Investors, Regulators Laid Path to 'Flash Crash'

As recently as this spring, many were applauding the speed, lower costs and competitive nature of the U.S. stock market that largely grew out of a series of policy and technology changes over a decade.

"Who could argue that competition was a bad thing ... and that faster trades would be a bad thing?" asks Joseph Saluzzi, co-head of trading at broker Themis Trading.

But the flash crash, he says, shows there have been "huge, unintended consequences."

A report by the SEC and the Commodity Futures Trading Commission on that day's steep decline, which saw the Dow Jones Industrial Average collapse 700 points in minutes before rebounding, is expected as soon as this week. SEC Chairman Mary Schapiro has called the day's events "clearly a market failure."

Staff from both agencies, which provided an initial joint-account in May, continued Tuesday to negotiate how certain events would be described in the report, according to people briefed on the discussions.

One area of discussion, one person said, concerns the so-called "E-mini" futures contract, which mimics movements in the Standard & Poor's 500 index and was a source of heavy trading that day when liquidity dried up. Part of the discussion concerns whether to disclose the number of contracts exchanged in the E-mini contract, which could show the size and impact of the trades.

The CFTC doesn't want to name the company behind the trade, this person said. The Wall Street Journal and other news outlets have identified the firm as Waddell & Reed Financial Inc. (NYSE: WDR - News). Waddell has said it didn't intend to "disrupt" the market.

"We expect the report will highlight any areas in which market structure played a role in the events of May 6," Ms. Schapiro said in a statement this week. Spokesmen for the CFTC and the SEC declined to comment on the coming report.

While the SEC has been pilloried in recent years for failures such as ignoring tips about Bernard Madoff's Ponzi scheme, the agency had started to ask questions about the reliability of the stock market months before the flash crash.

In January, in a so-called concept release on stock-market structure, the agency noted the significant changes that have taken place in trading thanks both to legislative and regulatory developments and advances in technology.

The changes were largely designed to usher in increased competition and speed, both of which were seen lowering costs for investors. In the release, which sought public comment, the SEC raised questions about what downsides the changes had wrought for markets.

Before May 6, the vast majority who responded to the SEC's concerns dismissed them.

We "think that our current equity-market structure generally works well," wrote Joseph M. Velli, chief executive of brokerage firm BNY ConvergEx Group LLC, in comments filed in April. "Innovation and technological advances can fix many perceived problems without the need for additional regulation."

Mr. Velli said this week through a spokesman that he "would support certain technical rule changes, like the single-stock circuit breakers, designed to iron out a few limited issues."

Some Wall Street players say the changes appear to have left markets more vulnerable to rapid and unchecked swings than had been anticipated.

Among the changes: The SEC in 1998 adopted regulation ATS to allow for nonexchanges to execute trades electronically. That marked a precursor to today's dark pools, private trading venues that have taken substantial trading volume away from the public exchanges. Ms. Schpiro has recently raised questions about the effect of dark pools on market stability and investors' ability to size up prices.

In 2000, the SEC mandated stock pricing in pennies instead of 1/8 fractions, a move that was touted as a benefit to small investors but that also has reduced the per-trade profits and incentives for traders expected to bring stability as market makers.

In 2005, the SEC adopted Regulation NMS, aimed at opening up stock trading to greater competition and ending the duopoly of the New York Stock Exchange and Nasdaq Stock Market.

The 2010 concept release questions whether having numerous trading centers, compared with essentially two a decade ago, could have a damaging effect. It asked whether there should be minimum requirements on the duration of orders.

And one question that became especially relevant after the flash crash was whether high-speed traders who reliably supplied liquidity would do so in crisis. "Are their orders accurately characterized as phantom liquidity that disappears when most needed by long-term investors and other market participants?" the release asked.

Larry Leibowitz, chief operating officer of Big Board operator NYSE Euronext (NYSE:NYX - News), says the SEC's broad questioning of market structure is appropriate. "Regulations don't exist in a static world. Regulations need to be tailored and tinkered."

Others say that, despite the May 6 flash crash, the markets are largely functioning well. Plus, any new alterations could themselves have unintended consequences.

Dan Mathisson, head of electronic trading at Credit Suisse Group (NYSE: CS - News), before May 6 described the recent evolution of the stock market as "a complete success." He largely stands by that assessment.

The flash crash "clearly revealed some problems," Mr. Mathisson said in a recent interview. "But it does not throw away all the tremendous progress that the market has made."

Write to Tom Lauricella at tom.lauricella@wsj.com, Kara Scannell at kara.scannell@wsj.com and Jenny Strasburg at jenny.strasburg@wsj.com

How To Buy a Home at a $100,000 Discount

To pare down their growing inventory of properties, Fannie Mae and Freddie Mac are scrambling to unload nearly 150,000 foreclosed homes. And that means 2004-esque deals — like requiring as little as 3% down, offering to pay a portion of the closing costs and arranging special financing and warranties for repairs and renovations.

It's another option for home owners who want to trade up — and an easier way into the market for first-time home buyers, says Dean Baker, co-director of the Center for Economic and Policy Research who studies the housing market.

The best bargain might be the home's price. A SmartMoney analysis revealed that buyers could save $100,000 by buying a Fannie or Freddie home instead of similar fair-market properties just a few blocks away.

And while many of Fannie and Freddie's homes are at the lower end of the market and in less-desirable areas, a SmartMoney.com search of Fannie Mae and Freddie Mac listings revealed that buyers could find properties in good neighborhoods — and for $100,000 less than comparable houses nearby. For example, a five-bedroom, three-bath with a backyard, deck and two-car garage in tony Alexandria, Va., was listed for $445,000, $100,000 less than the average listing price in the area, according to Trulia.com. Four blocks away, a similar non-foreclosed colonial is listed for $639,900.

Or how about a three-bedroom, two-bath in Bergen County's leafy River Edge, N.J for $359,900 -- $85,000 less than the average listing in the area. One avenue over, a non-foreclosed similar home is listed for $474,888.

The downside: Angry neighbors. These types of listings are devaluing nearby properties, says David Howell, realtor and executive vice president at McEnearney Associates, which sells homes in the metropolitan Washington D.C. area. That means in some areas where Freddie and Fannie homes are on the market, buyers could find a better deal on a nearby market-rate home that doesn't require repairs, he says.

Buying a Fannie or Freddie home can be more complex than pursuing an open-market real estate listing — or even a commercial bank foreclosed property. There's a smaller selection of appealing properties — there were just six higher-end homes listed on a recent day in Alexandria, for example — and those tend to sell the fastest. And there's little room to negotiate price.

"Our goal is to recover as much as we can to offset our loss and not to be low balling properties just to move them," says a Freddie Mac spokesman. "We absolutely have no motivation to be leading a downward spiral in home prices."

The three best features of Fannie and Freddie foreclosures that make digging for these deals worthwhile:

Small Down Payment

For its foreclosed properties, Fannie Mae will accept down payments as low as 3% on 30-year mortgages at the same interest rates banks are currently offering. And Fannie Mae doesn't require private mortgage insurance. Compared to a typical bank mortgage, which requires 10% down, plus PMI for buyers with less than 20%, that's a huge savings — an estimated $51,000 up front and upwards of $2,500 per year PMI on a $300,000 mortgage.

It's a tradeoff, though. For buyers with 20% down, mortgage payments on a 30-year mortgage loan at 5% would be $1,288 a month. With just 3% down, the buyer would need to borrow $291,000 and make a $1,562 monthly payment.

Help with Renovations

Fannie and Freddie have fixed big flaws like leaky roofs and damaged electrical work, and they often handle small projects like replacing appliances that are broken or missing, tearing up old carpet, or fixing other damage left by former owners or vandals.

Now, to entice buyers who want to update or upgrade, many of Fannie Mae's properties come with an optional mortgage that includes extra financing up to $30,000 for repairs and improvements. But with a little down payment and the extra amount tacked on, the buyer could end up owing more than the house is worth — especially if home prices continue to drop.

First Dibs

Buyers who plan to live in their Freddie Mac-purchased home will get to see properties for at least the first 15 days they're on the market — before the listing opens to would-be landlords. Many bank-owned foreclosure properties are snatched up by cash-stocked investors who can wait out the downturn to sell later at a profit.

And Fannie and Freddie homes can be seen inside and out — unlike some regular foreclosure listings. Consider bringing along a contractor when you view the home to help spot areas that need repairs and provide pricing. (Most contractors will do this for free.)

"It gives families who want to buy a home to live in the opportunity to look and bid without competition from cash-rich investors," says a Freddie Mac spokesman.

You Should Have Timed the Market

A remarkable new study from TrimTabs Investment Research shows that regular investors needlessly lost billions more than they should have on the stock market. Why? It's the old story: They invested more money in their equity mutual funds during the booms ... and then sold them during the panics.

So even though Wall Street overall ended the decade pretty much level (when you include dividends), average investors lost a bundle. TrimTabs puts the losses at $39 billion. It calculates that mutual fund investors bought into the Standard & Poor's 500-stock index at an average of 1,434. That's close to its record high of 1,565. If investors had invested at random times instead, their average purchase price would have been 1,171.

"It cost them about 20% to buy high and sell low," says TrimTabs' Vincent Deluard.

So even though the stock market today is around its 10-year average, TrimTabs reckons most of those who invested during the decade are actually sitting on hefty losses.

What does this dismal news mean for you, the investor, now?

Oddly enough, it means almost exactly the opposite of what Wall Street is going to tell you it means. The Wall Street crowd will say, as usual: "See, you can't time the market! Just like we told you! So just give us all your money, and just go with the flow."

That this line happens to serve the economic interests of Wall Street is, of course, a pure coincidence. Yet the TrimTabs numbers show, instead, that over the past decade it was actually quite easy to time the market. All you had to do was buy when the public was selling, and sell when the public was buying.

Naturally, going against the crowd is easier said than done. That's why the best professional investors like to say that successful investing is "simple, but it isn't easy."

Human beings are hard-wired to run with the herd. For millions of years, when the herd stampeded, the smartest move wasn't the hang around and wait to see why. It was to run.

And that's how they act on the stock market as well. But when it comes to investing, it's a bad idea. Your feelings are a bad guide. And there is no safety in numbers.

I am frequently surprised at how many people still give in to their instincts in these matters. During the housing boom, anything I wrote questioning house prices automatically drew scathing reactions. Today anything I write that is positive about buying a home draws a similar response. (I'll confess this alone makes me feel bullish.)

At the depths of the stock market lows, early last year, I pointed out that even rock-solid blue chips were being sold off cheaply: My email box filled up with people telling me I was an idiot, that Kellogg (then $38, now $51) (NYSE: K - News) or Procter & Gamble (then $47, now $61) (NYSE: PG - News) or Kraft Foods (then $22, now $31) (NYSE: KFT - News) were doomed along with everything else.

But as the TrimTabs research reveals, our feelings are terrible guides in these matters. Even during a flat decade, people could make money just by going against the herd. They didn't need to know anything else. They didn't need quantitative models, astrophysics Ph.D.s from M.I.T., inside information or privileged access. All that money spent on equity research? All you had to do was look at the latest numbers from the Investment Company Institute, showing whether the public was putting money into their stock-market funds or taking it out. And then do the opposite.

Last week I was in London, visiting one of the best investors I have ever known. Peter handles money on behalf of a small number of rich clients.

He shuns publicity (and requests that I don't mention his last name). He's been managing money for 40 years. Ten years ago he told me to sell the Nasdaq and buy gold.

Over dinner, as he reflected on a long career, he told me that as he has gotten older he has learned that good investing is even simpler than he used to think. He has abandoned most of the sophisticated tricks he tried to use as a young man. He sticks to value, and he runs against the herd.

Right now? He likes some blue-chip stocks, as they are reasonably cheap and no one else seems to be interested in them. He's avoiding fashionable emerging markets. And he's been quietly building a position in Japan. Why? "Everybody hates it," he says. "Twenty-year bear market. It's cheap. And your typical fund manager would rather suck a lemon than invest in Japan."

Most people's reaction to this is probably to shrug and forget about it. Japan is so over, after all. Why would you want to invest in Japan? Nobody wants Japan.

Hmmm.

Write to Brett Arends at brett.arends@wsj.comA remarkable new study from TrimTabs Investment Research shows that regular investors needlessly lost billions more than they should have on the stock market. Why? It's the old story: They invested more money in their equity mutual funds during the booms ... and then sold them during the panics.

So even though Wall Street overall ended the decade pretty much level (when you include dividends), average investors lost a bundle. TrimTabs puts the losses at $39 billion. It calculates that mutual fund investors bought into the Standard & Poor's 500-stock index at an average of 1,434. That's close to its record high of 1,565. If investors had invested at random times instead, their average purchase price would have been 1,171.

"It cost them about 20% to buy high and sell low," says TrimTabs' Vincent Deluard.

So even though the stock market today is around its 10-year average, TrimTabs reckons most of those who invested during the decade are actually sitting on hefty losses.

What does this dismal news mean for you, the investor, now?

Oddly enough, it means almost exactly the opposite of what Wall Street is going to tell you it means. The Wall Street crowd will say, as usual: "See, you can't time the market! Just like we told you! So just give us all your money, and just go with the flow."

That this line happens to serve the economic interests of Wall Street is, of course, a pure coincidence. Yet the TrimTabs numbers show, instead, that over the past decade it was actually quite easy to time the market. All you had to do was buy when the public was selling, and sell when the public was buying.

Naturally, going against the crowd is easier said than done. That's why the best professional investors like to say that successful investing is "simple, but it isn't easy."

Human beings are hard-wired to run with the herd. For millions of years, when the herd stampeded, the smartest move wasn't the hang around and wait to see why. It was to run.

And that's how they act on the stock market as well. But when it comes to investing, it's a bad idea. Your feelings are a bad guide. And there is no safety in numbers.

I am frequently surprised at how many people still give in to their instincts in these matters. During the housing boom, anything I wrote questioning house prices automatically drew scathing reactions. Today anything I write that is positive about buying a home draws a similar response. (I'll confess this alone makes me feel bullish.)

At the depths of the stock market lows, early last year, I pointed out that even rock-solid blue chips were being sold off cheaply: My email box filled up with people telling me I was an idiot, that Kellogg (then $38, now $51) (NYSE: K - News) or Procter & Gamble (then $47, now $61) (NYSE: PG - News) or Kraft Foods (then $22, now $31) (NYSE: KFT - News) were doomed along with everything else.

But as the TrimTabs research reveals, our feelings are terrible guides in these matters. Even during a flat decade, people could make money just by going against the herd. They didn't need to know anything else. They didn't need quantitative models, astrophysics Ph.D.s from M.I.T., inside information or privileged access. All that money spent on equity research? All you had to do was look at the latest numbers from the Investment Company Institute, showing whether the public was putting money into their stock-market funds or taking it out. And then do the opposite.

Last week I was in London, visiting one of the best investors I have ever known. Peter handles money on behalf of a small number of rich clients.

He shuns publicity (and requests that I don't mention his last name). He's been managing money for 40 years. Ten years ago he told me to sell the Nasdaq and buy gold.

Over dinner, as he reflected on a long career, he told me that as he has gotten older he has learned that good investing is even simpler than he used to think. He has abandoned most of the sophisticated tricks he tried to use as a young man. He sticks to value, and he runs against the herd.

Right now? He likes some blue-chip stocks, as they are reasonably cheap and no one else seems to be interested in them. He's avoiding fashionable emerging markets. And he's been quietly building a position in Japan. Why? "Everybody hates it," he says. "Twenty-year bear market. It's cheap. And your typical fund manager would rather suck a lemon than invest in Japan."

Most people's reaction to this is probably to shrug and forget about it. Japan is so over, after all. Why would you want to invest in Japan? Nobody wants Japan.

Hmmm.

Write to Brett Arends at brett.arends@wsj.com

Five Hidden Costs of Gold

There's a lot of talk right now about how gold is booming, and how gold bugs who have been stashing bullion under their mattresses over the last decade or so have made a killing.

That may be true if you look at the price of the yellow stuff per ounce. The price of an ounce of gold is up about 30% in the last year, or over 400% in the last 10 years. How does that relate to actual returns for investors?

The truth is that gold has steep hidden costs, and that looking at the numbers on paper doesn't tell the whole story. Here are big costs many investors overlook.

Higher taxes

The affinity for gold investing and a dislike of the government seem to go hand in hand, from predictions that massive government debt will render the dollar worthless to conspiracy theories that there will be another Executive Order 6102 in which Uncle Sam loots your safe deposit box and seizes your gold.

But the biggest reason for gold investors to get mad at the feds is their tax bracket. The IRS taxes precious metal investments — including gold ETFs like the SPDR Gold Trust (NYSE: GLD - News) and iShares Silver Trust (SLV - News) — as collectibles. That means a long-term capital gains tax of 28% compared with 15% for equities (20% if and when the Bush tax cuts expire next year).

While you may see your gold as a bunker investment, the IRS will treat you the same as if you were hoarding Hummel figurines. And that means a bigger portion of your gold profits go to the tax man.

Zero income

Just as the math game on gold price appreciation doesn't tell the whole story, the lack of regular payouts is another reason why the long-term profits quoted in gold are incomplete. Many long-term investors can't afford to stash their savings in the back yard for 20 years. Income is a very valuable feature of many investments and gold simply doesn't provide that.

Remember, simply looking at returns in a vacuum can't tell you whether an investment is "good" or "bad." Is it a good idea for a 70-year-old retiree on a fixed income to bet on penny stocks because they could generate huge profits? Even if those trades pay off, 99 out of 100 advisers would say something akin to "You got lucky this time, but don't tempt fate. Quit while you're ahead and don't be so aggressive."

Similarly, the volatile and income-starved gold market is not a place for everyone. Just because past returns for gold have been so stellar, that does not mean that gold is low risk or that investors who need a secure source of regular income will be well-served.

Gold scams take a toll

In a previous article, I detailed gold coin scams in detail. They include false gradings on the quality of the coins, the use of cheaper alloys instead of pure gold and even brazen scams where you don't actually even own the gold that you buy. And that's just on the coins front. Scams abound in pawn shops and "cash for gold" enterprises that refuse to give you a true value for your jewelry or other gold items.

You'd think it would be obvious that precious metals should never be purchased from anyone other than a broker or seller of good repute who provides proper documentations. But many investors fail to do their homework, or worse, can't tell forged documents from real ones.

Gold is ready-made to be a retail sales item, and with that comes all manner of unscrupulous activity. Vigilant investors can protect themselves, but do not underestimate the very real price of being taken to the cleaners by a gold scam if you don't do your homework.

High ownership and storage costs

Maybe through some creative accounting or selective amnesia at tax time you can mitigate the tax burden of gold. But one expense you can't as easily avoid is the high ownership cost of gold. After all, it's not like you mined it yourself — and all those middlemen between the ore and you want to get paid.

The first is that old tightwad Uncle Sam again. Even if you can avoid him going on the capital gains front, he gets you coming into gold via sales tax on most jewelry and coins. And then there are the high transaction costs and commissions that gold can carry. Anyone who has bought jewelry knows significant markups are part of the precious metals trade, and that's the same for investment gold as it is for engagement rings. The bottom line is that some of your initial buy-in goes towards the business of gold and you'll never get it back, not unlike realtor fees or broker fees.

And then there's the additional cost of storing your gold. You have to pay a fee for a safe deposit box, and if you have a lot of gold, that can run you a few hundred bucks a year for a good-sized box. Of course if you're afraid of that Order 6102 scam pulled by FDR you likely have your gold at home in a safe — so that's a one-shot deal. But are you really foolish enough to distrust the government but trust your gold stash to be safe without insurance?

The presumed "safety" of gold is good on paper, but obtaining the actual metal and keeping it safely stored is a costly endeavor.

Yes, gold can lose value

Proponents of gold love to claim that gold has never been worthless like Lehman Bros. or GM. And while this is true on its face, it is actually a half-truth. While gold may never become worthless, it is foolish to think it will never lose value.

Consider that after reaching a record high of $850 per ounce in early 1980, gold plummeted 40% in two months. The average price for gold in 1981 fell to a mere $460 an ounce — and continued nearly unabated until bottoming with an average price of around $280 in 2000. For those folks in their 40s and 50s who bought gold at that 1980 high, it took them 28 years to reclaim the $850 level. That's hardly much of a retirement plan, unless they lived to be 80 or 90 and just cashed out recently.

Gold is an investment, period. And no matter how gold bugs spin the metal as a hedge against inflation and a sure thing that will only go up, gold can lose its value — sometimes in a hurry, as in the early 1980s.

Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter at twitter.com/JeffReevesIP

Gas main repairs begin near 2 schools in Las Vegas

LAS VEGAS (AP) -- A fire official says repairs have begun on a broken gas main and a lockdown has been lifted for some 3,400 students at two northwest Las Vegas schools.

Las Vegas fire spokesman Tim Szymanski says no injuries were reported after a backhoe digging in the area hit a two-inch gas main about 8:40 a.m. at Buffalo Drive and Farm Road.

Police, fire and school officials ordered a lockdown for students at Arbor View High School and Betsy Rhodes Elementary School as a precaution.

Szymanski says an evacuation order is also being lifted for nearby homes and businesses.

Australia TV host announces wrong winner for Top Model

SYDNEY (Reuters) – Producers of Australia's Next Top Model have been left red faced after supermodel host Sarah Murdoch announced the wrong winner in what newspapers said was the country's most awkward TV moment.
Murdoch, the daughter-in-law of media baron Rupert Murdoch, was close to tears after realising she had mistakenly announced Sydney 19-year old Kelsey Martinovich as the winner of the Foxtel TV series during the live finale.
Martinovich had completed her acceptance speech before Murdoch backtracked on stage to reveal the real winner from a public vote was 18-year-old Gold Coast rival Amanda Ware.
"I don't know what to say right now. I'm feeling a bit sick about this," Murdoch told a 2,000-strong live audience.
"I'm so sorry. Oh my God, I don't know what to say. This is what happens when you have live TV folks, this is insane, insane, insane."
Foxtel is owned by Australian phone company Telstra, Rupert Murdoch's News Corp and Consolidated Media Holdings.
Foxtel publicity director Jamie Campbell on Wednesday blamed a miscommunication between series directors in a broadcasting truck control room and Murdoch on stage.
Series judge and fashion designer Alex Perry told Sydney radio that Murdoch had made a genuine mistake, denying accusations in media reports that the bizarre mix-up was a publicity stunt.
"Everybody wants to tag something sinister on it and say it was done for ratings. I know Sarah and I know the executive producer. It's just not their style," Perry said.
Martinovich may have had a short-lived reign as Australia's Next Top Model, but it wasn't all bad news as Foxtel said she would receive a A$20,000 (12,300 pounds) cash prize and trip to New York as consolation, almost matching Ware's series spoils.
Ware won an appearance in Harpers Bazaar magazine, a modelling contract, A$20,000, a trip to New York and a car.

BP ousts exploration chief, vows to boost safety

LONDON (Reuters) – BP Plc's incoming Chief Executive Bob Dudley has ousted the oil group's exploration and production chief following the Gulf of Mexico oil spill and promised to restructure the company to boost safety.
Echoing a move BP made after the Texas City blast in 2005, Dudley also said on Wednesday he was appointing a new safety guru, Mark Bly, who would ensure safe practices across the organization.
BP shares closed up 3.9 percent at 421 pence, against a 0.2 percent drop in the STOXX Europe 600 Oil and Gas index.
Andy Inglis, the head of its upstream Exploration and Production, becomes BP's second senior executive casualty of the spill following Dudley's replacement of Tony Hayward, who enraged U.S. public opinion during the crisis with his gaffes.
The blown-out well came under the remit of Inglis's unit, and BP insiders have predicted his departure for months.
He will leave at the end of the year with a year's salary of 690,000 pounds ($1.1 million) in lieu of notice and will retain his pension pot valued at 6 million.
Bly's role will be stronger than previous safety chiefs, a BP spokesman said, because he will have representatives in each business unit that will have the authority to intervene if they feel practices are not meeting BP's safety standards.
BP said it was also reviewing its system of incentives, which critics have said encouraged managers to put profits and cost-cutting ahead of safety.
"We will refine the checks and balances at all levels ... I want us to sharpen our everyday attitude to operational and technical risk -- to ensure it is the norm for people on the frontline to speak up about risk and for managers to listen," Dudley said in an email to staff seen by Reuters.
"There is a pressing need to rebuild trust in BP around the world," Dudley added.
Neither in the official or internal statements did Dudley admit that safety failings particular to BP played a role in the oil spill.
Instead, he repeated BP's position that the disaster highlighted industry shortcomings -- a line of argument which has enraged BP's rivals, who accuse the London-based company of having a weak focus on safety and technical excellence.
BOLD STEPS
Analysts said investors would be encouraged that Dudley appeared to be willing to take bold steps and that BP was increasing its focus on safety.
"It plays well to the U.S. government and to investors who worried that BP had not been as safety conscious as some of its rivals, although we have to see more detail to know how it will work," said Iain Armstrong, oil analyst at Brewin Dolphin.
A blowout in April at BP's Macondo well caused an explosion on the Deepwater Horizon drilling rig that killed 11 men and unleashed America's worst ever oil spill.
Fears about the final bill for the disaster, along with concerns that BP's battered image in the United States could make it hard for the company to exploit its assets there, have wiped around $60 billion off the company's stock market value.
Europe's second-largest oil company by market value said it was also splitting up its core upstream division into three units: exploration, project development and production, with the aim of fostering technical expertise.
Inglis said in an email to staff seen by Reuters that the change would be implemented over the next month.
BP's internal probe into the disaster revealed its main representative on the drilling rig, and possibly his colleagues onshore in Houston whom he may have consulted, were unable to correctly read a basic safety test, thus missing an opportunity to avoid the blast.
BP has laid most of the blame on its contractors, but rivals said BP's own account of the disaster showed its practices fell short of industry standards.
BP LIFER
Dudley will expand the top management team to include Bly, the heads of the three upstream units, and a new head of strategy and integration.
Evgeny Solovyov, oil analyst at Societe Generale, said there was a risk that the additional safety oversight and top management positions could slow down decision-making at the company.
"I am concerned that BP might become too bureaucratic," he said, though he agreed it was crucial for BP to send a message that it was taking safety more seriously if it wanted to preserve its U.S. growth hopes.
"BP is in image rebuilding mode," Solovyov said.
(Editing by Dan Lalor, David Holmes and Will Waterman)
($1=.6327 Pound)

The Fed Makes And Mints Money

The most profitable bank in the United States of America isn't Jamie Dimon's JP Morgan Chase or the rejuvenated Bank of America. In fact, it doesn't have any ATMs, and it pays out almost all its earnings to you and your neighbors.
It's the Federal Reserve, which is expected to post another year of record profits in 2010.
In recent years, America's central bank has come under criticism — much of it justified. Under former Fed Chairman Alan Greenspan and his successor, Ben Bernanke, the Fed slept through the housing/subprime bubble, did a poor job of regulating banks and failed to forecast the deepest recession in 80 years.

Once the crisis hit, the Fed intervened in unprecedented and expensive ways that have weakened the dollar and punished savers with rock-bottom interest rates. Bernanke vastly increased the size of the Fed's balance sheet, which now stands at $2.3 trillion vs. about $800 billion before the crisis began.
But as much as it may have contributed to our financial problems, the Fed may also be part of the solution — by helping to keep the deficit from growing even larger.
How does that work? Good question.
The Fed is a collection of regional Federal Reserve banks that are in turn owned by their members. But when the Fed and its banks generate profits, they turn them over to the Treasury Department via weekly payments. The Fed doesn't make money the way regular banks do — by charging ATM fees and making mortgage and credit card loans. Rather, it collects interest on the securities it acquires, by lending money to banks, and by charging fees for certain services.
It turns out that in the U.S., central banking is a reliably profitable business. The Fed's 2008 annual report (see Chart 11 on page 426) has tables that show profits going back to 1914. Over its lifetime, the Fed has funneled more than $680 billion into the coffers of the Treasury. Until recently, the figures were pretty steady and relatively small — between $20 billion and $30 billion from 2000 to 2008.
Last Bank Standing
But in the last few years, as America's banking system buckled, the Fed expanded its scope of activities. The Fed grew its balance sheet by swapping cash with banks for interest-bearing securities, acquired assets from Bear Stearns and AIG, lent money directly to AIG, and started new programs to guarantee asset-backed securities, like the TALF. In 2009, it kicked off a program to buy $1.25 trillion of mortgage-backed securities.
All the liabilities the central bank assumed essentially have created new streams of interest and fee income. As the 2009 annual report shows (page 187), the Fed in 2008 had about $1 trillion in securities and loans, which paid an average interest rate of 3.66 percent. At the end of 2009, it had $1.8 trillion in securities and loans, paying an average interest rate of 2.99 percent. Despite the lower interest rates, the Fed's collections rose sharply. The Fed also reaped gains in 2009 from the rise in value of the toxic assets it acquired from AIG.
The upshot: thanks to booming profits, the Fed transferred $47.4 billion in income to the Treasury last year, up 50 percent from 2008.
In 2010, responding to a sluggish economy and the poor housing market, the Fed has continued to boost its balance sheet. Last week, the Fed's balance sheet stood at $2.3 trillion, including nearly $1.1 trillion in mortgage-backed securities. The Fed's profits for 2010 are on pace to rise 50 percent from 2009. In the first half of 2010, according to the Fed's most recent quarterly report (see Table 24), the central bank kicked in $34.1 billion into the Treasury's coffers.
The U.S. government's 2010 fiscal year closes on Thursday (fiscal years run from October to September). The books will close with the federal deficit at about $1.3 trillion. But without the Fed's earnings, which could approach $75 billion, the deficit picture would be noticeably worse.

Taliban contacts still at embryonic stage: NATO envoy

WASHINGTON (Reuters) – Some senior Taliban leaders appear to be open to reconciliation with Afghan President Hamid Karzai's government, but contacts are in the embryonic stage and not likely to bear fruit soon, NATO's top civilian in Afghanistan said on Tuesday.

Mark Sedwill, who was visiting Washington to prepare for a NATO summit in Lisbon in November, said Karzai's government had been undertaking a "genuine effort" to reach out to insurgents who were willing to renounce violence, accept the constitution and re-enter Afghan society.

"There are significant leaders there who seem to be weary of the fight and seem to be willing to contemplate a future within the mainstream," Sedwill told reporters at a news conference at the National Press Club.

Sedwill, the former British ambassador to Kabul, said it was hard to determine if the Taliban contacts represented individuals or groups of people who might be willing to abandon the struggle.

But he said it was "unlikely the Taliban as a movement is going to enter into a major political negotiation." He also cautioned against overstating "the speed and prospects of that process completing any time soon."

"My sense is ... essentially we're at the embryonic stage," Sedwill said. "The channels of communication are open. I wouldn't at this stage say that we've reached the point of real negotiation."

General David Petraeus, the top U.S. and NATO commander in Afghanistan and Sedwill's military counterpart, has said there have been contacts between Kabul and very senior members of the Taliban. He, too, indicated the contacts were at an early stage and said it was premature to say whether those Taliban were willing to accept Karzai's terms for pursuing reconciliation.

Sedwill was visiting Washington in preparation for a NATO summit in Lisbon at which leaders of the North Atlantic Treaty Organization are expected to consider the way ahead in Afghanistan.

The meeting will set the stage for the U.S. President Barack Obama's strategy review in December, which is likely to look at the scope and scale of U.S. troop reductions the administration has promised beginning in July.

(Reporting by David Alexander, editing )

Stocks slip as European protests worsen debt fears

NEW YORK (AP) -- Stocks slipped Wednesday as protests against austerity measures in Europe brought new worries about the region's financial system.

The dollar fell further against other currencies on anticipation of more action by the Federal Reserve to push U.S. interest rates down. Gold continued to climb past $1,300.

European markets fell as demonstrators gathered in Brussels, Spain and Ireland to protest austerity measures aimed at preventing another fiscal crisis that required a bailout of Greece earlier this year. The protests raised concerns that countries like Spain will not be able to implement policies required to heal their bloated public finances.

U.S. stocks had swooned this spring as a fiscal crisis in Greece appeared to be spreading to other weak European economies like Portugal and Spain. A relative calm in European markets since then has allowed U.S. stocks to rise sharply.

Wednesday's decline in U.S. stocks marked another pause in a monthlong rally that has made this September one of the strongest for U.S. stocks in history.

With only two trading days left this month, the Dow Jones industrial average is on track for its best September since 1939 with a gain of 8.3 percent so far. It's still up only 4 percent for the year.

Trading was relatively subdued with no major economic reports or corporate earnings due out Wednesday.

The Dow Jones industrial average fell 7.27, or 0.1 percent, to 10,850.87 in midday trading.

The Standard & Poor's 500 index slipped 1.37, or 0.1 percent, to 1,146.33, and the Nasdaq composite index fell 1.40, or 0.1 percent, to 2,378.19.

Rising stocks narrowly outpaced falling ones on the New York Stock Exchange, where volume came to 350 million shares.

Bond prices edged lower. The yield on the 10-year Treasury note edged up to 2.49 percent from 2.47 percent late Tuesday.

There's a growing certainty within the bond market that the Federal Reserve will attempt to spur economic activity through pushing long-term interest rates down further. To do that, the Fed would buy more Treasurys, lifting bond prices and lowering yields.

Gold fell rose $3 to $1,311.30, a day after settling above $1,300 for the first time.

In currencies, the dollar fell to 83.57 yen from 83.93 yen late Tuesday in New York. The euro rose as high as $1.3638 in European trading before settling back to $1.3622.

In Europe, the FTSE 100 fell 0.2 percent, the DAX fell 0.5 percent and the CAC-40 fell 0.7 percent.

Benchmark crude for November delivery fell 14 cents to $76.04 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost 34 cents to settle at $76.18 on Tuesday.

Japan's benchmark Nikkei 225 stock average closed 0.7 percent higher at 9,559.38. A key central bank survey of business confidence at major Japanese manufacturers improved for the sixth straight quarter.

China promises currency flexibility

BEIJING (AP) -- China repeated promises of exchange rate flexibility Wednesday but offered no new measures that might avert a possible vote by the U.S. House of Representatives on currency legislation.

The statement in a central bank report on a quarterly economic meeting reflected currency policy and gave no details of possible changes. It made no mention of demands by some American lawmakers for Beijing to ease currency controls or face possible trade penalties.

Beijing promised a more flexible exchange rate in June when it broke a link between its yuan and the dollar. But the yuan has risen by only about 2 percent since then, fueling demands by American lawmakers for action.

China will continue reforms to "enhance exchange rate flexibility against the backdrop of a recovering global economy," said the report by the People's Bank of China.

The central bank will "further improve the yuan's exchange rate regime based on market supply and demand with reference to a basket of currencies," the report said. It gave no details of possible changes.

Democratic Party leaders say the House will take up a bill this week that would give the U.S. government power to impose sanctions on China or other countries found to be manipulating their currencies to gain trade advantages.

Supporters say the bill would protect U.S. jobs against unfair trade competition at a time of high unemployment. American lawmakers face rising pressure to create jobs ahead of November elections.

Half the yuan's increase against the dollar since June has come this month amid mounting U.S. pressure and threats of possible sanctions.

Critics say the yuan is kept undervalued, giving China's exporters an unfair price advantage and swelling its trade surplus. U.S. manufacturers blame the level of the yuan for the loss of millions of jobs.

Private sector analysts say a rise in the yuan is unlikely to generate U.S. jobs because American factories no longer make the goods produced by China.

Online:

http://www.pbc.gov.cn