wall. The insurgents often hide weapons in holes dug behind the posters, Sgt. Wrubel explained to his replacement. “I never imagined it like this before I came out here,” he said later, patrolling past empty houses, aiming his rifle down empty lanes. “Very, very, very odd.” Land mines present a greater danger than gunfire in Now Zad. The insurgents have seeded the entire town with an ingenious array of homemade mines. There are mortar rounds buried with spring-loaded triggers that explode when a Humvee passes over them. Another device uses a fist-sized rock above ground to hold metal contacts apart below ground; when a Marine kicks it, contact is made and a plastic bottle explodes with ferocious power. Since they arrived in November , five Lima Co. Marines have stepped on land mines, while U.S. vehicles have hit seven more. In more than 700 patrols, Marines found another 50 or so. To combat the danger, each patrol is led by an engineer with a mine detector, a long wand with a disc-shaped sensor at one end and headphones at the other. On Sgt. Wrubel’s earlymorning patrol this month, the job fell to Lance Cpl. Keith Greenberg, a 25-year-old from Long Branch, N.J., rarely seen without a slight grin on his face. As soon as the Marines reached the end of the hardtop road outside their base, Lance Cpl. Greenberg stepped to the front of the formation. The next man in line turned and held one hand vertically in front of his face, like half a prayer, indicating the patrol should move single file. As the patrol followed in near-total silence, Lance Cpl. Greenberg swept the mine detector side-to-side with his right hand. He kept his left behind his back, holding his rifle still. Through headphones he listened for minor inflections in the mine detector’s whine that might reveal the presence of a bomb. He swept every patch of dirt, every wall, every berm where a Marine put his weight. Every few steps, each man behind him dragged the toe of one boot, as if performing a primitive dance, scuffing a path for the rest to follow. Many of the Marines have torn the soles loose from their combat boots from hours of scraping their way through minefields. If he finds a mine, Lance Cpl. Greenberg marks it with spray paint and steers the column around it. The men warn each other with a quiet hand gesture, holding their palms down and flicking their fingers outward, as if shaking off water. Before he leaves the base, Lance Cpl. Greenberg prays as if he and the other Marines have already made it through alive: “Thank You for getting us back safe.” He figures that might make it a done deal. Just to make sure, he also carries a Bible, a rosary and a lucky wine cork. Three engineers have been blown up since Lima Co. arrived here in November, out of the company’s seven total fatalities. The Navy has stationed an emergencyroom doctor, along with a critical-care nurse and a trauma nurse at the Now Zad Marine base, a highly unusual decision for such a small position. The medical team built a mobile ER mounted on the back of a seven-ton truck. When a Marine steps on a mine, the medical team mounts up and drives across country, pulls up behind a wall or berm and begins treatment on site. The truck’s sides are scarred by insurgent mortar shots. “Am I scared?” asked the Navy doctor, 55-year-old Steve Temerlin, of Poulsbo, Wash, before answering his own question: “I’m not crazy.”

WSJ.com Online today

See a slideshow about life and war in Now Zad, at WSJ.com/Lifestyle.


18 M ON DAY, MAY 2 5, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

EUROPEAN MARKETS LINEUP

Moving the markets

European indexes… CAC-40

DAX

FTSE 100

At right, Europe’s benchmark stock indexes and stocks Friday. Below each index are its most actively traded stocks. The charts show the percentage change in each index’s or stock’s value, rather than the point change, for purposes of comparison. The index level or stock price is indicated on each axis. All indexes and stocks are shown in local currency terms.

U.K.

4365.29

SMI

4918.75 France

Germany

3227.97 Switzerland s 0.33% or 10.56

5409.26

s 0.46% or 19.82

s 0.37% or 18.08

Friday’s gain pushed the index to a plus for the week, its fifth weekly rise in six. The market is closed Monday for a holiday.

The index is coming off its best week in more than a month after rising 3.8% and posting increases in four out of five sessions.

7500

8250

6000

10500

6250

6875

5000

8750

5000

5500

4000

7000

3750

4125

3000

5250

This market has risen in 10 of the last 11 weeks and six of the last seven sessions. The benchmark moved into the black for the year.

t 1.82% or 100.01 Financials were weak amid the failure of BankUnited in the U.S. Thursday. UBS lost 4.8%, while Credit Suisse shed 2.7%.

WSJ.com 2750

2500

Follow the markets throughout the day, with updated stock quotes, news and commentary at WSJ.com/Europe. Also, receive email alerts that summarize the day’s trading in Europe and Asia. To sign up, go to

J J A S O N D J F M A M 2008 2009

J J A S O N D J F M A M 2008 2009

WSJ.com/Online Today

Stock

Volume in millions

Close In pence

VodafoneGp Lloyds Bnkng BP RoyalBnkofScot BT Group

240.47 82.01 61.52 39.52 37.86

115.50 68.60 500.75 40.90 87.10

Change Net %

1.70 1.90 2.75 1.00 0.80

1.49 2.85 0.55 2.51 0.93

Stock

Volume in millions

DeutscheTel Commerzbank DeutscheBk Daimler DeutschePost

18.00 7.63 7.14 5.86 4.94

Close In euro

Change Net %

8.21 0.05 5.60 0.05 47.32 0.31 25.00 –0.28 9.70 0.21

Volume in millions

Stock

0.61 0.90 0.65 –1.11 2.16

3500

2000 J J A S O N D J F M A M 2008 2009

J J A S O N D J F M A M 2008 2009

Alcatel Lucent Arcelormittal AXA Total FrTelecom

13.73 12.13 6.76 5.22 5.03

Close In euro

1.769 20.965 13.105 39.685 16.685

Change Net %

0.012 0.195 0.320 –0.125 0.095

0.68 0.94 2.50 –0.31 0.57

Stock

UBS Nestle ABB Novartis CreditSuisse

Volume in millions

Close In franc

12.79 10.45 7.91 6.29 5.19

15.74 39.94 17.54 43.66 46.16

Change Net %

-0.79 -0.72 -0.31 -0.86 -1.26

–4.78 –1.77 –1.74 –1.93 –2.66

European stocks in the news Homeserve PLC

Aviva

Peugeot

United Kingdom 1,348.00 pence s 5.3% or 68.00 pence

United Kingdom 339.25 pence s 5.8% or 18.50 pence

France

Brewin Dolphin raised its target price following the company's annual results.

The insurer said it expects to see acquisition opportunities in the next six months.

Its automotive-equipment maker Faurecia raised fresh capital with a rights issue.

In pence

2100

720 600

In pence

1800 1500 1200 900

600 J J A S O N D J F M A M 2008 2009 Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

PERCENTAGE CHANGE Daily 1 wk. 52 wks

Indus Gds & Svcs Homeserve PLC

-0.7% 2.2% -36.0% 5.3% 13.7% -24.4%

UBS Switzerland

CHF15.74 t 4.8% or CHF0.79

Financials were weak following he seizure of a U.S. bank on Thursday.

In franc

28

360

24

240

16

none -36.60 9.73%

Insurance Aviva

0.5% 2.7% -41.7% 5.8% 8.5% -44.6%

Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

none n.a. none

-0.3% 3.3% -30.1% 6.1% 14.5% -51.7%

Price-to-earnings ratio Earnings per share, past four quarters Dividend yield Basic Resources Kazakhmys

United Kingdom 1,192.00 pence t 4.9% or 62.00 pence

Finland

Finland

Shares didn't benefit from Mogan Stanley's target-price increase.

Goldman Sachs cut its rating to "sell" from "neutral," citing overcapacity.

2100

20

1500

16

1200

12

900

8

Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

PERCENTAGE CHANGE Daily 1 wk. 52 wks

11 111.13 none

-0.1% 1.1% -34.7% -4.9% -8.2% -37.6%

1.4% 6.4% -55.8% 6.1% 7.7% -59.3%

none -2.41 3.71%

In euro

17.50

Basic Resources Outokumpu

1.4% 6.4% -55.8% -5.1% 14.5% -53.9%

Travel & Leisure National Express Grp

-0.8% 1.6% -29.6% 7.3% 7.8% -65.2%

Œ24.48 t 6.7% or Œ1.75

Shares retreated a day after rising on upbeat analyst comments.

In euro

42

15.00

36

12.50

30

10.00

24

7.50

18

5.00 J J A S O N D J F M A M 2008 2009 Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

PERCENTAGE CHANGE Daily 1 wk. 52 wks

14 0.78 3.77%

12 J J A S O N D J F M A M 2008 2009 Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

PERCENTAGE CHANGE Daily 1 wk. 52 wks

Technology Nokia

4 77.91 7.59%

PERCENTAGE CHANGE Daily 1 wk. 52 wks

Œ10.62 France t 6.0% or Œ0.68

5

Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

Atos Origin

10

PERCENTAGE CHANGE Daily 1 wk. 52 wks

Oil & Gas Dana Petroleum

5 126.49 1.43%

15

J J A S O N D J F M A M 2008 2009

100 J J A S O N D J F M A M 2008 2009

20

600 J J A S O N D J F M A M 2008 2009

350

Shares gave back some recent gains with Telecom equipment makers under pressure.

30 25

In euro

525

PERCENTAGE CHANGE Daily 1 wk. 52 wks

Nokia

In pence

600

150

Outokumpu Œ13.47 t 5.1% or Œ0.72

1100 850

In pence

900

J J A S O N D J F M A M 2008 2009

PERCENTAGE CHANGE Daily 1 wk. 52 wks

Automobiles & Parts Peugeot

The rail and coach operator said late Thursday it had sold its bus operations to pay down debt.

1650 1275

In pence

Dana Petroleum

1800

0.1% 5.4% -47.0% -4.8% 4.7% -43.7%

Bullish calls on the mining sector drove metals stocks higher.

8 J J A S O N D J F M A M 2008 2009

PERCENTAGE CHANGE Daily 1 wk. 52 wks

J J A S O N D J F M A M 2008 2009

Banks UBS

48 40

In euro

32

24

-3.63 none

Œ19.69 United Kingdom 682.50 pence United Kingdom 299.25 pence s 6.1% or 39.00 pence s 7.3% or 20.25 pence

120

Price-to-earnings ratio Earnings per share, past four quarters Dividend yield

National Express Grp

s 6.1% or Œ1.13

480

J J A S O N D J F M A M 2008 2009 none -56.20 2.63%

Kazakhmys

-2.4% 1.5% -32.1% -6.0% 1.0% -41.3%

none n.a. none

PERCENTAGE CHANGE Daily 1 wk. 52 wks

Technology Atos Origin

-2.4% 1.5% -32.1% -6.7% 14.7% -36.6%


How global rice markets went from shortages and riots to plenty and a prolonged slump in prices. Page 24 s Copyright 2009 Dow Jones & Company. All Rights Reserved

Heard on the Street: Weaning studios off DVDs. Page 32

PetroChina buys stake in Singapore refiner. Page 25 MONDAY, MAY 25, 2009 19

THE WALL STREET JOURNAL EUROPE.

will stick to plan Venezuela buys bank unit OPEC as market moves its way Chávez government will pay $1.05 billion to Banco Santander By Darcy Crowe And Raul Gallegos Caracas

V

ENEZUELAN PRESIDENT Hugo Chávez capped his latest spate of nationalizations with a deal to buy the local unit of Spain’s Banco Santander SA. Venezuela agreed to pay $1.05 billion for the unit, a deal that appeared to please Banco Santander investors. Some of Mr. Chávez’s recent series of nationalizations in different

DEALS & DEAL MAKERS

sectors has been spurred in part by Inc. for a period of time, in retaliation Venezuela’s precarious economy, for the company’s decision to close a which has been hit generally by the plant located in the city of Valencia. global downturn and particuCommerce Minister Edularly by lower oil prices. ardo Saman, who oversaw Oil revenue is about half the government’s takewhat it was a year ago. Sevover of some of the food eral recent oil-service complants controlled by pany nationalizations unCargill Inc, said he will ask folded after the companies Mr. Chávez to authorize stopped working because the temporary seizure, the the government couldn’t pay state news agency rewhat it owed them. ported. Almost every sector in The government had Venezuela is now under the granted Pfizer access to state’s expanding embrace, dollars at the official rate, Hugo Chávez including power, telecommuan advantage over other nications, and agro-indusfirms doing business in trial companies. The government Venezuela that need to finance local also seized rice mills and pasta facto- operations. “It can’t be that they are ries from U.S. food giant Cargill Inc. paying us back by closing a plant,” Venezuela said it is also consider- Mr. Saman said. ing seizing the local operations of A Pfizer representative couldn’t U.S. pharmaceutical company Pfizer Please turn to next page

Investors want risk, not dollars By Alex Frangos And Riva Froymovich The U.S. dollar is on the retreat, and the broad selloff may continue this week if the Federal Reserve increases its purchases of Treasury securities. As global optimism rebounds, investors who hoarded the dollar during the recent turmoil are shifting into riskier assets, in particular currencies of big commodities exporters that would benefit from global growth. Investors poured into dollars during the financial crisis, betting that

CURRENCY MARKETS

it was the world’s safest currency, thwarting predictions that the Federal Reserve’s easing policies would weaken the dollar. Low interest rates in Europe and elsewhere also gave less incentive to leave the dollar. “Now we are getting a reversal of all those things,” says Parker King, head of currency investing at Putnam Investments. He expects the U.S. to be among the last to raise interest rates and is betting the dollar will continue to weaken. “The market will be riskseeking, so all the money that was repatriated into the U.S. will be put back to work outside the U.S.” Please turn to next page

Forex race The yen and the euro against the dollar, and the dollar versus the currencies of major U.S. trading partners (J.P. Morgan index)* Dollar (J.P Morgan index)

20% 10

Yen

0 –10

Euro

–20 –30

2008

’09

*Trade-weighted index

Source: Thomson Reuters Datastream via WSJ Market Data Group

By Spencer Swartz LONDON—Oil markets have turned in OPEC’s favor after months of drilling a hole in the cartel’s coffers. But internal wrangling in the producer group still could cap recent price gains. The Organization of Petroleum Exporting Countries’ production cuts over the past five months are beginning to whittle down excess supply. World crude demand appears to be stabilizing and will be pressed further with the start of the summer driving season in the U.S. and Europe, after plunging for much of the past year. Economic recession has cut drilling investment in non-OPEC nations like Canada, fanning worry among traders that supply will once again tighten as the world economy recovers. Fewer non-OPEC barrels down the road will bump up the world’s reliance on OPEC crude, which supplies about four in 10 barrels consumed daily world-wide. These factors give OPEC ministers something to crow about when they meet Thursday in Vienna: Though still relatively weak, oil prices are up 35% since their last meeting two months ago. With such price increases a threat to the global economy, OPEC seems set to keep its oil spigots steady at its meeting, cartel delegates and officials said. Friday, light, sweet crude oil for July delivery settled 62 cents higher, or 1%, to $61.67 a barrel on the New York Mercantile Exchange, near a recent six-month high, although prices remain below an exchange-record $145 in July. Beyond

On the rebound Nymex-traded light, sweet crude on the continuous front-month contract $70

Friday’s close: $61.67 a barrel, up 70% since OPEC’s Dec. 18 announcement to cut 2.2 million barrels a day

60

COMMODITIES MARKETS

50 40

D

J 2009

F

M

A

M

30

Source: Thomson Reuters via WSJ Market Data Group

the fillip from OPEC output cuts, prices also have gained support from speculative froth, refining glitches and Nigerian militant attacks on energy infrastructure. “Prices are higher than OPEC could have hoped for and expected. Had OPEC not cut the way it did, prices would have fallen to $20 [a barrel] or less,” said Leo Drollas, deputy executive director and chief economist at the Centre for Global Energy Studies in London. Saudi Arabia, the cartel’s largest producer and the only OPEC nation in the Group of 20 industrial and developing nations, has added an incentive to keep production steady because it doesn’t want to be seen as spoiling the G-20’s stimulus plan for the world economy, announced in April, by backing measures that could sock consumers with higher Please turn to next page


20 MON DAY, MAY 2 5, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

MONEY & INVESTING

Morgan cuts role of bonuses Firm boosts base pay of its top employees; facing U.S. oversight

Chief Administrative Officer The company’s board approved Thomas Nides will get a base salary the changes this past week. of $750,000 each. The roughly 1,000 Morgan StanEach executive previously had a ley managing directors also will see base salary between $300,000 and their base salaries increase. People $600,000. In fiscal 2008, Messrs. familiar with the matter said the Chammah, Kelleher, Lynch and move is necessary to compete with Nides had base salaries ranging the pay at competitors like Goldman By Aaron Lucchetti from $300,000 to $322,903, accord- Sachs Group Inc. Under the changes, managing diMorgan Stanley said it will raise ing to a proxy filing by Morgan Stanthe base salaries of most of its top of- ley. Mr. Gorman’s base salary wasn’t rectors will see about 25% to 30% of ficers and many top-earning employ- disclosed in the filing. Morgan Stan- their overall compensation come ley Chairman and Chief Exec- from their base salary, up from ees in an effort to reduce utive John Mack’s salary will about 15% to 20%, said a person fathe importance of their anremain unchanged at miliar with the matter. A managing nual bonuses. $800,000. director making $250,000 in base The move comes as the The move shows salary could now see that U.S. government pushes Morgan Stanley and salary rise to $400,000. its own overhaul of comother Wall Street The move to de-emphapensation practices at firms acknowledge size bonuses is likely to banks and securities compensation was win praise from some Wall firms. Those companies part of the problem Street critics, though othgot government assisthat led to the finaners want lower overall pay. tance after investors lost cial crisis. Big yearDefenders of the tradiconfidence in their balend bonuses based tional pay structure on ance sheets, and are now Wall Street lament the pofacing tougher oversight James Gorman on recent profits drove traders, investtential decline of the boaimed at curbing the sort nus culture, partly beof excessive risk-taking that helped ment bankers, risk managers and top executives at Walid Chammah cause it could take away cause the financial crisis. some of the incentive to Under the changes, announced af- Wall Street firms to juice up ter the close of regular trading Fri- their bets to maximize short-term generate profitable ideas for firms and their clients. day, the base salary of Morgan Stan- profit while increasing risk. “The salary adjustments are not In the first quarter, Morgan Stanley co-presidents James Gorman and Walid Chammah will increase intended to increase total annual ley’s overall compensation and beneby one-third to $800,000 a year, ac- compensation” but to restore a bal- fits fell about 45% from a year earcording to a securities filing. Chief ance between fixed and variable lier. Several top executives, includFinancial Officer Colm Kelleher, compensation, the firm said in its fil- ing Mr. Mack, took no bonus in 2008. Chief Legal Officer Gary Lynch and ing Friday.

Demand looks solid for big sales By Min Zeng Despite rising concerns about the U.S.’s credit ratings, this week’s hefty round of government debt supply is still likely to attract investors. Last week, gripped by anxiety over rising budget deficits and soaring debt supply, investors sold longdated Treasurys, sending yields higher. But shortterm Treasurys and bills remained relatively unscathed, as they are anchored by the Federal Reserve’s zero-to-0.25% federal-funds target rate. That bodes well for the $162 billion in government debt slated for sale this week, with offerings of $61 billion in Treasury bills and $40 billion in two-year notes planned. The government will also sell $35 billion in five-year notes and $26 billion in seven-year notes. “The backup in yields will attract investors to make the auctions not a disaster,” said Jeff Feigenwinter, the head of U.S. government-bond trading at BNP Paribas Securities Corp. in New York. “There will be enough demand” for short-dated maturities. Indeed, while the 10-year yield jumped above 3.4% Friday, rising to its highest level since November,

U.S. CREDIT MARKETS

U.S. Treasury yields 10-year note: 3.455% 2-year note: 0.891% 5% 4 3 2 1 0 2008

’09

Source: Ryan ALM via WSJ Market Data Group

the two-year yield remained well below 1%. Friday afternoon, the 10-year note was yielding 3.455% while the two-year yield was 0.891%. That divergence pushed the gap between two- and 10-year yields wider, a trend that gained momentum last week. The gap Friday was 2.56 percentage points, approaching the 2.619-point gap seen on Nov. 13, 2008, the widest since the peak of 2.747 points on Aug. 13, 2003. Market participants said that the gap will eventually break through the peak, because selling in long-

term Treasurys will persist in coming weeks amid concerns about the U.S.’s credit ratings. The possibility of an actual downgrade remains remote, however. Traders note that foreign central banks have increasingly cut their holdings of long-dated Treasurys and shifted to short-dated maturities in an attempt to safeguard the value of their holdings. The declining U.S. dollar also propelled foreign investors to rebalance their holdings, because the dollar’s weakness shrinks the value of bonds in foreign-currency terms. James Combias, head of U.S. government bond trading at Mizuho Securities USA Inc. in New York, said the 10-year note’s yield may break 3.5% in the coming week. Higher yields could prompt the Fed to increase its Treasury purchases, particularly if the 10-year yield heads for 4%. That could jeopardize tentative improvements in the credit and mortgage markets by pushing mortgage rates back over 5%. “The Fed wants to bring consumer rates down, not to manipulate Treasury yields,” said Thomas Roth, head of U.S. government-bond trading at Dresdner Kleinwort Securities LLC in New York. “We could see slightly higher Treasury yields. But if the 10-year yield gets back to 3.5%, it will entice new buyers.”

OPEC will stick to plan as market moves its way Continued from previous page oil prices. Millions of consumers globally still are struggling with reductions in personal wealth, large debts and job losses that have yet to bottom out in many nations. “With the current and more optimistic economic indicators, and prevailing oil prices, I think OPEC will preach compliance” with the

group’s past output reductions, said one senior Persian Gulf OPEC delegate. That sentiment is echoed by other OPEC officials for additional reasons. Irritation has increased among Gulf OPEC producers that less-disciplined members, namely Iran and Venezuela, aren’t pulling their weight with OPEC cuts of 4.2 million barrels a day announced in late 2008.

Adherence to those reductions is slipping. OPEC laxity is just part of why some analysts said continued price increases aren’t a given. “OPEC has cut a lot of production, but the near-term fundamentals are not good, and we still haven’t a clue how and when demand recovers,” said Antoine Halff, deputy head of research at Newedge USA in New York.

Earnings boost Sears, while bank shares slide By Geoffrey Rogow U.S. stocks ended last week little changed as a late selloff for financial stocks offset buying in other sectors. The Dow Jones Industrial Average fell 14.81 points Friday, or 0.2%, to 8277.32, the fourth decline in a row. But after a 235-point gain Monday, the Dow finished the week up 0.1%. Traders noted activity was sparse ahead of the holiday weekend. All U.S. financial markets will be closed Monday in observance of Memorial Day. The Standard & Poor’s 500-stock index slipped 0.1% Friday to 887.00. Its financial sector declined 1.2% while utilities rose 0.7%. Consumerdiscretionary stocks also gained after some retailers posted betterthan-expected earnings. Financial stocks slipped as investors tried to figure out how many more bank failures might be coming, after federal regulators late

ABREAST OF THE MARKET

Thursday made their biggest bank seizure in the year to date. American Express fell 3.1% and Bank of America lost 3%. Sears Holdings gained 10% after it reported a surprise first-quarter profit late Thursday amid cost cuts and tighter inventory controls, and announced a new credit facility. American International Group fell 5.6% following news that Chairman and Chief Executive Edward Liddy will step down as soon as successors are chosen, which people familiar with the matter estimated could take roughly three to six months. In an interview on Thursday, Mr. Liddy said the company had reached an “inflection point” and needed a CEO who was ready to commit long term. Cougar Biotechnology rose 16% after Johnson & Johnson said late Thursday it struck a deal to buy the development-stage biopharmaceutical company, with a specific focus on cancer treatment, for approximately $1 billion in a cash tender offer. Johnson & Johnson fell 0.4%.

Pursuing risk, fleeing dollar Continued from previous page Investors fear rising federal deficits and the expansion of the Fed’s balance sheet are unsustainable, could compromise the U.S.’s credit rating and lead to a sharp spike in inflation, all of which would be bad for the value of the dollar. If the willingness to take on risk is sustained by fresh economic data or official comments in the days ahead, buying of the euro, the U.K. pound and emerging-market currencies against the dollar could build. More pressure could come if the Fed, as part of its efforts to keep long-term rates low in the broader economy, increases its Treasury purchases at the two scheduled operations this week. The government plans to sell $162 billion in bills and notes this week. This week will be crucial, said David Woo, global head of foreignexchange strategy at Barclays Capital in London.

“If the Fed does not come in to buy more bonds, the dollar can rally back. But yields will be higher,” he said. “What it boils down to is a tug of war between the market and Washington.” On the other side of the dollar’s slide is a big boost in currencies tied to oil and metals. The Canadian dollar has recovered nearly half the value it lost following the collapse of Lehman Brothers last September. Late Friday in New York, the euro was at $1.4004, from $1.3905, the dollar’s lowest level since Dec. 30, 2008. The dollar lost 3.6% against the euro on the week. The dollar was at 94.81 yen, up from 94.30 yen late Thursday and the first time in four sessions that it has firmed against the yen. The pound was at $1.5907 from $1.5856, down from the 2009 high of $1.5942 it hit earlier Friday. The dollar was also lower on the Swiss franc at 1.0848 francs from 1.0930 francs.

Venezuela buys Santander unit Continued from previous page be reached to comment. The Banco Santander deal gives Mr. Chávez direct access to commercial banking, one of the few remaining areas of the economy where the state doesn’t already have a significant, if not dominant, presence. By adding Banco de Venezuela, as the Santander unit is known, to its roster of state-owned banks, the government will command a market share of more than 20% in the banking sector, according to Softline Consultores, a local banking-research firm. Banco de Venezuela is the fourth-largest bank in the country by assets, with a nationwide network of nearly 300 branches. The government is expected to pay $630 million in cash for the Santander unit when a formal takeover takes place on July 3. The remaining $420 million will be paid before year’s end through two promissory notes for $210 million each. Santander, which last year was trying to shed its operations in Vene-

zuela, had little choice but to cut a deal with the Chávez administration. The government announced its intention to buy the bank after word surfaced that the Spanish group was discussing the sale of its local unit with a Venezuelan private bank for as much as $1.4 billion. Speculation that Mr. Chávez was backing out the deal or playing hardball on price arose on fears that the steep fall in oil prices from last year’s peaks were crimping the government’s coffers. In the end, Venezuela agreed to pay significantly more than recent expectations of $600 million to $800 million. Thursday, the government announced the nationalization of Matesi and Comsigua, two iron producers, and Tavsa, a seamless steel tube maker owned by Tenaris, all of them part of giant Argentine-Italian conglomerate Techint, a company affected by Mr. Chávez’s decision last year to nationalize steel mill Sidor. —Jonathan House in Madrid contributed to this article.


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 21

MONEY & INVESTING

U.S. credit-card firms likely to lose billions in fees Law expected to hurt revenue at issuers to riskier borrowers

House of cards Percentage of credit-card balances owed by subprime customers*: Bank of America 30.3%

By Robin Sidel Risky borrowers usually are a cash cow for credit-card issuers, thanks to hefty fees and interest rates. But some of that revenue will dry up after U.S. President Barack Obama signed new creditcard legislation Friday. Companies that pitch plastic to customers with dented credit histories and issuers specializing in cards for retailers likely will be hit hard by the federal law, according to analysts. Major players in those niches run from banks such as Bank of America Corp., Citigroup Inc. and HSBC Holdings PLC to General Electric Co. and Target Corp. GE issues cards stamped with the logos of J.C. Penney Co. and Lowe’s Cos., while Target is one of the few retailers that issues its own credit cards. The law will restrict some fees, limit certain interest-rate increases and require companies to provide more disclosure to customers. It is yet another headache for the credit-card industry, already battered by rising delinquencies and defaults because of the recession. Analysts are scrambling to calculate the financial impact, which is difficult because few card com-

Capital One (consumer) 29.8% Discover 27.9% Citigroup 27.3%

Companies ranked by market share in private-label cards: General Electric 39.2% Citigroup 21.7% *Bank percentages include only securitized credit-card loans. Subprime customers have credit scores lower than 660.

panies disclose how much revenue is derived from raising interest rates or imposing fees and other penalties on customers who fall behind on their bills. Robert Hammer, who runs a credit-card consulting firm, predicts that the new law will subtract $10 billion in revenue from the industry’s overall interest income. Credit-card companies are expected to impose $20.5 billion of penalty fees this year, up from $19.1 billion in 2008. “Those portfolios that are

AIG chief to make room for long-term successor Liddy leaves, and Mr. Liddy said the newboard head is likely to playanimportant behind-the-scenes role in American International Group Congress, where AIG has endured Inc. Chairman and Chief Executive sharp criticism in recent months. Edward Liddy will step down as “We need to spend considerably soon as successors are chosen, more time in Washington,” said Mr. which people familiar with the mat- Liddy, who was grilled last week in ter estimated could take roughly the House of Representatives for three to six months. the second time in three months. Mr. Liddy, in an interview ThursIn addition to answering to Conday, said the decision to leave AIG gress and AIG’s board, Mr. Liddy has was his. He said the comalso worked with the Fedpany had reached an “ineral Reserve Bank of New flection point” and needed York, which has agreed to a CEO who was ready to lend AIG as much as $60 bilcommit long term. He relion in the bailout. cently said in an interview The Fed, in consultation with The Wall Street Jourwith the Treasury Departnal that he planned to leave ment, has also appointed within a year. three trustees to oversee Mr. Liddy has led the inthe nearly 80% stake the surer since a U.S. governgovernment got due to the ment bailout in September, bailout. through more than eight tuMr. Liddy, who came out multuous months that Edward Liddy of retirement from the inhave included three subsesurance industry to take quent expansions of the rescue plan. the CEO job, agreed to a salary of $1 The government has committed as a year. But he said his successor as much as $173.3 billion in aid to AIG. CEO should be paid “commensurate Mr. Liddy has had to answer to with the complexity of the commultiple overseers, try to dismantle pany.” The company has operations a massive conglomerate amid a fi- in 130 countries, more than 100,000 nancial crisis and navigate a public- employees, and businesses ranging relations minefield. In a statement from insurance to aircraft leasing. expressing gratitude to Mr. Liddy Yet Mr. Liddy has said even he was for taking “stewardship of AIG” at surprised at how complicated the the government’s request, Treasury company has proven to be. Secretary Timothy Geithner called For the next CEO, he says, a backit “one of the most challenging jobs ground in insurance would be “good in the American financial system to- to have but not necessary.” Leaderday.” ship skills, he says, are important, as The chairman and CEO jobs are is experience in financial services likely to be separated when Mr. generally.

By Liam Pleven And Joann S. Lublin

Sources: Keefe Bruyette & Woods; The Nilson Report

Tim Foley

skewed toward late-payment fees, over-limit fees and penalty repricing will be most at risk,” says Craig Maurer, an analyst at Calyon Securities, a unit of Crédit Agricole SA. Subprime customers represent nearly a third of the credit-card portfolios at Bank of America, Citigroup and Capital One Financial Corp., according to Keefe Bruyette & Woods Inc., a research firm that specializes in the financial-services industry. Such accounts, typically including borrowers with a credit score of less than 660, ex-

ploded in number as card companies tried to offset slower growth by extending credit to less-creditworthy borrowers. “It’s our intention to continue providing credit to the broadest range of creditworthy customers possible, while remaining prudent in our lending practices,” a Bank of America spokeswoman said. Specialized retail credit cards, known as private-label cards, also are considered risky because those bills often are among the last to be paid if a customer falls into finan-

cial distress. GE is the U.S.’s biggest issuer of private-label cards and tried unsuccessfully last year to sell that business. A GE spokesman couldn’t be reached for comment. Target earned $355 million in credit-card finance charges and $87 million in late fees and other revenue in its latest fiscal quarter. The Minneapolis-based discount retailer struck a deal with J.P. Morgan Chase & Co. last year in which the New York bank took on about half of the risk in Target’s card portfolio. “Our view is that we will be impacted by a much less degree than anybody else,” said Eric Hausman, a Target spokesman. One of the most significant changes under the new law would prohibit credit-card companies from raising interest rates on card balances until customers are 60 days late on their payments. That will provide some initial relief to subprime and retail-card customers, who typically rack up the highest delinquency rates in the industry. Those cards also carry among the highest fees and interest rates. Credit-card companies are trying to decide how to recalibrate their portfolios to reflect the coming changes. Industry executives say that credit is likely to become less available, particularly to risky borrowers, and more fees likely will be loaded into the front end of the account, rather than being assessed after a customer falls behind on payments.

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22 M ON DAY, MAY 2 5, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

MONEY & INVESTING

SEC tightens trade rules on staff as flaws surface

On the winch or taking the helm?

Shift follows probe into stock dealings of 2 agency lawyers By Kara Scannell

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WASHINGTON—The Securities and Exchange Commission imposed tough new rules on trading by employees, following an investigation into the dealings of two veteran enforcement lawyers. The rules will, for the first time, prohibit staff from trading securities of companies under SEC investigation regardless of whether employees have personal knowledge of the investigation. Staff will also be required to have their brokers supply trading statements to the SEC so that ethics officers can confirm that employee reports are accurate. The SEC’s inspector general disclosed the trading of the two lawyers in a 50-page report released earlier this month and referred them to prosecutors for further investigation. They haven’t been charged with any crime, and deny any impropriety. According to the report, the two mostly followed the SEC rules but didn’t report some trades. The inspector general called the rules confusing and inadequate. The report didn’t name the two employees. The Wall Street Journal has identified them as veteran SEC lawyers Glenn Gentry and Nancy McGinley. The two friends, referred to in the redacted version of the SEC report respectively as #1 and #2, had a standing lunch date on Mondays where they talked stocks and politics, according to the report. They shared what the report called “a passion” for financial markets and spent a good part of their work day emailing each other with stock ideas. “Oh yuckola!” Ms. McGinley wrote in a 2007 email, according to the report, when SEC rules blocked her friend from making a trade. The case is highlighting broader issues at the agency that is charged with ensuring the fairness of U.S. stock markets. The SEC has come under fire for missing risky transactions at big Wall Street firms during the boom years and failed to catch confessed Ponzi schemer Bernard Madoff, among other things. Ms. McGinley’s lawyer, Adam Augustine Carter, confirmed that his client is the subject of a probe and said she did nothing wrong. The inspector general cited trades Ms. McGinley made in companies’ shares around the time those companies were facing SEC probes. The lawyer said those trades took place either before any SEC investigation started, or after the investigation was “publicly disclosed and widely discussed in the press.” There is “absolutely no basis in law or in fact for the IG’s statements that the transactions could have been improper in any way,” Mr. Carter said. “The SEC’s inspector general apparently considers speculation and innuendo as evidence.” Mr. Gentry, whose identity was confirmed by lawyers familiar with the matter, didn’t respond to phone calls or emails. In the report, he was quoted as denying making trades with nonpublic information. The two were active stock traders compared with others at the

New rules Highlights of the SEC’s rules on stock trades by employees n Staff, regardless of position, barred from trading shares of companies under SEC investigation n Staff must certify before any trade that they don’t have nonpublic information about the company n Brokers must supply SEC with statements of trades by SEC staff Source: SEC

agency, officials say, and they filled out most of the required paperwork, though with some lapses. Many current and former SEC enforcement attorneys said they shy away from buying individual shares to avoid the appearance of a conflict. But the probe has revealed a breakdown in compliance. Employees should get clearance for individual stock trades and report them within five days. The SEC’s clearance system is designed to identify a company that has business pending before the agency and is therefore off-limits for trading. But the report found that it’s often out of date. No one person is charged with reviewing forms or monitoring trades. Ms. McGinley and Mr. Gentry are career employees who work at Washington headquarters. Both make more than $167,000 a year, according to the inspector general. Mr. Gentry works in the enforcement division’s chief counsel office, whose lawyers help colleagues with legal theories as they build cases. Ms. McGinley, a staff attorney, has worked on a handful of high-profile cases. Ms. McGinley bonded with Mr. Gentry over her hobby, according to the inspector general’s report. The two emailed “on most days,” the report said. During one discussion about a company, Mr. Gentry exchanged 15 emails with Ms. McGinley from January through April 2006. He had made his first investment in the stock on June 24, 2002. “But this still kills me,” he wrote in an email dated Feb. 1, 2006, to Ms. McGinley. The company “was one of my best ideas in years and I knew it at the time—but couldn’t buy more because of a damn case. (As I may have whined about before.) I would have bought at least $10K worth back then. Basically 2000 shares instead of 200.” One trade being looked at is Ms. McGinley’s liquidation of her holdings in UnitedHealth Group Inc., say people familiar with the matter. Two months after her sale, the SEC opened an investigation. That probe was handled by a lawyer who worked in the same large group but wasn’t within the same reporting line. The SEC’s rules against certain types of trading, including trading of options and futures, are stricter than at many federal agencies and private companies. But the SEC lacks the systems in place at brokerages to monitor employee trading. SEC Chairman Mary Schapiro said the changes she announced Friday will address the compliance breakdowns. The new policy has been submitted for approval by the Office of Government Ethics.


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 23

www.efinancialnews.com

Move over, black boxes: Brains are back Crisis reveals flaws of computer models; the value of secrecy By Mark Cobley

Computer-run quantative funds have been underperforming their stock-picking peers in a variety of strategies. Total net assets as of March 31, in billions

Large cap equity Quantitative funds Nonquantitative funds

Cumulative total return 2008 / ’09 2006 / ’07 Number of funds –50% –40 –30 –20 –10 0 10%

$12.1 $780.0

107 2,339

$3.2 $16.6

45 56

$0.3 $5.2

6 97

$0.3 $12.0

38 97

Enhanced indexation Quantitative Nonquantitative Long/short equity Quantitative Nonquantitative Equity market neutral Quantitative Nonquantitative Note: Fiscal years end March 31

als and negative market returns. Some computer models have performed well. Managed futures funds, hedge funds that rely on computers to spot trends in financial markets and use derivatives to bet on them, made 14.1% last year, according to data provider BarclayHedge. But many kinds of equity quant funds, which try to pick stocks systematically, are still struggling, according to the data provider Lipper. In U.S. large-cap equities, quants’ historic outperformance has been eroded— they lost 37.53% during the 12 months to March 31, 1.4 percentage points behind their non-quant rivals. Meanwhile, quantitative equity long-short funds lost 43.37% over the same period, against a 27.07% drop for nonquants. Investors remain wary of quantitative funds. In March, one of the early adopters of quantitative “hedge-fund lite” strategies, the U.K. pension plan for home-improvement retailer Kingfisher PLC, terminated its account. The manager of the product, known as a 130/30 fund, was Goldman Sachs Asset Management. Investment consultants, who help guide the decisions of large investors, say they are still unwilling to put many of these products in front of their clients. A spokesman for Watson Wyatt said last week that in early 2008 it had started to be skeptical when advising clients about quantitative strategies and that it hadn't changed its stance since. Hans-Olov Bornemann, head of the quantitative strategy group at

Deutsche Bank hires former ABN debt banker By Duncan Kerr Deutsche Bank AG has hired the former head of public-sector bond origination at ABN Amro, marking the return of one of Europe’s bestknown debt bankers to the market a year after he left the Dutch bank following its takeover by the Royal Bank of Scotland Group PLC. Clinton Orr, who left during ABN Amro’s integration with RBS in June last year, is expected to join Deutsche Bank shortly, according to a person with knowledge of his move. On joining Deutsche as director of sovereign, supranational and

agency bond origination in London, Mr. Orr will report to Bill Northfield, head of the bank’s frequent borrower group in debt capital markets. Deutsche has confirmed Mr. Orr’s hire. Mr. Orr was unavailable for comment. Mr. Orr joined ABN in 2004 from the European operations of Daiwa, the Japanese broker, where he worked for about three years. During his time at ABN, the bank’s clients included the Swedish government, the World Bank, German development bank KfW and KommuneKredit, the Danish local government funding agency.

n/a

Source: Lipper

Skandinaviska Enskilda Banken AB’s SEB Asset Management, which runs about Œ3 billion, or about $4.2 billion, in funds using quantitative strategies, said the withdrawal of banks’ credit lines to hedge funds had turned highly leveraged funds into forced sellers. “In the case of one big house, I was told that their average position corresponded to about 40 days’ trading,” he said. “If it takes you 40 trading days—nearly two months—to exit your average position, you really have to question your risk man-

ager since 1998, taking over as head of quant. It is now working market risk factors into its models, such as generally rising volatility. Convincing skeptical clients may take longer than fixing models, however, particularly if they can no longer see the nuts and bolts. But Mr. Bornemann of SEB, who has never let investors have the details of how his process works, said he is making headway in convincing clients that the cloak of secrecy was worth it. He said: “A few years ago, consultants used to say, ‘if I cannot see the factors in the model, I cannot recommend it to my clients.’ Now they understand why that might not be a good thing.” Mr. Bornemann added that this was no more secretive than ordinary managers. “An investor or consultant can never really know what goes on in the mind of their fund manager. All they can do is ask him to explain his process, and trust his judgement. The human brain is the blackest box of all.”

— NOTICE TO READERS — The articles on this page on the securities and investment-banking industry are provided by Financial News, a Dow Jones company in London that publishes the Financial News Web site (www.efinancialnews.com) and Financial News weekly newspaper.

by % e 15 ac e pl av ur d s yo an ok ne Bo Ju 30

Quantitative fund managers, who use computer models rather than human judgment to pick securities, have seen their world turned upside down by the credit crisis. The first generation of managers and their models have moved on: Their inheritors are having to accommodate a changed landscape full of skeptical investors. In reaction, quant managers have spent 2008 making adjustments to their models, finding new sources of data and tightening secrecy. Assetmanagers, in general,are facing tough times, but stock-picking is at least a familiar and well-worn concept for investors. They may not always be happy with their human asset managers, but they are continuing to talk to them. The so-called black boxes that carry out the complex strategies of quantitative funds, on the other hand, are increasingly out of favor with investors and investment consultants. A few years ago, they were heralded as a way around the biases and irrationality of humans. They could analyze value metrics, such as earnings information in company accounts, in a systematic, scientific fashion and make impassive judgements to build the best portfolios. In a smoothly rising market, they were efficient at picking out the best of the bunch, and exploiting sometimes small differentials ruthlessly. Goldman Sachs Group Inc.’s quantitative Alpha fund, posted stellar performance in the mid-2000s, swelling to about $12 billion in size at its peak in 2007. But quant funds were following similar market factors, such as changes to analysts’ earnings estimates. During a bout of volatility in July and August 2007, the models came unglued. Price drops in certain securities automatically led to further declines as computers sold en masse. The use of leverage added to the snowball effect. Goldman Sachs’s Global Alpha fund had shrunk by about 80% from its peak to the end of last year, thanks to a combination of client withdraw-

Circuits down

agement. Markets move a lot quicker than that.” Mr. Bornemann’s global equity fund is unleveraged, and has produced an annualized 0.5% of excess return over its benchmark, the MSCI World index, since inception in December 2003, but he said that excess was much larger before summer 2007. One of the biggest problems in 2007 was of quantitative funds “crowding,” or all getting stuck in the same bad trades. That happened because their models factored in publicly available information from companies’ reports and, in many cases, used it in the same way to make the same bets. So now they are looking further afield for insights on stocks, and keeping those insights to themselves. Mike O’Brien, head of the European institutional business at Barclays Global Investors, which runs about $200 billion in quantitative and enhanced-indexation strategies, described 2007 as a “wake-up call.” “The tier-one players have worked to reduce and remove the generic signals from their models, and replace them with proprietary factors and insights,” Mr. O’Brien said. “At BGI, we are using a lot more independently generated information, such as market research from the companies themselves.” Goldman Sachs, too, has overhauled its team and process, with Katinka Domotorffy, a portfolio man-

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T H E WA L L ST R E E T J O U R NA L .

THE INTERNATIONAL INVESTOR

Rice reversal: plenty this year

FUND SCORECARD Euro Inflation Linked Bond

Prices have slumped after shortage in ’08; large crops in Asia

Funds that invest principally in inflation-linked bonds denominated in or hedged-into the Euro. Ranked on % total return (dividends reinvested) in U.S. dollars for one year ending May 22, 2009

Leading 10 Performers FUND FUND RATING NAME

NS

By Ian Berry

NS NS 4 4 4 Reuters

CHICAGO—A year after prices soared to record levels amid panic over supply shortages, rice appears to be plentiful and the market is in the midst of a prolonged slump. The stalled global economy, large Asian crops and a move by governments to loosen their grip on stocks have conspired to keep prices under pressure for months, analysts said. Friday, nearby July Chicago Board of Trade rice futures fell seven cents to settle at $12.055 a hundredweight, down from $15.63 on the first trading day of 2009. On April 24, 2008, the nearby contract hit a high of $24.85. Although the market has had brief rallies and remained rangebound at times, the trend has been lower since the start of the year. “The markets can collapse, they can rise, but they can also just sort of grind down,” said Milo Hamilton, co-founder of advisory firm firstgrain.com. “And that’s what we’ve been seeing.” Rice’s performance is in contrast to other grain markets. It also is a departure from last year when fears of shortages sparked food riots internationally. Looming over the market are large supplies in some Asian countries, which, unlike last year, are willing to part with some of it. Thailand is expected to unload some of its stocks into the market, with the U.S. Department of Agriculture projecting 2009-10 exports of 8.5 million metric tons after the country was a net importer in 2008-09. India is expected to end its export ban, as well as its ban on rice-futures trading. Some countries, such as Indonesia and Bangladesh, are expected to curb imports. The USDA projected world rice production for 2009-10 at a record 448.1 million tons, up 4.5 million from the current year. “Large crops are projected for most of Asia, including record crops in Bangladesh, Cambodia, India, Indonesia, the Philippines, and Thailand; and a near-record in Burma and Vietnam,” the report said.

3

Filipinos lined up last July to buy subsidized rice outside a National Food Authority warehouse in the Manila area, amid shortages and high prices.

4

The seeds for the current bear market were sown during last year’s bull market, some analysts said. Mark Creed, president and chief executive of brokerage Creed Rice Co., said growers “undoubtedly responded to high prices” and planted more rice. Governments also intervened to encourage growers to plant more rice and pursue higher yields, he said. He said would-be buyers have been “constipated” with highpriced stocks purchased last year. “There’s no question that what happened last year was extremely detrimental to the overall process of the market,” Mr. Creed said. Analysts mostly agree that there was no shortage of rice last year; the problem was that some countries decided to ban exports. Now, Thailand and India are expected to slowly release supplies. “They’re sitting on it; they’re still not selling it much yet, but eventually they’re going to have to,” said Jack Scoville, vice president of brokerage Price Futures Group. In the face of large supplies and a market that shows no signs of returning to last year’s highs, buyers have largely retreated to the sidelines, analysts said. “Basically, people are buying hand to mouth,” firstgrain.com’s Mr. Hamilton said. “When you have those large supplies in countries, there’s always an opportunity for the buyer to think he can get a better price some time.” Analysts disagree as to how

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bearish the current market is, and how long prices will continue to drag. Some said the market needs a surprise buyer, which they said seems unlikely. Mr. Creed said the most obvious way the market could get a jolt is from a natural disaster. He said large supplies could loom over the market through the first half of 2010, although he said that others don’t think prices will suffer for that long. The market’s swoon has been driven by supply, he said, and a disruption of supply is how it could rebound. He said, for example, that a reduction in the Indian crop from 100 million tons to 80 million tons, perhaps because of an unusual monsoon season, could change the market’s outlook in short order. Jeremy Zwinger, president and CEO of the Rice Trader, a trade publication, said the long-term supply situation isn’t as bearish as it seems to some. Stocks-to-use ratios still are low, he said, and supplies are a product of strong crops. “You don’t have record world crops every year forever,” Mr. Zwinger said. “You need to have a record crop every year to be able to keep up with the population increase. If you dropped down to the [production] level of five years ago today, you’d have massive issues.” He said the biggest factor in the market’s climb last year and its plunge this year hasn’t been supply and demand, but the dollar. It was weaker last year and has rebounded, but Mr. Zwinger and others expect it to plunge again. That will make prices higher, he said.

NS

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NAV GF AT LB DATE CR

NAV

— %RETURN — YTD 12-MO 2-YR

US US US US US US OT OT OT GL GL GL GL GL GL GL GL EU EU EU EU EU EU EU

7.71 14.53 7.71 7.22 6.69 7.74 11.35 9.99 12.59 13.62 16.81 13.62 16.29 13.62 25.24 21.52 27.84 6.05 5.47 6.56 5.47 10.23 5.47 9.56

9.5 10.0 10.1 0.1 –0.3 0.5 29.7 29.2 30.1 20.3 20.8 19.9 20.3 20.5 25.9 25.5 26.3 8.6 8.1 8.8 10.5 11.1 10.3 10.8

BD BD BD EQ EQ EQ EQ EQ EQ BD BD BD BD BD EQ EQ EQ EQ EQ EQ BD BD BD BD

LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX

05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20

USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD EUR EUR EUR EUR EUR EUR EUR

–4.3 –4.2 –2.9 –32.5 –33.1 –31.9 –29.8 –30.5 –29.2 –4.4 –4.4 –5.4 –5.3 –3.9 –45.3 –45.9 –44.9 –35.5 –36.2 –35.0 –14.4 –14.2 –15.1 –14.9

–0.8 –0.7 0.6 –23.2 –23.9 –22.5 –16.8 –17.6 –16.2 –0.6 –0.6 –1.6 –1.6 –0.1 –19.1 –20.0 –18.5 –26.3 –27.1 –25.8 –8.4 –8.4 –9.1 –9.0

FUND NAME Eur Income I Eur Strat Value A Eur Strat Value I Eur Value A Eur Value B Eur Value I Gl Balanced (Euro) A Gl Balanced (Euro) B Gl Balanced (Euro) C Gl Balanced (Euro) I Gl Balanced A Gl Balanced B Gl Balanced I Gl Bond A Gl Bond A2 Gl Bond B Gl Bond B2 Gl Bond I Gl Conservative A Gl Conservative A2 Gl Conservative B Gl Conservative B2 Gl Conservative I Gl Eq Blend A

LEGAL BASE

CURR.

CAAM LDI Crédit EURiFrance Inflation LT Acc Agricole-LCL Oblicycle CamGestion EURiFrance Inflation I Acc CAAM LDI Crédit EURiFrance Inflation MT Acc Agricole-LCL SGAM Invest Société Générale EURiFrance Euro Inflation BC Acc BNP Paribas BNP Paribas EURiFrance Obli Inflation P Acc UniEuroRenta Union Investment EURiLuxembrg Real Zins A Inc Luxembourg S.A. Sparinvest Sparinvest DKKiDenmark Indeksobligationer Inc Venus Bonds Bank Degroof S.A. EURiLuxembrg Euro Long Term Acc Raiffeisen-Inflationsschutz-Fd Raiffeisen EURiAustria A Inc Kapitalanlage-G.m.b.H. OP-Reaalikorko OP-Rahastoyhtiö Oy EURiFinland A Acc

YTD

% Return in $US ** 1-YR 2-YR 5-YR

–1.93

0.40 9.43

NS

6.28 –2.81 12.68

NS

4.28 –4.13 9.35

NS

3.12 –5.79 7.60 7.17 1.99 –5.85 7.05 6.94 3.01 –5.95 6.98

NS

2.87 –6.11 3.70 6.59 –0.97 –6.12 7.15

NS

4.30 –6.17 7.87

NS

4.78 –6.30 7.56

NS

NOTE: Changes in currency rates will affect performance and rankings. Source: Morningstar, Ltd KEY: ** 2YR and 5YR performance is annualized 1 Oliver’s Yard, 55-71 City Road NA-not available due to incomplete data; London EC1Y 1HQ United Kingdom NS-fund not in existence for entire period www.morningstar.co.uk; Email: mediaservice@morningstar.com Phone: +44 (0)203 107 0038; Fax: +44 (0)203 107 0001

India bucks region’s losses, rising for 11th straight week A WSJ NEWS ROUNDUP

grade the U.K. government’s credit rating raised concerns about U.S. credit ratings as well. Steelmakers lost ground on concerns that Chinese supply of the metal could outstrip demand and keep prices in check. In Tokyo, Nippon Steel fell 2.9% and JFE Holdings was down 2.1%. In Seoul, Posco fell 3.2%, while in Hong Kong, Angang Steel gave up 2.7%. The yen’s strength against the dollar hurt shares of exporters in Tokyo. Canon fell 1.9% and Elpida Memory shed 1.5%. Resource stocks were broadly lower in Sydney, with BHP Billiton down 2.7% and Rio Tinto off 3.3%. In Taiwan, construction and realestate stocks got a boost from an Economic Daily report that Taiwan planned to let Chinese investors take out bank loans to buy houses. Farglory Land Development jumped 7%, while Cathay Real Estate Development added 4.3%. The Bank of Japan left its policy rate unchanged. But it upgraded its economic assessment for the first time in nearly three years, seeing improvement in exports and production.

The Indian market dodged a regional slide Friday to snap a two-session losing streak and end the week with a 14% advance, marking its 11th straight week of gains. The Bombay Stock Exchange’s benchmark Sensitive Index rose 1.1% to close at 13887.15. Elsewhere in Asia, stocks were mostly lower, with Japan’s Nikkei Stock Average of 225 companies down 0.4% at 9225.81 and Australia’s S&P/ASX 200 losing 1.4% to 3761.60. Both were down for the second consecutive day and the second week in a row. In Mumbai, Larsen & Toubro, India’s top engineering firm by revenue, was the biggest percentage gainer among the blue chips, rising 4.7%. Reliance Industries, India’s most valuable company, gained 3.1%, while ICICI Bank jumped 4.5%. All had fallen a day earlier. The region’s broad losses came after a warning Thursday from Standard & Poor’s that it may down-

ASIAN-PACIFIC STOCKS

[ INTERNATIONAL INVESTMENT FUNDS FUND NAME

FUND NAME

5

FUND MGM'T CO.

www.wsj.com/funddata

NAV GF AT LB DATE CR

NAV

— %RETURN — YTD 12-MO 2-YR

EU EU EU EU EU EU EU EU EU EU US US US US US US US US US US US US US GL

5.47 7.16 7.29 7.70 7.13 8.85 13.58 13.30 13.49 13.77 13.91 13.30 14.36 8.71 14.72 8.71 12.97 8.71 13.59 15.14 13.56 14.47 13.63 9.34

10.7 2.9 3.1 5.8 5.3 6.0 4.0 3.5 3.9 4.3 4.7 4.2 4.9 3.4 3.6 3.0 3.2 3.6 3.9 3.8 3.5 3.4 4.2 4.5

BD EQ EQ EQ EQ EQ BA BA BA BA BA BA BA BD BD BD BD BD BA BA BA BA BA EQ

LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX

05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20

EUR EUR EUR EUR EUR EUR USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD

–13.9 –43.6 –43.1 –38.5 –39.1 –38.0 –29.9 –30.7 –30.1 –29.4 –31.5 –32.2 –31.0 –0.7 –0.8 –1.8 –1.8 –0.2 –16.9 –16.9 –17.7 –17.8 –16.2 –48.1

–7.9 –32.6 –32.0 –30.0 –30.7 –29.4 NS NS NS NS –17.9 –18.8 –17.4 1.8 1.7 0.7 0.7 2.4 –8.6 –8.6 –9.6 –9.6 –8.0 –30.2

]

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FUND NAME Gl Eq Blend B Gl Eq Blend I Gl Growth A Gl Growth B Gl Growth I Gl High Yield A Gl High Yield A2 Gl High Yield B Gl High Yield B2 Gl High Yield I Gl Value A Gl Value B Gl Value I India Growth A India Growth B India Growth I Int'l Health Care A Int'l Health Care B Int'l Health Care I Int'l Technology A Int'l Technology B Int'l Technology I Japan Blend A

NAV GF AT LB DATE CR GL GL GL GL GL US US US US US GL GL GL EA EA EA OT OT OT OT OT OT JP

EQ EQ EQ EQ EQ BD BD BD BD BD EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ

LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX

05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/15 05/15 05/15 05/20 05/20 05/20 05/20 05/20 05/20 05/20

USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD USD JPY

NAV 8.82 9.81 33.30 27.97 36.79 3.50 7.09 3.50 11.47 3.50 8.97 8.29 9.49 69.54 59.82 71.85 109.24 92.71 118.77 80.96 70.59 90.34 5643.00

— %RETURN — YTD 12-MO 2-YR 4.1 4.9 3.3 2.9 3.6 22.4 23.1 21.8 22.7 22.8 5.7 5.2 5.9 20.4 20.0 20.5 –7.0 –7.3 –6.7 10.7 10.3 11.0 5.2

–48.6 –47.7 –48.9 –49.4 –48.5 –17.1 –17.1 –18.2 –17.9 –16.5 –47.5 –48.0 –47.1 –36.9 –37.5 –36.7 –24.8 –25.5 –24.2 –37.6 –38.3 –37.1 –40.6

–30.9 –29.6 –29.3 –30.1 –28.8 –8.9 –8.9 –9.9 –9.8 –8.3 –31.2 –31.9 –30.7 –11.2 –12.1 –10.9 –19.9 –20.7 –19.2 –19.6 –20.4 –19.0 –30.0

Please turn to next page

For information about listing your funds, please contact: Peter Jennings, tel: +44-20-7842-9674; email: peter.jennings@dowjones.com or Carson Wong tel: +852 2831-6481; email: carson.wong@dowjones.com


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 25

THE INTERNATIONAL INVESTOR

PetroChina reaches abroad Chinese firm to buy a $1 billion stake in Singapore refiner

business under Singapore’s takeover code. The offer values the entire company at US$2.25 billion. Singapore Petroleum, one of the nation’s three major refining companies, has exploration interests in Australia, China, Indonesia and Vietnam. It reported 2008 revenue of S$11.1 billion. Keppel is part-owned by Singapore’s Temasek Holdings Pte. Ltd. investment company. Oil and gas companies are less hard-hit by the global downturn than mining assets, but remain prime targets for Chinese energy companies with flush balance sheets. The purchase of Singapore Petroleum represents a new move by PetroChina to extend its influence in the region’s oil-refining and distribution markets. The acquisition will become “a new platform for the implementation of our international strategy and will provide a broader foundation and stable path for development,” PetroChina said in a prepared statement. China’s state oil companies are hunting for acquisitions abroad at a

By Rick Carew HONG KONG—PetroChina Co. agreed Sunday to buy a US$1 billion stake in oil refiner Singapore Petroleum Co. in a move expected to lead to an offer for the entire company. The agreement signals China’s continued interest in extending its reach into global natural resources at a time when many resources companies are desperate for cash. PetroChina will buy 45.5% of publicly listed Singapore Petroleum from Keppel Corp. for about 1.47 billion Singapore dollars, or US$1.02 billion. Once the deal is approved by Chinese regulators and closed, it will trigger a general offer for the entire

DEALS & DEAL MAKERS

Sinopec output is rising, but oil prices sap profit

time when they have access to greater cash reserves than many international peers. In the past, Chinese companies have struggled in international oil markets dominated by Western giants such as Chevron Corp. and Exxon Mobil Corp. Past acquisitions mainly focused on markets or regions with unstable political regimes that were largely ignored by Western oil companies. More recent acquisitions have included oil fields in Syria and a China National Offshore Oil Corp. takeover of a oilfield-services company in Norway. Lower oil prices have made acquisitions of oil-related assets cheaper. China has been a chief source of funding for natural-resource companies, included several recent oil-forloan deals between Chinese policy banks and national oil companies in Russia and Kazakhstan. China also signed a deal with Brazil to guarantee oil supplies in exchange for helping to finance Brazil’s aggressive oilexploration plans. Deutsche Bank AG is advising PetroChina on the acquisition.

By Shai Oster

BOJ raises assessment of economy By Tomoyuki Tachikawa And Megumi Fujikawa

contracted 4% quarter-to-quarter in bonds as collateral in its open-marthe January-March period, for an an- ket operations. The board also voted nualized 15.2% drop—the worst to accept U.S. Treasury bonds and showing since Tokyo adopted the other foreign-government debt incurrent data format in 1955. struments as collateral for its fundBut “exports and proing operations. duction are beginning to The BOJ has taken steps level out against the backin recent months to make drop of progress in invenfunds available to cashtory adjustments both at strapped financial instituhome and abroad,” the tions affected by the recesBOJ said in its statement. sion. Whether the economy Traders questioned the will get back on a recovery impact of that move in the track, however, “depends current environment. on the strength of final de“The BOJ needed to find mand after inventory adsomething nonmaterial to justments end,” Mr. do because if they ended up Masaaki Shirakawa said. just showing concern Shirakawa The less-pessimistic [about the economy] but doview implies that the cening nothing, it would have tral bank is unlikely to adopt signifi- been a disappointment,” said Hideki cant new measures unless the econ- Nakano, head fixed-income trader omy again shows signs of a rapid at Nikko Citigroup. “So they have to downturn. be innovative in finding ways to “I think they’re going to keep send the message that they’re contheir wait-and-see stance, keep cur- cerned and taking action, but it’s rent monetary policy unchanged to more a message than anything else, see how the economy will develop,” it’s just about attitude.” Mitsubishi UFJ Securities strategist Analysts said the BOJ’s decision Naomi Hasegawa said. on foreign bonds was essentially inOn Friday, the BOJ policy board surance against another major liquidvoted unanimously to keep interest ity crisis such as the one last fall. rates steady at 0.1%, and to begin ac—Michael S. Arnold cepting some foreign-government contributed to this article.

TOKYO—The Bank of Japan raised its assessment of the economy for the first time in nearly three years, amid signs that the country may have seen the worst of its recession. BOJ Governor Masaaki Shirakawa said at a news conference after the bank’s policy-board meeting Friday that Japan’s gross domestic product likely will be markedly better in the April-June quarter than in the first period, but warned that uncertainty and downside risks remain high. “Economic conditions in Japan have been deteriorating,” but “the pace of deterioration in economic conditions is likely to moderate gradually,” the BOJ said in a statement at the end of its policy-board meeting. That was a slight change from last month, when the central bank said economic conditions in Japan had deteriorated “significantly.” The change in the BOJ’s assessment adds to a growing sense that the Japanese economy may be through the worst of the recession. The government said Wednesday that Japan’s gross domestic product

Advertisement FUND NAME Japan Growth A Japan Growth I Japan Strat Value A Japan Strat Value I Real Estate Sec. A Real Estate Sec. B Real Estate Sec. I Short Mat Dollar A Short Mat Dollar A2 Short Mat Dollar B Short Mat Dollar B2 Short Mat Dollar I

NAV GF AT LB DATE CR JP JP JP JP OT OT OT US US US US US

EQ EQ EQ EQ EQ EQ EQ BD BD BD BD BD

LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX

05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20

JPY JPY JPY JPY USD USD USD USD USD USD USD USD

NAV 5528.00 5660.00 5697.00 5819.00 10.31 9.49 11.03 6.75 8.89 6.75 8.87 6.75

— %RETURN — YTD 12-MO 2-YR –0.6 –0.3 10.5 10.8 –3.4 –3.7 –3.1 1.2 1.5 1.1 1.3 1.4

–40.5 –40.0 –41.3 –40.8 –47.6 –48.1 –47.2 –12.7 –12.7 –13.1 –13.1 –12.1

–30.8 –30.3 –29.6 –29.0 –32.4 –33.0 –31.8 –10.8 –10.9 –11.2 –11.3 –10.3

FUND NAME Andfs. Espanya Andfs. Estats Units Andfs. Europa Andfs. Franca Andfs. Japo Andfs. Plus Dollars Andfs. RF Dolars Andfs. RF Euros Andorfons Andorfons Alternative Premium Andorfons Mix 30 Andorfons Mix 60

NAV GF AT LB DATE CR EU US EU EU JP US US EU EU OT EU EU

EQ EQ EQ EQ EQ BA BD BD BD OT BA BA

AND AND AND AND AND AND AND AND AND AND AND AND

05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 05/20 03/31 05/20 05/20

EUR USD EUR EUR JPY USD USD EUR EUR EUR EUR EUR

NAV 10.76 12.48 6.61 8.25 459.70 8.52 10.51 9.42 12.59 92.76 8.22 7.92

— %RETURN — YTD 12-MO 2-YR –0.6 2.3 1.9 –0.4 4.9 1.0 2.9 5.2 5.5 0.4 1.5 –2.5

–33.6 –35.0 –33.1 –34.4 –36.9 –19.1 –8.2 –13.2 –15.5 –17.7 –25.7 –34.8

–21.7 –21.0 –24.2 –26.5 –27.7 –10.9 –3.4 –8.8 –11.2 –9.1 –17.1 –23.3

n CHARTERED ASSET MANAGEMENT PTE LTD - TEL NO: 65-6835-8866 Fax No: 65-6835 8865, Website: www.cam.com.sg, Email: cam@cam.com.sg CAM-GTF Limited

AS EQ MUS 05/15 USD 171950.27

27.5

–28.2

–17.5

n DJE INVESTMENT S.A. internet: www.dje.lu email: info@dje.lu phone:+00 352 269 2522 0 fax:+00 352 269 25252 n BANC INTERNACIONAL D'ANDORRA. BANCA MORA. Avgd. Meritxell 96, Andorra la Vella. Andorra. Ph. +376.884884 www.bibm.ad Andfs. Anglaterra Andfs. Borsa Global Andfs. Emergents

UK EQ AND 05/20 GBP GL EQ AND 05/20 EUR GL EQ AND 05/20 USD

6.82 5.55 13.36

2.4 –4.3 33.6

–24.9 –36.9 –37.4

–15.5 –25.1 –12.6

DJE Real Estate P DJE-Absolut P DJE-Alpha Glbl P DJE-Div& Substanz P DJE-Gold&Resourc P DJE-Renten Glbl P

OT GL EU GL OT EU

OT EQ BA EQ EQ BD

LUX LUX LUX LUX LUX LUX

05/22 05/22 05/22 05/22 05/22 05/22

EUR EUR EUR EUR EUR EUR

9.78 181.16 158.57 185.34 148.04 123.35

–2.9 3.4 3.1 6.0 13.2 3.1

–4.4 –23.4 –19.2 –20.5 –24.2 1.8

–2.2 –14.7 –11.4 –12.8 –7.2 0.7

FUND NAME LuxPro-Dragon I LuxPro-Dragon P LuxTopic-Aktien Europa LuxTopic-Pacific

Friday close: $61.67 a barrel $70 60 50 40 30

J 2009

F

M

A

M

Source: Thomson Reuters via WSJ Market Data Group

pany’s annual general meeting. Chinese customs data Friday showed that diesel exports rose to a record in April, while gasoline hit a near two-year high, as refiners sought to offload stockpiles and cash in on higher prices outside China. The fall of global commodity prices such as steel have reduced costs for oil companies. “Now is a good time to reassess our plans and optimize them,” Mr. Su said. The company has announced plans to increase capital expenditures by 4.2% this year to 111.8 billion yuan (about $17 billion), of which half would go to developing oil and gas fields and building gas pipelines in China. Separately, Mr. Su said Sinopec is actively assessing possible acquisition targets or ventures in South America and Africa. —Wan Xu contributed to this article.

BEIJING—China’s securities regulator issued draft rules late Friday for new-share issues, in a signal that initial public offerings are set to resume on China’s stock markets. The China Securities Regulatory Commission has imposed an unofficial moratorium on IPOs since September because of concerns that pressure on liquidity would worsen the country’s ailing markets. The regulator said the revised rules are intended to boost the market’s role in pricing new shares. It has said that once completed, the revised rules are meant to narrow the

www.wsj.com/funddata

NAV GF AT LB DATE CR AS AS EU AS

Light, sweet crude oil, settlement price on the continuous front-month contract on the New York Mercantile Exchange.

China signals IPOs set to resume

[ INTERNATIONAL INVESTMENT FUNDS

Continued from previous page

Crude-oil futures

China Petroleum & Chemical Corp. said its refineries are running at higher rates, adding to some tentative signs of economic recovery in China. But the rebound in international oil prices to about $60 a barrel has pushed the company’s refining business back into the red, because low, state-set fuel prices make it hard to recoup the greater costs. Su Shulin, chairman of the stateowned company, known more familiarly as Sinopec, said China’s apparent consumption of fuel and other oil products rose 1.5% in April compared with a year earlier. Zhang Jianhua, senior vice president, said the company’s refineries were running at 90% capacity. Sinopec is Asia’s biggest refiner, with a smaller presence in oil and natural-gas production. The company has struggled with low profit margins despite a new government policy that domestic fuel prices should more closely track the international markets where Sinopec buys its crude oil. The company’s profit fell 47% last year, its first annual earnings decline in seven years. Sinopec saw some relief when oil prices cratered, but the recent climb back toward $60 a barrel has erased its profit margins. “The pressure is large,” Mr. Su said. To make up for losses on the domestic fuel market, Asia’s biggest refiner has been exporting 600,000 tons of refined products a month, about half of it diesel, according to Mr. Zhang. The two Sinopec executives were speaking on the sidelines of the com-

EQ EQ EQ EQ

LUX LUX LUX LUX

05/22 05/22 05/22 05/22

EUR EUR EUR EUR

NAV 118.34 115.51 14.79 12.23

— %RETURN — YTD 12-MO 2-YR 27.5 27.3 3.2 35.1

–19.6 –20.0 –16.0 –33.8

–6.1 –7.1 –9.3 –20.6

]

discrepancy between the IPO price and the trading price on a stock’s debut. China’s shares have no limit on how much they can rise or fall on their first day of trading. Subsequently, they aren’t allowed to rise or fall more than 10% in a single day. New issues have typically soared on their stock-market debut. The regulator is seeking opinions on the draft rules until June 5. IPOs will resume after the rules are finalized. —Terence Poon and Michelle Ng

Advertisement NAV GF AT LB DATE CR

FUND NAME Sel European Equity Sel Glob Equity Sel Glob Fxd Inc Sel Pacific Equity Sel US Equity Sel US Sm Cap Eq

EU GL GL AS US US

EQ EQ BD EQ EQ EQ

GGY GGY GGY GGY GGY GGY

05/21 05/21 05/21 05/21 05/21 05/21

NAV

— %RETURN — YTD 12-MO 2-YR

USD USD USD USD USD USD

145.94 151.32 129.04 106.17 101.37 135.50

6.1 5.4 0.1 17.4 0.6 3.6

–46.6 –41.5 –14.7 –39.1 –37.1 –38.0

–28.7 –27.3 –4.1 –18.1 –24.2 –28.3

EUR EUR EUR JPY EUR USD EUR USD EUR EUR EUR USD USD EUR USD

295.68 220.46 425.79 16471.00 460.50 673.42 330.54 349.06 1510.50 720.88 541.91 1124.06 477.46 409.63 424.13

1.3 2.0 9.5 –1.5 0.8 1.5 3.7 4.8 42.7 14.7 4.5 24.6 39.4 20.3 17.6

–14.5 –21.7 –38.2 –38.8 –38.3 –36.4 –41.8 –40.5 –53.1 –42.8 –33.3 –34.1 –47.1 –35.0 –42.9

–9.5 –14.7 –28.4 –30.3 NS –21.4 –24.3 –22.8 –29.1 –32.7 –25.4 –17.4 –17.7 –15.1 –14.7

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GL GL EA OT

EQ BMU EQ BMU EQ SAU EQ BMU

04/30 03/31 05/19 03/31

USD USD SAR USD

36.20 19.10 5.82 24.85

4.7 –8.8 22.8 –3.1

–49.2 –47.1 NS –28.2

–9.4 –13.2 NS –12.9

–7.7 –39.7 –38.0

–2.9 –15.6 –28.7

n HSBC ALTERNATIVE INVESTMENTS LIMITED T +44 20 7860 3074 F + 44 20 7860 3174 www.hail.hsbc.com n HSBC Portfolio Selection Fund Sel Emerg Mkt Debt Sel Emerg Mkt Equity Sel Euro Equity EUR

GL BD GGY 05/21 USD GL EQ GGY 05/21 USD US EQ GGY 05/21 EUR

290.32 163.46 79.95

18.2 24.8 9.4

EPB Flexible 25/75 EPB Flexible 50/50 KBC Eq (L) Europe KBC Eq (L) Japan KBC Eq (L) NthAmer EUR KBC Eq (L) NthAmer USD KBL Key America EUR KBL Key America USD KBL Key East Europe KBL Key Eur Sm Cie KBL Key Europe KBL Key Far East KBL Key Major Em Mkts KBL Key NaturalRes EUR KBL Key NaturalRes USD

OT OT EU JP US US US US EU EU EU AS GL OT OT

OT OT EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ

LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX

05/19 05/19 05/20 05/20 05/20 05/20 05/19 05/19 05/19 05/19 05/19 05/19 05/19 05/19 05/19

Please turn to next page

For information about listing your funds, please contact: Peter Jennings, tel: +44-20-7842-9674; email: peter.jennings@dowjones.com or Carson Wong tel: +852 2831-6481; email: carson.wong@dowjones.com


26 MON DAY, MAY 2 5, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

[ INTERNATIONAL INVESTMENT FUNDS

Advertisement Continued from previous page FUND NAME

NAV GF AT LB DATE CR

NAV

— %RETURN — YTD 12-MO 2-YR

n LLOYD GEORGE MANAGEMENT (HK) LTD Suite 3808, One Exchange Square, HK: Tel. 852 2845 4433 Fax. 852 2845 3911 LG Antenna

GL EQ BMU 05/15 USD

42.59

24.8

–37.2

–17.2

LG Asian Plus

AS EQ CYM 05/15 USD

41.87

10.8

–40.4

–18.9

LG Asian SmallerCo's

AS EQ BMU 05/21 USD

73.23

32.8

–42.1

–32.6

LG India

EA EQ MUS 05/21 USD

47.69

49.5

–29.0

–13.1

Siberian Investment Co

OT OT IRL 02/27 USD

22.58

39.1

–70.6

–45.3

NAV GF AT LB DATE CR

NAV

PF (LUX)-USD Liq-Pdi PF (LUX)-USD Sov Liq-Pca

US MM LUX 05/19 USD OT OT LUX 05/19 USD

85.36 101.51

FUND NAME

— %RETURN — YTD 12-MO 2-YR 0.4 0.2

1.7 NS

MP-BALKAN.SI

OT OT SVN 05/21 EUR

22.90

–12.7

–58.2

–49.3

MP-TURKEY.SI

OT OT SVN 05/21 EUR

24.77

26.8

–33.1

–28.1

n PAREX ASSET MANAGEMENT IPAS Basteja Blvd. 14, Riga, LV-1050, Latvia www.parexgroup.com Tel: +371 67010810 Eastern European Bond Fund

OT OT LVA 05/21 USD

11.34

30.0

–19.8

–7.9

Parex Caspian Sea Eq

EU EQ LVA 05/21 EUR

2.93

39.5

–68.1

–46.0

Parex Eastern Europ Bd

EU BD LVA 05/21 USD

11.34

30.0

–19.8

–7.9

Parex Russian Eq

EE EQ LVA 05/21 USD

14.55

68.0

–55.7

–23.4

n PICTET & CIE, ROUTE DES ACACIAS 60, CH-1211 GENEVA 73 Tel: + 41 (58) 323 3000 Web: www.pictetfunds.com

NAV GF AT LB DATE CR

NAV

— %RETURN — YTD 12-MO 2-YR

2.7 NS

Currency Alpha SEK -RC-

OT OT LUX 05/22 SEK

109.94

–3.1

0.6

1.8

Generation Fd 80

OT OT LUX 05/22 SEK

6.69

4.9

–22.6

NS

PF (LUX)-USD Sov Liq-Pdi

OT OT LUX 05/19 USD

100.80

0.2

NS

NS

Nordic Focus EUR

NO EQ LUX 05/22 EUR

63.61

27.5

–32.5

NS

PF (LUX)-Water-Pca

GL EQ LUX 05/19 EUR

106.85

3.7

–25.2

–18.5

Nordic Focus NOK

NO EQ LUX 05/22 NOK

70.19

27.5

–32.5

NS

PF (LUX)-WldGovBds-Pca

GL BD LUX 05/22 USD

158.82

–3.7

2.6

8.2

Nordic Focus SEK

NO EQ LUX 05/22 SEK

70.77

27.5

–32.5

NS

PF (LUX)-WldGovBds-Pdi

GL BD LUX 05/22 USD

131.46

–3.6

2.6

8.2

PTF (LUX)-MidEast&NorAfr-Pca

OT OT LUX 05/19 USD

42.58

2.6

NS

NS

n POLAR CAPITAL PARTNERS LIMITED International Fund Managers (Ireland) Limited PH - 353 1 670 660 Fax - 353 1 670 1185 Global Technology

OT EQ IRL 05/21 USD

9.78

24.7

–26.4

–17.7

Japan Fund USD Polar Healthcare Class I USD

JP EQ IRL 05/22 USD OT OT IRL 05/21 USD

14.89 10.25

1.4 NS

–12.9 NS

–9.0 NS

Polar Healthcare Class R USD

OT OT IRL 05/21 USD

10.26

NS

NS

NS

n Hemisphere Management (Ireland) Limited

n MP ASSET MANAGEMENT INC. Tel: + 386 1 587 47 77

FUND NAME

www.WSJ.com

n SEB Fund 3 Choice North America Eq. Fd

US EQ LUX 05/22 USD

1.44

3.6

–36.0

–24.2

Ethical Global Fd

GL EQ LUX 05/22 USD

0.64

3.7

–38.9

–25.6

Ethical Sweden Fd

NO EQ LUX 05/22 SEK

33.11

20.1

–21.0

–17.5

Europe Fd

EU EQ LUX 05/22 USD

1.72

2.0

–34.7

–27.2

Index Linked Bd Fd SEK

OT BD LUX 05/22 SEK

12.47

–2.1

1.4

3.0

Medical Fd

OT EQ LUX 05/22 USD

2.65

–7.6

–22.8

–16.9

Short Medium Bd Fd SEK

NO MM LUX 05/22 SEK

8.78

0.8

2.5

2.9

Technology Fd

OT EQ LUX 05/22 USD

1.86

19.1

–29.9

–15.1

World Fd

NO BA LUX 05/22 USD

1.77

7.1

–35.3

–19.0

Discovery USD A

OT OT CYM 03/31 USD

127.32

10.8

12.5

12.2

Elbrus USD A

GL EQ CYM 03/31 USD

6.99

3.6

–55.3

–27.8

Europn Conviction USD B

EU EQ CYM 03/31 USD

126.59

0.2

17.5

10.0

n SEB Fund 4

Europn Forager USD B

OT OT CYM 03/31 USD

175.87

–1.7

–18.7

–5.0

Short Bond Fd EUR

EU MM LUX 05/22 EUR

1.27

0.1

0.6

1.6

Latin America USD A

GL EQ CYM 03/31 USD

13.88

2.2

–4.7

14.7

Short Bond Fd SEK

NO MM LUX 05/22 SEK

21.84

1.3

2.6

3.0

Paragon Limited USD A

OT OT CYM 12/31 USD

309.60

12.7

12.7

14.2

Short Bond Fd USD

US MM LUX 05/22 USD

2.49

–0.2

0.8

2.1

UK Fund USD A

OT OT CYM 03/31 USD

168.42

1.5

0.7

2.5 Alpha Bond Fd SEK -A-

NO BD LUX 05/22 SEK

9.91

–1.5

–3.2

–0.8

Alpha Bond Fd SEK -B-

NO BD LUX 05/22 SEK

8.58

–1.5

–3.2

–0.8

Alpha Bond Fd SEK -C-

NO BD LUX 05/22 SEK

24.82

–1.6

–3.4

–1.0

Alpha Bond Fd SEK -D-

NO BD LUX 05/22 SEK

7.73

–1.6

–3.4

–1.0

Alpha Short Bd SEK -A-

NO MM LUX 05/22 SEK

11.01

1.9

3.2

3.4

Alpha Short Bd SEK -B-

NO MM LUX 05/22 SEK

10.07

1.9

3.2

3.4

Alpha Short Bd SEK -C-

NO MM LUX 05/22 SEK

21.54

1.9

3.1

3.2

Alpha Short Bd SEK -D-

NO MM LUX 05/22 SEK

8.15

1.9

3.1

3.2

Bond Fd SEK -C-

NO BD LUX 05/22 SEK

41.47

–0.2

9.0

5.5

Bond Fd SEK -D-

NO BD LUX 05/22 SEK

12.04

–3.4

5.5

3.3

EU BD LUX 05/22 EUR

1.13

3.5

–4.8

–2.4

n SEB Fund 5

n PT CIPTADANA ASSET MANAGEMENT Tel: 521-3479 Fax: 521-3478 Website: www.ciptadana-asset.com Indonesian Grth Fund

EA EQ CYM 05/20 USD

85.18

44.2

–30.4

NS

n RUSSELL INVESTMENT GROUP Multi-Style, Multi-Manager Funds www.russell.com Actions France A

EU EQ IRL 05/21 EUR

569.74

1.1

–35.7

NS

Core Eurozone Eq B

EU EQ IRL 05/21 EUR

672.76

2.3

–34.7

NS

Euro Fixed Income A

EU BD IRL 05/21 EUR

1138.98

0.6

–7.2

–5.2

Euro Fixed Income B Euro Small Cap A

EU BD IRL 05/21 EUR EU EQ IRL 05/21 EUR

1211.50 969.13

0.8 14.3

–6.6 –38.4

–4.6 –33.6

Euro Small Cap B

EU EQ IRL 05/21 EUR

1034.32

14.6

–38.0

–33.2

Corp. Bond Fd EUR -C-

]

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FUND NAME Bonds Europe A Bonds US MtgBkSec A Bonds US OppsCoreplus A Bonds World A Eq. China A Eq. ConcentratedEuropeA Eq. Eastern Europe A Eq. Equities Global Energy Eq. Euroland A Eq. Euroland MidCapA Eq. EurolandCyclclsA Eq. EurolandFinancialA Eq. Glbl Emg Cty A Eq. Global A Eq. Global Technol A Eq. Gold Mines A Eq. Japan Sm Cap A Eq. Japan Target A Eq. Pacific A Eq. US ConcenCore A Eq. US Lg Cap Gr A Eq. US Mid Cap A Eq. US Multi Strg A Eq. US Rel Val A Eq. US Sm Cap Val A Eq. US Value Opp A Money Market EURO A Money Market USD A

Eurozone Agg Eq A

EU EQ IRL 05/21 EUR

529.08

6.5

–36.7

–28.9

Corp. Bond Fd EUR -D-

EU BD LUX 05/22 EUR

0.87

3.6

–4.7

–2.6

AS EQ LUX 05/22 USD

133.05

20.0

–38.3

–17.1

Eurozone Agg Eq B

EU EQ IRL 05/21 EUR

757.58

6.7

–36.3

–28.5

Corp. Bond Fd SEK -C-

NO BD LUX 05/22 SEK

11.00

2.1

–10.4

–4.8

n YMR-N Series

PF (LUX)-Asian Eq-Pca

AS EQ LUX 05/22 USD

127.28

19.6

–38.8

–17.8

Glbl Bd (EuroHdg) A

GL BD IRL 05/21 EUR

1234.53

3.1

–4.2

–2.0

Corp. Bond Fd SEK -D-

NO BD LUX 05/22 SEK

8.32

–1.7

–13.8

–6.5

PF (LUX)-Biotech-Pca

OT EQ LUX 05/19 USD

251.33

–11.8

–23.5

–9.6

Glbl Bd (EuroHdg) B

GL BD IRL 05/21 EUR

1305.57

3.3

–3.5

–1.4

Danish Mortgage Bond Fd EUR -ID-

NO BD LUX 05/22 EUR

100.62

–3.1

2.3

NS

PF (LUX)-CHF Liq-Pca

CH MM LUX 05/19 CHF

124.08

0.1

0.9

1.5

Glbl Bd A

EU BD IRL 05/21 EUR

1019.12

3.9

4.9

–1.1

Danish Mortgage Bond Fd EUR -RC- NO BD LUX 05/22 EUR

105.06

1.4

6.9

NS

PF (LUX)-CHF Liq-Pdi

CH MM LUX 05/19 CHF

93.66

0.1

0.9

1.5

Glbl Bd B

EU BD IRL 05/21 EUR

1080.94

4.2

5.5

–0.6

Danish Mortgage Bond Fd SEK -ID-

OT OT LUX 12/17 SEK

121.91

NS

NS

NS

YMR-N Growth Fund YMR-N Japan Fund YMR-N Low Price Fund YMR-N Small Cap Fund

PF (LUX)-Digital Comm-Pca

OT EQ LUX 05/19 USD

91.37

12.4

–26.9

–13.2

Glbl Real Estate A

OT EQ IRL 05/21 USD

638.12

–4.3

–50.0

–33.5

Danish Mortgage Bond Fd SEK -RC-

NO BD LUX 05/22 SEK

1097.62

1.4

6.9

NS

EU EQ LUX 05/19 EUR

209.30

56.7

–54.7

–31.1

Glbl Real Estate B

OT EQ IRL 05/21 USD

655.45

–4.1

–49.7

–33.1

Flexible Bond Fd -C-

NO BD LUX 05/22 SEK

21.19

1.6

6.1

4.4

PF (LUX)-Emg Mkts LC-Pca

GL EQ LUX 05/22 USD

119.81

28.6

–45.8

–19.2

2.6

–19.8

–34.7 –34.2

2.5

–46.2

–48.2 –48.6

–1.9

26.6

–5.7 –6.6

11.59

385.25

591.37 55.39

NO BD LUX 05/22 SEK

GL EQ LUX 05/22 USD

OT EQ IRL 05/21 EUR OT EQ IRL 05/21 GBP

Flexible Bond Fd -D-

PF (LUX)-Emg Mkts-Pca

Glbl Real Estate EH-A Glbl Real Estate SH-B

PF (LUX)-Eu Indx-Pca

EU EQ LUX 05/19 EUR

83.39

9.1

–34.3

–24.3

Glbl Strategic Yield A

EU BD IRL 05/21 EUR

1306.32

15.6

–13.6

PF (LUX)-EUR Bds-Pca

EU BD LUX 05/19 EUR

371.41

–0.5

3.4

1.1

Glbl Strategic Yield B

EU BD IRL 05/21 EUR

1392.72

15.8

–13.1

–7.0

Global Hedge I SEK -C-

OT OT LUX 05/22 SEK

78.19

–2.4

–25.8

–15.2

1.1

Japan Equity A

JP EQ IRL 05/21 JPY

11091.00

7.3

–35.1

–28.2

Global Hedge I SEK -D-

OT OT LUX 05/22 SEK

71.46

–2.4

–25.8

–16.4

Japan Equity B

JP EQ IRL 05/21 JPY

11777.00

7.6

–34.7

–27.8

PacBasn (Ex-Jap) Eq A

AS EQ IRL 05/21 USD

1642.70

27.7

–34.5

–16.0

PacBasn (Ex-Jap) Eq B

AS EQ IRL 05/21 USD

1746.66

28.0

–34.1

–15.5

PF (LUX)-EUR Bds-Pdi PF (LUX)-EUR Cp Bd-Pca

EU BD LUX 05/19 EUR EU BD LUX 05/19 EUR

282.64 131.80

–0.5 5.5

3.3 0.5

–0.2

–7.5

PF (LUX)-EUR Cp Bd-Pdi

EU BD LUX 05/19 EUR

92.66

5.5

0.5

–0.2

PF (LUX)-EUR HiYld-Pca

EU BD LUX 05/19 EUR

110.68

22.7

–21.9

–15.0

PF (LUX)-EUR HiYld-Pdi

EU BD LUX 05/19 EUR

64.16

22.7

–21.9

–15.0

PF (LUX)-EUR Liq-Pca

EU MM LUX 05/19 EUR

135.52

0.7

2.8

3.1

PF (LUX)-EUR Liq-Pdi

EU MM LUX 05/19 EUR

97.67

0.7

2.9

3.1

PF (LUX)-EUR Sov Liq-Pca

OT OT LUX 05/19 EUR

102.27

0.4

NS

NS

PF (LUX)-EUR Sov Liq-Pdi

OT OT LUX 05/19 EUR

100.90

0.4

NS

NS

PF (LUX)-Europ Eq-Pca

EU EQ LUX 05/19 EUR

339.31

10.9

–38.2

–28.5

PF (LUX)-EuSust Eq-Pca

EU EQ LUX 05/19 EUR

109.81

8.6

–34.7

–27.4

PF (LUX)-Gl Em Dbt-Pca

GL BD LUX 05/19 USD

211.47

11.6

3.7

3.3

PF (LUX)-Gl Em Dbt-Pdi

GL BD LUX 05/19 USD

143.86

11.6

3.7

3.3

PF (LUX)-Gr China-Pca

AS EQ LUX 05/22 USD

270.20

27.0

–31.1

–7.7

PF (LUX)-Indian Eq-Pca

EA EQ LUX 05/22 USD

274.46

43.2

–28.3

–12.5

Choice Global Value -C-

GL EQ LUX 05/22 SEK

62.10

3.2

–40.0

–30.8

PF (LUX)-Jap Index-Pca

JP EQ LUX 05/22 JPY

8440.12

3.6

–36.6

–28.4

Choice Japan Fd

JP EQ LUX 05/22 JPY

46.36

3.1

–36.0

–30.4

PF (LUX)-Jp Eq Sel-Ica

JP EQ LUX 05/22 JPY

7370.60

1.0

–41.4

–32.9

Choice Jpn Chance/Risk

JP EQ LUX 05/22 JPY

46.55

3.9

–43.3

–31.8

PF (LUX)-Jp Eq Sel-Pca

JP EQ LUX 05/22 JPY

7176.83

0.7

–41.7

–33.3

PF (LUX)-JpEq130/30-Pca

JP EQ LUX 05/22 JPY

4067.79

3.6

–38.0

–29.2

Choice NthAmChance/Risk Europe 2 Fd

US EQ LUX 05/22 USD EU EQ LUX 05/22 EUR

3.12 0.76

11.2 10.2

–39.4 –39.9

–22.7 –30.8

PF (LUX)-Pacif Idx-Pca

AS EQ LUX 05/22 USD

189.73

19.8

–39.3

–17.8

Europe 3 Fd

EU EQ LUX 05/22 EUR

3.32

8.6

–40.8

–31.3

PF (LUX)-Piclife-Pca

CH BA LUX 05/19 CHF

721.84

4.7

–11.4

–9.8

Global Chance/Risk Fd

GL EQ LUX 05/22 EUR

0.49

3.6

–33.3

PF (LUX)-PremBrnds-Pca

OT EQ LUX 05/19 EUR

49.58

12.3

–28.4

–24.1

PF (LUX)-Rus Eq-Pca

OT OT LUX 05/19 USD

40.39

76.8

–62.6

NS

PF (LUX)-Security-Pca

GL EQ LUX 05/19 USD

80.61

12.8

–21.1

–14.8

PF (LUX)-Sm Cap Eu-Pca

EU EQ LUX 05/19 EUR

372.38

14.1

–36.1

–28.1

PF (LUX)-US Eq-Ica

US EQ LUX 05/19 USD

84.02

2.9

–33.8

–18.9

PF (LUX)-USA Index-Pca

US EQ LUX 05/19 USD

73.34

1.2

–35.2

–21.6

PF (LUX)-USD Gov Bds-Pca

US BD LUX 05/19 USD

510.69

–3.7

PF (LUX)-USD Gov Bds-Pdi PF (LUX)-USD Liq-Pca

6.4

US BD LUX 05/19 USD

374.73

–3.7

6.4

US MM LUX 05/19 USD

130.72

0.4

1.7

Advertisement NAV GF AT LB DATE CR

NAV

OT OT VGB 03/31 USD

33.60

–1.0

BHS CYM CYM CYM CYM

03/31 03/31 03/31 03/31 03/31

USD USD USD USD USD

EU OT CYM 03/31 EUR EU MM CYM 02/27 EUR

–27.3

US Equity A

US EQ IRL 05/21 USD

688.88

2.9

–37.0

–22.4

Choice Asia SmCap exJpn

AS EQ LUX 05/22 SEK

23.60

40.6

–15.7

–16.1

US Equity B US Small Cap A

US EQ IRL 05/21 USD US EQ IRL 05/21 USD

734.90 1007.26

3.2 0.2

–36.6 –37.4

–21.9 –25.2

Europe Chance/Risk Fd

EU EQ LUX 05/22 EUR

846.84

11.1

–43.3

–32.8

US Small Cap B

US EQ IRL 05/21 USD

1075.17

0.4

–37.0

–24.7

OT OT OT OT OT

OT BMU OT BMU OT BMU OT BMU OT BMU

04/30 04/30 04/30 04/30 04/30

USD EUR USD USD GBP

GL EQ JEY 05/15 USD

GL EQ GBR 04/30 EUR GL EQ USA 04/30 USD

MENA Real Estate Acc Fund

OT OT ARE 05/14 USD

931.85

–0.9

NS

NS

UAE Blue Chip Fund Acc

OT OT ARE 05/14 AED

5.23

14.0

–57.7

–18.5

–26.5

Global Fd

GL EQ LUX 05/22 USD

1.72

3.0

–40.3

–24.7

Intl Mixed Fd -C-

NO BA LUX 05/22 USD

23.01

0.1

–30.9

–16.3

Intl Mixed Fd -D-

NO BA LUX 05/22 USD

16.01

–1.3

–31.8

–16.9

Wireless Fd

OT EQ LUX 05/22 EUR

0.12

22.0

–27.6

–20.4

AS EQ LUX 05/22 USD

5.67

25.1

–31.1

–15.2

n SEB Fund 2

n WWW.SGAM.COM SGAM FUND Bonds ConvEurope A

OT OT LUX 05/19 EUR

27.57

–2.8

–7.1

–0.6

OT OT LUX 05/19 EUR

21.55

3.9

–1.4

–1.4

6.9

Bonds Eur Hi Yld A

OT OT LUX 05/19 EUR

15.95

20.0

–22.1

–15.8

Currency Alpha SEK -ID-

OT OT LUX 05/22 SEK

98.62

–6.6

–3.0

NS

Bonds EURO A

OT OT LUX 05/20 EUR

39.67

0.5

6.5

4.3

[ ALTERNATIVE INVESTMENT FUNDS

0.5 0.7 0.4 2.7 –0.3

4.1 –7.3 4.8 7.0 1.6

5.9 –3.1 5.8 6.4 6.7

97.80 1000.67

–0.6 0.5

–21.5 –25.4

–10.2 –12.7

2086.32 2039.80 1193.21 1171.94 1014.46

3.2 4.0 3.1 3.9 0.6

–2.0 –0.6 –2.5 –0.9 –1.5

–6.2 –5.7 –6.6 –6.1 –5.6

660.99

46.6

–62.5

–32.9

FUND NAME

NAV GF AT LB DATE CR

Horseman EurSelLtd EUR Horseman EurSelLtd USD Horseman Glbl Ltd EUR Horseman Glbl Ltd USD

EU EU GL GL

196.71 199.61

Special Opp EUR Special Opp Inst EUR Special Opp Inst USD Special Opp USD

EQ EQ EQ EQ

GBR GBR CYM CYM

04/30 04/30 04/30 04/30

EUR USD USD USD

NAV 188.76 196.47 433.95 433.95

— %RETURN — YTD 12-MO 2-YR –9.8 –9.7 –11.9 –11.9

–4.1 –4.7 8.1 8.1

9.3 9.3 17.0 17.0

OT OT GGY 04/30 GBP OT OT GGY 04/30 USD

0.95 1.78

1.5 1.3

–13.7 –13.0

–4.7 –4.8

OT OT OT OT

OT OT OT OT

CYM CYM CYM CYM

04/30 04/30 04/30 04/30

EUR EUR USD USD

75.50 71.05 80.09 78.79

–1.1 –1.0 –0.8 –1.0

–32.5 –32.2 –29.9 –30.4

–14.5 NS –12.2 –12.8

n HSBC Portfolio Selection Fund GH Fund AP GH Fund CHF Hdg GH Fund EUR Hdg (Non-V) GH Fund GBP Hdg GH Fund Inst EUR GH Fund Inst USD GH FUND S EUR GH FUND S GBP GH Fund S USD GH Fund USD Hedge Investments Leverage GH USD MultiAdv Arb CHF Hdg MultiAdv Arb EUR Hdg MultiAdv Arb GBP Hdg MultiAdv Arb S EUR MultiAdv Arb S GBP MultiAdv Arb S USD MultiAdv Arb USD

–8.4 –9.1

8.5 6.5

20.9 20.5

Alpha AdvantEdge Asian AdbantEdge EUR Asian AdvantEdge Emerg AdvantEdge Emerg AdvantEdge EUR Europ AdvantEdge EUR Europ AdvantEdge USD

Yuki 77 Excellent Yuki 77 General Yuki 77 Growth Yuki 77 Income

EUR USD USD USD USD EUR EUR USD EUR EUR EUR EUR USD USD USD USD JPY JPY USD USD USD USD USD USD USD USD EUR USD

38.06 24.41 33.49 39.02 18.57 23.03 18.29 15.65 9.37 14.61 15.52 9.49 7.96 22.08 4.46 25.34 932.99 1631.31 7.78 18.60 12.44 22.81 17.19 16.23 12.68 13.32 27.31 15.81

0.5 –4.7 6.2 –2.0 24.3 11.8 38.4 9.8 2.2 1.4 13.0 12.7 33.1 4.9 22.1 21.2 3.0 4.2 21.9 14.5 15.4 13.8 7.6 4.5 –2.0 2.8 0.7 0.4

6.6 11.9 4.2 –0.5 –30.9 –34.9 –54.5 –47.9 –35.7 –45.7 –32.3 –41.7 –40.7 –39.4 –29.7 –20.5 –34.7 –17.2 –37.4 –26.0 –39.2 –40.5 –40.3 –41.3 –45.4 –44.9 3.4 1.9

3.6 0.0 5.6 6.9 –10.1 –27.2 –31.4 –14.8 –28.1 –33.8 –20.6 –34.3 –14.0 –25.1 –21.6 –0.1 –33.1 –18.3 –15.2 –15.0 –20.9 –17.4 –24.7 –29.5 –33.3 –32.2 3.7 3.1

OT OT OT OT

OT OT OT OT

IRL IRL IRL IRL

05/22 05/22 05/22 05/22

JPY JPY JPY JPY

8447.00 9563.00 12926.00 6079.00

–1.8 1.3 –0.4 –5.3

–40.7 –38.0 –36.6 –40.6

–35.6 –31.9 –30.6 –36.6

JP JP JP AS

EQ EQ EQ EQ

IRL IRL IRL IRL

05/22 05/22 05/22 05/22

JPY JPY JPY JPY

4118.00 6061.00 5714.00 4688.00

–2.0 2.7 –3.4 –8.3

–46.6 –40.1 –43.0 –40.2

–35.7 –32.1 –37.1 NS

IRL IRL IRL IRL

05/22 05/22 05/22 02/09

JPY JPY JPY JPY

6314.00 4781.00 7889.00 3989.00

1.2 –6.5 –3.7 –14.7

–38.6 –42.8 –32.6 –45.6

–33.3 –34.7 –28.1 –38.5

JP EQ IRL 05/22 JPY

6665.00

–1.5

–41.8

–34.3

4405.00 5101.00 4462.00

–3.2 –3.4 –5.2

–44.8 –37.1 –39.6

–34.1 –29.9 NS

4153.00 4313.00 6184.00 8136.00 6075.00 7566.00 4898.00 11300.00 7547.00 5948.00 5376.00 2399.00

–2.3 –4.0 1.4 1.4 –2.8 –4.9 –1.7 –0.3 –1.2 –3.0 3.5 0.5

–47.9 –49.0 –44.0 –38.1 –39.1 –39.6 –39.7 –29.6 –42.8 –42.6 –36.2 –47.8

–36.7 –38.9 –34.4 –33.3 –35.1 –31.4 –32.7 –27.5 –36.0 –36.5 –29.7 –44.7

4620.00

2.6

–44.8

–35.8

5139.00

0.8

–39.6

–33.7

n Yuki Chugoku Series Yuki Chugoku Jpn Gen Yuki Chugoku Jpn Gro Yuki Chugoku JpnLowP Yuki Chugoku JpnPurGth

JP JP JP OT

EQ EQ EQ OT

n Yuki Daishi Series Yuki Daishi General

FUND NAME

NAV GF AT LB DATE CR

Japan AdvantEdge JPY Japan AdvantEdge USD Lvgd Alpha AdvantEdge Trading AdvantEdge Trading AdvantEdge EUR Trading AdvantEdge GBP US AdvantEdge

OT OT OT OT OT OT OT

OT OT OT OT OT OT OT

OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT

OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT

JEY JEY JEY JEY JEY JEY CYM JEY CYM GGY JEY GGY JEY JEY JEY CYM CYM CYM GGY

04/30 04/30 04/30 04/30 04/30 04/30 04/30 04/30 04/30 04/30 04/17 04/30 04/30 04/30 04/30 04/30 04/30 04/30 04/17

EUR CHF EUR GBP EUR USD EUR GBP USD USD USD USD CHF EUR GBP EUR GBP USD USD

120.82 100.20 109.43 119.03 89.01 99.98 114.48 118.98 133.83 246.03 124.66 98.79 85.95 93.06 100.34 98.65 103.34 112.21 172.81

1.3 0.4 0.9 1.0 6.6 1.3 1.3 1.1 1.4 0.9 0.6 1.3 2.3 3.0 3.5 3.1 3.6 3.6 2.4

–13.9 –17.0 –16.3 –16.4 –11.0 –14.0 –15.7 –15.4 –13.6 –14.8 NS –32.5 –21.4 –20.6 –21.1 –20.0 –20.0 –17.8 NS

–4.0 –7.5 –6.2 –5.5 NS –4.3 –5.4 –4.4 –3.8 –5.0 NS –15.9 –13.5 –12.4 –12.1 –11.5 –10.8 –10.0 NS

OT OT OT OT OT OT OT

OT OT OT OT OT OT OT

JEY JEY JEY JEY JEY JEY JEY

04/30 04/30 04/30 04/30 04/30 04/30 04/30

USD EUR USD USD EUR EUR USD

108.75 92.91 169.28 148.98 83.40 116.84 123.34

1.6 4.8 4.5 6.1 6.2 1.4 1.1

–15.6 –17.2 –16.0 –23.1 –25.4 –15.5 –14.6

–7.0 –5.6 –4.3 –8.2 –10.2 –9.6 –8.9

Yuki Mizuho Gen Jpn III Yuki Mizuho Jpn Dyn Gro Yuki Mizuho Jpn Exc 100 Yuki Mizuho Jpn Gen Yuki Mizuho Jpn Gro Yuki Mizuho Jpn Inc Yuki Mizuho Jpn Lg Cap Yuki Mizuho Jpn LowP Yuki Mizuho Jpn PGth Yuki Mizuho Jpn SmCp Yuki Mizuho Jpn Val Sel Yuki Mizuho Jpn YoungCo

JP EQ IRL 05/22 JPY JP EQ IRL 05/22 JPY JP EQ IRL 05/22 JPY

JEY JEY JEY GGY GGY GGY JEY

04/30 04/30 04/30 04/30 04/30 04/30 04/30

JPY USD USD USD EUR GBP USD

NAV 7759.90 90.54 88.06 144.10 131.15 138.39 104.82

OT OT OT OT OT OT OT OT OT OT OT OT

Yuki Nishi-Nippon Cty General

–12.5 –11.2 –34.1 0.2 0.8 2.1 –16.2

–8.8 –6.4 –19.1 12.5 11.9 13.8 –6.5

IRL IRL IRL IRL IRL IRL IRL IRL IRL IRL IRL IRL

05/22 05/22 05/22 05/22 05/22 05/22 05/22 05/22 05/22 05/22 05/22 05/22

JPY JPY JPY JPY JPY JPY JPY JPY JPY JPY JPY JPY

JP EQ IRL 05/22 JPY

n Yuki Shizuoka Japan Series Yuki Shizuoka General Japan

]

JP EQ IRL 05/22 JPY

Advertisement

— %RETURN — YTD 12-MO 2-YR –4.0 –3.8 2.6 –5.0 –4.7 –4.9 2.4

OT OT OT OT OT OT OT OT OT OT OT OT

n Yuki Nishi Nippon City Japan Series

www.wsj.com/funddata

INDICES FUND NAME

NAV GF DATE CR

NAV

% RETURN 1-WK 1-MO 1-Q 1-YR 2-YR

n ARIX ABSOLUTE RETURN INVESTABLE INDEX Feri Institutional Advisors, www.feri.de ARIX Composite Gross USD

FUND NAME

OT 04/30 USD 1265.86

NAV GF AT LB DATE CR

1.5

1.5

NAV

–0.7 –18.6

–8.8

— %RETURN — YTD 12-MO 2-YR

n OTHER FUNDS For information about these funds, please contact us on Tel: +44 (0) 207 842 9694/9633 n INTEGRATED ALTERNATIVE INVESTMENTS, TEL: +44 (0)20 75149200 Email: contact@integratedai.com - Website: www.integratedai.com Altipro Integrated Dir Trading EUR Integrated Emg Markets EUR Integrated European EUR Integrated Event Driven EUR Integrated Lg/Sh Sel F EUR Integrated MultSt B EUR Integrated Relative Value EUR

OT OT OT OT OT OT OT OT

OT OT OT OT OT OT OT OT

FRA CYM CYM CYM CYM CYM VGB CYM

04/30 02/27 02/27 02/27 02/27 02/27 02/27 02/27

EUR EUR EUR EUR EUR EUR EUR EUR

187.39 105.06 69.33 149.65 81.72 86.33 116.68 91.16

–23.8 3.0 –2.6 0.4 –0.1 0.8 3.3 1.7

NS –4.8 –32.3 0.1 –22.1 –12.0 –16.8 –10.0

NS 7.1 –15.1 0.0 –9.6 –3.7 –5.6 –3.1

n KREDIETBANK LUXEMBOURG www.kbl.lu Fax : +352 47 97 73 911 KBL SPOP Investing KBL SPOP Investing

OT OT LUX 03/31 EUR OT OT LUX 03/31 USD

1469.36 1442.92

NS NS

–30.2 –29.2

–15.3 –14.2

Medinvest Plc Dublin

OT OT IRL 03/31 USD

1217.26

NS

–14.6

–5.6

n SUPERFUND ASSET MANAGEMENT GMBH For information about open funds, please contact us on Tel: +43 1 24700 www.superfund.com *Closed for New Investments Superfund Cayman* Superfund GCT USD* Superfund Gold A (SPC) Superfund Gold B (SPC) Superfund Q-AG*

OT OT OT OT OT

OT OT OT OT OT

CYM LUX CYM CYM AUT

05/19 05/19 05/19 05/19 05/19

USD USD USD USD EUR

59.81 2767.00 991.26 1046.38 7384.00

–28.2 –24.2 –14.7 –22.4 –15.7

–1.8 –8.4 –7.2 –12.1 –2.8

11.9 2.8 15.0 13.0 5.9

n WEAVERING CAPITAL www.weaveringcapital.com chas.dabhia@weaveringcapital.com T:+44(0)2073554720 Weavering Macro F.I. Fd

GL OT CYM 02/27 USD

183.52

–0.1

9.3

10.8

–3.8 –4.0 0.7 –3.9 –3.5 –3.6 –4.6 –3.9

–5.5 –5.2 –3.8 –6.0 6.3 7.1 2.8 5.5

7.0 8.0 7.1 7.2 17.1 18.6 13.6 17.2

n WINTON CAPITAL MANAGEMENT LTD Tel: +44 (0)20 7610 5350 Fax: +44 (0)20 7610 5301

n HSBC Uni-folio

n HORSEMAN CAPITAL MANAGEMENT LTD. T: +44(0)20 7838 7580, F: +44(0) 20 7838 7590, www.horsemancapital.com Horseman EmMkt Opp EUR Horseman EmMkt Opp USD

n THE NATIONAL INVESTOR PO Box 47435, Abu Dhabi, UAE Web:www.tni.ae Email: am@tni.ae Tel:+971 2 619 2300

n HSBC ALTERNATIVE STRATEGY FUND 1358.87 1753.22 1252.26 1712.79 1002.36

05/20 04/29 05/19 05/19 05/20 05/20 05/20 05/20 05/20 04/30 05/20 05/20 05/20 05/20 04/24 05/20 05/20 05/22 05/20 05/20 05/20 05/20 05/19 05/20 05/20 05/20 05/20 05/20

n Yuki Mizuho Series

n SEB Fund 1

2.7

5.6

LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX LUX

n Yuki 77 Series

Yuki Hokuyo Jpn Gen Yuki Hokuyo Jpn Inc Yuki Hokuyo Jpn Sm Cap

n SEB ASSET MANAGEMENT S.A. www.seb.se

Choice Asia ex. Japan Fd

OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT

n Yuki Hokuyo Japan Series

2.2 1.8

n HERMITAGE CAPITAL MANAGEMENT LTD. Tel: +7501 258 3160 www.hermitagefund.com The Hermitage Fund

n SEB Sicav 2

1.0 0.6

n HARMONY CAPITAL email: info@harmonycapitalfund.com Harmony Cap Ltd A USD Harmony Cap Ltd B EUR Harmony Cap Ltd D USD Harmony Cap Ltd E EUR Harmony Cap Ltd F GBP

–11.8

–27.7

–35.5

–2.9 –3.1

n D'AURIOL FUNDS WWW.DAURIOL.BIZ 2 FUNDS OF FUNDS OF HEDGE FUNDS D'Auriol Alt Non-Lev A D'Auriol Opp F3 EUR

–37.7

–35.8

7.9

10.60 10.52

n CAPITAL MANAGEMENT ADVISORS Phone Number: +1 441 295 59 29 OT OT OT OT OT

30.8

7.7

821.97

Global Absolute Global Absolute USD

OT OT OT OT OT

2.01

773.91

EU EQ IRL 05/21 EUR

n HSBC ALTERNATIVE INVESTMENTS LIMITED T +44 20 7860 3074 F + 44 20 7860 3174 www.hail.hsbc.com HSBC Absolute Companies HSBC Absolute Companies

CMA Dynamic CMA MultHdge Arbtrge CMA MultHdge Balncd CMA MultHdge Growth CMA MultiHdge Lvrgd

GL EQ LUX 05/22 USD

EU EQ IRL 05/21 EUR

Pan European Eq B

OT OT LUX 05/22 EUR OT OT LUX 05/22 EUR

— %RETURN — YTD 12-MO 2-YR –10.3

Choice Emerging Mkts Fd

Pan European Eq A

Currency Alpha EUR -ICCurrency Alpha EUR -RC-

6.9

n ALEXANDRA INVESTMENT MANAGEMENT Alexandra Global Inv I

n SEB Sicav 1

Bonds Eur Corp A

12-month and 2-year returns may be calculated over 11- and 23-month periods pending receipt and publication of the last month end price.

FUND NAME

n SEB Global Hedge

OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT OT

— %RETURN — YTD 12-MO 2-YR

NAV

n YUKI INTERNATIONAL LIMITED Tel +44-207-269-0203 www.yukifunds.com

PF (LUX)-Asian Eq-Ica

PF (LUX)-East Eu-Pca

NAV GF AT LB DATE CR

n MERIDEN GROUP Tel: + 376 741 175 Fax: + 376 741 183 Email: meriden@meriden-ipm.com Antanta Combined Fund Antanta MidCap Fund Meriden Opps Fund Meriden Protective Div

EE EE GL OT

EQ EQ OT OT

AND AND AND AND

05/15 05/15 05/13 11/24

USD USD EUR EUR

244.00 349.10 82.88 78.88

27.0 20.5 –4.8 –2.8

–66.6 –80.5 –23.7 NS

–45.2 –50.5 NS NS

Winton Evolution EUR Winton Evolution GBP Winton Evolution JPY Winton Evolution USD Winton Futures EUR Winton Futures GBP Winton Futures JPY Lead Series 2 Winton Futures USD

GL GL OT GL GL GL GL GL

OT OT OT OT OT OT OT OT

VGB VGB VGB CYM VGB VGB VGB VGB

04/30 04/30 02/27 04/30 04/30 04/30 04/30 04/30

EUR 1245.07 GBP 1224.31 JPY 115254.95 USD 1214.43 EUR 198.61 GBP 214.05 JPY 14083.60 USD 705.05

For information about listing your funds, please contact: Peter Jennings, tel: +44-20-7842-9674; email: peter.jennings@dowjones.com or Carson Wong tel: +852 2831-6481; email: carson.wong@dowjones.com


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 27

BLUE CHIPS & BONDS

Major players & benchmarks

Dow Jones Industrial Average

Below, a look at the Dow Jones Stoxx 50, the biggest and best known companies in Europe, including the U.K.

Market value, in billions of US$

Previous close, in local currency

STOCK PERFORMANCE Previous session

Company

Country

Industry

ING Groep

Netherlands

Life Insurance

$24.1

8.28

Rio Tinto

U.K.

General Mining

44.1

27.69

–56.0

–8.6

Anglo Amer

U.K.

General Mining

34.6

16.25

2.85

–51.8

–26.0

AXA S.A.

France

Full Line Insurance

38.3

13.11

2.50

–40.5

–52.1

BG Grp

U.K.

Integrated Oil & Gas

62.8

11.05

2.31

–15.7

52.5

Nokia

Finland

Telecomms Equipment

$56.5

10.62

–41.3

UBS

Switzerland

Banks

42.5

15.74

Credit Suisse Grp

Switzerland

Banks

50.3

46.16

L.M. Ericsson Tel B

Sweden

Telecomms Equipment

26.3

Novartis

Switzerland

Pharmaceuticals

106.2

4.43%

52-week

–65.7%

4.22

Banco Santander 83.1 Spain (Banks) BNP Paribas S.A. 67.1 France (Banks) BHP Billiton 50.4 U.K. (General Mining) Vodafone Grp 106.8 U.K. (Mobile Telecomms) Banco Bilbao Viz 45.0 Spain (Banks) E.ON 69.8 Germany (Multiutilities) Unilever 42.0 Netherlands (Food Products) ArcelorMittal 42.5 Luxembourg (Iron & Steel) Intesa Sanpaolo 43.1 Italy (Banks) Soc. Generale 31.6 France (Banks) BASF 38.5 Germany (Commodity Chemicals) Barclays 38.1 U.K. (Banks) Tesco 43.8 U.K. (Food Retailers & Wholesalers) Iberdrola S.A. 42.2 Spain (Conventional Electricity) UniCredit 40.4 Italy (Banks) Deutsche Bk 37.8 Germany (Banks) Deutsche Telekom 50.1 Germany (Mobile Telecomms) France Telecom 61.0 France (Fixed Line Telecoms) Assicurazioni Gen 31.4 Italy (Full Line Insurance) BP 164.3 U.K. (Integrated Oil & Gas)

Latest, in local currency

7.28

9000

–73.3%

8400

7800

–38.0

–43.7

–74.6

–2.66

–13.6

–33.8

50–day moving average

65.80

–2.37

–17.4

–44.5

43.66

–1.93

–19.5

–36.6

–6.02% –4.78

Company/Country (Industry)

–32.5

–39.5

14.22

1.79

–29.3

32.0

1.16

1.49

–29.3

–3.5

8.58

1.42

–39.8

–46.4

24.92

1.26

–42.9

–18.5

17.50

1.13

–14.2

–2.7

20.97

0.94

–66.7

...

2.60

0.87

–37.5

–42.7

38.92

0.84

–41.7

–66.3

29.93

0.81

–35.9

–7.9

2.87

0.79

–23.7

–51.9

3.51

0.75

–15.2

8.6

6.04

0.67

–34.6

–4.5

1.83

0.66

–50.1

–64.1

47.32

0.65

–34.6

–48.4

8.21

0.61

–23.7

–34.7

16.69

0.57

–17.0

–2.4

15.91

0.57

–37.7

–37.0

5.01

0.55

–20.5

–22.0

Market value, in billions (U.S)

ENI 93.9 Italy (Integrated Oil & Gas) Siemens 67.6 Germany (Diversified Industrials) SAP 51.3 Germany (Software) Telefonica S.A. 98.3 Spain (Fixed Line Telecommunications) Koninklijke Phlps 18.8 Netherlands (Consumer Electronics) Allianz SE 42.9 Germany (Full Line Insurance) Royal Dutch Shll 92.0 U.K. (Integrated Oil & Gas) Diageo 37.4 U.K. (Distillers & Vintners) Roche Hldg Part. Cert. 93.6 Switzerland (Pharmaceuticals) Total S.A. 131.7 France (Integrated Oil & Gas) British Amer Tob 53.4 U.K. (Tobacco) GDF Suez 81.4 France (Multiutilities) HSBC Hldgs 146.6 U.K. (Banks) Astrazeneca 60.5 U.K. (Pharmaceuticals) Sanofi-Aventis S.A. 80.7 France (Pharmaceuticals) Daimler 33.7 Germany (Automobiles) GlaxoSmithKline 95.4 U.K. (Pharmaceuticals) Bayer 42.0 Germany (Specialty Chemicals) ABB 37.5 Switzerland (Industrial Machinery) Nestle S.A. 140.7 Switzerland (Food Products)

2.10% –41.4% –31.8% 1.98

Close Low

20 27 6 Mar.

Latest, in local currency

STOCK PERFORMANCE Latest 52-week Three-year

16.76

0.54% –36.4%

–28.8%

52.89

0.51

–26.0

–22.7

29.90

0.44

–10.0

–29.2

14.93

0.20

–18.6

18.0

13.80

0.18

–43.1

–44.6

67.83

0.10

–42.8

–44.9

18.53

–0.03

–31.9

–29.0

8.54

–0.12

–13.3

–5.0

144.80

–0.14

–17.2

–23.4

39.69

–0.31

–29.8

–23.4

16.61

–0.36

–13.2

22.3

26.55

–0.51

–33.7

–1.8

5.37

–0.74

–27.4

–34.8

26.23

–0.87

20.4

–7.9

43.88

–0.97

–5.6

–42.4

25.00

–1.11

–49.4

–39.8

10.52

–1.13

–6.2

–30.1

39.30

–1.23

–28.2

8.8

17.54

–1.74

–46.6

14.8

39.94

–1.77

–20.4

8.6

13

20

27

3 9 Apr.

17

24

Hedge funds Dow Jones Hedge Benchmark

0.14% 0.56% -0.15% 0.46%

0.14% 1.34% -1.69% 0.49%

*Estimates as of 05/21/09, after fees;

0.7% 2.1% -3.1% -1.9%

2.7% 3.8% -3.8% -0.5%

-6.0% -26.8% -11.6% -19.9%

Credit derivatives

Markit iTraxx Indexes Mid-spread, in pct. pts. Mid-price Coupon

1.28 2.54 7.65 1.95 2.05

102.67% 105.35 107.57 107.06 113.88

0.02% 0.04 0.10 0.04 0.05

SPREAD RANGE, in pct. pts. since most recent roll Maximum Minimum Average

1.87 3.89 9.71 3.84 4.33

1.19 2.20 7.10 1.95 1.96

1.50 3.00 8.51 2.90 3.08

Note: Data as of May 21

Spreads

Follow the markets throughout the day, with updated stock quotes, news and commentary at WSJ.com/Europe. Also, receive email alerts that summarize the day’s trading in Europe and Asia. To sign up, go to

Spreads on fiveyear swaps for corporate debt; based on Markit iTraxx indexes.

WSJ.com/Online Today

In percentage points Asia ex-Japan IG t

Index roll

5.00 3.75 2.50

t

WSJ.com

22

DJIA component stocks Stock

Symbol

AT&T Alcoa AmExpress BankAm Boeing Caterpillar Chevron Citigroup CocaCola Disney DuPont ExxonMobil GenElec GenMotor HewlettPk HomeDpt Intel IBM JPMorgChas JohnsJohns KftFoods McDonalds Merck Microsoft Pfizer ProctGamb 3M UnitedTech Verizon WalMart

T AA AXP BAC BA CAT CVX C KO DIS DD XOM GE GM HPQ HD INTC IBM JPM JNJ KFT MCD MRK MSFT PFE PG MMM UTX VZ WMT

Volume, in millions

Latest

22.10 26.80 12.10 468.90 2.80 14.00 8.50 125.70 11.90 10.40 5.30 18.00 51.60 247.90 11.50 14.80 42.50 5.40 35.40 7.10 9.20 10.40 14.30 35.40 32.10 6.40 3.60 4.00 9.20 10.70

$23.68 8.86 23.40 11.07 42.94 34.31 64.44 3.67 47.30 23.70 27.77 68.83 13.10 1.43 34.14 22.86 15.05 101.89 34.41 54.77 25.46 57.08 26.17 19.75 14.96 53.03 56.07 51.04 28.81 49.25

CHANGE Points Percentage

0.01 –0.24 –0.75 –0.34 –0.35 –1.23 –0.03 –0.05 0.62 0.47 0.47 0.44 –0.14 –0.49 –0.08 –0.03 –0.13 –0.93 –0.49 –0.22 0.53 1.39 0.05 –0.07 0.13 0.01 –0.48 0.28 –0.35 0.14

0.04% –2.64% –3.11% –2.98% –0.81% –3.46% –0.05% –1.34% 1.33% 2.02% 1.72% 0.64% –1.06% –25.52% –0.23% –0.13% –0.86% –0.90% –1.40% –0.40% 2.13% 2.50% 0.19% –0.35% 0.88% 0.02% –0.85% 0.55% –1.20% 0.29%

Source: WSJ Market Data Group

Showing the biggest improvement...

Source: www.djhedgefundindexes.com

Spreads on credit derivatives are one way the market rates creditworthiness. Regions that are treading in rough waters can see spreads swing toward the maximum—and vice versa. Indexes below are for five-year swaps.

Europe: 11/1 Eur. High Volatility: 11/1 Europe Crossover: 11/1 Asia ex-Japan IG: 11/1 Japan: 11/1

15

At its most basic, the pricing of credit-default swaps measures how much a buyer has to pay to purchase-and how much a seller demands to sell-protection from default on an issuer's debt. The snapshot below gives a sense which way the market was moving yesterday.

Yesterday

Index: series/version

1 8 May

Credit-default swaps: European companies

TOTAL RETURN for rolling periods, net of fees* One week One month One quarter Year to date One year

Merger Arbitrage Event Driven Equity Market Neutral Equity Long/Short

6600

Note: Price-to-earnings ratios are for trailing 12 months

Sources: Dow Jones Indexes; WSJ Market Data Group

Tracking credit markets & dealmakers

7200

High

6000

STOCK PERFORMANCE Latest 52-week Three-year

45.90

t 4,202.31, or 33.7%

t

Market value, in billions (U.S)

t 499.07, or 5.7%

Three-year

...And the rest of Europe’s blue chips Company/Country (Industry)

t 14.81, or 0.18%

LAST: 8277.32 YEAR TO DATE: OVER 52 WEEKS

Dow Jones Stoxx 50: Friday’s best and worst…

P/E: 42

Australia

1.25 0

Dec. Jan. Feb. Mar. April May 2009 Source: Markit Group

Rentokil Initial 1927 Rhodia Smurfit Kappa Fdg Heineken EMI Group Invensys Tomkins ISS Glob PPR Swiss Reins

213 865 784 176 713 187 248 769 292 283

And the most deterioration

CHANGE, in basis points Yesterday Five-day 28-day

–18 –10 –6 –6 –6 –5 –4 –4 –3 –3

–32 –46 –71 –7 –29 –11 –35 –31 –38 –61

Yesterday

–136 –284 –28 –24 –74 –63 –129 –37 –76 –224

C de Aho Y Monte de Piedad de Madrid Grohe Hldg Renault ArcelorMittal Fin Norske Skogindustrier Corus Group Contl Stena Aktiebolag Rallye TUI

267 1884 355 575 1016 816 815 936 1415 1602

CHANGE, in basis points Yesterday Five-day 28-day

17 20 22 23 27 36 37 42 45 111

7 –4 –377 –768 –41 –4 –45 –250 –15 –156 –327 –2240 –92 –305 –59 –169 –63 –88 –87 –158 Source: Markit Group

Behind global deals: Bank revenues from equity capital markets Behind every IPO, follow-on or convertible equity offering is one or more investment banks. At right, investment banks historical and yearto-date revenues from global equitycapital-market (ECM) deals

n Equity capital markets n Debt capital markets (both in billions, left axis)

ECM as a percentage of total

12

60%

(right axis) t

8

40

4

20

0

0 2003

2004

2005

2006

2007

2008

2009 Source: Dealogic


28 MON DAY, MAY 2 5, 2 0 0 9

T H E WA L L ST R E E T J O U R NA L .

GLOBAL MARKETS LINEUP Commodities

Currencies

Prices of futures contracts with the most open interest

EXCHANGE LEGEND: CBOT: Chicago Board of Trade; CME: Chicago Mercantile Exchange; ICE-US: ICE Futures U.S.MDEX: Bursa Malaysia Derivatives Berhad; LIFFE: London International Financial Futures Exchange; COMEX: Commodity Exchange; LME: London Metals Exchange; NYMEX: New York Mercantile Exchange;ICE-EU: ICE Futures Europe ONE-DAY CHANGE Contract Commodity Exchange Last price Net Percentage high

Corn (cents/bu.) Soybeans (cents/bu.) Wheat (cents/bu.) Live cattle (cents/lb.) Cocoa ($/ton) Coffee (cents/lb.) Sugar (cents/lb.) Cotton (cents/lb.) Crude palm oil (ringgit/ton) Cocoa (pounds/ton) Robusta coffee ($/ton)

430.25 1166.00 612.50 83.775 2,420 135.00 15.70 57.11 2,521.00 1,611 1,516

6.25 –9.00 19.00 0.550 40 –0.80 0.08 0.33 22 14 –23

Copper (cents/lb.) Gold ($/troy oz.) Silver (cents/troy oz.) Aluminum ($/ton) Tin ($/ton) Copper ($/ton) Lead ($/ton) Zinc ($/ton) Nickel ($/ton)

209.75 COMEX 958.90 COMEX 1469.50 LME 1,441.00 LME 13,700.00 LME 4,590.00 LME 1,425.00 LME 1,492.00 LME 12,640

4.65 7.70 25.00 –24.00 200.00 71.00 5.00 22.00 390

Crude oil ($/bbl.) Heating oil ($/gal.) RBOB gasoline ($/gal.) Natural gas ($/mmBtu) Brent crude ($/bbl.) Gas oil ($/ton)

NYMEX

61.67 1.5642 1.8107 3.636 60.78 479.50

0.62 0.0085 0.0389 –0.090 0.85 2.75

CBOT CBOT CBOT CME ICE-US ICE-US ICE-US ICE-US MDEX LIFFE LIFFE COMEX

NYMEX NYMEX NYMEX ICE-EU ICE-EU

1.47%

314.00 779.00 447.00 78.075 1,932 106.60 9.97 41.21 1,790 1,040 1,434

372.00 1,035.00 2,170.00 3,340.00 1.48 24,200.00 1.57 8,811.00 0.35 2,225.00 1.50 2,169.00 3.18 24,530

129.95 476.00 690.00 1,288.00 9,750.00 2,815.00 870.00 1,065.00 9,000

3.20 0.66 1.68 –0.59 0.51 0.58 0.88 0.88 –1.49 2.27 0.81 1.73

–1.64

1.02 0.55 2.20

147.40 4.1300 3.6800 11.981 143.31 1,342.50

–2.42 1.42 0.58

42.19 1.2000 1.1250 3.395 42.62 380.00

Source: Thomson Reuters; WSJ Market Data Group

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Major stock market indexes Price-toearnings ratio*

20

Region/Country

EUROPE

13 16

Euro Zone

14

Index

Close

In U.S. dollars

Per

3.7363 0.2676 2.0228 0.4944 1.1253 0.8887 1.1251 0.8888 1.1246 0.8892 1.1239 0.8898 561.40 0.001781 2205.00 0.0004535 1 1 13.1812 0.0759 2.9955 0.3338 23.550 0.0425 1 1 2.15 0.465701 1.2747 0.7845 6.8232 0.1466 7.7518 0.1290 46.9600 0.0213 10270 0.0000974 94.65 0.010566 94.61 0.010569 94.55 0.010576 94.44 0.010589 3.4905 0.2865 1.6125 0.6202 80.100 0.0125 46.870 0.0213 1.4420 0.6935 1243.30 0.0008043 32.605 0.03067 34.335 0.02912

SDR -f

0.9060

PREVIOUS SESSION Net change Percentage change

PERFORMANCE Yr.-to-date 52-wk.

Price-toearnings ratio*

Region/Country

Index

Close

PREVIOUS SESSION Net change Percentage change

DJ Stoxx 600

207.01

–0.56

–0.27%

5.1%

–35.1%

Russia

RTSI

1013.37

12.01

2094.25

–4.51

–0.21

1.4%

–33.9%

8

Spain

IBEX 35

9308.6

83.3

226.29

0.45

1.6%

–37.0%

15

Sweden

OMX Stockholm

241.72

–4.22

–1.72%

–0.7%

–34.7%

10

Switzerland

SMI

–1.82

17.3%

–53.0%

Turkey

ISE National 100

DJ Euro Stoxx 50

2433.52

9.80

Austria

ATX

2053.88

–53.00

13

Belgium

Bel-20

2064.64

8.27

925.8

–2.3

286.31

unch.

Czech Republic PX

1.1037

0.6475

1.5444

a-floating rate b-commercial rate c-government rate c-commercial rate d-Russian Central Bank rate f-Special Drawing Rights from the International Monetary Fund ; based on exchange rates for U.S., British and Japanese currencies. Note: Based on trading among banks in amounts of $1 million and more, as quoted by Thomson Reuters.

DJ Stoxx 50 DJ Euro Stoxx

In

EUROPE Per euro In euros U.S. dollar U.S. dollars Euro zone euro 1 1 0.7147 1.3993 1-mo. forward 1.0003 0.9997 0.7149 1.3988 3-mos. forward 1.0008 0.9992 0.7153 1.3981 6-mos. forward 1.0016 0.9984 0.7158 1.3970 Czech Rep. koruna-b 26.673 0.0375 19.063 0.0525 Denmark krone 7.4472 0.1343 5.3223 0.1879 Hungary forint 280.23 0.003569 200.27 0.004993 Norway krone 8.8619 0.1128 6.3333 0.1579 Poland zloty 4.4011 0.2272 3.1453 0.3179 Russia ruble-d 43.482 0.02300 31.075 0.03218 Sweden krona 10.4644 0.0956 7.4786 0.1337 Switzerland franc 1.5209 0.6575 1.0870 0.9200 1-mo. forward 1.5205 0.6577 1.0866 0.9203 3-mos. forward 1.5193 0.6582 1.0858 0.9210 6-mos. forward 1.5170 0.6592 1.0841 0.9224 Turkey lira 2.1586 0.4633 1.5427 0.6482 U.K. pound 0.8811 1.1349 0.6297 1.5880 1-mo. forward 0.8813 1.1347 0.6298 1.5878 3-mos. forward 0.8814 1.1345 0.6299 1.5875 6-mos. forward 0.8818 1.1341 0.6302 1.5869 MIDDLE EAST/AFRICA Bahrain dinar 0.5275 1.8957 0.3770 2.6526 Egypt pound-a 7.8757 0.1270 5.6285 0.1777 Israel shekel 5.5088 0.1815 3.9370 0.2540 Jordan dinar 0.9910 1.0091 0.7083 1.4119 Kuwait dinar 0.4035 2.4786 0.2883 3.4681 Lebanon pound 2109.37 0.0004741 1507.50 0.0006634 Saudi Arabia riyal 5.2474 0.1906 3.7502 0.2667 South Africa rand 11.6061 0.0862 8.2945 0.1206 United Arab dirham 5.1390 0.1946 3.6727 0.2723

Stock indexes from around the world, grouped by region. Shown in local-currency terms.

8 8

Per U.S. dollar

AMERICAS Per euro In euros Argentina peso-a 5.2279 0.1913 Brazil real 2.8303 0.3533 Canada dollar 1.5745 0.6351 1-mo. forward 1.5743 0.6352 3-mos. forward 1.5736 0.6355 6-mos. forward 1.5726 0.6359 Chile peso 785.54 0.001273 Colombia peso 3085.35 0.0003241 Ecuador US dollar-f 1.3993 0.7147 Mexico peso-a 18.4438 0.0542 Peru sol 4.1915 0.2386 Uruguay peso-e 32.952 0.0303 U.S. dollar 1.3993 0.7147 Venezuela bolivar 3.00 0.332822 ASIA-PACIFIC Australia dollar 1.7836 0.5607 China yuan 9.5473 0.1047 Hong Kong dollar 10.8466 0.0922 India rupee 65.7088 0.0152 Indonesia rupiah 14370 0.0000696 Japan yen 132.43 0.007551 1-mo. forward 132.39 0.007554 3-mos. forward 132.30 0.007559 6-mos. forward 132.15 0.007567 Malaysia ringgit-c 4.8841 0.2047 New Zealand dollar 2.2563 0.4432 Pakistan rupee 112.080 0.0089 Philippines peso 65.583 0.0152 Singapore dollar 2.0176 0.4956 South Korea won 1739.69 0.0005748 Taiwan dollar 45.623 0.02192 Thailand baht 48.043 0.02081

Contract low

826.00 1,650.00 1,144.75 117.500 3,220 181.60 16.03 101.50 2,747 2,004 2,314

–0.77%

London close on May 22

0.20% 0.40 –2.52 0.40 –0.25 Closed

5409.26

–100.01

35014.50

293.95

8.2%

–43.8%

10

U.K.

FTSE 100

4365.29

19.82

7.9%

–44.6%

11

ASIA-PACIFIC

DJ Asia-Pacific

102.11

–0.31

26.6%

–32.6%

Australia

SPX/ASX 200

3761.6

–52.3

7.0%

–40.1%

24

China

CBN 600

22349.90

–42.92

0.3%

–34.6%

15

Hong Kong

Hang Seng

17062.52

–136.97

1.20% 0.90

PERFORMANCE Yr.-to-date 52-wk.

60.4%

–58.4%

1.2%

–31.4%

18.4%

–25.0%

–2.3%

–27.5%

0.85

30.3%

–12.4%

0.46

–1.6%

–28.3%

–0.30

–34.0%

1.1%

–34.8%

16

Denmark

OMX Copenhagen

12

Finland

OMX Helsinki

5781.22

11

France

CAC-40

3227.97

19

Germany

DAX

4918.75

18.08

0.37

2.3%

–29.2%

17

India

Sensex

13887.15

150.61

Hungary

BUX

15261.25

42.85

0.28

24.7%

–32.1%

Japan

Nikkei Stock Average

9225.81

–38.34

8

Ireland

ISEQ

2697.98

–16.88

15.1%

–55.5%

Singapore

Straits Times

2245.27

34.30

9

Italy

S&P/MIB

20007

124

2.8%

–39.1%

11

South Korea

Kospi

1403.75

–17.90

9

Netherlands

AEX

260.14

1.12

5.8%

–45.6%

13

AMERICAS

DJ Americas

232.07

0.30

2.6%

–36.1%

9

Norway

All-Shares

332.98

–7.49

23.2%

–44.2%

Brazil

Bovespa

50568.49

481.16

0.96

34.7%

–29.2%

17

Poland

WIG

29399.62

–281.74

8.0%

–36.9%

16

Mexico

IPC

24093.24

271.98

1.14

7.7%

–22.5%

12

Portugal

PSI 20

7230.80

54.89

14.0%

–33.1%

–208.91 –3.49 10.56

*P/E ratios use trailing 12-months, as-reported earnings Note: Americas index data are as of 5:00 p.m. ET.

0.33

–0.62 0.62 0.43 –2.20 –0.95 0.76

3.39% 2.38% 3.58% 3.74% 2.76% 2.97% 3.56% 3.68% 2.96% 3.04% 6.01% 5.34%

11 12 20 16 -24 21 16 13 -17 14 7 9

PERFORMANCE (euros) Last Daily 52-wk.

World -a % % Global Dow 1079.80 –1.28% –32.7% Stoxx 600 207.00 –0.27% –35.1% Stoxx Large 200 221.80 –0.25% –35.2% Stoxx Mid 200 190.90 –0.29% –34.3% Stoxx Small 200 120.20 –0.51% –34.0% Euro Stoxx 226.30 0.20% –37.0% Euro Stoxx Large 200 240.50 0.22% –37.3% Euro Stoxx Mid 200 214.90 0.34% –36.1% Euro Stoxx Small 200 130.90 –0.48% –35.7% Stoxx Select Dividend 30 1170.90 –0.50% –47.6% Euro Stoxx Select Div 30 1352.60 0.03% –50.2%

Price-toDividend earnings yield* ratio* Dows Jones Index

0.40% –37.6% 0.31% –40.3% 1.33% –42.4% 1.35% –42.5% 1.31% –41.7% 1.09% –41.5% 1.81% –44.2% 1.83% –44.3% 1.95% –43.3% 1.12% –42.9% 1.10% –53.5% 1.63% –55.8%

5.11% 4.79% 2.33% 1.62% 4.60% 4.09% 5.35% 2.76% 3.10% 3.10% 2.34% %

10 14 7 9 13 6 10 11 10 10 11

U.S. Select Dividend -b Infrastructure Luxury BRIC 50 Africa 50 GCC Sustainability Islamic Market -a Islamic Market 100 Islamic Turkey -c DJ U.S. TSM DJ-UBS Commodity

PERFORMANCE (euros) Last Daily 52-wk.

1189.60 677.20 342.20 682.30 675.90 1431.40

118.80

PERFORMANCE (U.S. dollars) Last Daily 52-wk.

% % 496.36 0.09% –36.2% –0.55% –28.1% 1586.63 1.04% –36.2% –0.99% –28.2% 803.16 0.60% –36.3% –0.16% –31.4% 456.46 1.44% –39.2% –0.09% –37.6% 605.79 1.52% –44.6% % % 1286.05 0.07% –56.1% –0.81% –31.3% 798.33 0.78% –39.1% % % 1573.93 0.50% –34.4% –1.37% –23.1% 1713.71 0.22% –31.8% % % % % % % 9068.67 –0.17% –35.0% –0.63% –38.1% 120.65 0.97% –45.0%

*Fundamentals are based on data in U.S. dollar. Footnotes: a-in US dollar. b-dividends reinvested. c-in local currency. Note: All data as of 5 p.m. ET.

Cross rates

1.10 –0.41 1.55 –1.26 0.13

51.4%

–23.0%

18.6%

–31.0%

43.9%

–16.6%

4.1%

–34.2%

27.5%

–28.1%

24.8%

–23.2%

MSCI indexes

PERFORMANCE (U.S. dollars) Last Daily 52-wk.

180.50 1604.22 216.28 230.54 198.39 124.84 236.43 249.73 223.05 135.75 1401.80 1625.58

–0.19 –0.80

Reuters Group PLC is the primary data provider for several statistical tables in The Wall Street Journal, including foreign stock quotations, futures and futures options prices, and foreign exchange tables. Reuters real-time data feeds are used to calculate various Dow Jones Indexes.

Sources: Thomson Reuters; WSJ Market Data Group

Dow Jones and Dow Jones Stoxx Indexes Price-toDividend earnings yield* ratio* Dows Jones Index

–1.37

9.1%

Source: Dow Jones Indexes

U.S.-dollar and euro foreign-exchange rates in global trading

USD

GBP

CHF

SEK

RUB

NOK

JPY

ILS

EUR

DKK

CDN

AUD

Australia

1.2747

2.0242

1.1727

0.1704

0.0410

0.2013

0.0135

0.3238

1.7836

0.2395

1.1328

...

Developed and emerging-market regional and country indexes from MSCI Barra as of May 22, 2009 Price-toDividend earnings yield ratio Morgan Stanley Index

Last

LOCAL-CURRENCY PERFORMANCE Daily YTD 52-wk.

3.40% 13

ALL COUNTRY (AC) WORLD*

238.21 –1.71% 4.6% –37.9%

3.40% 14

World (Developed Markets)

937.59 –1.67% 1.9% –37.9%

3.10% 14

World ex-EMU

109.95 –1.52% 2.2% –36.2%

3.20% 15

World ex-UK

936.06 –1.59% 1.3% –37.2%

4.20% 12 3.40% 10

EAFE Emerging Markets (EM)

4.70% 10

EUROPE

5.10% 10

EMU

4.50% 12

Europe ex-UK

5.80%

Europe Value

81.07 –2.37% 4.6% –39.1%

3.70% 11

Europe Growth

62.90 –1.60% 4.1% –32.7%

4.00% 10

Europe Small Cap

126.38 –1.61% 25.2% –34.6%

3.60%

5

EM Europe

212.41 –4.76% 33.7% –47.4%

5.30%

8

UK

9

3.40% 10 2.70% 4

Nordic Countries Russia

9

1,280.63 –1.50% 3.5% –40.1% 740.96 –2.00% 30.7% –37.8% 72.44 –1.98% 4.3% –35.8% 142.55 –2.46% 0.3% –45.7% 79.58 –1.85% 2.6% –35.8%

1,291.28 –2.78% –1.8% –28.6% 117.88 –0.43% 20.2% –35.9% 581.24 –6.01% 41.0% –57.1%

Canada

1.1253

1.7869

1.0352

0.1505

0.0362

0.1777

0.0119

0.2858

1.5745

0.2114

...

0.8828

4.40%

South Africa

599.65 –2.90% 3.6% –19.7%

Denmark

5.3223

8.4517

4.8965

0.7117

0.1713

0.8404

0.0562

1.3519

7.4472

...

4.7298

4.1753

4.10% 13

AC ASIA PACIFIC EX-JAPAN

310.49 –1.16% 25.5% –36.8% 547.15 –0.59% 3.2% –36.5%

Euro

0.7147

1.1349

0.6575

0.0956

0.0230

0.1128

0.0076

0.1815

...

0.1343

0.6351

0.5607

2.20% 25

Japan

Israel

3.9370

6.2520

3.6221

0.5264

0.1267

0.6216

0.0416

...

5.5088

0.7397

3.4988

3.0886

2.70% 11

China

50.82 –0.99% 24.6% –32.4%

1.50% 14

India

540.92 –1.95% 46.5% –24.0%

Japan

94.6450

150.2963

87.0739

12.6554

3.0457

14.9440

...

24.0399

132.4320

17.7829

84.1102

74.2490

Norway

6.3333

10.0573

5.8267

0.8469

0.2038

...

0.0669

1.6087

8.8619

1.1900

5.6283

4.9685

Russia

31.0754

49.3477

28.5895

4.1552

...

4.9067

0.3283

7.8932

43.4823

5.8388

27.6164

24.3787

1.70% 14

Korea

386.53 –1.05% 25.9% –24.2%

Sweden

7.4786

11.8760

6.8804

...

0.2407

1.1808

0.0790

1.8996

10.4644

1.4052

6.6462

5.8670

5.90% 13

Taiwan

246.79 –0.04% 42.3% –28.3%

Switzerland

1.0870

1.7261

...

0.1453

0.0350

0.1716

0.0115

0.2761

1.5209

0.2042

0.9660

0.8527

2.60% 19

US BROAD MARKET

976.28 –1.69% –0.6% –35.2%

U.K.

0.6297

...

0.5793

0.0842

0.0203

0.0994

0.0067

0.1599

0.8811

0.1183

0.5596

0.4940

U.S.

...

1.5880

0.9200

0.1337

0.0322

0.1579

0.0106

0.2540

1.3993

0.1879

0.8887

0.7845

1.80% -56 3.80% 12

US Small Cap EM LATIN AMERICA

1,261.90 –1.65% 1.2% –33.3% 2,841.78 –3.08% 36.8% –39.8%

Source: Thomson Reuters via WSJ Market Data Group

*Twenty-three developed and 26 emerging markets

Source: MSCI Barra


T H E WA L L ST R E E T J O U R NA L .

M ONDAY, M AY 25, 2009 29

MARKETPLACE

Nigeria’s Nollywood confronts real life Film, TV industries face rampant losses from DVD piracy Lagos, Nigeria—Producer Paul Julius is confident that the tens of thousands of dollars he has spent producing the soap opera “Tomorrow’s Tears” will be recouped, no matter the electricity shortages, lack of investors or grease-palmed government officials hampering his shooting schedule. Fighting to be heard over a steady stream of traffic and actors complaining about the lack of food, money and air conditioning, Mr. Julius explained the plot of his soap, which he hopes to sell to local TV stations. “I changed the subject from the normal stuff: blood, magic, stepmothers, etc.,” he said. “This is going to be about real-life issues.” Mr. Julius is an up-and-coming player in Nigeria’s film and television industry, known as Nollywood, which has grown from its infancy in the 1980s into the one of the world’s biggest movie industries, but is facing some real-life issues of its own. In 2006, nearly 900 movies, almost all straight-to-video, were shot in Nigeria, trailing only India and almost doubling Hollywood’s total for the same year, according to a Unesco report released this month. Currently around 40 movies are shot every month in Lagos, Nigeria’s commercial capital, not counting the dozens of television dramas that are also shot here. The industry generates an estimated $250 million a year, and is

Will Connors

By Will Connors

Paul Julius is a producer in Nigeria’s film industry, which is experiencing growing pains.

popular throughout Africa and immigrant enclaves in Europe and the U.S. But rampant piracy means substantial losses for producers and directors already operating on tight budgets. Understaffed and bribeready police means copyright enforcement is minimal. Inadequate roadways inhibit a small distribution network itching to grow. Constant electricity outages stall production schedules. These problems threaten to derail the industry. Nigeria’s messy and often corrupt oil industry drives much of what happens in this country. It is the biggest oil producer in Africa, and as much as

95% of the country’s export earnings come from oil. Nigeria has taken in roughly $400 billion in oil-generated revenue since 1970 but the standard of living for most Nigerians has actually decreased. Nonetheless, the country’s residents have an impressive appetite for movies. The most successful Nollywood movies are often melodramas like “Living in Bondage” and “Domitilla,” filled with adultery, bribery and elements of local mysticism. A comedy, however, may have given Nollywood its best chance at international exposure. “Usuofia in London,” about a Nigerian man who lands

in the big city straight from his native village, may be the best-selling Nollywood movie to date, with an estimated 500,000 copies sold. Only a handful of Nigerian movies have made it to international film festivals, such as “The Rivals,” directed by Aquila Njamah, which was shown at the New York International Independent Film and Video Festival in 2007. Most Nigerian movies are produced fast and cheap, shot in a few weeks for $15,000 to $25,000, then roughly edited and handed off to marketers and eventually street-side vendors, or video clubs, as they are known locally. Financiers, usually friends or family members of the producer or director, want to see their investments recouped and care little for artistic exploration or high-quality technical effects. Directors are under pressure to keep each movie on schedule and under budget. Profits, when made, are small. Producers estimate that as much as 70% of their yearly revenue is lost to piracy. “I would say the biggest challenge facing the industry at the moment is lack of structure, and a high level of informality,” said Emeka Mba, the chairman of the National Film and Video Censors Board, the Nigerian movie industry’s main regulatory body. There is no formal distribution network for Nollywood producers. A finished movie in Lagos is burned onto around 15,000 DVDs with no copy protection and released into the market. If it’s a hit, demand swells. Vendors need more copies. But the producers often can’t keep up. So the movie is copied by pirates and thrown back into the market. The producer can only hope he made back his investment in time. “We’ve been crying to the govern-

ment. If these things are not checked now, Nollywood will go into extinction,” said Cosmas Ndulue, 42, a producer and owner of one of only two indigenous DVD manufacturing companies in Nigeria. Industry officials and government agencies have started paying closer attention to piracy, but so far there hasn’t been much of an effect. A recent police raid on a well-known DVDcopying operation resulted in a brief confrontation between police and piracy-ring leaders. The pirates stood their ground and burned a police truck, then went back to work making knock-off Nollywood copies. The only repercussion for the offenders? A bill for the damage to the police vehicle. As piracy takes a larger and larger chunk of the profits, finding enough money to shoot a movie is becoming even more of a challenge. Chico Ejiro, a producer and director, has been struggling to find financing for his movies. A few years ago, during the shooting of his movie “Sisters on the Run,” he sold his car to keep the production afloat. This year he convinced a local bank to sponsor “100 Days in the Jungle,” a film about abduction and village lore, but it was a flop and Mr. Ejiro says the bank quickly soured on Nollywood. Mr. Julius, despite his production headaches, is optimistic about the future of Nollywood, as are most industry players. While watching two of his actors struggle to finish a scene on a busy Lagos street, Mr. Julius was looking forward to a complicated shoot that would involve a substantial police convoy, hundreds of extras, and foreign actors. “I need someone to play the British prime minister in the big scene we’re shooting this weekend,” Mr. Julius said, eyeing a reporter up and down. “Am I looking at him?”

By Robert Lee Hotz Seeking signs of genius, a researcher recently reconstructed the shape of Albert Einstein’s brain with techniques normally used to analyze fossils. This mold of thought, she believes, reveals the imprint of a rare intelligence thattransformed our understanding of space, time and energy. By studying photographs of Einstein’s brain taken at his death in 1955, paleoanthropologist Dean Falk at Florida State University identified a dozen subtle variations in its surface that may have heightened his ability to see physics in a new way. Her research suggests how the brain shaped the inner life of the 20th century’s most famous mind. “Einstein’s brain is really unusual,” says Dr. Falk. “On the surface at least, it looks different than others. It’s suggestive.” Like every human brain, Einstein’s was an island universe of thought. The insights that revolutionized physics were the product of 25 billion neurons linked by billions of connections—an essence of intellect so densely compacted that a thimble full of brain matter normally holds 50 million neurons and a trillion synapses. His ideas and impressions raced through a maze of 150,000 kilometers of insulated nerve fibers at

SCIENCE JOURNAL

about 322 kilometers per hour . No one knows exactly how intelligence and originality arises from the action of so many special cells. Researchers at Drexel University in Philadelphia and Northwestern University in Evanston, Ill., recently discovered that patterns of electrical brain activity, as measured by electroencephalograms, usually are different among creative thinkers than among more methodical problem solvers. An expert on ancient neural evolution, Dr. Falk is accustomed to studying brains that no longer exist. She reviewed 25 autopsy photographs. She could see that Einstein’s brain had an unusual pattern of grooves and ridges along its parietal lobes, suggesting a rearrangement of areas associated with mathematical, visual and spatial cognition. Although he published 300 scientific papers, Einstein couldn’t easily describe the way his mind worked. “A new idea comes suddenly and in a rather intuitive way,” he once said. His thoughts moved “in a wildly speculative way.” As a theorist, he sometimes solved physics problems by imagining himself riding alongside a light beam or falling in an elevator. “I rarely think in words at all. A thought comes and I may try to express it in words afterwards …I have no doubt that our thinking goes on for the most part without the use of signs and, furthermore, largely unconsciously.” Told that many people only think

Everett Collection

Heady theories on the contours of Einstein’s genius

Scientists look to Einstein in hunt for links between brain structure and genius.

in words, he laughed. By studying Einstein’s neural remains, researchers like Dr. Falk pursue an inquiry at the confluence of science, folklore and medical history. For a century, scientists have compared famous brains in hopes of finding the link between neural structure and talent. It’s heady work. “The brain is as close as we can get to the physical essence of what makes us human,” she says. To this end, Soviet scientists once conducted top-secret studies of Lenin’s brain, seeking in its dead

cells the intellectual seeds of social revolution, says University of Houston political economist Paul Gregory, who discovered the 1936 medical report hidden in Communist Party archives. More recently, researchers at the Institute of Medicine in Juelich, Germany, took apart the brain of a translator fluent in 60 languages, in hopes of finding the secret of his exceptional language ability. In both cases, the findings were inconclusive. By itself, brain size is no true measure of intellect, comparative studies confirm. Einstein’s brain weighed 1.2 kilograms, less than most men. The brain of 1921 Nobel laureate Anatole France weighed just under one kilogram. At 1.4 kilograms, Lenin’s brain was exactly average. The brain of Russian novelist Ivan Turgenev outweighed them all at two kilograms. To understand the anatomical reasons our mental capacities often differ, researchers must look instead for subtle distinctions among neurons and synapses in structures associated with specific abilities. Nonetheless, the effort to study Einstein’s brain was controversial from the start. When Einstein died in New Jersey at the age of 76, an eccentric hospital pathologist named Thomas Harvey conducted a routine autopsy. But he removed the physicist’s brain for later study—apparently acting on his own authority. He soaked it in preservative and cut it into 240 pieces, each containing about two tea-

spoons of cerebral tissue. He mounted 1,000 slivers on microscope slides for study. It was decades, though, before Dr. Harvey could persuade anyone to seriously examine them. Einstein’s brain samples languished in a cider box next to the beer cooler under his desk. Not until 1985 did the first scientific analysis appear. Pioneering neuroscientist Marion Diamond at the University of California, Berkeley, discovered that, in some tissue samples, Einstein’s brain had more cells nurturing each neuron than normal. These well-tended cells, located in a region associated with mathematical and language skills, might help explain the physicist’s “unusual conceptual powers,” she speculates. Then Dr. Harvey contacted neuropsychologist Sandra Witelson at McMaster University in Hamilton, Ontario. An authority on cognition and comparative neuroanatomy, Dr. Witelson had assembled the world’s largest collection of normal brains, all crossmatched and cataloged by intelligence tests and behavioral surveys conducted while the donors were still alive. “Unannounced, he sent me packages—packets of slides— just addressed to me without a return address,” Dr. Witelson recalls. “These slides of Einstein’s brain kept coming through the mail, unannounced and uninsured.” She compared Einstein’s brain Please turn to page 31


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FROM PAGE ONE

U.S. court backs ruling against tobacco firms Suit says industry deceived the public; appeal is planned By Brent Kendall WASHINGTON—A U.S. federal appeals court on Friday upheld major points of a landmark ruling that said the tobacco industry violated federal racketeering laws in a

scheme to deceive the public about the dangers of smoking. A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit rejected, however, the Justice Department’s request for additional penalties against cigarette makers, including a proposal that the tobacco industry fund a $10 billion national smoking-cessation campaign. Defendants in the case included Altria Group Inc.’s Philip Morris, Reynolds American Inc., British

American Tobacco PLC and Lorillard Inc. Murray Garnick, an Altria senior vice president, said the company disagreed with the ruling and would appeal. Altria could first ask for a review of the case by the entire D.C. appeals court. Representatives of the other companies in the case couldn’t be reached for a comment. In a unanimous 92-page ruling, the court said Friday that there was ample evidence to conclude the tobacco industry intentionally de-

ceived the public about the harmful and addictive effects of cigarette smoking. The court affirmed most of the remedies imposed against tobacco companies in 2006 by U.S. District Judge Gladys Kessler following a nine-month trial, including a ban on promoting brands as “light” or “low tar.” Judge Kessler’s ruling also required the industry to make corrective public statements about the health effects and addictiveness of smoking.

“The court’s conclusions are not supported by the law or the evidence presented at trial, and we believe the exceptional importance of these issues justifies further review,” Altria’s Mr. Garnick said. The case dates to 1999, when the Clinton administration filed a federal racketeering lawsuit against nine tobacco companies and two trade associations, alleging they had engaged in a 50-year conspiracy to deceive the public about the dangers of smoking.

Europe’s appetite for Russian gas is likely to decline Continued from first page around $85 billion. “The bottom line is Gazprom’s revenues will fall 30% to 40% this year,” said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. “We’ve never had a decline in demand as dramatic as this.” Gazprom’s exports should start to rise again later this year. The gas price in its long-term supply contracts is linked to the price of a basket of oil products, but with a six- to ninemonth lag—so the price Gazprom charges its customers will fall sharply in a few months’ time. Many of them are delaying purchases till then. The gas monopoly could find itself under pressure from customers to renegotiate some of those traditional long-term contracts, especially as alternative sources of gas emerge. A wave of liquefied natural gas from countries like Qatar will hit global markets over the next two years, much of it finding its way to

A declining appetite Europe's natural-gas demand is shrinking as economies contract. OECD Europe gas demand, in billions cubic meters* 531.1

478.9

492.8

Breakdown of EU27 supplies in 2007 Egypt 1% Libya 2%

Trinidad & Tobago 1% Gulf countries 1% Others 4%

Nigeria 3% Algeria 9%

2007–08

Forecast

Forecast

2008–09

2009–10

Norway 17%

* Fiscal years end Sept. 30 Sources: IHS Global Insight (gas demand); Eurogas (supplies)

Europe. Many analysts expect rising competition between LNG supplies and pipeline gas. “If the global recession lasts, or

Russia 24%

Indigenous production 38%

the recovery is slow, the market will be awash with LNG,” says Pierre Noël of EPRG, an energy research group at Cambridge University. “The timing

couldn’t be worse for Russia.” Russia itself hasn’t helped. Its reputation as a reliable energy supplier was damaged by the gas cutoffs of last winter and January 2006, though many in the industry say Ukraine was equally to blame. Mr. Medvedev’s hard-line rhetoric at Friday’s summit will do little to reasssure Russia’s European partners. The long-term picture is also far from rosy for Gazprom. The EU has set targets to reduce emissions of greenhouse gases by 20% by 2020, wants 20% of energy demand to be sourced from renewables such as solar and wind power, and has also set a nonbinding goal of improving energy efficiency by 20% by 2020. Many think the targets are too ambitious. But if met, they could transform Europe’s energy landscape. IHS Cambridge Energy Research Associates says if the renewables and energy-efficiency goals are made mandatory and oil and gas prices rebound next year, total natu-

ral-gas consumption across the EU could drop 16% by 2020 and 35% by 2030. In Berlin this week, E.ON’s Mr. Reutersberg made a similar prediction. If the EU’s goals are met, and if the price of oil goes up to $100 a barrel next year, European gas use in 2020 would be 22% lower than today and import needs 5% lower, he said. Meanwhile, the friction between Brussels and Moscow shows no sign of abating. Gazprom has been enraged by what it sees as a deliberate policy on the EU’s part of reducing its reliance on Russian gas, whether through efficiency savings, renewables or by diversifying gas imports. “The EU is ... prepared to do everything it can to replace our gas with gas from other sources,” Alexander Medvedev, Gazprom’s deputy chief executive, told the Berlin conference this week. “It’s not Gazprom but Russophobe politicians who are the real threat to Europe’s energy security.”

Immigrants leave France as employment opportunities recede Continued from first page around twice that of non-immigrants. Now that France is in recession, the first jobs to go are often those filled by minorities. Most of the French “returnees” are of Moroccan background, according to people who have studied the phenomenon, though there is also a trickle to other former French colonies, such as Algeria and Vietnam. In 2002, Rabat set up a “Ministry for the Overseas Moroccan Community,” to encourage émigrés to return and invest their skills in their native land. Morocco is also becoming more open and prosperous. Overhauls under King Mohammad VI, who ascended to the throne in 1999, have improved freedom of expression and women’s rights. In addition, the country has formed free-trade agreements with the U.S. and the Eu-

ropean Union. The economy expanded at an average of more than 4% from 2000 to 2008, and even this year is expected to post growth higher than that. While a large number of rural poor keep Morocco relatively low in international measures of economic prosperity, city life can be good for better-off residents. Life can be better than in France. Surveys show that in France, applicants for a job have around a third the chance of getting a reply if their name sounds Arab or African as they do with a more traditional French name. But no one knows the exact extent of inequality: The French Republic’s doctrine that everyone is equal has so far ruled out the collection of statistics on race and religion. As a result, unlike in the U.S., there are no detailed data on how many French people are black, Arab

or Asian—and how they fare in education and work. Opponents say that such an ethnic census would divide society by validating the existence of groups based on race and religion. President Nicolas Sarkozy, acknowledging the problem, said before his 2007 election that he wanted better ways to measure discrimination, and in December he appointed a commissioner for diversity. Algerianborn Yazid Sabeg recently published a report in which he recommended that people be allowed to identify— but not in a mandatory way—which ethnic group they belong to on official documents. “We need to measure the negative situation that is the result of different appearances,” Mr. Sabeg said in a recent interview in his office on Paris’s Left Bank. “It’s very important for France to get out of its fan-

Heady theories on contours of Einstein’s genius Continued from page 29 samples with dozens of normal men and women in her brain bank. Most of his brain was unremarkable, but she found that one area associated with visual and spatial reasoning— the inferior parietal region—was 15% larger than normal. Even more unusual, his brain lacked a special fissure there, effectively fusing two key brain regions into one. “I can’t prove that those were the regions that Einstein was using when he was thinking about relativity,” says

Dr. Witelson. “We suggested that anatomy could have given him an advantage in three-dimensional thinking.” No one knows whether the quirks of Einstein’s brain structure were the cause or effect of his genius. Some of his gift, no doubt, was hereditary. But his research required intense study, and such concentrated effort can alter the brain physically. Regular meditation, for example, can increase the size of brain areas that regulate emotion, researchers at the University of California, Los Angeles, Laboratory of

Neuroimaging reported this month in the journal Neuroimage. Indeed, a curious knob-like feature that Dr. Falk saw in pictures of Einstein’s motor cortex might be due to his early musical training. It resembled a structure detected in neural studies of experienced pianists and violinists, caused by hand exercises. “I wish Einstein were alive,” says Dr. Falk, “and we could ask a little more about how he thinks.” Email to sciencejournal@wsj.com.

tasy that there is no discrimination.” A French education is highly valued in former colonies, and salaries are good relative to the cost of living. In Morocco, former émigrés are very welcome. Big European companies have been actively recruiting French-educated staff for their units there over the past three or four years, says Jamal Belahrach, president of the North African operations of job agency Manpower. The recruits find they can rise faster in their careers than they would have in France—and are surprised to find a country different from the one their parents left. “There’s a generation who didn’t see Morocco in the past, and now sees the modern Morocco,” he says. Barka Biye’s parents had moved to France from Morocco when she was just two months old. Ms. Biye graduated in law from the University of Paris, and then worked for several years in insurance. In 2007, she decided to look for a job in Morocco. She found one with a French insurance company in Casablanca in just two weeks. “I thought I could play my part in the evolution of a country going through big changes,” she says. “Morocco is expanding fast, and the companies who set up there want managers educated in Europe and at the same time capable of understanding the country’s culture.” When Ms. El Kahlaoui was jobhunting in the late 1990s, she had trouble finding an interesting job, even though she held an undergradu-

Nawal El Kahlaoul, above, moved to Morocco from France to find work.

ate degree in chemistry from the University of Paris and another in marketing from ESSEC, an elite business school. When she asked a university careers adviser why she was having so much trouble, the woman gave her some advice: “She told me I had to change my name and address,” says Ms. El Kahlaoui. The problem: Her name and address told potential employers she was from a typical North African immigrant background. In Casablanca, Ms. El Kahlaoui started off working for French pharmaceuticals company Pierre Fabre and then German cosmetics group Beiersdorf before joining a small retail consultancy. She says she’s happy in Morocco, but being there makes her feel very French. “I will come back ,” she says, “but only when the system can generally accept people like me.”


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Financial Analysis and Commentary

Quackery by central bankers? Parsing the buck Number of euros one U.S. dollar buys Œ0.85 0.80 0.75 0.70 0.65

Getty Images

Is the experimental medicine being dished out by central banks starting to have worrying side effects? Using policies that would have been considered dangerously distorting and inflationary before the credit crunch, the Fed and others have unleashed a torrent of liquidity that has helped lift global stocks nearly 40% from their March lows. But other assets, like gold, the dollar and Treasurys, point to unease with flood-the-zone central banking. Central banks want to be in a position to print more money if economies stay weak, but their hands may be tied if key markets react badly. One fear is that all the easing could lead to inflation. Granted, credit markets have reacted well to the central bank medicine. Yield premiums for the likes of corporate bonds have narrowed from panic highs. And it’s easy to make too much of recent weakness in the dollar and Treasurys. At 3.42%, the yield on the 10-year Treasury is still below the 2008 average of 3.65%. The greenback’s de-

0.60 2008

’09

Source: Thomson Reuters via WSJ Market Data Group

cline versus the euro merely takes it back to around where it started the year. However, the speed with which both markets have moved suggests investors are taking more seriously the threats that have lurked in the background for many months. The first is that the U.S.’s fiscal deficit will mean investors demand a higher yield on its debt. The second is that printing too much money, through Fed programs, will debase the dollar. The nightmare for central banks is if inflation ex-

Stacks of one-dollar bills pass through a machine

pectations escalate. In that scenario, a selloff could extend to corporate bonds and stocks as investors start to price in tighter monetary policy. One closely followed indicator shows inflation expectations are low. The difference between the yield on the 10-year inflation-protected Treasury and the regular 10-year Treasury suggests an annual rate of just 1.78%, well below the 2.44% inflation rate this “spread” predicted on average from 2005 to 2007. This apparent inflation

insouciance might be warranted, given excess capacity in most developed economies and caution among debt-laden consumers. But the gold price is showing surprising strength. That could reflect investor mistrust in central banks’ willingness to unwind reflationary policies. Certainly, the last 20 years have shown that central bankers find it hard to engineer Goldilocks-type outcomes. It’s even harder right now for the Fed to calibrate correctly, because its response—its balance sheet has expanded by nearly $900 billion in the last year— has been especially aggressive. The chance of extreme outcomes has risen. If Treasury yields continue rising, it would hurt banks, housing markets and consumers, whose balance sheets are in poor shape. Recent month-to-month inflation data in the U.S. shows prices have started rising. The increases are slight so far. But if inflation breaks out, central bankers’ recent medicine will be seen as quackery. —Peter Eavis

S T R E E T more at WSJ.com/heard

Catching the DVD genie Next stop, Hollywood. Like the music industry, and more recently book publishing, film studios are grappling with the transition from physical to electronic delivery. Weaning themselves off DVDs could cut costs and curtail piracy. Another advantage is regaining control of pricing. Studios let that genie out of the bottle by using low prices to maximize DVD sales, rather than using high wholesale prices to keep the video business primarily based on rentals. Low prices worked for a while. Film revenues from video sales nearly tripled between 1997 and 2004 to $9.5 billion, boosting total film revenues 72%, estimates Adams Media Research. But DVD sales fell back to $8 billion last year. The downside is now evident. Price cutting allowed the emergence of Redbox, which buys DVDs cheaply and uses vending machines to rent them for $1 a night before selling some used for $7. The company’s approach threatens high-margin DVD sales, as well as the traditional rental business, where studios take a cut.

Because anyone can legally resell or rent a DVD they have bought, there isn’t much Hollywood can do about Redbox, except embrace digital distribution. Already, the gap between release of a movie on DVD and for on-demand rental on cable-TV is shrinking. Studios get about 70% of the electronic rental price, more than the share they get from DVD rentals. But worries that simultaneous on-demand release could cannibalize more-valuable sales have caused studios to hold back electronic release of hits. That strategy won’t solve the Redbox problem. Another option is offering electronic purchase of movies before the DVD release. Services such as iTunes, Amazon and Vudu sell movies online at prices that deliver higher margins to the studios than even physical sales, because there isn’t any manufacturing involved. Admittedly, the mass market won’t transition away from DVDs for years. But by doing what they can to make electronic delivery attractive, the studios can at least start regaining control of their product. —Martin Peers

Citizen spies lift the veil on North Korea Public information helps fill the blanks; where was Mr. Kim? By Evan Ramstad SEOUL—In the propaganda blitz that followed North Korea’s missile launch last month, the country’s state media released photos of leader Kim Jong Il visiting a hydroelectric dam and power station. Images from the report showed two large pipes descending a hillside. That was enough to allow Curtis Melvin, a doctoral candidate at George Mason University in suburban Virginia, to pinpoint the installation on his online map of North Korea. Mr. Melvin is at the center of a dozen or so citizen snoops who have spent the past two years filling in the blanks on the map of one of the world’s most secretive countries. Seeking clues in photos, news reports and eyewitness accounts, they affix labels to North Korean structures and landscapes captured by Google Earth, an online service that stitches satellite pictures into a virtual globe. The result is an annotated North Korea of rocket-launch sites, prison camps and elite palaces on white-sand beaches. “It’s democratized intelligence,” says Mr. Melvin. More than 35,000 people have downloaded Mr. Melvin’s file, North Korea Uncovered. It has grown to include thousands of tags in categories such as “nuclear issues” (alleged reactors, missile storage), dams (more than 1,200 countrywide) and restaurants (47). Its Wiki-

pedia approach to spying shows how Soviet-style secrecy is facing a new challenge from the Internet’s power to unite a disparate community of busybodies. “Here is one of the most closed countries in the world and yet, through this effort on the Internet by a bunch of strangers, the country’s visible secrets are being published,” says Martyn Williams, a Tokyo-based technology journalist who recently sent Mr. Melvin the locations of about 30 North Korean lighthouses. An economist who studies developing countries and has traveled from Turkmenistan to Zimbabwe, Mr. Melvin started his project in early 2007 to designate places he visited on two group tours to North Korea earlier this decade. He shared it on several North Korea-related Web sites. People soon started sending him locations they knew, from tourist sites to airfields tucked into valleys near South Korea. Mr. Melvin says that sadness for North Koreans’ plight, and the fascination of discovery, motivated him to continue. Many updates later, Mr. Melvin and his correspondents have plotted out what they say is much of the country’s transportation network and electrical grid, and many of its military bases. They have spotted what they believe are mass graves created in the 1995-98 famine that killed an estimated two million people. The vast complexes of Mr. Kim and other North Korean leaders are visible, with palatial homes, pools, even a water slide. An official at North Korea’s consulate in Hong Kong declined to grant an interview. Its embassy in

London didn’t respond to a faxed request for comment. Mr. Melvin says he cross-checks what information he can and adjusts other facts with the help of collaborators. He says he has met only a few of the contributors. Some have identified themselves as former members of the U.S. military who once studied the country professionally. Some have been anonymous. Joshua Stanton, an attorney in Washington who once served in the U.S. military in South Korea, used Google Earth to look for one of the country’s notorious prisons. In early 2007, he read an international news report about a mass escape from Camp 16, which the report mentioned was near the site of a nuclear test conducted the year before.

‘When you’re playing detective, it’s a lot more fun,’ says Mr. Williams. No pictures of Camp 16 are believed to have been seen outside the country. But Mr. Stanton had pored over defector sketches of it and combed the map for familiar structures. “I realized I had already noticed the guard posts” while looking on Google Earth the previous year for the nuclear test site, he says. Mr. Stanton traced what he believed is Camp 16’s boundary, enclosing nearly 500 square kilometers, and those of other large North Korean prisons and shared them with Mr. Melvin. The fences aren’t easy to

follow because they go over mountain ridges, he says. But satellite images often reveal gaps in the vegetation along the fence line, because trees are cleared on either side to prevent people from climbing over. Last year, U.S. Sen. Sam Brownback of Kansas used Mr. Stanton’s maps in a floor presentation criticizing the North’s human-rights record. “Google has made a witness of all of us,” Mr. Brownback said. “We can no longer deny these things exist.” Mr. Williams, the technology journalist in Tokyo, first contacted Mr. Melvin two months ago after he ran across a notice that North Korea filed with international maritime authorities ahead of its April 5 missile launch. The filing gave coordinates where North Korea believed its missile or rocket stages would likely fall. The pair figured they could mine other international filings for other interesting sites. Mr. Melvin found one that helped him pinpoint North Korea’s aeronautical beacons. Mr. Williams turned up the lighthouse locations, which he sent to Mr. Melvin, along with links to a site with lighthouse images from North Korean postage stamps. “If North Korea came out and published all this, no one would be interested,” says Mr. Williams. “But when you’re playing detective, it’s a lot more fun.” The project has also attracted Andrei Lankov, a Seoul-based historian of North Korea who grew up in the Soviet Union and went to college in Pyongyang, the North Korean capital. Last summer, Mr. Lankov wrote about how the evolution of public markets in North Korea has challenged Mr. Kim’s authoritarian gov-

ernment. He sent Mr. Melvin the location of several markets, including one called Pyongsong near Pyongyang that the two men think is the biggest in the country. The market is in a town about 15 kilometers outside the city, the closest that nonresidents can get to the capital. “At the same time, this is a place where the dwellers of Pyongyang can go anytime,” Mr. Lankov says. On the satellite images of North Korean towns, it is easy to see many people gathered around the markets and no one in the giant plazas that are tributes to Mr. Kim’s government. Mr. Melvin says the images also make clear the gulf between the lives of Mr. Kim and his impoverished people. “Once you start mapping the power plants and substations and wires, you can connect the infrastructure with the elite compounds,” Mr. Melvin says. “And then you see towns that have no power supply at all.” Mr. Melvin says he spends hours at the computer tracing power lines, looking for telltale shadows of electric towers or posts. The work is often tedious. Other times it is revelatory. The recent report of Mr. Kim at the hydroelectric station in Wonsan showed him looking at a painting of the complex. Mr. Melvin noticed the painting depicted a unique pattern of roads. He then spotted the roads on the satellite image, along with the giant pipes, and added the station to his map. “We’re relying on the North Koreans to keep publicizing” Mr. Kim’s movements, Mr. Melvin says. “This leads to great discoveries.”

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