11-23-08 Modesto BeeToo bad Congress has delayed vote on fixing the San Joaquin...Editorialhttp://www.modbee.com/opinion/story/509377.htmlIt would be nice to get judges and politicians out of the San Joaquin River and more salmon into it. Unfortunately, but predictably, that won't happen anytime soon.The U.S. Senate has decided to postpone action on a public lands bill that includes funding to restore the San Joaquin River from just north of Fresno to Merced. Funding legislation grew out of a 1988 case in which environmentalists charged that completion of Friant Dam in the 1950s illegally diverted water needed to maintain salmon runs in the river. Because its waters are captured in Millerton Reservoir, about 40 miles of the river dries up most summers.Fearing they would lose the case, farmers and south valley water agencies reached a settlement that will reduce their water deliveries and restore some of the river's flow. Whether it will result in the return of salmon is debateable, considering the crash of salmon populations across the west this year.Had the case been decided by a federal judge, farming interests could have lost even more water, so a compromise made sense. Some farmers don't agree, and the settlement has become controversial. It shouldn't be; this deal had input from Sen. Dianne Feinstein, Reps. Dennis Cardoza, Jim Costa and George Radanovich. It included those who depend on the river's water and those who live and farm on its tributaries. We believe the deal is the best compromise available.Yet, the settlement requires federal approval and funding, which is what brought this issue to the Senate. Lawmakers decided the massive lands bill, which contains many other items, was too ambitious for the lame-duck session. It has been put over to next year.The settlement will cost $250 million, but the funding proposal will provide just $88 million, a down payment at best. Most people believe actual restoration will cost nearly $1 billion. The remainder of the funding will have to be sought in future years.San Diego State fraternity shut down...last updated: November 23, 2008 09:31:37 AMhttp://www.modbee.com/state_wire/story/509188.htmlSAN DIEGO -- Months after a major drug bust at San Diego State University, a fraternity has been kicked off campus for its role in the widespread drug bust.University officials say Theta Chi will not be allowed back on campus for at least three and a half years.The fraternity had been on suspension since federal agents and campus police stormed the school's fraternity row and made 128 arrests in one of the nation's largest campus drug busts.In a yearlong sting operation, undercover officers purchased cocaine, marijuana and other drugs from fraternity members with ease.The Phi Kappa Psi fraternity will remain on suspension for 18 months.The fraternities were served disciplinary letters Thursday.Fresno BeeHousing woes are bad but will likely get worse, some economists predict...KEVIN G. HALLhttp://www.fresnobee.com/news/national-politics/v-printerfriendly/story/1031030.htmlIf you think the housing slump can't get much worse, Martin Feldstein thinks that both home prices and the broader economy can - and very likely will - get a whole lot worse.The Harvard University professor and former chief economic adviser to Ronald Reagan isn't part of the crowd that continually forecasts doom. For two decades, he's headed the National Bureau of Economic Research, which officially determines when U.S. recessions begin and end. So when he spoke on Monday night at the annual dinner of the National Economists Club, a gathering of like-minded wonks, Feldstein's grim calculations were noteworthy. "There are now 12 million homes in the United States with a loan-to-value ratio greater than 100 percent. That's one mortgage in four. The aggregate amount of that is some $2 trillion," said Feldstein. "If you look at the median (midpoint) loan-to-value ratio in that 12 million group of underwater mortgages - mortgages with negative equity - the median loan-to-value ratio is 120 percent." That means about 25 percent of all U.S. mortgages exceed the value of the homes the mortgages are financing. In the case of half the homes that are underwater, homeowners are paying a mortgage that's now 20 percent higher than the value of the home. That's bad - but it's likely to get worse. A recent report by First American Core Logic, a real estate data firm in Santa Ana, Calif., estimated that as of Sept. 30, 7.5 million mortgages, or 18 percent of all properties with a mortgage, had negative equity. The group thinks there are another 2.1 million mortgages that are within 5 percent of going underwater. Together, these two categories account for 23 percent of all properties with a mortgage. Nevada led all states with 48 percent of homes with negative equity. Florida and Arizona each had 29 percent of homes with underwater mortgages, while 27 percent of mortgages in California were upside-down, the group said. If home prices fall another 10 to 15 percent, as measured by the Case/Shiller Home Price Index, then four out of every 10 mortgages in the U.S. could be underwater, Feldstein said. "At those levels, it's hard to see how many people are going to be willing to keep up with their mortgages," Feldstein said. The implications for many homeowners are staggering. Before the recent housing boom of 2000 to 2006, homes increased in value at a historical annual rate of about 2.3 percent when adjusted for inflation. That means that for homeowners who owe 35 percent more than their homes' value, it would take, at historical averages, about 15 years just to break even on their home investment. They won't build equity. It would be a huge incentive for millions to hand the keys back to the lender and seek cheaper housing. Not all real estate experts buy Feldstein's stark numbers. "That's the highest percentage I've heard from anybody, by quite a bit," said Rick Sharga, senior vice president for Realtytrac, an Irvine, Calif., company that publishes foreclosure data. More conservative forecasts, though still dismal, point to a smaller drop in home prices of 5 percent to 7 percent, he said. Added Jay Brinkmann, chief economist for the Mortgage Bankers Association in the nation's capital, "If you generalize the numbers too far, I think it leads to some incorrect conclusions." The Case/Shiller Index is driven by home sales that have taken place. It doesn't reflect the stability in older, established neighborhoods, Brinkmann said. The vacant and for-sale rates nationwide for homes built before 2000 - that is, pre-boom - is just 2 percent. The delinquency and foreclosure problems are concentrated mostly in a handful of states, such as California, Florida, Arizona and Nevada, which had overbuilding and weak lending standards. "Those states have about 25 percent of the mortgages and 50 percent of the foreclosure starts" in the latest association survey, Brinkmann said. Nationwide, 6.4 percent of all mortgages were delinquent through June, but the number of delinquencies and foreclosure starts are breaking records every quarter, the most recent MBA survey said. Brinkmann's rough guess is that somewhere between 6 million and 8 million mortgages are underwater, still a very high number. He doesn't see the national outlook getting better any time soon, framing his estimate of when that happens in the form of a question: "When does the influence of these massive declines in California and Florida go away?" Realtytrac's forecast isn't any brighter. "The best-case scenario in terms of the real estate market is we probably bottom out between mid-year and the end of 2009. And that's the best case from where we're sitting," Sharga said. "The only reason it could happen that soon is because of how rapidly and how severe the downturn has been in the housing market." A lot would have to go right to reach that best-case scenario. Government and industry efforts would have to step up efforts to forgive or make up the difference between the value of the mortgage and the value of the home. The final batch of subprime mortgages scheduled to reset to a higher interest rate will have done so by the end of the first quarter of 2009. In a rare bit of relief for one segment of the housing market, the interest rates that determine the monthly payments for some adjustable-rate mortgages are falling. Sharga said, however, that the next problem is the $60 billion of adjustable-rate Alt-A mortgages, which fall between subprime and prime loans. Millions of these loans are scheduled to reset next year to higher interest rates. That could bring monthly mortgage payment increases of $1,000 or more if the loans aren't modified or refinanced. All this is happening amid what now clearly is a deepening recession, with the highest job losses and deepest drops in consumer spending in decades. The Labor Department reported on Thursday that weekly jobless claims jumped to 542,000, a 16-year high, the week of Nov. 9. That suggests a fast-deepening recession. The White House Thursday acknowledged for the first time that it now supports efforts in Congress to extend unemployment benefits for longer periods to the millions of Americans who can't find work in the downturn. Consumer spending drives about two-thirds of U.S. economic activity, and as unemployment mounts and consumers retrench, that leads to even more unemployment, mortgage delinquencies and foreclosures. "The problem now is what will be happening with jobs," Brinkmann said. ON THE WEB Most recent MBA delinquency survey: http://www.mortgagebankers.org/NewsandMedia/PressCenter/64769.htm Latest Realtytrac foreclosure activity report: http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5420&accnt=64847   Economy takes toll on state housing aid in Valley...Marc Benjaminhttp://www.fresnobee.com/local/v-printerfriendly/story/1030865.htmlTwo years ago, developers built 450 homes in Sanger. This year, the city has issued permits for just 14. But state housing officials have told Sanger to make plans for an additional 2,351 homes in the next five years -- a goal the city says is impossible to meet. If it doesn't accept the plan, however, Sanger could be cut off from state funds for affordable housing. "They are some real big numbers, and I don't know how we can get to those numbers," said Ralph Kachadourian, Sanger's senior planner. Sanger is not alone. Across Fresno County, cities could lose millions of dollars in state grants and loans for affordable housing projects because they can't meet state housing goals that were based on growth rates from the recent housing boom. The goals -- which include a certain number of homes for the low-income -- are intended to ensure that each community helps the state meet the need for additional housing for families of varying income levels. In exchange, the state offers money to help build affordable housing. Already, Clovis has lost out on $4 million in grants this year for low-rent senior housing and down-payment assistance because the state rejected the city's housing plan. Clovis failed to comply with state housing goals, the state concluded. Tulare County recently was told to plan for more than 35,000 homes -- including about 14,000 in Visalia alone -- by 2014. Local officials, who are just beginning to work on their housing plans, say they won't be able to meet the goals. "The Valley has a challenge because of the growth that recently happened," said Ted Smalley, executive director for the Tulare County Association of Governments, which is monitoring other counties' experiences. "That created this [exaggerated] expectation that probably can't reasonably be sustained." State officials say they're not trying to penalize cities. They say they are not requiring cities to build all the homes in their goal -- only that they set aside the land required and zone it appropriately. If developers do not want to build, the city is not penalized, said Cathy Creswell, deputy director with the state Housing and Community Development Department in Sacramento. The problem with that, city officials say, is that many cities just don't have enough land for all the houses that they're supposed to plan. The state no longer lets them include plans on land outside city limits. If the building boom had continued, the cities would have have been able to keep annexing land. But without actual developments under way, countywide rules prevent annexations. Creswell said her department is willing to look "for areas of flexibility" to help the cities meet their goals. Under the state's housing goals, Fresno County as a whole is being told to provide space for nearly 52,142 additional homes between 2006 and 2013. Cities are allocated a piece of that goal. Kerman, for example, would have to plan for 2,424 homes by 2013, and Selma is being told to prepare for 2,166 homes. Fresno, the county's largest city, has a goal of about 21,000 new residential units, including houses, apartments, condominiums and mobile homes. That means building 7,000 to 7,500 units per year -- a number the county has hit only in the peak years of the housing boom, said Mike Prandini, president of the San Joaquin Valley Building Industry Association. This year the county is likely to see only 2,000, he said. In Clovis, officials are being told the city needs to plan for adding more than 15,384 homes within city limits by 2013. In 2004, Clovis home building peaked at 2,032 homes built. This year, the city expects to issue permits for just 350. The chaotic housing market will make predicting demand for homes difficult over the next several years, said Tina Sumner, Clovis housing project manager. But city leaders are not expecting to meet the state's goals. The problem has been compounded because the state changed how cities can meet the goal, officials said. Previously, a city could count land outside of its boundaries as available for development. Now all land must be within the city. But annexing land without a development proposal conflicts with county policies designed to protect agricultural land from urban encroachment. Cities have asked that the state either reduce the housing goals or change the rules to allow possible future annexations to count toward the goals. "In an effort to have sensible growth that protects farming, we have held very tight city limit boundaries and have been very frugal in how we have annexed," Sumner said. Creswell said Clovis could have challenged the current goal if it thought the numbers were unreasonable. Sumner said Clovis considered a challenge. But any numbers trimmed from Clovis' goal would have been redistributed among the other cities in Fresno County, she said. Assembly Member Juan Arambula, D-Fresno, who is trying to mediate the dispute, said he is optimistic that a compromise can be reached. "The state wants to find a way for the cities to be in compliance if the cities have done everything they can," he said. "If there are circumstances beyond their control, it makes no sense to penalize cities." Sacramento BeeCity bankruptcies may signal trouble for California...Robert Lewishttp://www.sacbee.com/101/v-print/story/1421024.htmlAre they signs of difficulties yet to come for municipal governments? Or, is the revelation that two small cities in Northern California are considering bankruptcy protection merely news of isolated financial trouble that's unlikely to spread around the region?Government leaders and experts on municipal finance are quick to say Rio Vista and Isleton face unique difficulties that might not affect others. But with local, state and national economies fully roiled, the same experts acknowledge that other municipalities on the brink could tumble into insolvency.Rio Vista and Isleton face budget shortfalls and massive debt. Their leaders are looking at the same bankruptcy option that Vallejo chose in May. If other cities follow suit, it may mean trouble across the state."The more that start talking about it, the more that start filing, investors will stop investing in municipal securities," unless governments are willing to pay more in interest, said Matthew Fong, former state treasurer who oversaw California's finances in the wake of Orange County filing for bankruptcy protection in late 1994.After that county filed for Chapter 9 bankruptcy following a major loss on investments, lenders became wary, Fong said."Any other county or city that went to the market was punished by what I call the 'Orange County premium,' " he said. "What appears to be a local problem is really a regional and state issue."More cities and counties are likely to consider bankruptcy protection as the housing slump continues and credit remains tight, said Michael Coleman, fiscal policy adviser to the League of California Cities. Sales tax revenue has been declining for several years, but property tax revenue lags. The impact of the real estate downturn will become more evident in the next several years.Most cities will weather the troubled times, Coleman said. But small cities with few revenue streams and inflexible employee contracts – particularly newer cities that have funded recent budgets largely with taxes on new development – could be in trouble."There's something to be said for economies of scale," Coleman said.After Vallejo's bankruptcy filing, state finance experts did look at historical causes and effects of municipal failures, said Paul Rosenstiel, California's deputy treasurer.Of 60 municipal entities nationwide that sought bankruptcy protection between 2000 and 2007, only 13 were general governments – cities and counties. The median population size was 700; the largest was Desert Hot Springs, population 16,000, in Southern California.Most of the bankruptcy filings were the result of a sudden event – like a lawsuit – that a small town was unable to handle.The Village of Hillsdale, Mo., for example, filed after having to pay $88,000 to a police officer who slipped on a patch of ice, Rosenstiel said."Vallejo is fairly unique in recent history," he added, referring to the Solano County city of 120,000, which had trouble paying even day-to-day expenses.It is difficult to predict how the municipal finance market will respond and what impact bankruptcy filings could have on other California cities' ability to borrow."We have very little experience with that because municipal bankruptcies are so rare," Rosenstiel said.History shows they're rare even in times of economic turmoil, said Mark Baldassare, president of the Public Policy Institute of California.But in these uncertain times, and amid a tightening credit market, municipal insolvencies could reverberate."One thing credit markets don't like is surprise," Baldassare said. "Municipal bankruptcy just adds to the uncertainty."Officials, lawyers and financial experts all seemed to agree that bankruptcy is – or should be – a last resort.Rosenstiel also cautioned against overgeneralizations.Vallejo's leaders say that city's budget woes stem from public safety salaries and benefits. Rio Vista has had decades of costly sewer problems. And Isleton – a Delta town of about 850 people – has allowed debt to accumulate."I'm not saying there won't be more bankruptcies. There might be. But right now there's one," Rosenstiel said.Stockton RecordDistrust abounds in land tussle...Michael Fitzgeraldhttp://www.recordnet.com/apps/pbcs.dll/article?AID=/20081123/A_NEWS0803/811230314/-1/A_NEWSOccasionally, a court battle can seem like a poker game in which you can't see the players' hole cards. You can't even make out everything in the pot they're playing to win.The Shadowbird case is like that.This long-running lawsuit between The Grupe Co. developers and a small nonprofit long has given the impression somebody's hiding a card up his sleeve. That's how the participants feel.Anyway, a judge this week handed a defeat to The Grupe Co., which sought to take back 50 acres of Delta land given the nonprofit Shadowbird in 1999.The land - the visible part of the kitty - is open space on Elmwood Tract.Grupe gave it to the Land Utilization Alliance, an environmental group, in a 1989 settlement of a different lawsuit. It is supposed to remain open space forever.But when LUA gave it to Shadowbird to steward, Grupe sued to take it back.Grupe contended there was a clause in an agreement prohibiting LUA from giving away the land. The judge disagreed.Grupe's CEO Kevin Huber professed concern that Shadowbird, with only four trustees, no members and little cash, is too flimsy an organization to steward the land."You can argue that we should just stand idly by and not care," Huber said. "But that's not who we are. We made a commitment to keep it in open space and we're going to see that that happens."Huber also questioned the motives of Shadowbird's trustees, all American Indians of different tribes. What are they up to? An Indian casino?He apparently finds it difficult to believe Shadowbird's members fought so long and expended six figures in legal fees merely to keep the land pristine.He believes they want to sell a conservation easement - accept money from an organization such as the Center for Natural Lands Management - for as much as $10,000 an acre."I would question who's trying to grab profit here. Me? Or them?" he asked.Alex Roessler, Shadowbird's founder, conceded Shadowbird may sell a conservation easement. The money will fund and endowment to maintain the land, he said.Shadowbird's members have each made great personal sacrifices to protect the land, Roessler said."We've spent over $300,000 out of our own pockets over the last six years," Roessler bristled. "We're never going to see that money again. But that was never the point of it. It was the land."Roessler, for his part, long proclaimed Grupe wants to develop the land, not protect it. Or obtain its water rights or some other financial asset. They're developers, right?He apparently finds it difficult to believe a developer - who owns land adjacent to the 50 acres, by the way - nobly wishes to insure it remains protected.The challenge interpreting this case is the players distrust each other so thoroughly, and project such base motives onto their rivals, it fogs up the game table.What nobody can argue is that Shadowbird slew a Goliath. Over the course of the six-year battle, Grupe fielded more attorneys - six - than Shadowbird has members.Nor is Grupe done. Huber vowed to appeal.Roessler remained buoyant."Eventually, if things go well, and if we're able to secure the funds the city has been collecting all these years out at Brookside, we'll have a park the caliber of Oak Grove or Micke Grove," he declared.Funds? Roessler is referring to his belief that Brookside residents pay some sort of fee or tax for upkeep of that land. It is not clear that they do, though.That's typical of this case.A third player at the table was LUA. The notoriously quarrelsome environmental organization broke its promise to defend Shadowbird. It actually turned on Shadowbird and filed a cross-complaint, which it later dropped.A jury said LUA must pay Shadowbird $60,000 in legal fees.Critics blast report on state regulation of groundwater use...Alex Breitlerhttp://www.recordnet.com/apps/pbcs.dll/article?AID=/20081123/A_NEWS/811230315/-1/A_NEWSSTOCKTON - A report saying groundwater use should be regulated by the state was blasted last week by San Joaquin County farmers and water users as the latest "assault" on water rights here.The nonpartisan Legislative Analyst's Office in October issued a report recommending lawmakers approve a water rights system for groundwater, as the state already has for water diverted from rivers or streams.Most landowners can draw groundwater without such approvals or permits.The county's Advisory Water Commission on Wednesday voted to recommend county supervisors oppose the proposal and keep close watch for any legislation that might result from the report."Tell (the state) to stay out of it," Stockton water attorney Dante Nomellini said at an earlier meeting. "It should be a local matter. They want to eliminate all property rights to water."The report is indeed intended to inform legislators, but it doesn't say outright that the state should dictate exactly how much water an individual landowner can take."You'll see, it's pretty vague," said Catherine Freeman, a water analyst with the LAO. "The idea is not to say, 'You have to go this route to regulate groundwater.' We know there are a lot of folks doing a great job locally. We don't discount that."But the report says relying on groundwater as a significant future source may be hampered by the fact that there are no state rules governing its use. Groundwater management at the local level may not take into account the needs of the state, the report says.Every other western state except Texas issues groundwater rights in some form, Freeman said.San Joaquin County officials have plans to recharge the dwindling underground aquifers here, in part by sucking up more surface water to reduce dependence on below-ground storage.Mel Lytle, water resources coordinator for the county, called the report a "new assault" on water rights."It's potentially a huge concern, not only for irrigation districts but also for any cities that rely on groundwater," he said. Stockton gets about one-third of its supply from the ground.Water commissioners were also unhappy with the LAO's recommended changes to surface water rights. The group's report says that the "use it or lose it" policy attached to water rights on rivers or streams can foster waste.The report recommends that water rights for agriculture, for example, might in the future cover only the amount of water needed to grow a given crop.San Francisco ChronicleSearch on to get food crops out of biofuels...Arthur Max, Associated Presshttp://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/23/MNG91467GR.DTL&type=printableIn future years, we may look back at the Great Mexican Tortilla Crisis of 2006 as the time when ethanol lost its vroom.Right or wrong, that was when blame firmly settled on biofuels for the surge in food prices. The diversion of American corn from flour to fuel put the flat corn bread out of reach for Mexico's poorest.Two years later, the search is on for ways to keep corn on the table rather than in the gas tank. Moving away from food crops, the biofuel of the future may come from the tall grass growing wild by the roadside, from grain stalks left behind by the harvest, and from garbage dumps and dinner table scraps.Carlo Bakker's tiny biofuel operation, World Mobile Plants, avoids edibles. He says his mini-refinery, loaded into a 40-foot shipping container on a flatbed truck, roams South Africa making biodiesel fuel from used cooking oil, or from sunflower seeds or the jatropha shrub, which grows in poor soil with little water. He says he plans eventually to use organic household waste as well.Bakker says one mobile unit can make 260,000 gallons per year, which he sells for the equivalent of $3.79 per gallon, on a par with regular diesel prices."We don't compete with the food chain," Bakker said during a biofuels conference in Amsterdam. "We see opportunities not only to make money but to help people."Governments encouraged the switch to alternative fuels in recent years to lessen dependence on imported oil. But producers are taking a hard look at the food crops used as raw material for these first-generation biofuels. After all, they, too, had to pay more as prices spiked."They got burned. They don't want to go through that problem again," said Vicky Sharpe, director of Sustainable Development Technology Canada, which administers a $1 billion Canadian government fund to invest in clean technologies.Universities, corporate research laboratories and startup companies are pouring millions of dollars into finding ways to break down woody or grassy biomass for cellulosic ethanol - or second-generation biofuel - that would unshackle ethanol from the volatile food market."You will see a movement from first- to second-generation biofuels because the second generation uses waste streams. They don't enter the food-versus-fuel debate," said Sharpe. "This is just stuff that would be wasted otherwise."But second-generation technology is still young, and Sharpe says commercial plants are still several years away.Food prices rose steadily for the past three years until they peaked in June. Before they retreated, the World Bank said corn prices had tripled since January 2005. Rice and wheat weren't far behind.Around the world, the poor - U.N. figures say the number of undernourished is approaching 1 billion - protested that they were hungrier than ever. Food riots erupted in 18 countries, from Bangladesh to Haiti. Some 75,000 Mexicans marched in their capital, accusing the government of "stealing tortillas." Some countries imposed export bans to hoard their grain stocks.World grain harvests had soared, reaching a record 2.3 billion tons last year. But demand continued to grow, not only for biofuel but for animal feed to satisfy an increasingly meaty diet for the growing middle class in India and China.Just how much influence biofuels had on food prices is debatable. The U.S. Department of Agriculture said biofuel production was responsible for just 3 percent of the global price increases. It said the real culprits were oil prices, which pushed up fertilizer and transportation costs, and the sharp drop in the dollar's value.On the high end, a World Bank report in June calculated that 70 to 75 percent of the price rise was due to biofuels and the cascading effect they had on grain stocks, export bans and investor speculation."The moderation of global prices over the last few months is scant consolation to the millions who are still facing high domestic prices and have cut back on eating nutritious food and investing in their child's schooling," a World Bank report said in October.Energy policies played a role. The European Union last year mandated a 10 percent biofuel mix in transport fuels by 2020, and the United States set a production target of 36 billion gallons of ethanol by 2022 - compared with 6.5 billion last year, which already consumed almost one-quarter of the U.S. corn crop.The EU mandate is being reconsidered, and calls are being heard in Washington to rethink the U.S. goal.Some producers say critics unfairly lump all biofuels together."You should look at biofuels as separate kinds of fuel," says Uwe Jurgensen, head of the Association of Dutch Biofuels Producers.Brazil's massive ethanol industry, based on sugarcane grown on just 1 percent of its arable land, has little impact on edible sugar.Biodiesel, the biofuel of choice in Europe, is made largely from rapeseed grown on disused land, Jurgensen said. Only 40 percent of the crushed rapeseed is refined into biodiesel, while the rest is processed into the food chain as animal feed.Blaming biofuels for exploding food prices "was an easy argument. Either you eat or you drive. If you look at it a bit further, you see that is not the case," Jurgensen said, speaking at a gleaming, soon-to-be-open $110 million biodiesel factory at Rotterdam port.Peter van der Gaag agrees. The head of BER-Rotterdam, building a plant in the port city to convert 350,000 tons of wheat a year into ethanol and gas, said just 2 to 3 percent of the world's wheat goes toward ethanol. How much impact can it have on the price of bread? he asked."Biofuels are certainly not to blame for poverty, but it is easy for environmentalists to give a bad name to biofuels," he said.In fact, environmentalists are skeptical of even nonfood biofuels, which consume scarce water and are sometimes cultivated on fertile cropland."If biofuels were grown on degraded land, that could be a good thing. But it has to be seen with a lot of caution," said Frauke Thies, a Greenpeace campaigner for renewable energy. "We are not opposed to biofuels in principle, but the practices of today are not sustainable."Even as scientists work on second-generation answers, foodstuffs are likely to remain in the fuel chain for years to come because of government subsidies. In the United States, biofuels have been getting tax credits since 1978. Globally, the U.N. Food and Agriculture Organization estimates governments supported biodiesel and ethanol with up to $12 billion in 2006.Last year, 139 U.S. ethanol plants produced fuel equal to 5 percent of U.S. gasoline consumption. As of July, however, just 33 cellulosic ethanol plants were in the pilot or demonstration phase.Corn ethanol costs $1 per gallon to make, but cellulosic fuel from stalks, leaves and straw costs $5 to $6. It requires the injection of enzymes to convert plant matter into sugars that are then fermented into ethanol.Michigan State University's Mariam Sticklen is one scientist trying to reduce that cost, to about $2 per gallon, by genetically engineering crops to produce their own enzymes."It's still early days," she said, "but the world needs a no-food-for-fuel policy."Prices for goods and services taking a plunge...David Streitfeld, New York Timeshttp://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/23/BUI51499BK.DTL&type=printableThe farmers said it would not last, and they were right.When the price of wheat, corn, soybeans and just about every other food grown in the ground began leaping skyward two years ago, farmers were pleased, of course. But generally they refused to believe that the good times would be permanent. They had seen too many booms that were inevitably followed by busts.Now, with the suddenness of a hailstorm flattening a field, hard times are back on the American farmstead. The price paid for crops is dropping much faster than the cost of growing them.The government reported this week that the cost of goods and services nationwide fell by a record amount in October as frantic businesses tried to lure customers. While lower prices are good for consumers in the short run, a prolonged stretch of deflation would wreak havoc as companies struggled to stay afloat.In this lonesome stretch near the Texas border, farmers are getting an early taste of a deflationary world. They have finished planting next year's winter wheat, turning the fields a brilliant emerald green. But it cost about $6 per bushel in fuel, seed and fertilizer to put the crop in. That is $1 more than they could sell it for today, and never mind other expenses like renting land.This looming loss sharpens their regret that they did not unload more of this year's crop back when they harvested it in May."I waited all my life for wheat to go from $4 to $5," said Jimmy Wayne Kinder, a fourth-generation farmer. "Then it hit $10 and we were all asking, 'What are we going to do?' "Kinder, who farms about 5,000 acres with his father, James Kinder Jr., and his brother, Kevin, held on to much of his wheat, hoping that prices would go still higher. Instead, they plunged. "I lay in bed at night kicking myself," Kinder said.The farmers in Walters still have to worry about drought and floods and grain bugs and army worms, as they have for decades, but they have new anxieties beyond their control: manic commodity markets, a rising dollar that makes their crops more expensive overseas, and - an urgent new concern this fall - the solvency of their banks.Oklahoma exports two-thirds of its wheat, much more than the 40 percent for the country as a whole. That worked to the state's advantage in 2007 and the first half of 2008, as a combination of bad harvests in Australia, the cheap dollar and rising Asian consumption created intense international demand.The state's farmers responded, naturally enough, by ramping up production. Because of better weather and therefore a better yield, 166.5 million bushels of wheat were harvested in Oklahoma this spring, a 10-year high. And because of the high prices, the crop was valued for the first time at more than $1 billion, nearly twice as much as 2007 and nearly three times as much as 2006."They made a killing," said Kim Anderson, a grain economist at Oklahoma State University.Assuming, that is, they sold. The farmers who cashed in at the right moment are acquiring legendary status. "I know a fellow that sold some wheat for $12 a bushel. That was almost beyond belief," said James Kinder, 74.But his son suspects that most were like the Kinder family: they either did not sell or did not sell enough.The Kinders still have about 40 percent of their wheat, stored on the farm and in commercial grain facilities. "Farmers are terrible marketers," said Jimmy Wayne Kinder, 50. "We fall in love with our crop."It was the same misguided optimism that caused homeowners to think their houses would always keep increasing at a 20 percent annual clip. Farmers across the country fell prey to it.David Kanable at the Oregon Farm Center, a mill near Madison, Wis., was paying $7.25 per bushel for corn in June. "We never had a farmer lock in at that price. They wanted $8," Kanable said. The mill is now paying $3.39 per bushel.When commodity prices were feverish, the price of good farmland exploded, too. Cropland values rose about 20 percent in the Midwest farm belt last year, capping a multiyear rise, according to the Agriculture Department. Walters and other areas in southern Oklahoma, where the land is not as rich and the crops have to be coaxed from the soil, were swept up in the excitement.The previous land boom around Walters was in the late 1970s, a reaction to the high commodity prices of that era. Land went for as much as $1,000 per acre."Doctors and lawyers were buying the land from farmers," said the senior Kinder. "Then prices fell, and those same doctors and lawyers were begging the farmers to take it off their hands."Prices dropped to $500 an acre. Only in the past few years did they begin to approach the records set three decades ago.The elder Kinder, who is pessimistic enough to think land values will once again fall 50 percent, is taking it philosophically."People have great prosperity and everyone gets spoiled," he said. "Then there are times of great hardship and everyone learns patience."Contra Costa TimesSupport for new aqueduct comes from unexpected source...Mike Taugherhttp://www.contracostatimes.com/environment/ci_11051495?nclick_check=1The year was 1980, and a young Contra Costa supervisor was making a last-minute plea to lawmakers who were about to approve a massive ditch that would divert Sacramento River water for Southern California.The Peripheral Canal, it appeared, would ruin the Delta environment and jeopardize the East Bay's water supply, but its supporters in the Capitol had the votes they needed to get it built. Supervisor Sunne Wright McPeak was forced into a fallback position. Contra Costa, she told an Assembly committee, would drop its opposition if lawmakers agreed to prevent the canal from being used until two new reservoirs under consideration were built — one near Brentwood and another in Merced County.Her rationale: In a drought, Southern California certainly would take the water it needed and, without those reservoirs, the water would come straight out of the canal, leaving the Delta to fill with seawater and polluted runoff.Twenty-eight years later, McPeak is making a similar argument, with a twist. It is now time to reconsider building a new aqueduct around the Delta, she says. However, it must be done with new reservoirs and in conjunction with a major new commitment to water conservation and environmental protection. That position has raised a few eyebrows among McPeak's successors on the board of supervisors, where opposition to the canal has held steady for a quarter-century."I have respect for Sunne, but I don't understand her transition," said Supervisor Mary Nejedly Piepho, whose father, the late state Sen. John Nejedly, also fiercely opposed the canal. "Everything that existed 26 years ago that Sunne advocated against exists today, except it's worse." Building a canal is an expensive proposition. Building it and new dams is even more so.In 1980, McPeak thought the deal she was offering lawmakers would prove whether they really meant what they said about protecting the Delta."Were they serious and sincere about operating that Big Ditch in concert with the environment?" she asked.She recalled that at the 1980 committee hearing, the committee's chairman, Assemblyman Lawrence Kapiloff of San Diego, looked to a man seated near McPeak — Earl Blaise, chairman of the powerful Metropolitan Water District of Southern California. Blaise, McPeak said, sort of shook his head, indicating no deal. McPeak's amendment was rejected, the Peripheral Canal bill passed and was signed by Gov. Jerry Brown.Influential in defeatThe canal never got built — it was defeated two years later in a historic referendum that was started, and largely run, in Contra Costa.Few, if any, figures were as influential in that anti-canal campaign as McPeak. She launched the referendum, personally borrowed $50,000 to pay signature gatherers — with the help of a wealthy co-signer — and led the statewide campaign.Since those days, McPeak has worked as president and CEO of the Bay Area Council and the Bay Area Economic Forum, and she served for three years as Gov. Arnold Schwarzenegger's secretary for business, transportation and housing. All the while, she stayed involved in state water issues.Last year, Schwarzenegger appointed her to a task force assigned with coming up with a "Delta Vision" to guide the state's response to the worsening problems in the Delta, the hub of the state's water system and the West Coast's largest estuary.The task force's plan, completed last month with strong support from McPeak, calls for reconsideration of a canal. The task force, which included experts in public policy, business, environmental law and engineering, concluded that the best approach "probably" would be to build a new aqueduct to deliver water around the Delta and operate it in combination with existing Delta channels.How did one of the original canal's fiercest critics come to support a Delta plan that features such an aqueduct?First, the details of the original Peripheral Canal and the Delta Vision plan are significantly different, so it would be inaccurate to suggest that McPeak is supporting the same project she had previously opposed. Most importantly, the original Peripheral Canal — 43 miles long, 30 feet deep and at 400 feet wide, wider than the length of a football field — was massive and would have been operated with relatively few environmental safeguards. The Delta Vision plan has strong — though not absolute — protections for the environment and for the economic well-being of the region, although some local officials want more say in how the plan is implemented.Second, things have changed in the past quarter-century. The Delta has deteriorated badly. Fish populations have crashed, putting the entire ecosystem of the estuary in peril. Levees have continued to deteriorate, and worries about the consequences of levee failures is stronger. Water supplies have become less reliable.Third, although McPeak is intensely interested in protecting the Delta and the region's economy and quality of life, she is no longer a local official solely responsible for protecting county interests. The state's economy depends to a degree on the ability to move Delta water to Silicon Valley, to San Joaquin Valley farms and over the Tehachapis to Southern California."The Big Ditch in isolation is a disaster — the death knell for the Delta," she said, adding that the Bay Area economy depends on a healthy estuary and environment.However, she is convinced that, done properly, a canal, new reservoirs and the other measures called for in the Delta Vision plan are the best protection for the Delta."The Delta will never be protected if the rest of the state is thirsty," she said.Canal reconsideredIn 1982, the canal was defeated when 63 percent of Californians voted to stop its construction. In the Bay Area and the rest of Northern California, the opposition was overwhelming. Contra Costa County voters were against it by a margin of 96 percent to 4 percent. Despite its defeat, the idea for a canal never really went away. A proposal to dig a shorter ditch through the Delta was floated later in the 1980s, but it never got anywhere. In the 1990s, a major water policy effort called CalFed contemplated the canal once again. Water policy officials determined that it was the best technical solution to the Delta's problems, but they found it was politically infeasible.It was during that period that McPeak began looking more favorably on a canal, as did the late environmentalist and "Cadillac Desert" author Marc Reisner, according to "The Great Thirst," a history of California water."Over the last decade, I've become more persuaded that it is a likely necessity, and that is mostly due to the need for redundancy," McPeak said. If the Delta levees fail — or more specifically, if key Delta levees fail — sunken Delta islands would flood and saltwater from the Bay would be sucked into the water supply pumps. If that happens — and some studies have suggested levee failures are likely in the coming decades due to erosion or earthquakes — there is an argument that it would be better if "redundancy" — in other words, a canal — already was in place to continue delivery of safe drinking water. Otherwise, the imperative to get drinking water to the south could lead to a canal being dug in an emergency, a scenario that is bound to be more destructive.New system consideredTwo Delta plans are moving forward.The Delta Vision plan contends that the demand for water historically has trumped environmental needs and calls on those values to be put on equal footing. It calls for an aqueduct to be considered, but only as part of a comprehensive package that includes more water conservation across the state, stronger legal protections for the environment, more promotion of, and protection for, the Delta's recreation and agriculture, and new reservoirs like the ones McPeak called for in 1980. A two-channel system that uses an existing Delta channel along with a new aqueduct is likely the best alternative, pending more studies, the task force concluded.The other plan, the Bay-Delta Conservation Plan, is essentially a negotiation between big water agencies and wildlife regulators to do two things: build a canal to improve the reliability of water supplies in the San Joaquin Valley and Southern California, and get those water deliveries permitted under endangered species laws. As Delta smelt veered toward extinction and other Delta fish populations plummeted in recent years, those endangered species laws have wreaked havoc on water supply reliability.One judge has ordered state-owned pumps that deliver Delta water as far as San Diego be shut off for violations of state endangered species laws, but that order is on hold pending appeal.Another judge has imposed new rules meant to prevent state and federal pumps from pushing Delta smelt to extinction. Those rules have reduced water deliveries, and most water agencies do not expect any relief for years.Under the Bay-Delta Conservation Plan, the canal would be defined as a "conservation measure" that would help, rather than hurt, endangered species. That argument is based on the fact that water would no longer be taken at the massive south Delta pumps near Tracy that kill millions of fish each year.It is not yet clear whether those two plans will mesh or whether one will be abandoned. The Delta Vision is now being reviewed by a committee of cabinet-level officials who will advise Schwarzenegger. If the governor or lawmakers decide to pursue the Delta Vision plan, they could begin introducing legislation as early as January. A draft Bay-Delta Conservation Plan, meanwhile, is expected to be done by the end of next year and a final plan is scheduled to be adopted in 2010.For now, Contra Costa supervisors say they want a seat at the table, where they hope to influence coming decisions.Supervisor John Gioia said he was glad that McPeak was on the task force because of her continued interest in the well-being of the county, but he added that it is up to local officials to fight for the Delta."We believe that a centerpiece of these plans is the eventual construction of a facility to transport more water to Southern California," he said.For Piepho, the wise course is to oppose both proposals."It's going to get up to Sacramento, and it's going to get hijacked," she said. "The battle lines are being drawn."Los Angeles TimesCredit market freeze may claim local governments as victimsStates, cities and other entities that issued variable-rate municipal bonds are facing interest-rate shocks akin to those that hammered homeowners with adjustable-rate loans...Michael A. Hiltzik...11-22-08http://www.latimes.com/business/la-fi-muni22-2008nov22,0,6806632,print.storyThe worldwide credit market freeze may be claiming a new set of victims: states, cities and other government entities that issued variable-rate bonds and are now facing interest-rate shocks akin to those that hammered homeowners with adjustable-rate loans.The government agencies at risk issued a hybrid municipal bond known as a variable-rate demand note. The payouts on many of these issues have been driven sky-high by the credit crisis.The situation prompted California Treasurer Bill Lockyer and 19 municipal treasurers to ask Friday for an emergency Federal Reserve program to restore liquidity to the malfunctioning market and force rates back down.Without government intervention, there will be higher costs for taxpayers, more budget woes for localities and higher obstacles for crucial infrastructure projects, they said in a letter to California's Democratic Sens. Dianne Feinstein and Barbara Boxer, House Speaker Nancy Pelosi (D-San Francisco) and House Banking Committee Chairman Barney Frank (D-Mass.). The variable-rate notes were sold mostly to money market funds. The bonds carry maturities of up to 30 years but pay short-term interest rates that can be reset as frequently as once a day.Until recently, the resets were not a problem for issuers. The dysfunctional credit markets, however, have exposed them to rate increases no one ever anticipated.The Los Angeles Metropolitan Transportation Authority, for example, says the rate it is paying on $132 million in variable-rate notes has soared to as much as 12%, from as little as 1%. That's a difference of as much as $1.2 million in interest a month. The MTA says it may also have to pay $50 million to retire interest-rate swaps it purchased to hedge against interest-rate changes on the original notes. When variable-rate notes were first developed in the 1980s, they looked like a good deal for issuers as short-term interest rates in the municipal market consistently undercut long-term rates by as much as 3 percentage points. On a $5-billion bond issue, that difference would mean savings for taxpayers of $150 million a year. Between 1999 and 2007, states and municipalities across the country issued $420 billion in variable-rate notes, Lockyer's office said. California municipalities and the state itself have more than $60 billion of such bonds outstanding."Over the years, they saved us a lot of money," Deputy California Treasurer Paul Rosenstiel said in an interview. "It was a prudent thing to have a certain amount of our debt at a variable rate."But the notes are extremely complex. The interest rates are established daily or weekly by investment banks, which must set them high enough to lure buyers. The notes also allow buyers to demand repayment of the principal at almost any time, a provision known as a put. To protect themselves against the expense of the puts, the municipalities typically are required to back up the notes with a credit line from a bank, usually through a letter of credit. The credit line or letter of credit essentially obligates the bank to repurchase the notes if necessary.Until recently, some municipalities also enhanced the bonds' credit ratings -- and therefore lowered their interest costs -- by backing them with bond insurance. And many municipal issuers further protected themselves against adverse moves in short-term rates by buying interest-rate swaps. These are derivatives that essentially convert floating rates to fixed rates.Beginning in March, the cascading worldwide credit crisis knocked each of these supports out from under the variable-rate note market. First, credit-rating agencies downgraded many municipal bond insurers, citing doubts that they would be able to cover all possible claims. This led to ratings cuts on bonds backed by those insurers.Because money market funds typically must invest only in high-rated bonds, the prospect of downgrades prompted many to exercise their puts, selling the bonds back to their municipal issuers. To lure new buyers, the investment banks began jacking up the rates -- but even that didn't always lure buyers.As a result, more notes ended up in the hands of the banks providing the credit lines or letters of credit. This created two new problems, a recent report by Lockyer's office said. First, under the note terms, those so-called bank bonds carry much higher interest rates and shorter terms, sharply raising the borrowing costs for their issuers. Second, many banks, weakened by the credit crisis, decided to bail out of the variable-rate note market by refusing to renew the credit lines or letters of credit.Issuers faced with those conditions have only one option: to convert the notes to fixed-rate debt at a higher rate than the original notes.Municipal bond experts say localities that have good credit ratings and notes backed by strong banks are still successfully saving money with variable-rate notes. But others are scrambling to find new bond insurers, to substitute letters of credit or to convert their notes to fixed-rate bonds. The credit crisis has made that process more difficult and costly. California on Wednesday received bids for only about one-third of the $523 million in Department of Water Resources notes it attempted to convert to fixed-rate bonds. Investor demand was "close to nonexistent" for the rest, Lockyer's office said. Some $350 million of the notes will become bank bonds Dec. 1, exposing the state to higher interest rates and shortened maturities."We got caught up, like everyone else, in the deteriorating conditions in the capital markets," Rosenstiel said. "This is a problem affecting even the strongest issuers."Lockyer and his fellow treasurers say the Federal Reserve should support the variable-rate note market in the same way it has assisted the market for commercial paper, the analogous short-term debt for private corporations. In their letter, the treasurers proposed that the Fed directly purchase "bank bonds," or make direct loans to banks to finance their own purchases of the debt securities. Either step would preserve the tax exemptions for the notes, which is crucial for keeping rates low, and would give municipalities time to find new backup banks or convert the notes to fixed rates at a reasonable cost.A Fed spokesman declined Friday to comment on the letter. But he noted that during an Oct. 20 appearance before the House Budget Committee, Fed Chairman Ben S. Bernanke acknowledged that "the municipal bond markets are not functioning well." Without giving specifics, Bernanke said "this might be an area where the federal government could assist the state and local governments" by helping them to obtain lower-cost credit.How new bank deposit coverage may affect youNow a single account can be fully insured for as much as $250,000 -- until the end of next year. Here's a rundown of how it all works...Kathy M. Kristof, Personal Financehttp://www.latimes.com/business/la-fi-perfin23-2008nov23,0,3980596,print.columnIf the beaten-down stock market has got you seeking a haven for your cash, there's some good news. The financial system bailout legislation enacted last month boosted limits on federal insurance for bank deposits, increasing the amount of cash you can stash in a bank account with every dollar fully insured by the government.And the Federal Deposit Insurance Corp. has made it easier to structure your accounts in a way that maximizes your total coverage.Here's a rundown of the changes: What's different?Until last month, the FDIC covered deposits of as much as $100,000 per owner per bank. For individual retirement accounts that hold bank deposits, the limit was $250,000 per owner.The bailout legislation raised the insurance limit on nonretirement accounts to $250,000. There are tricky but perfectly legal ways to significantly increase that coverage, however, even if you keep all your deposits in a single bank.How do I raise my coverage?The FDIC insures accounts based on their ownership status. For instance, you can have an individual account, a joint account, an IRA and a business account. Technically, each account has a different owner. If the accounts are set up properly, each is covered separately under its own insurance cap. Under the old limits, that would mean those four accounts could have as much as $550,000 in coverage (three at $100,000 each and the IRA at $250,000). Under the new limits, that maximum coverage rises to $250,000 per account, or a total of $1 million.And there's a way to have even more deposits covered -- a whole lot more if you have many people you'd like to leave money to after you die.What's that about inheritance?Another form of ownership that the FDIC gives separate coverage to is a trust: an account for which you name one or more beneficiaries who will inherit the money after your death. Under FDIC rules, the account gets an additional $250,000 in coverage for each beneficiary named. Until recently, the FDIC extended that extra coverage only for beneficiaries who were close relatives, such as a child, grandchild, parent or spouse. Now, the agency says any living person can be a qualified beneficiary."So Bill Gates could essentially set up an account, name every person in the country as equal beneficiaries, and his billions would be fully insured," said David Barr, an FDIC spokesman.What's to stop me from naming all my friends as beneficiaries?Nothing, if you really want to leave them the money. If you die while the beneficiary designations are in place, the assets in a pay-on-death account will go to the named beneficiaries no matter what other arrangements you might have made in your will.Do I have to set up a "living trust" to name beneficiaries?No. Banks can help you set up a simple trust through a "pay on death" account. In some ways, these are preferable to a living trust, with which you might be tempted to do something tricky -- such as give different beneficiaries varying portions of your assets -- that could have an effect on FDIC coverage.Are these changes permanent?Yes and no. The relaxation of the rule governing trusts, which the FDIC did on its own, is permanent.But the increase in the insurance limit per account owner to $250,000 from $100,000 is temporary. Under the bailout law, the higher caps expire at the end of 2009.If you decide to take advantage of the higher limits, you'll need to set an alert in your electronic calendar or find another way to remind yourself to restructure your accounts before then.What about business accounts? I heard a number of small businesses lost money when IndyMac Bank failed because their checking accounts used for payroll exceeded FDIC limits.That's true. That issue is addressed by new -- but temporary -- FDIC rules. Until the end of 2009, "non-interest-bearing transaction accounts "-- essentially business checking accounts -- get unlimited FDIC coverage. There are two important caveats, besides the expiration date, however. Banks must pay extra to provide this coverage, so some may opt out. If you want to make sure that your bank is included in the plan, check with the FDIC. The agency is keeping a list on its website of banks that have opted out. The other caveat is that this extra coverage applies only to accounts that earn no interest. If your business checking account pays even a token amount of interest, it does not qualify.Do I need to keep documentation to prove my accounts are fully insured?It shouldn't be necessary, but it's never a bad idea to save the documents you got when you opened an account. These should clearly state the type of ownership on the account, such as individual, joint or pay-on-death. If your bank fails, those papers could come in handy.What about people who lost money in a recent bank failure because some of their deposits were uninsured? Can they recoup their losses under the new, higher limits?Unfortunately no. The rules are not retroactive.Washington PostBanking Regulator Played Advocate Over EnforcerAgency Let Lenders Grow Out of Control, Then Fail...Binyamin Appelbaum and Ellen Nakashimahttp://www.washingtonpost.com/wp-dyn/content/article/2008/11/22/AR2008112202213_pf.htmlWhen Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007.The benefits were clear: Countrywide's new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank's mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual -- the largest bank in U.S. history to go bust -- and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide.In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out.OTS is responsible for regulating thrifts, also known as savings and loans, which focus on mortgage lending. As the banks under OTS supervision expanded high-risk lending, the agency failed to rein in their destructive excesses despite clear evidence of mounting problems, according to banking officials and a review of financial documents.Instead, OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low. When the housing market turned downward, the thrifts were left vulnerable. As borrowers defaulted on loans, the companies were unable to replace the money they had expected to collect.The decline and fall of these thrifts further rattled a shaky economy, making it harder and more expensive for people to get mortgages and disrupting businesses that relied on the banks for loans. Although federal insurance covered the deposits, investors lost money, employees lost jobs and the public lost faith in financial institutions.As Congress and the incoming Obama administration prepare to revamp federal financial oversight, the collapse of the thrift industry offers a lesson in how regulation can fail. It happened over several years, a product of the regulator's overly close identification with its banks, which it referred to as "customers," and of the agency managers' appetite for deregulation, new lending products and expanded homeownership sometimes at the expense of traditional oversight. Tough measures, like tighter lending standards, were not employed until after borrowers began defaulting in large numbers.The agency championed the thrift industry's growth during the housing boom and called programs that extended mortgages to previously unqualified borrowers as "innovations." In 2004, the year that risky loans called option adjustable-rate mortgages took off, then-OTS director James Gilleran lauded the banks for their role in providing home loans. "Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion," he said in a speech.At the same time, the agency allowed the banks to project minimal losses and, as a result, reduce the share of revenue they were setting aside to cover them. By September 2006, when the housing market began declining, the capital reserves held by OTS-regulated firms had declined to their lowest level in two decades, less than a third of their historical average, according to financial records.Scott M. Polakoff, the agency's senior deputy director, said OTS had closely monitored allowances for loan losses and considered them sufficient, but added that the actual losses exceeded what reasonably could have been expected."Are banks going to fail when events occur well beyond the confines of reasonable expectation or modeling? The answer is yes," he said in an interview.But critics said the agency had neglected its obligation to police the thrift industry and instead became more of a consultant."What you had here is a regulatory motif that was too accommodating to private-sector interests," said Jim Leach, a former Republican lawmaker who led what was then the House Banking Committee and now lectures in public affairs at Princeton University. "In this case, the end result is chaos for the industry, their customers and the national interest."Warning Signs IgnoredOn a hot Friday afternoon in June 2001, federal regulators swept into the suburban Chicago offices of Superior Bank and told stunned employees that it had been closed by OTS.Superior was the largest thrift to fail since the savings and loans crisis in the early 1990s. Its demise foreshadowed the current upheaval. The company had made billions of dollars in mortgage loans to customers with credit problems but boosted profits instead of setting aside enough revenue to cover the eventual losses.OTS regulators had not questioned the company's assurances about the quality of its loans. They had not required Superior to set aside more money. Even after the problems were identified, several federal investigators concluded that regulators had continued to rely on the company's promises rather than forcing it to take action."The whole Superior episode should have served as a warning," Ellen Seidman, then-director of OTS, said in a recent interview. Seidman acknowledged that she should have acted faster and more forcefully to address Superior's problems. Seidman, a Democrat, left her post shortly after the Bush administration began and had little role in revising the agency's approach.Although the failure and disappearance of Superior triggered minor reforms, OTS did not learn the broader lesson. Thrifts were expanding into high-risk mortgage lending, but OTS was not requiring stronger safeguards.John Reich, who has been OTS director since 2005, and Polakoff, his deputy, were well positioned to have learned the lesson. At the time of Superior's difficulties, Reich was one of the leaders of the Federal Deposit Insurance Corp. and Polakoff ran FDIC's Chicago office. Indeed, Polakoff's office recognized Superior's problems before OTS and pushed for increased scrutiny of Superior's bookkeeping.In testimony before Congress in the fall of 2001, Reich listed what he considered the lessons of Superior's failure. Among them, he said, "we must see to it that institutions engaging in risky lending . . . hold sufficient capital to protect against sudden insolvency."But instead of increasing oversight, OTS shrank dramatically over the next four years.Reducing RegulationIn the summer of 2003, leaders of the four federal agencies that oversee the banking industry gathered to highlight the Bush administration's commitment to reducing regulation. They posed for photographers behind a stack of papers wrapped in red tape. The others held garden shears. Gilleran, who succeeded Seidman as OTS director in late 2001, hefted a chain saw.Gilleran was an impassioned advocate of deregulation. He cut a quarter of the agency's 1,200 employees between 2001 and 2004, even though the value of loans and other assets of the firms regulated by OTS increased by half over the same period. The result was a mismatch between a short-handed agency and a burgeoning thrift industry.He also reduced consumer protections. The other agencies that regulate banks review corporate health and compliance with consumer laws separately, which consumer advocates say helps ensure that each gets proper scrutiny from specialists. Gilleran merged the consumer exam into the financial exam.Gilleran did not respond to multiple requests to be interviewed for this article. But at the time he headed the agency, he defended the consolidation of the exams, saying thrifts would be required to conduct "self-evaluations of their compliance with consumer laws."Then-Rep. John J. LaFalce (D-N.Y.), who at the time was the ranking Democrat on the House Financial Services Committee, wrote in a letter to Gilleran that this was "a complete abrogation of the mandate your agency has been given by Congress."The consumer exam had in part monitored whether thrifts were complying with the law by providing quality loans in lower-income communities. During Gilleran's four-year tenure, OTS cited only one institution for failing to meet that obligation, compared with 12 citations in the previous four years.John Taylor, chief executive of the National Community Reinvestment Coalition, and other advocates say better enforcement of consumer protections, such as rules against predatory lending, could have kept thrifts healthy because consumer complaints are an early warning of unsustainable business practices.A Surge in High-Risk LoansFor thrifts regulated by OTS, the option ARM was the rocket fuel of the mortgage boom, the product most responsible for driving profits to record heights and for burning lenders badly on the way back down. Yet even after other bank regulators urged higher lending standards for these mortgages, OTS was reluctant to insist on it.Simeon Ferguson, an 85-year-old Brooklyn resident with dementia, according to his attorney, signed up in February 2006 for an option ARM. The monthly cost was $2,400, but the terms of the loan from IndyMac Bancorp, a major thrift based in Pasadena, Calif., allowed Ferguson to pay less than that each month, the way people can with a credit card.Many of the loans made by IndyMac and other thrifts were extended to borrowers without ensuring they could afford their full monthly payments. Ferguson, who lived on a fixed monthly income of $1,100, was one such borrower, according to a pending lawsuit filed on his behalf in federal court. The suit alleges that IndyMac never checked on his income or assets.In 2006, at the peak of the boom, lenders made $255 billion in option ARMs, according to Inside Mortgage Finance, a trade publication. Most option ARMs were originated by OTS-regulated banks.Concerns about the product were first raised in late 2005 by another federal regulator, the Office of the Comptroller of the Currency. The agency pushed other regulators to issue a joint proposal that lenders should make sure borrowers could afford their full monthly payments. "Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning," Comptroller of the Currency John C. Dugan said in a speech advocating the proposal.OTS was hesitant to sign on, though it eventually did. Reich, the new director of OTS, warned against excessive intervention. He cautioned that the government should not interfere with lending by thrifts "who have demonstrated that they have the know-how to manage these products through all kinds of economic cycles." Reich, through a spokesman, declined to be interviewed for this article.The lending industry seconded Reich's concerns at the time, arguing that the government was needlessly depriving families of a chance at homeownership. IndyMac argued in a letter to regulators that in evaluating loan applications it was not fair to rule out the possibility that a prospective borrower's income might increase. "Lenders risk denying home ownership to qualified borrowers," chief risk officer Ruthann Melbourne wrote.The proposal languished until September 2006, when it was swiftly finalized after a congressional committee began making inquiries.The long delay in issuing the guidance allowed companies to keep making billions of dollars in loans without verifying that borrowers could afford them. One of the largest banks, Countrywide Financial, said in an investor presentation after the guidance was released that most of the borrowers who received loans in the previous two years would not have qualified under the new standards. Countrywide said it would have refused 89 percent of its 2006 borrowers and 83 percent of its 2005 borrowers. That represents $138 billion in mortgage loans the company would not have made if regulators had acted sooner.Risks Ran RampantEven after the guidance was issued, some banks interpreted it as permission to maintain old habits because the regulatory agencies had stopped short of issuing a binding rule.Washington Mutual, for instance, said in a December 2006 securities filing that it was continuing to qualify borrowers based on their ability to afford a teaser interest rate. In August 2007, the bank was still qualifying borrowers at a 2 percent teaser rate instead of the full rate of 5 percent or higher they would eventually face, according to a shareholders' lawsuit filed by Bernstein Litowitz Berger & Grossmann.As early as 2003, the company set up credit risk teams at more than a dozen offices around the country to assess the growing flood of applications for option ARM loans. The basic job was to "make exceptions" to the bank's standards so loans could be approved, said Dorothea Larkin, a former Washington Mutual credit risk manager and a witness in the Bernstein Litowitz suit."As we kept making the same exception over and over again, what was an exception in 2003 and in 2004 became the norm in 2005," Larkin said in an interview.It was clear to some Washington Mutual employees that the company was making loans that borrowers could not afford and that the bank could suffer as a result. In 2005, a small group of senior risk managers drew up a plan that would have required loan officers to document that borrowers could afford the full monthly payment on option ARM loans.The plan was shared with OTS examiners, according to a former bank official who spoke on condition of anonymity because the bank's practices are the focus of a federal investigation as well as several lawsuits."We laid it out to the regulators. They bought into it. They supported it," the former official said. But when a new executive team at the bank nixed the plan, the former official said, "the OTS never said anything."In addition to taking more risks, Washington Mutual was setting aside a smaller share of revenue to cover future losses. The reserves had steadily declined relative to new loans since 2002. By June 2005, the bank held $45 to cover losses on every $10,000 in outstanding loans, according to financial records filed with federal regulators. Average reserves at OTS-regulated institutions had declined by about a third since June 2002, but Washington Mutual's reserves had fallen even further. They were 25 percent lower than the average for OTS-regulated thrifts.OTS did not force the company to address the problem with reserves, though agency examiners worked full-time inside Washington Mutual's Seattle headquarters.Polakoff said OTS closely monitored the company's allowance for loan losses and considered it sufficient. "They had good models in place calculating expected losses on the loan portfolio," he said.But the agency did not fix a basic problem with how Washington Mutual predicted future losses. According to a confidential internal review in September 2005, the company had not adjusted its prediction of future losses to reflect the larger risks associated with option ARM loans. The review described those loans as "a major and growing risk factor in our portfolio." As a result, the company was not setting aside enough money to cover future losses.Management responded in November to the internal review with a memo promising to update its risk assessment by June 30, 2006. During the nine months before the risk model was revised, Washington Mutual issued about $32 billion in new option ARM loans. OTS officials said in an interview that they were unfamiliar with the company's internal correspondence but would consider nine months an unacceptable delay."Nine months to get that model into compliance?" said Dale George, a former WaMu risk manager and a witness in a lawsuit. "I found that astounding."Known for Being 'Lenient'Countrywide Financial's decision to reconstitute itself as a thrift and come under the OTS umbrella was a victory for Darryl W. Dochow, the OTS official in charge of new charters in the Western region, home to Washington Mutual, IndyMac and other large thrifts.In the late 1980s, Dochow had been the chief career supervisor of the savings-and-loan industry, and federal investigators later concluded he played a key role in the collapse of Charles Keating's Lincoln Savings and Loan by delaying and impeding proper oversight of that thrift's operations.Dochow was shunted aside in the aftermath and sent to the agency's Seattle office. Several of his former colleagues and superiors say he eventually reestablished himself as a credible regulator and again rose in the organization. Dochow did not return a phone call requesting an interview, and OTS said he declined to give one.As early as 2005, Angelo R. Mozilo, then the chief executive of Countrywide, approached OTS about moving out from under the supervision of the Office of the Comptroller of the Currency, which regulates national commercial banks. In 2006, Dochow and his OTS colleagues met with Countrywide at its headquarters in Calabasas, Calif., in a room decorated with color photos of the company's float entries in the annual Tournament of Roses parade. One depicted a big bad wolf, with arms outstretched, huffing and puffing on a brick house.Senior executives at Countrywide who participated in the meetings said OTS pitched itself as a more natural, less antagonistic regulator than OCC and that Mozilo preferred that. Government officials outside OTS who were familiar with the negotiations provided a similar description."The general attitude was they were going to be more lenient," one Countrywide executive said. For example, he said other regulators, specifically OCC and the Federal Reserve, were very demanding that large banks not allow loan officers to participate in the selection of property appraisers. "But the OTS sold themselves on having a more liberal interpretation of it," the executive said.Winning Countrywide was important for OTS, which is funded by assessments on the roughly 750 banks it regulates, with the largest firms paying much of the freight. Washington Mutual paid 13 percent of the agency's budget in the fiscal year ended Sept. 30, according to OTS figures. Countrywide provided 5 percent. Individual firms tend to make a larger difference to OTS finances than other bank regulators because the agency oversees fewer companies with fewer assets.Polakoff said in an interview that the main reason Countrywide sought a new charter was that OTS was a better fit because it regulated banks that focus on mortgage lending. He said he challenged Mozilo: "If you're looking for a weak regulator, and if you're calling us because you think we're a weak regulator, stop now. We will walk away."Polakoff said Mozilo told him, "That is absolutely not the reason we're even talking to you about a charter." Mozilo declined to be interviewed for this article.But critics in government and industry said Countrywide's shift from OCC oversight to that of OTS was evidence of a "competition in laxity" among regulators eager to attract business. "Institutions should not be able to find a safe haven in one regulator from the reasonable concerns of another regulator," said Karen Shaw Petrou of Federal Financial Analytics, referring to the Countrywide episode.In September 2007, six months after helping orchestrate the arrival of Countrywide under OTS, Dochow was promoted to head the agency's Western region.He had arrived just in time for the second savings-and-loan crisis.New York TimesEight Years Is More Than Enough...Editorialhttp://www.nytimes.com/2008/11/23/opinion/23sun2-2.html?sq=mining&st=cse&scp=3&pagewanted=printAs the sun sets on the Bush administration, the survival rite known as burrowing is under way. Burrowing is when favored political appointees are transformed into civil servants and granted instant tenure on the federal payroll. There is, of course, nothing new in this cynical practice. Dozens of political loyalists were burrowed in the final months of the Clinton administration. But the score of Bush burrowers who have so far come to light bring with them the worst pro-industry, anti-regulatory biases that have made this administration such a disaster. At the Interior Department, six senior managers were brazenly burrowed as a package. One of the protected appointees was earlier criticized by the agency’s inspector general for overriding career experts in the field to deliver a posh grazing agreement to a Wyoming rancher. Another has survived in a management position affording clout to continue the scandalous mining industry bias of the Bush years.Barack Obama the candidate smartly appealed to demoralized federal workers, writing campaign letters promising to reverse many of the Bush administration’s worst practices. Mr. Obama went on record for more mine-safety workers, tougher regulation of workplace safety, an end to censorship of research by government scientists and a rollback of the Bush administration’s outsourcing to favored private contractors.The promises extend to such trouble spots as staff shortages that have created a shameful backlog in Social Security disability claims, and the push to eliminate the Environmental Protection Agency’s valuable library system. Mr. Obama also took care to warn that some agencies may face pruning because of merit or fiscal pressures. It’s encouraging that the president-elect recognizes that to make the changes he’s promising — and deliver a government that will protect and help its citizens — he will need energized, rather than alienated, federal workers. His aides will have to circumvent or dump any Bush burrowers intent on sabotaging that effort.