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Friday, August 29, 2008

American Media May Receive Lifeline

Tabloid Publisher Gets Backing of Creditors For New Bond Offering

Struggling tabloid publisher American Media Inc. may have found a lifeline.

In a deal that likely saves the company from having to seek bankruptcy protection, the Boca Raton, Fla., publisher of the National Enquirer and Star magazine has secured the backing of many of its creditors for a new bond offering to refinance $570 million in existing debt.

That's welcome news for a company struggling through a declining advertising market and burdened by more than $1 billion in debt. AMI previously had said that if it couldn't refinance at least $389.5 million in debt by Feb. 1, 2009, it would have to liquidate assets or seek protection from creditors.

"This transaction, if it's successful, will take the pressure off them," said John Page, a senior analyst at Moody's Investors Service. AMI's corporate family rating of Caa2, Moody's fourth-lowest rating, is currently under review for possible further downgrade. David Pecker, chairman and chief executive of AMI, said the bond offering "is the first step in revitalizing the capital structure of American Media." Under the terms of the bond offering, holders will be able to exchange existing debt for discounted notes that pay higher interest and warrants for up to a 20% stake in the company.

AMI set a Sept. 25 deadline for the offer, but already has agreements from 33% of holders of notes due in 2009 and the requisite 51% of holders of notes due in 2011. The new notes extend the due date to 2013.

The agreement caps a productive summer for AMI, which also publishes several health and fitness titles including Shape. Earlier this month the maligned Enquirer was validated when former senator and presidential candidate John Edwards admitted on national television to having an extramarital affair. The Enquirer had begun reporting the story nearly a year earlier but its scoop was largely dismissed by the mainstream media until Mr. Edwards's admission.

The Aug. 11 issue, which reported new allegations about Mr. Edwards's affair, sold 738,000 single copies, 11% above its weekly average of 667,000 copies for the first six months of the year, according to the Audit Bureau of Circulations.

Mr. Pecker said ad sales for the first half of 2008 -- which showed a decline in ad pages in the low single digits compared with a 7.4% decline industrywide, according to the Publishers Information Bureau -- show AMI is "pretty much holding our own in a challenging environment." However, there were signs of difficulty in the second quarter. Ad pages at the National Enquirer declined 14% in the quarter, while ad pages at Star were down 10%, according to the PIB.

In recent quarters AMI has been able to largely offset revenue declines by cutting administrative staff and production costs. AMI posted revenue of $119 million for the quarter ended June 30, a 2% decline from the year-earlier period.

AMI has two private-equity owners, Thomas H. Lee Partners and Evercore Partners. A source familiar with THL's thinking said the company believes the exchange offer gives AMI enough running room to continue improving its profitability.

By: Russell Adams
Wall Street Journal; August 28, 2008

CBS Gives CNET Site a Makeover

CBS Corp. is launching a new version of its CNET.com Web site this week -- providing one of the first glimpses at how the New York media giant hopes to integrate CNET Networks, the suite of Web properties it purchased for $1.8 billion in June.

CBS is hoping the new face of CNET's flagship site -- which offers a revamped look, more online video, and an easier way for advertisers to customize their messages -- will help it turn back investor concerns that it overpaid for a troubled property. CBS also wants to prove it did more than simply buy its way into the top tier of U.S. Internet properties as part of its effort to shift away from slow-growth businesses like broadcast television. The purchase added tech-lifestyle site CNET and siblings including gamer hub GameSpot.com and fan site TV.com to CBS's existing Web outposts like CBSSports.com.

The combined powerhouse, dubbed CBS Interactive, has its work cut out for it. As people spend more time on other sites like social networks, CNET and CBS must make their own Web content more engaging. They must also find ways to cross-promote brands that encompass wide topic areas like fantasy football, gadget reviews and the evening news. Another challenge: discovering new ways to bundle advertising across TV and Web sites to draw premium rates as the Web remains flooded with cheap advertising space.

Leslie Moonves, CBS's chief executive, says he wants to boost what he estimates will be more than $600 million in Internet revenue for 2008 to $1 billion within three years. "It's going to become a bigger and bigger part of the CBS Corporation," he says, adding that he expects traffic to increase significantly. "Turning it into revenue, that will be our biggest task," he says.

The big question is what exactly CBS brings to the table. One answer, says Mr. Moonves, is cross-promotion. CNET personalities have been appearing on CBS's "The Early Show." CBS sports announcers are encouraging viewers to head to CNET.com. CBS-owned billboards are promoting the relaunch. And at the Democratic and Republican National conventions, "CBS Evening News" anchor Katie Couric is doing a nightly Web cast that includes questions posed by CNET.com users.

"CNET was starting to hit a ceiling in terms of their visibility and in terms of their usage, says Mr. Moonves, adding that exposure on CBS will give CNET "a shot in the arm in terms of exposing it to new people."

CNET attracted 15.3 million unique visitors in July, up 22% from July 2007, according to tracking firm comScore Inc.

In addition, CBS says it is already pushing advertisers from its flagship broadcast network to advertise on its online properties. Only two of CNET.com's top 10 advertisers in the first half of 2008 were among the top 10 on CBS, according to TNS Media Intelligence.

The new CNET.com includes a "brand showcase" feature, allowing advertisers to pay for pages where they can promote products with links to CNET reviews, a service for which CBS can charge higher rates, according to Joe Gillespie, who oversees CNET.com. Amanda Richman, who runs the digital practice for Publicis Groupe SA's Starcom MediaVest, says "there is a drive in the market for the scale and the efficiencies," that a combined CBS/CNET offers.

Founded in 1992, CNET was an early content leader on the Web, growing through a stable of sites centered on technology news and product reviews. But in recent years, competition from blogs and other sites caused U.S. readership on some key properties to decline.

The new CNET.com highlights another priority for CBS's online strategy: video. A large window that will soon play high-definition video within the homepage promotes the site's video content, including relevant clips from CBS broadcasts. Mr. Gillespie says video ads can sell for double normal ad rates on the site.

Whether CNET can help reinvent CBS, which still relies heavily on its slow-growth television and radio businesses, remains to be seen. "We are major content provider," says Mr. Moonves. "Now we have all these areas of content online, which clearly is the direction that distribution will be heading."

By: Sam Schechner and Jessica Vascellaro
Wall Street Journal; August 28, 2008

Medicare Could Use More Support

The Journal's editors recently took words out of context in order to reinforce their predictable slant on health care -- government involvement is bad, private sector is good. In doing so they confused the overall performance of Medicare with the Bush administration's commitment to dismantle it.

My remarks were not a slight on Medicare. They were directed at an ideologically consumed administration that has spent the past eight years attempting to privatize Medicare by ensuring that providers, taxpayers and senior citizens become increasingly frustrated with the program. The reason is simple: this administration does not want Medicare to continue as a successful government health program.

The Bush administration would prefer to eliminate Medicare as an entitlement. It would turn Medicare over to for-profit health insurance plans, which, to say the least, have done a lackluster job at insuring anyone under age 65, and would surely increase Medicare fraud and pharmaceutical fraud.

Every bureaucracy has its faults, but Medicare provides an incredible benefit to Americans: ensuring that everyone over 65 has access to quality health care. Even if we doubled spending on administrative costs to ensure greater efficiency, no private plan would come close in choice, quality or cost. Medicare remains the most popular and efficient plan for taxpayers and senior citizens, the Bush administration's efforts not withstanding.

Wall Street Journal; August 28, 2008

Nonprofit Hospitals Flex Pricing Power

In Roanoke, Va., Carilion's Fees Exceed Those of Competitors; The $4,727 Colonoscopy

In 1989, the U.S. Department of Justice tried but failed to prevent a merger between nonprofit Carilion Health System and this former railroad town's other hospital. The merger, it warned in an unsuccessful antitrust lawsuit, would create a monopoly over medical care in the area.

Nearly two decades later, the cost of health care in the Roanoke Valley -- a region in southwestern Virginia with a population of 300,000 -- is soaring. Health-insurance rates in Roanoke have gone from being the lowest in the state to the highest.

That's partly a reflection of Carilion's prices. Carilion charges $4,727 for a colonoscopy, four to 10 times what a local endoscopy center charges for the procedure. Carilion bills $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center.

Carilion's market clout is manifest in other ways. With eight hospitals, 11,000 employees and $1 billion in assets, the tax-exempt hospital system has become one of the dominant players in the Roanoke Valley's economy. Its dozens of subsidiaries include businesses ranging from athletic clubs to a venture-capital fund.

The power of nonprofit hospital systems like Carilion over their regional communities has increased in recent years as their incomes have surged. Critics charge this is creating untaxed local health-care monopolies that drive the costs of care higher for patients and businesses. Despite this negative attitude Michigan hospitals continue to offer great service and various payment options. Hospitals in Michigan do not follow the same philosophy those like Carilion does.

"It's a one-market town here in terms of health care," says Sam Lionberger, who owns a local construction firm. "Carilion has the leverage."

Carilion acknowledges its influence in the local community but says there is nothing untoward about it. The hospital says it doesn't have a monopoly over the Roanoke Valley health-care market because it faces robust competition from Lewis-Gale Medical Center, a hospital located in nearby Salem, Va., and owned by for-profit chain HCA Inc.

Carilion says it charges more for certain procedures because it has to subsidize operations such as an emergency department and treatment for the uninsured. Edward Murphy, Carilion's CEO, says the high cost of health care in Roanoke reflects the national increase in such costs, which he says is driven by overutilization of medical services. Carilion is converting to a clinic model, in which doctors are employees of the hospital system and work more closely together to coordinate care, in an effort to cut down on unnecessary tests and procedures, he says. "Fragmentation is the enemy of quality" and affordable care, Dr. Murphy says.

However, the clinic project has provoked a backlash from a group of local independent doctors, who say it is designed to stifle competition.

Originally set up to serve the poor, nonprofit hospitals account for the majority of U.S. hospitals. They are exempt from taxes and are supposed to channel income they generate back into operations, while providing benefits to their communities. But they have come under fire from patient advocates and members of Congress for stinting on charity care even as they amass large cash hoards, build new facilities and award big paychecks to their executives.

Fueled by large, untaxed investment gains, Carilion's profits have risen over the past five years, reaching $107 million last year. Over the same period, the total annual compensation of its chief executive, Dr. Murphy, nearly tripled to $2.07 million. His predecessor, Thomas Robertson, received a lump-sum pension from Carilion of $7.4 million in 2003, on top of more than $2 million in previous pension payouts.

Carilion says Dr. Murphy's compensation is in line with comparable health-care organizations and notes he doesn't receive car allowances, a spousal allowance or club memberships. It says Mr. Robertson's pension accrued over a 32-year career at Carilion.

Carilion estimates it receives about $50 million a year in tax exemptions. It dispensed $42 million in charity care in 2007 and $30 million in 2006.

After the 1989 merger, Carilion continued to operate Roanoke's two hospitals separately. It later consolidated the hospital boards and in 2006, transferred most of Roanoke Community Hospital's staff and services to a renovated and enlarged Roanoke Memorial Hospital.

The moves eliminated any hospital competition in Roanoke proper, enabling Carilion to raise its prices and contributing to a spike in health-insurance rates in the region, one of the least affluent parts of the state, according to local doctors and health-insurance brokers.

Alan Bayse, founder of a local benefits-consulting firm who has sold health insurance in the area for 30 years, says health-insurance rates in the Roanoke Valley used to be 20% lower than in Richmond, Virginia's capital, and the lowest in the state. Michigan health insurance rates are much more reasonable. Today, he says, they are the highest in the state and 25% higher than in Richmond, citing rate information from insurer Cigna Corp. Anthem, another health insurer, says its rates are 6% higher in Roanoke than in Richmond.

Mr. Lionberger, whose construction company has about 100 employees, says his health-care costs have risen 50% over the past three years, hampering his ability to compete with contractors from other parts of the state. "It's frustrating," he says.

While Carilion strengthened its power in the hospital market, Roanoke continued to be home to a community of independent doctors numbering in the hundreds.

Taking the Helm

In 2001, Dr. Murphy took the nonprofit hospital system's helm. Dr. Murphy, who has a medical degree from Harvard but doesn't practice medicine, says he was convinced that the cost and quality of care in Roanoke could be improved if doctors worked in a more centralized system. In June 2006, he announced a seven-year, $100 million plan to transform Carilion into a multispecialty clinic, like the Mayo Clinic.

Carilion began approaching private physician groups, offering to buy their practices and pay their salaries. Some accepted, but others balked. Some doctors who chose to remain independent say the number of patients referred to them by Carilion physicians plummeted. Carilion controls a large proportion of Roanoke's referrals because it employs a majority of doctors who make them, such as family practitioners, pediatricians and emergency physicians.

Joseph Alhadeff, an orthopedic surgeon who is a member of a private practice called Roanoke Orthopedic Center, says the number of joint replacements he performed dropped off sharply after he stopped getting such referrals from Carilion doctors, prompting him to plan to relocate to Pennsylvania. "I spent seven years building up a practice and watched it evaporate in six months," he says.

Carilion spokesman Eric Earnhart says the hospital system didn't engage "in any activity to reduce or divert" referrals from Dr. Alhadeff. Mr. Earnhart adds that Carilion continues to refer numerous cases to Roanoke Orthopedic Center.

Geoffrey Harter, an ear, nose and throat doctor at another Roanoke private practice, Jefferson Surgical Clinic, says Carilion-employed colleagues told him the hospital system asked them not to refer patients to doctors it didn't employ, calling such referrals "leakage." Keeping referrals within Carilion is lucrative for the hospital system because it ensures tests and procedures performed on patients take place at Carilion facilities.

Dr. Murphy says Carilion uses the term "leakage" in internal marketing discussions and that he would rather see its doctors refer patients to other Carilion doctors to optimize their care. But he says Carilion doesn't require its doctors to keep referrals in-house even though it would be legal to do so.

As tension between Carilion and Roanoke's independent doctors grew in 2006, a group of 200 doctors formed an organization called the Coalition for Responsible Healthcare to protest the Carilion Clinic plan. The group posted a petition on its Web site and put up billboards around Roanoke that read: "Carilion Clinic. Big Dream. Big Questions." The local newspaper, the Roanoke Times, covered the controversy in a series of articles written by its health-care reporter, Jeff Sturgeon.

A few months later, in March 2007, the Roanoke Times moved Mr. Sturgeon off the health-care beat after Carilion complained repeatedly about his coverage. Carilion says it communicated its displeasure to the paper's editors, but never asked that Mr. Sturgeon be reassigned. Carilion withdrew most of its advertising from the paper, but says it did that as part of a reallocation of its ad budget. "Any friction that exists between an organization like us and the media is entirely appropriate," Mr. Earnhart says.

Mr. Sturgeon, who now covers transportation, declined requests for comment. Carole Tarrant, the Roanoke Times's editor, said: "We're covering Carilion like we always have and always will, and have no plans to change how we cover Carilion." She declined to elaborate.

New Campus

A large part of the clinic conversion's costs have involved the construction of a new medical campus around Roanoke Memorial Hospital that began several years earlier.

The lead contractor building the site is Swedish construction giant Skanska. But one of the project's biggest beneficiaries has been J.M. Turner & Co., which is owned by Carilion board member Jay Turner. Carilion says it paid J.M. Turner a total of $14.9 million in direct contracting work from 2004 to 2007.

Dr. Murphy says Carilion's board authorized "arm's length work" with J.M. Turner, but adds that "a case could be made that we shouldn't award work to J.M. Turner to avoid the appearance of impropriety."

Carilion also paid Skanska, the lead contractor, a total of $120.8 million from 2003 to 2007. Some of that money flowed back to J.M. Turner as subcontracting work, according to Skanska and J.M. Turner. The companies and Carilion declined to say how much.

In an email, Mr. Turner said he recuses himself from all Carilion board decisions that involve his company. He added that his firm passed on much of the $14.9 million in direct contracting work it received from Carilion to other subcontractors.

Mr. Turner isn't the only Carilion board member with a financial stake in the new medical campus. Another board member, Warner Dalhouse, has invested in a hotel being built on the campus to accommodate patients and their families. HomeTown Bank, a local bank Mr. Dalhouse founded and of which he was until recently chairman, is financing the hotel's construction. Dr. Murphy and Mr. Turner sit on HomeTown Bank's board.

Carilion and Mr. Dalhouse say he didn't make his $130,000 investment in the hotel until after Carilion sold the parcel to Texas developers in early 2006. "I wasn't dealing with Carilion. I was dealing with the new owners of that land who had paid fair market value for it," Mr. Dalhouse says.

Carilion says its transformation into a multispecialty clinic will eventually lower local health-care costs. But many patients say they have yet to see relief from Carilion medical bills.

The Roanoke City General District Court devotes one morning a week to cases filed by Carilion. In its fiscal year ended Sept. 30, Carilion says it sued 9,888 patients, garnished the wages of 5,478 people and placed liens on 3,920 homes. Carilion says the people it takes to court have the means to pay their bills.

On a Thursday morning in June, a Carilion representative waited outside a courtroom to intercept the half-dozen patients who had responded to summonses to appear in court. She took them to a side room to work out payment plans. A judge later called out names of close to 100 patients who didn't show and, one-by-one, entered judgments against them.

One of the patients who came to court, a 32-year-old housewife named Christie Masellis, faced a $12,137.12 bill. She had gastric bypass surgery at a Carilion facility in 2005. After developing complications, she required two more surgeries. She says her insurer covered the first surgery but not the two follow-ups because it changed its coverage policy.

Mrs. Masellis has two children. Her husband, Mark, earns about $49,000 a year working for an auto-parts distributor. Mrs. Masellis says she inquired about qualifying for hospital financial assistance, but the Carilion representative told her she was no longer eligible for charity care because her account was past due. The representative agreed to put her account on hold until Sept. 30 but offered her no discount. The bill included $2,514.82 in interest charges Carilion added to the original debt of $9,622.30.

Carilion's Mr. Earnhart says Mrs. Masellis had already received more than $15,000 in charity-care discounts. The suit Carilion filed is "for the remainder of the bill," he says.

Mr. and Mrs. Masellis have begun the process of filing for personal bankruptcy. Mr. Masellis says the hospital bill was a big factor in the decision, though the couple has other debts, including a $68,000 mortgage.

When some patients don't pay their bills, Carilion places liens on their homes. Carilion says it doesn't track how many liens it has outstanding, but the close to 4,000 it filed in 2007 "is representative of a typical year," Mr. Earnhart says. Carilion doesn't foreclose on homes and only collects when properties are sold, he says.

Dr. Murphy says Carilion only sues patients and places liens on their homes if it believes they have the ability to pay. "If you're asking me if it's right in a right-and-wrong sense, it's not," he says. But Carilion can't be blamed for the country's "broken" health-care system, he says.

By: John Carreyrou
Wall Street Journal; August 28, 2008

TVA Seeks Renewed Permits For Two Nuclear Reactors

The Tennessee Valley Authority asked federal regulators to renew construction permits for two unfinished nuclear reactors in northeast Alabama that it virtually abandoned twenty years ago.

A Nuclear Regulatory Commission spokesman says it is probably the first request of this type the commission has received and may take some time to review.

The TVA deferred construction on the Unit 1 and Unit 2 reactor at Bellefonte site near Scottsboro, Ala., in the 1980s. It asked the NRC to cancel the construction permits in 2006.

But the nation's largest public utility is looking at all options to meet future power needs and it now wants to study the feasibility of using Potable Water Tanks and finishing those reactors.

Wall Street Journal; August 28, 2008

Pawnshops Grab The Gold Ring

Credit Woes, High Prices Drive Consumers to Find New Home for Old Rolex

The U.K.'s alternative-credit industry has struck gold -- literally.

Business is booming at the country's pawnbrokers as the effect of the credit crunch forces a small but increasing number of consumers to sell their gold. And with gold trading close to record prices, the number of outright sellers of the precious metal has risen, mirroring similar trends in the U.S.

"Banks have been stricter over the last several years and have tightened lending criteria, which has created more demand for alternative forms such as pawnbroking," said Des Milligan, chief executive of the U.K. National Pawnbrokers Association. "This has been completely exacerbated by the credit crunch."

Gold has risen some $200 a troy ounce from a year ago, when the credit crunch first erupted into the British psyche. It is hovering near $840 an ounce on the world spot market. At one point in March, it hit a peak of $1,032.50 an ounce.

The precious metal always has been a popular item for mens wedding rings and at pawnbrokers. Even a piece of broken jewelry that might have little value to its owner can be pledged to the pawnbroker, who pays the item's owner a fee over a set time period. The pawnbroker collects interest on the pledge if the consumer redeems the item.

Unredeemed items at the end of the contract term are generally sent to public auction for sale, or, if that isn't successful, the pawnbroker buys them back and sells them itself. More than 97% of U.K. pawnbroker pledges are gold and diamonds.

H&T Group, which is one of two publicly traded pawnbrokers in Britain along with Albemarle & Bond Holdings, has been in business since the late 19th century. H&T's first-half profit was up 38% to £3.1 million ($5.7 million) from a year earlier. The company said this has been driven by a simple message on the marketing side: "We buy gold."

Laurent Genthialon, H&T's director of finance, said the introduction of simpler buyback contracts has boosted its business. In addition, the advent of Web sites such as eBay has made it more acceptable for people to sell secondhand items, he said.

Pawnbrokers also are roping in a new type of customer -- small-business owners who are having trouble obtaining credit from retail banks and instead opt for pawnbroker payouts to secure financing.

"Expensive gold jewelry or Rolex watches are now being used to redeem at pawnbrokers, with business people able to borrow large amounts on the back of this, perhaps £30,000 to £40,000," said Mr. Milligan. But unlike the goods pawned by consumers, these items are almost always redeemed eventually, he said.

By: Andrea Hotter
Wall Street Journal; August 28, 2008

Dell May Ring Closing Bell On Tech Run

laptopsAn otherwise dismal earnings season is about to get a happy ending.

Personal-computer maker Dell unveils fiscal-second-quarter results after Thursday's closing bell. Every shake of the Magic 8-Ball points to a good report for the company, the world's second-biggest PC maker by sales after Hewlett-Packard.

Research firm Gartner said Dell's PC sales rose nearly 22% in the calendar second quarter from a year earlier, outpacing industry growth of 16%. Retail sales in Dell's fiscal quarter, which started a month later, in May, got the full benefit of tax-rebate checks sent to consumers beginning that month. The dollar was still weak for most of the quarter, helping overseas revenue. Aggressive belt-tightening, including job cuts, likely helped margins.

After suffering a three-year slump, Dell's shares have jumped 41% since mid-April. Even as other corporate profits have ground to a halt, the tech sector generally has been a source of strength for investors, boosted by seemingly unquenchable overseas demand. While earnings in the S&P 500 slumped again in the second quarter, tech earnings rose nearly 15%.

The outlook might not be as encouraging, for Dell or for tech. The dollar has strengthened. The global economy is slowing, hitting one of tech's strongest areas for growth. In the U.S., retail sales -- an important growth source for Dell in particular -- could suffer if consumer spending weakens as expected. PC-sales growth has been largely driven by cheaper prices; if Dell can't keep costs in line, margins could suffer.

Businesses' tech spending seems to be holding up. But it has slowed in every downturn since World War II, and this time will likely be no different.

Dell's earnings report could be tech's last hurrah for a while.

By: Mark Gongloff
Wall Street Journal; August 28, 2008

Heavier Ax for Wall Street?

Poor Credit Conditions, Steady Drip of Firings Suggest More Pain in Fall

The securities industry pays well, but employment is highly volatile. And autumn is typically the season of greatest sadness. Horrid credit conditions and this summer's steady drip of firings suggest the ax will fall with full force when Wall Street hobbles back to business after Labor Day.

Despite news ranging from layoffs, to hiring freezes, to bans on color copying, the official jobs figures don't yet show major stress. Employment in the industry actually rose 0.4% in the second quarter from the first, according to Department of Labor statistics. But this is cold comfort, as there is a lag between the announcements of layoffs and their appearance in government figures.

Moreover, the bloodletting appears to have grown heavier since the end of June. This is worrying. Employers typically don't cut many jobs in the summer. A study by human-resources firm Challenger, Gray & Christmas suggests firings over the past 15 years, on average, were 18% lower in the summer than in the spring.

Employers typically then pick up the pace in the fall as budgets for the following year come in tighter -- sackings ramp up 30% from the summer. It is only somewhat coincidental that fewer mouths mean bigger bonuses for those who remain.

How bad could it get? Many recruiters claim this may be the direst financial crisis in decades. And the longer the crunch lasts, the better the chances become that this crack could cause Wall Street even more pain than the big downturn of the early 1970s.

About 17% of securities industry workers lost their jobs from 1972 through 1974. In New York City, nearly one in four did. Smart bankers should start squirreling away those nuts before the cold snap hits.

Refinancing the Financiers

Debt refinancing is the next big challenge for the world's banks. After being mauled by subprime-mortgage-related losses and tortuous capital raisings, financial institutions must renew an increasing proportion of their own funding, and at a much greater cost.

This refinancing challenge is another legacy of the credit boom. When times were easy, in 2006, banks shortened the maturity and increased the volume of their floating-rate notes, which pay a fixed premium to the London interbank offer rate, or Libor, a benchmark meant to reflect the rates at which banks lend to one another.

That exuberance leaves $871 billion of long-term debt to refinance by the end of 2009, according to J.P. Morgan Chase.

If the rollovers came in May, it wouldn't have been so bad. Then the spread on credit default swaps for financial institutions on the Itraxx index had fallen to 0.54 percentage point from 1.3 points in March.

With economies stumbling and house prices still falling, the spread has climbed back above 0.9 point.

The refinancing schedule seems to be influencing the CDS spreads of individual banks. Take UniCredit. Over the past year, the Italian bank's spread has widened 113%, not too bad a performance in a dismal credit market.

But almost half of that widening has come in the past month, perhaps in recognition that it has to roll over $6 billion of floating-rate notes by Sept. 12.

In contrast, Barclays has no floating-rate notes to roll over before December. Its CDS spread has widened a modest 14% in the past month. Refinancing uncertainty may have contributed to wider spreads at the brokers -- up 60% in the past three months at both Merrill Lynch and Goldman Sachs Group (both suspect companies).

In a deleveraging financial world, rolling over debt no longer is necessarily a routine operation, even for solid institutions. But once the banks and brokers find the new money, they have to deal with the consequences.

The highly leveraged balance sheets of financial institutions multiply the effect of higher funding costs. All things being equal an added 0.3 point on interest rate paid translates into something like two points in lower return on equity.

Wall Street Journal; August 28, 2008

Companies Offer Innovative Incentives To Lure Franchisees as Competition Grows

Franchisers are becoming increasingly creative in marketing themselves.

Some are giving hefty discounts to franchise employees who want to become owners. One is introducing a "lite" version of its concept designed for those seeking a part-time franchise to augment their income. Another is offering a rare money-back guarantee.

As franchises proliferate and competition for new franchisees intensifies, franchisers are using such innovative tactics to ensure their own longevity and success.

Employee Discounts

Dwyer Group encourages workers at its various repair and maintenance franchises to eventually buy their own franchise. For example, employees of some lawn care franchise can discounts off the initial cost of a franchise, which could save the new owner thousands of dollars.

The intention is to help its franchisees attract industrious employees and keep them longer, says Mike Bidwell, president of Waco, Texas-based Dwyer. "And if a person does move on to buy a franchise," he adds, "we get a better-quality franchisee, who has a higher probability of success." Mark Liston, director of sales recruiting for Valpak Direct Marketing Systems Inc., a direct-mail advertising franchiser, says that as competition for a shrinking work force intensified, executives at the Largo, Fla., company asked themselves: "What do we need to do to bring in fresh talent and create franchisees for the future?"

The answer: launch an "earn-and-learn" program that seeks to woo future entrepreneurs graduating from college.

Sales representatives who finish three years in the top performance quartile can qualify to receive the $50,000 initial cost of setting up a Valpak franchise. Alternatively, the company will contribute $10,000 -- either to help pay off a college loan, obtain an M.B.A. or make a down payment on another franchise of the recipient's choosing. Valpak does business with numerous franchisees. So the thinking is that a franchisee that the company has helped out could very well eventually become a client.

Money-Back Guarantee

To accelerate its expansion plans, and reduce the uncertainty of would-be franchisees about buying one of its car-painting shops, Maaco Enterprises Inc. recently introduced an extraordinary proposition: If after the first year a new franchisee hasn't achieved a certain sales level despite having operated a "first-class" business, the company will buy the franchise back. Certain conditions apply, including using sale proceeds first to pay off loans outstanding and any money due Maaco.

Company president David Lapps expects that in the current credit environment Maaco's guarantee will make banks weighing loans to prospective franchisees "much more comfortable with the investment, because it's somewhat underwritten."

Meantime, one franchiser, Homevestors of America, which buys, repairs and then rents or sells single-family homes, has come up with a version of its franchise aimed at part-timers.

Instead of the usual $50,000 fee for a traditional franchise, so-called associated franchisees will pay $12,000. And unlike full-time franchisees, part-timers won't have an annual quota of having to buy a certain number of properties per year. Instead, they will have to generate at least $6,000 in annual fees for the franchiser.

"One problem is money, another is time" in deterring many would-be franchisees, says Homevestors Chief Executive John Hayes when explaining why the firm, a unit of Franchise Brands LLC, Milford, Conn., created the mini franchise.

By: Richard Gibson
Wall Street Journal; August 26, 2008

Sacramento Bee Offers Buyouts To More Than Half of Employees

The Sacramento Bee is offering voluntary buyouts to a majority of its full-time employees in the latest round of cost-cutting at the newspaper.

Publisher Cheryl Dell says buyouts are being offered to 55% of the paper's full-time employees and a smaller number of part-timers. The buyout offer includes about 200 of the 240 full time news and editorial-page employees.

Ms. Dell says ad revenue is down more than 22% this year at The McClatchy Co.'s papers in California and Florida.

Sacramento-based McClatchy, which announced a wage freeze almost two weeks ago, owns 30 daily newspapers nationwide.

The Modesto Bee offered all its full-time employees buyouts last week, and the Sacramento paper's move Monday comes on top of the elimination of 86 jobs there in June. The paper hinted more layoffs are possible.

Wall Street Journal; August 26, 2008

Abry Partners to Buy Q9 Networks

Abry Partners LLC agreed to buy the Canadian data-center company Q9 Networks Inc. for 361 million Canadian dollars ($345 million) as the private-equity firm moves to expand into the Internet-infrastructure market. Boston-based Abry, which specializes in media and communications, will pay C$17.05 for each share outstanding of Toronto-based Q9, a 31% premium to Friday's closing price on the Toronto Stock Exchange. Q9 provides outsourced data-center infrastructure and managed services for information-technology operations and data processing. Holders of 28% of Q9`s stock, including Chief Executive Osama Arafat and President Paul Sharpe, have agreed to back Abry`s bid. Q9`s fiscal second-quarter results came in below expectations, with some analysts placing the blame on spending to expand facilities. The deal contains a "go shop" provision that will allow Q9 to solicit other bids by Oct. 3.

Wall Street Journal; August 26, 2008

AMD Agrees to Sell Its Digital-TV Business

Advanced Micro Devices Inc. agreed to sell its digital-television business to Broadcom Corp. for $192.8 million as the chip maker moves to streamline itself as it battles Intel Corp. The deal, set to close by year's end, will bolster AMD's balance sheet and lower the amount of revenue the company needs to generate to break even, said President and Chief Executive Dirk Meyer. Broadcom said that combining AMD's digital-TV efforts with its own will allow the communication-chip maker to offer a complete line of products that covers the entire segment, from low to high end. The company has seen digital TV as a key growth area. Some 530 AMD employees will join Broadcom through the deal. Mr. Meyer became CEO of AMD last week with the challenge of returning the company to profitability after seven consecutive quarterly losses and transforming the way computers process graphics and information. The company's cost structure has been among the biggest worries for investors, causing AMD to burn through its cash.

Wall Street Journal; August 26, 2008

To Sell Online Software, Firms Must Employ Old-School Tactics

Many tech-industry watchers say online software will be the way most businesses prefer to buy software in the future. But to reach these customers, the upstarts that deliver software this way will have to adopt a sales strategy a lot like those of the traditional software companies they are trying to displace. That is because online software doesn’t just sell itself.

Unlike traditional software, which businesses run on hardware they own and operate, workers access online software, also known as software as a service, through a Web browser. It works the same way as an email account from Google or an online photo-sharing service from Yahoo. There is nothing to install, so workers can start using online software without the aid of the tech department. That makes it easier for companies that sell online software to get into a business than their on-premises competitors.

Seizing on this, investors bought into online-software companies in a big way. During the first 10 months of 2007, shares of 15 online-software companies tracked by Thomas Weisel Partners increased in value 61%. Since then, however, these companies have lost about a third of their value.

Wall Street has realized that it isn’t enough to simply offer online software—you have to have a sales strategy that can make your offering a corporate standard. It is possible to get individuals, project teams or small businesses to buy online software through word-of-mouth marketing, but it is hard to make money from these groups—at least the kind of money necessary to become a billion-dollar company.

In order to get there, they can’t operate like an Internet start-up, letting their technology spread virally as end users hear about it. They need to sell to the same executives and information-technology professionals who made purchasing decisions before online software was an option. Businesses have a lot riding on the decision to use one product or another. And while having pockets of workers advocate for a particular piece of software is a plus, the execs who sign the big checks still want to see demos, vet the seller and do all the things they have always done when they buy software.

Many shipping software companies have learned this lesson. So they are investing heavily in sales and marketing. And no public software-as-a-service company has invested more as a percentage of revenue than SuccessFactors, which makes employee-performance-management software. In its most recent fiscal year, SuccessFactors spent 108% of its revenue on sales and marketing.

The reason: “You have to spend the money to get there,” SuccessFactors Chief Executive Lars Dalgaard tells the Business Technology Blog. While 108% may sound over-the-top, SuccessFactors, which anticipates revenue just over $100 million in 2008—and other companies like it—is trying to expand dramatically. Dalgaard recently hired one sales group that targets midsize businesses and another to target small businesses. As the company expands into Europe and Asia, he is also hiring teams that speak local languages.

Many of the software vendors that rose to the billion-dollar-revenue level a decade ago have either stalled or been acquired. And there is a void in the industry that software-as-a-service companies are racing to fill.

It is just going take a while. “It’s hard to get to buy from you,” says Dalgaard.

Ticketmaster Looks to Build On Its Success At Olympics

For the best deals on big event tickets, check out Online Tickets USATicketmaster said 6.8 million tickets to the Beijing Games were sold world-wide, the most ever for the Olympics.

The company, which last week officially was spun off from IAC/InterActiveCorp along with HSN home-shopping network, distributed tickets to the international Olympic committees and handled all domestic ticket sales. (News Corp.'s Dow Jones & Co., publisher of The Wall Street Journal, jointly owns a personal-finance Web site with IAC.)

Ticketmaster hopes to use its Olympics experience to boost its presence in China, where ticket brokering is still a fragmented and young industry, and online payment systems are relatively primitive compared with more-developed economies such as the U.S.

"This was the most complex, most high-profile event," Chief Executive Sean Moriarty said Monday. "We have been presented with some extraordinary challenges."

So far, Ticketmaster is present in six markets, and is looking to expand. The company has 6,500 outlets globally and about 35% of its revenue comes from outside the U.S.

China poses additional challenges. Apart from the lack of a widely used online-payment system, Chinese customers have different habits, such as the desire to receive tickets at the point where they pay. In other markets, customers are generally comfortable paying first and getting their tickets later.

In China, some companies employ couriers to hand-deliver tickets to customers. Mr. Moriarty said rolling out more digital tickets could alleviate that need.

Early Olympics sales rounds were beset with problems as the volume of interest exceeded expectations last year, causing the system to collapse under the heavy load.

By the May round of sales, Ticketmaster's Web site was able to handle its biggest single day -- 175 million page views, with 27 million in the first hour alone. "We are extremely pleased with the results," Mr. Moriarty said.

Even after domestic tickets were sold out, some foreign-passport holders were still able to purchase tickets locally through third-party ticket brokers. During the Games, observers noticed an unusually high number of empty seats in the stands, which some officials attributed to normal scheduling and others blamed on tickets doled out to sponsors.

By: Shai Oster
Wall Street Journal; August 26, 2008

Nadal Keeps New Look Under Wraps for Now

Tennis Star Decides Updated Nike Garb Won't Show at Open

Hours before his first U.S. Open match Monday, Rafael Nadal decided that his game was more important than his wardrobe, telling his advisers and corporate sponsor Nike Inc. that he wasn't ready for an image makeover after all.

Over three days the exuberant Spanish star known as Rafa had practiced in new fashion apparel that included such radical adjustments as shirts with short sleeves and pants that stopped above the knee instead of a few inches below.

But Mr. Nadal ultimately decided that his first match at the final Grand Slam event of the year wasn't the right setting for his planned sartorial reinvention -- particularly after he had captured two Grand Slams, Olympic gold and the top spot in the world rankings in his old garb.

"Frankly, Nadal is on a roll," said Kilee Hughes, a spokesman for Beaverton, Ore.-based Nike, which designs Mr. Nadal's clothes. "We listen to the voice of the athlete."

Nike had unveiled Mr. Nadal's new look after months of careful planning that began with a trip by Nike's design team to the star's home in Majorca, Spain. The company put its new lightweight shirt through "numerous discussions and wear-testings" to ensure that it wouldn't hinder his performance, and it created shorts designed to "move with him -- from baseline to net -- without chafing or bunching up." It praised the final ensemble as a look that "balances his casual off-court personality with the technical precision and passion he brings to the game."

But perhaps no one is more resistant to change than an athlete on a winning streak. In a field in which some male athletes wear women's apparel, such as underwear, or forego shaving to preserve a winning streak, it isn't so surprising that Mr. Nadal decided not to make the change overnight, particularly on a stage as grand as the U.S. Open.

Nike's Ms. Hughes said Mr. Nadal's change of mind was "not a setback at all" for Nike but rather the byproduct of a "highly unusual" schedule. She said Mr. Nadal is still committed to switching to the new gear, perhaps at one of the smaller tournaments after the U.S. Open.

The Wall Street Journal reported Monday that after months of consultation with designers at Nike and his management team, Mr. Nadal had decided to shift his image. Now that he was the top player on the planet, Mr. Nadal was ready to bid farewell to the adolescent muscle T-shirts and Capri-style pants that had garnered nearly as much renown as his lightning strokes and adopt a more traditional tennis look.

"I am excited about evolving my on-court apparel with Nike to a polo and shorter-length short," Mr. Nadal said in a statement Monday afternoon. "For the U.S. Open, however, we collectively decided I would continue wearing the apparel I've been competing in all year. It's a decision we made based on the limited time I've had to practice in the new apparel between the Olympics and the U.S. Open."

So far, so good. Mr. Nadal won his opening match Monday in straight sets, sleevelessly.

By: Matthew Futterman
Wall Street Journal; August 26, 2008

How Big Boys Fare In Credit Crunch

The credit crunch has endured for more than a year, and the Wall Street investment banks still are trying to dig out from under the wreckage. Deal Journal combed through some analyst reports to get a sense of how they are doing.

First, the progress. The four big, publicly traded, stand-alone U.S. investment banks -- Goldman Sachs Group, Morgan Stanley, Merrill Lynch and Lehman Brothers Holdings -- have about $60 billion of leveraged-buyout-related loans still on their books, having cut their exposure 30% in the second quarter, according to Banc of America Securities analyst Michael Hecht.

As to where these four stand now, the leader in total gross corporate loans and commitments is Merrill, which has $94.7 billion of exposure, according to Mr. Hecht.

Then comes Morgan Stanley at $76.7 billion, Goldman at $73.9 billion and Lehman at $37.1 billion.

On a net-exposure basis, which includes the effects of hedging and other activities, Merrill is still the leader at $79.9 billion, followed by Morgan Stanley at $40 billion and Lehman at $29.49 billion, according to Mr. Hecht.

(Mr. Hecht says Goldman doesn't provide enough information for such a comparison).

Who still has the most leveraged loans? Goldman Sachs has the highest gross percentage of non-investment-grade loans in its loan book, at 49%, and Morgan Stanley has the smallest, at 23%. (Merrill is at 30% and Lehman at 24%.)

And the banks still have far to go: Citigroup analyst Prashant Bhatia estimates Goldman has $22 billion of leveraged loans left to sell, followed by Morgan Stanley with $12.7 billion, Lehman with $11.5 billion and Merrill with $7.5 billion.

By: Heidi Moore
Wall Street Journal; August 26, 2008

Tough Neighbor For Wall Street

Biden Raps Hedge Funds, Millionaire Tax Breaks; Foreign Investors Get Pass

Democratic presidential nominee Barack Obama has picked Delaware Sen. Joe Biden to be his running mate. Mr. Biden's foreign-policy experience made him Mr. Obama's choice, according to news reports. But what of Mr. Biden's views on deal making and Wall Street? Here is a quick look.

Not a fan of hedge funds: In a Democratic debate on "This Week With George Stephanopoulos" last year, Mr. Biden blamed hedge funds and private-equity funds for the credit crunch: "We need more transparency, particularly with regard to hedge funds and private-equity funds. They are the ones that are causing this thing to go under. And there's no transparency, no accountability. We don't know how deep this problem is."

A stable capital-gains tax: Mr. Biden voted against cutting the 15% capital-gains tax rate in 2005 and 2006. He has said he believes raising taxes on dividends will raise $195 billion a year.

Caution over, but not rejection of, sovereign-wealth funds: Mr. Biden led Senate hearings in June on sovereign-wealth funds and urged caution when accepting investments from the investment arms of foreign countries, but credited such funds with helping bolster several U.S. banks. Mr. Biden said greater transparency would make sovereign-wealth funds appear no less a threat to U.S. national-security interests but that "punitive defensive regulation could be self-defeating, depriving us of potential benefits out of the fear of potential harm."

No tax breaks for anyone earning more than $1 million: Sorry, Wall Street. Those deal makers who are still employed will surely pay higher taxes if an Obama-Biden administration has its way. Mr. Biden has said he supports the elimination of tax cuts for anyone earning more than $1 million a year, which he says would raise $85 billion a year for the government.

By: Heidi Moore
Wall Street Journal; August 26, 2008

Thursday, August 28, 2008

India's Poor Get Health Care in a Card

Credit Plan Gives Nation's Neediest the Funding for Medical Treatment -- and Tool for Charging It

Virender Kumar's leg was crushed when a truck hit the motorbike he was riding, and he was brought to a private hospital. The ward at Gaba Hospital is damp and cramped. Ceiling fans whir in the sweltering heat.

But things aren't as bad as they could have been for the 36-year-old shoe salesman. Because of a new Indian government initiative, Mr. Kumar carries a smart card that entitles him to 30,000 rupees, about $700, of hospital care. That can go a long way at the treatment prices set by the program. A day in intensive care, for instance, costs as much as $23.

"For poor people, it's great," says Mr. Kumar.

To qualify for the National Health Insurance Program, families must meet certain criteria and generally earn less than about $100 a year.

The smart card, which contains personal data and fingerprints for an entire family, costs participants less than $1 -- what could be a day's pay for a casual laborer. The fee is intended to make sure beneficiaries value the program and take time to understand it, and it creates an obligation on the part of the government to deliver. The card is good at any hospital, private or public, that has enrolled. While a universal healthcare program like this one would be great in the United States, many health insurance companies, like Priority health who provides Michigan health insurance, take care of their clients, and offer great benefits at affordable prices.

India has earmarked $1 billion for the rollout of the program by insurance companies in states across the country. The program isn't expected to fund itself -- it will be bankrolled by the government because the beneficiaries are so poor.

Many health-care programs have been introduced in India by New Delhi, state governments and nongovernmental organizations. But so far, none of those programs has taken root throughout the country.

The National Health Insurance Program is different, according to the Indian government, because of its use of technology; its business model, in which insurance companies and hospitals are given incentives to take part; and because the information on the smart cards is secure. The program enables a family that is below the poverty line to choose where its members would like to receive their benefits, and it helps migrant workers who travel with the card and also likely wouldn't have the money to cover the costs of treatment up front.

The plan presents a way for insurance companies to market themselves and develop brand awareness. A large, private general-insurance company in India, ICICI Lombard General Insurance Company Ltd., which is a joint venture of ICICI Bank Ltd. of India and Fairfax Financial Holdings Ltd. of Canada, is introducing the program in the northern states of Haryana, Rajasthan and Uttar Pradesh -- regions with a combined population of more than 240 million people, many of whom would qualify. ICICI Lombard says that though the business currently operates at a loss, it views the program as a way of engaging with rural customers. And as India's economy grows, these customers may become better off.

For private hospitals, the program can increase the number of patients and potentially widen the client base. By opening private facilities to more patients it should take some of the weight off overflowing government hospitals.

Those government hospitals, which already offer free treatment to such patients, can also apply to join the program. If they do, they are paid the same rates private hospitals would get.

Since its launch in April, about 1.5 million people have joined the plan. India's government said it would like to add 12 million families before next April -- about 60 million people -- and then continue at that rate for another four years.

Rural India has enjoyed few of the fruits of growth as India's economy has expanded by about 9% annually over the past four years. Providing some welfare to India's poorest -- 60% of the nation's 1.1 billion people eke out a meager living off the land -- has been a key focus of the ruling coalition, led by the Congress Party.

During the past four years, the government has rolled out a host of programs aimed at improving life for the poor, and the pace has accelerated as the government approaches the next general election, which must be held by next May.

The health-care plan has had plenty of teething trouble. In rural areas where there is no electricity, teams have to carry mobile generators to run their printers, scanners and other equipment. Dust gets into the printers and breaks them. In the summer heat, the tape that needs to be affixed to the smart cards gets stuck in the machines, which are imported and designed to operate in cooler conditions.

At a local school in the village of Balachaur, families lined up one warm, humid monsoon afternoon in August to register for the program.

It is not long before a problem arises.

Vidhya Devi, the wife of a farm worker with two daughters, says only her husband's name is on the card, making only him eligible for care.

Himanshu Roy, a manager with ICICI Lombard, explains that this problem occurs frequently because the state government has provided incomplete information. He says Mrs. Devi needs to write to the state, then present the complete information.

Another hurdle for the plan: It requires families to register in their home states, where they need to already have been recognized as sufficiently poor to qualify. That means some of those who are in need of hospital treatment but are far from home might not be able to tap into the funds.

And since it is limited to hospital care, the program doesn't address some of the factors that cause many illnesses in India, such as malnutrition.

Supporters say despite the program's shortcomings it provides a crucial lifeline for India's poorest who can barely afford food, let alone hospital treatment. For them, hospitalization typically means borrowing money from extended family members or paying extortionate interest rates to a moneylender.

"The moment they are hospitalized, they are dead, whether they die in the hospital, or when they come out of the hospital they are burdened with so much debt they will never recover," said Anil Swarup, director general of labor and welfare at the Ministry of Labor and Employment in New Delhi.

In Gaba Hospital in Jagadhri, where Virender Kumar sought treatment for his leg, B.S. Gaba, the hospital's director and owner, says more than 1,000 people have had their treatment paid for in the two months since the smart-card program was introduced there. "It's the best scheme India has, I think, and real welfare for the poor," he says.

By: Jackie Range
Wall Street Journal; August 26, 2008

Bad Labor Law Is a Path to Economic Ruin

I recently said that America "would become France" if a certain bill now in Congress -- which would virtually guarantee that every company becomes unionized -- ever became law. Deceptively named the Employee Free Choice Act, this bill would in most cases take away an employee's right to a secret ballot in a union election and give unions the option to have federal arbitrators set the wages, benefits, hours and all other terms and conditions of employment.

Countries other than France have suffered the consequences of bad labor laws. When I was CEO of Handy Dan, the precursor to Home Depot, I traveled to England in the 1970s to take a look at a chain of stores we were considering for acquisition. When I arrived in London, the airport workers, bus drivers and garbage collectors were all on strike. The major shareholder of the company asked me to interview three employees. He informed me afterward that he wanted me to hire them at Handy Dan "because the U.K. was finished." He explained that his tax rate was 75% and there were no incentives to grow.

When I asked what he and his company were doing about it, he told me that the media would attack the company if it got involved politically. I jumped all over him and the company's CEO for letting this happen without a fight. Needless to say, Handy Dan did not buy these stores. Fortunately for Britain and thanks to the courage of Margaret Thatcher, both tax rates and the power of labor unions were reduced in later years.

My advice today about the Employee Free Choice Act is the same as I gave in England: You better fight to stop this undemocratic bill: hire a labor lawyer and have current labor laws protected. I'm not the only one who thinks the proposed law violates long-established principles of democracy. In these pages, George McGovern, a former Democratic senator and a champion of organized labor, called this bill what it really is -- "a disturbing and undemocratic overreach not in the interest of either management or labor."

To my astonishment, most CEOs in America are unaware of this planned hostile takeover of their human resources. I am retired, so this is not business for me. It's strictly personal. I care deeply about the competitiveness of American companies and our system of free enterprise.

I know that labor-union contributions are the lifeblood of many in the House and Senate. But I just cannot understand how so many in Congress are willing to sell out America for political dollars. When the bill came up for a key vote in 2007, all Senate Democrats voted yes and only two Democrats in the House had the courage to vote no. While the bill passed the House, it failed in the Senate because the Democrats were unable to get the required 60 votes to stop a Republican filibuster.

If the Democrats have a good November, the measure could become law early next year. Bill co-sponsor Barack Obama has said: "We will pass the Employee Free Choice Act. It's not a matter of if, it's a matter of when. We may have to wait for the next president to sign it, but we will get this thing done."

Those who support the bill claim that it will "protect workers." This doesn't pass the straight-face test. Mr. McGovern saw through the false rhetoric of the bill's sponsors, saying that the measure "runs counter to ideals that were once at the core of the labor movement. Instead of providing a voice for the unheard, [it] risks silencing those who would speak."

It's time to stand up and fight. America's competitiveness, jobs and right to a secret ballot are at stake. CEOs, and employees who want to keep their jobs in America -- and those retirees like me who would not be where we are today but for our system of free enterprise -- must stop this anti-democratic legislation.

By: Bernie Marcus
Wall Street Journal; August 26, 2008

Housing Recession Just Builds

Supply Grew in July to a Record 11.2 Months of Inventory; That Is Trouble for Publicly Traded Sellers of New Homes

With each economic release related to the state of the housing market comes the hope that this one, finally, will prove that the residential real-estate market is on the way to recovery.

But disappointment has been the overriding influence for those trading home-building stocks, which have made several attempts to rebound from devastating losses over the past three years, only to resume the previous downtrend.

Sales of existing homes rose 3.1% in July, compared with the June rate of sales, but the National Association of Realtors also said that housing supply grew once again, to a record 11.2 months of supply on the market. That is trouble for publicly traded sellers of new homes, which have been aggressively reducing inventory in an attempt to get ahead of the housing recession.

The SPDR S&P Home Builders exchange-traded fund, which tracks a basket of builders, is down 2% on the year, having put together a strong recovery since mid-July, when it was down 23% on the year. That's a better performance than the Standard & Poor's 500-stock index, down 12% on the year, but this ETF fell 48% in 2007, and the underlying stocks are still trying to regain their footing.

Analysts at UBS are skeptical, saying they don't expect a recovery in housing until mid-2009, which could damp interest in furthering this rally. "Limited near-term positive catalysts will lead to continued volatility in the stocks over next 2-3 months," they wrote.

Monday's home-sales news wasn't greeted warmly by investors in builders; the SPDR S&P Home Builders fund fell 74 cents, or 3.9%, to $18.25. Len Blum, managing director at investment bank Westwood Capital, says housing isn't likely to turn around until the supply overhang is eliminated, mortgages are more readily available again, and it becomes cheaper to buy versus renting a home. The firm still expects a 10.8% decline in home prices when compared with July 2008 levels.

UBS says the builders that have concentrated on "proactively" reducing land positions are better-positioned for the recovery, whenever it happens. Those include Toll Brothers, Ryland Group and Centex. Shares of those stocks have been mixed on the year; Toll has gained a bit more than 14% on the year, Ryland is down 18%, and Centex is down nearly 39%.

By: David Gaffen
Wall Street Journal; August 26, 2008

Time to Sing Back-to-School Borrow Blues

Paying for college might seem hopeless, but many private student loans are availableSubprime-lending woes that have pained mortgage lenders and Wall Street banks are taking a toll in another arena -- academic institutions such as Corinthian Colleges.

Private student loans are being lended to students more hesitantly, but obtaining a private student loan in addition to federal funding is not impossible. As Corinthian reports fiscal fourth-quarter results Tuesday, Wall Street wants to hear how well the company is handling borrowing stresses among its students.

The company, which offers short-term diploma and degree programs at more than 100 post-secondary schools across the U.S. and Canada, says about 10% of its fiscal 2008 revenue came from private loans to subprime student borrowers. However, "the bigger picture," says Kevin Doherty, at Banc of America Securities, "is that about 75% of it students are subprime."

Corinthian is ramping up a program to lend internally to those students, and has said that between 2% and 3% of would-be borrowers likely won't be eligible for loans. But that means a large number will. So the company faces the prospect that the bad debt that student-loan lenders are trying to avoid "grows on Corinthian's balance sheet," says Mr. Doherty.

That, says Amy Junker, a Robert W. Baird analyst, would likely mean compressed profit margins at some point.

She notes that the stock is near a 52-week high, and sports a lofty P/E exceeding 50, on company statements earlier this year that margins will expand in 2009 and beyond. But if subprime problems persist, Corinthian could fail at achieving those projections, undermining its richly priced shares.

By: Jeff D. Opdyke
Wall Street Journal; August 26, 2008

Coach Will Buy Back $1 Billion of its Stock

Coach Inc. said its board authorized the buyback of up to $1 billion in common stock, or about 10% of its current market capitalization, by June 2010.

The New York-based maker of handbags and other accessories also announced it had just finished its previous $1 billion buyback, which began in November 2007. During that buyback, Coach acquired 31.8 million common shares at an average of $31.42, including 5.7 million shares at an average of $28.45 since it announced its fourth-quarter earnings last month.

Coach reported a 33% jump in fiscal fourth-quarter net income, driven by higher sales and a favorable tax settlement, but said it wasn't optimistic about the retail environment amid consumer malaise. It also predicted first-quarter and fiscal 2009 earnings below analysts' expectations.

Coach, hedging against potential softness in North America, is trying to take advantage of new wealth in emerging markets, particularly China. The company bought out its distributor in Hong Kong, Macau and China in late May and plans to open 50 new locations in the region over the next five years.

Wall Street Journal; August 26, 2008

Target Settles With Blind Group on Web Access

Target Corp., as part of a class-action settlement with the National Federation of the Blind, agreed to pay $6 million in damages to plaintiffs in California unable to use its online site.

The settlement, announced Wednesday, also requires Target to implement internal guidelines to make its site more accessible to the blind by Feb. 28, 2009, with assistance from the NFB.

The retailer and federation have agreed to a three-year relationship during which the advocacy group will keep testing the site to make sure it is accessible to blind people who use technologies such as screen-reading software. NFB said it will certify the site through its own certification program once the improvements are completed.

Under the financial portion of the settlement, Target will place $6 million in an interest-bearing account from which members of the California settlement class can make claims.

The issue centers on the Americans With Disabilities Act, a 1990 law that requires retailers and other public places to make accommodations for people with disabilities. Target had argued that the law covered only physical spaces.

"We feel that it is a wake-up call to companies that have Web sites that are selling goods and services," said Christopher S. Danielsen, a spokesman at the NFB. "They need to pay attention to accessibility." He also pointed out that the benefits of attracting new users far outweigh the costs of making changes to the site.

Mr. Danielsen noted that when the suit was filed two years ago, Target's site was more difficult to navigate than other sites, such as Walmart.com. He noted that at the time, many links on Target's site were unintelligible to screen-reading software, which converts written words into speech. He added, however, that Target has made progress, and said the advocacy group looks forward to working with Target to make additional improvements.

Steve Eastman, president of Target.com, said that "as the company's online business has evolved, we have made significant enhancements in order to provide an accessible shopping experience." He added that the company will work with the NFB on refinements to the Web site.

Associated Press
Wall Street Journal; August 28, 2008

Monday, August 25, 2008

Tech Firms Pitch Tools For Sifting Legal Records

A growing number of tech companies are riding the rising flood of corporate email and electronic records by pitching software to sift them -- and meeting resistance from lawyers who want a piece of the action.

Lawsuits increasingly rely on electronic documents being produced early on, feeding demand for tools that help archive and retrieve those records, a process known as e-discovery work. Much of that work requires little brainpower or legal training, says Michael Lynch, chief executive of British software company Autonomy Corp., which last year acquired e-discovery company Zantaz for $375 million.

"The old-fashioned way of doing this was having a lot of lawyers doing a lot of simple things," he says. "You would literally have lawyers reading through things saying 'there was chicken for lunch.' You don't need lawyers to know it's a lunch menu."

Among those who have jumped into the field are Hewlett-Packard Co., Xerox Corp., International Business Machines Corp. and EMC Corp., some of whom have bought smaller companies specializing in the work. They say in-house teams using their tools can cut e-discovery costs by half.

But big law firms, facing the loss of lucrative client fees, are crying foul. They question how much of the discovery process can be automated and how much money the tools will really save. They also say companies could end up spending more to fix mistakes. "You need to have some kind of quality control," says Robert Brownstone, a partner with the Silicon Valley law firm Fenwick & West, which consults with companies on how to combine software with lawyer supervision.

One company saving some cash is Comcast Corp. When outside lawyers working for the cable company recently requested thousands of archived documents for a court case, Genny Garrett, who is in charge of managing Comcast's records, found them by doing a search from her desktop computer.

The lawyers "were surprised," she says, that "they didn't have to wander around a warehouse" looking for records, a task that once generated big legal fees.

Comcast uses software from Tower Software, which was acquired this year by H-P. It archives and classifies employee e-mails and other documents as they are created. The system also creates inventories of paper records, Ms. Garrett says, so she can locate and retrieve documents by using computer searches. She says the software has saved thousands of attorney hours over the past few years because Comcast gets about 400 legal-search requests annually, many related to claims that arise when technicians visit customers' homes.

The technology suppliers say their software can save time by automatically setting aside any documents that would be subject to attorney-client privilege. The systems use linguistic technology to scan for certain words, group messages by subject matter and weed out duplicates.

Such systems can be expensive, especially for a large company, says Marty Smith, a lawyer whose consulting firm Metajure advises companies on e-discovery. He says a large client will pay $1 million or more for systems to archive and search electronic records. But the savings from automating the discovery process quickly make up for the cost of such a system, he says.

H-P says using lawyers to search through 100 gigabytes of data would cost about $180,000. But since its software automatically culls irrelevant documents, attorneys in such a case would have to go through only a small portion of that data -- for a cost of about $25,000, it says.

Mark Cochran, an executive vice president and general counsel at software firm McAfee Inc., says his company bought a software system from Autonomy in late 2006. He says that the cost of the system -- which he pegged at "several million dollars" -- was recouped after a few big cases, in which hiring an outside firm for discovery would have cost more than $2 million for each case.

The e-discovery push has accelerated since 2006, when federal courts finalized rules that increased the amount of electronic information that must be produced under tight deadlines. Expecting fast growth in the sector, companies such as Xerox, Symantec Corp. and Iron Mountain Inc. bought smaller software makers to expand their offerings.

"We're trying to get away from the traditional hardware model and into more of a services business," says Chris O'Brien, a vice president of litigation services at Xerox, which in 2006 bought a company in the field called Amici. That same year, IBM bought content-management company Filenet. EMC, which specializes in data-storage systems, launched its own e-discovery product.

The attorneys counter that there are pitfalls to replacing them. Early this year, a federal judge required chip maker Qualcomm Inc. to pay rival Broadcom Corp. more than $8 million after it failed to uncover and share emails relevant to a case.

Mr. Brownstone, the Fenwick lawyer, also tells of one client who declined to have attorneys oversee an email archives search, thinking internal IT staff could do a cheaper automated search. The IT workers disposed of files that, legally, had to be retained, he says. They were recovered, but only after the company paid Fenwick lawyers extra to fix the problem.

Recently, tech companies and lawyers have taken steps to resolve their conflict. Some law firms that handle big business cases -- such as Fenwick and San Francisco's Howard, Rice, Nemerovski, Canady, Falk & Rabkin, among others -- now consult with clients on which e-discovery software to choose and how to use it. Mr. Brownstone says that his firm has a proprietary system that combines software with attorney supervision that can save clients more than 20% of what they normally would pay his firm for an e-discovery project.

At EMC, Andrew Cohen, an in-house lawyer and vice president, has been making sales pitches to law firms. He says that providing tech services to law firms should help EMC win over litigators. Jonathan Martin, who heads H-P's e-discovery marketing, says his employer is close to hiring a lawyer with years of e-discovery experience to reach out to law firms.

Meanwhile, corporate clients say they are happy to see tech vendors develop more legal expertise, because they think it will help outside lawyers come to terms with automation.

"That's ultimately where this business is going," says John Frantz, a vice president and associate general counsel at Verizon Communications Inc., which uses FTI Consulting Inc. for automated e-discovery work. "It costs so much money to have humans do the work."

By: Justin Scheck
Wall Street Journal; August 22, 2008

The Absentee Lawnlord

After years of pitched battle, a homeowner reaches détente with her grass.

This summer, all has been strangely quiet on my yard's southwestern front.

It's the site where, three years ago, I launched a campaign to convert my lawn to organic care. That meant substituting toxic or synthetic chemicals to combat weeds and foster growth with natural ingredients from plant, animal and mineral sources such as corn gluten meal, seaweed extract and worm waste. In the heat of battle, I tested some wild weapons -- a flamethrower to toast weeds known as plantains and a drill attachment called the Dandelion Terminator that rips out the hearts of those yellow intruders. When weeds fought back my neighbors mocked; more than once, I considered surrendering.

But now, a welcome détente has set in. My grass is holding its own and looks good enough that visitors offer compliments -- a first at my house. I accept, although a bit reluctantly, because the truth is, I've been an absentee lawn warrior this year. All I managed to do this season was to fertilize and toss down some corn gluten to inhibit weed growth. There are still some patches of surly plantains and crabgrass, but nothing that two hours of hand-weeding and some extra grass seed won't fix this fall. And no watering has been necessary -- we've had decent rainfall but organic lawns are also notably drought-resistant -- and I mow about two to three times a month. In short, my lawn regimen has become boring.

This is what the experts promised when I first started chronicling my foray in this newspaper. "Year three, that's your turning point," said Scott Meyer, editor of Organic Gardening magazine, back in 2006. Along the way, readers offered creative solutions to keep spirits high, from dousing weeds with boiling water to eating them.

Today, however, the industry is moving well beyond homespun remedies. By year's end, Home Depot says it will voluntarily stop selling traditional chemical pesticides and herbicides in all its Canadian stores, replacing them with green alternatives as more of that country's communities ban pesticides for residential cosmetic use. Here in the U.S., the retailer says the organic category continues to blossom, with "double-digit" sales increases in organic landscaping products. And industry leader Scotts Miracle-Gro, which already sells an Organic Choice lawn fertilizer, says it will launch a full U.S. line of natural lawn products as soon as next year, complete with weed and pest controls. The company already offers such products in Europe and Canada.

"The emerging technology is increasingly encouraging," says Jim King, Scotts's vice president of corporate affairs.

Just how well new products like Organic Choice work, and how much educational and marketing muscle the company puts behind them, will be critical to taking the organic lawn movement more mainstream. While interest has surged -- today, 12 million households say they use only all-natural products on their lawns and gardens, about double the number in 2004 -- that's still a small fraction of the 100 million U.S. households with yards or gardens, according to the National Gardening Association. Partly, people accustomed to quick fixes with traditional pesticides and fertilizers still don't understand how natural products work. When asked, a mere 14% of people said they felt knowledgeable about organic lawn care, according to a 2008 NGA study.

In fact, organic care is pretty simple: Get soil healthy and pH-balanced using compost and other amendments so it fosters grass growth; the grass then crowds out weeds and doesn't require chemicals. But some skeptical homeowners think going "organic" is the same as doing nothing. I wondered too, and so when I started my quest, I left a large test area of the lawn untouched. Today, it's almost all weeds and there's a noticeable line between where the organically treated lawn begins and ends.

Perhaps the largest hurdle organic proponents face are long-held attitudes about what makes an attractive yard. In Harmony Sustainable Landscapes Inc. in Bothell, Wash., has offered three tiers of service for 10 years: "No Weeds," "Minimum Pesticides" and "Completely Organic." Today, about 60% of customers are still in the middle, wanting to decrease their environmental and health impact but still asking for a spot application of herbicides once a year. While corn gluten inhibits root development of weeds when they are germinating, there currently is no truly effective organic herbicide that can kill existing weeds but not the grass around it. "Weeds drive people crazy," says In Harmony co-owner Ladd Smith.

This perception has pitted neighbor against neighbor, with organic advocates likening pesticide use to second-hand smoke and the other side complaining about dandelion drift from the au naturals' lawns. Unlike Canada, all but nine U.S. states currently forbid local lawmakers from enacting residential pesticides bans because they would pre-empt looser state laws.

But that could change as homeowners become increasingly concerned about the health ramifications of the paint they spread, the countertops they install or the glue in the cabinets they hang. Earlier this year, a bill was introduced in California to restore local communities' rights to ban pesticides. And data from institutions such as the Mayo Clinic and the Harvard School of Public Health linking pesticides to Parkinson's and certain cancers in pets are further fueling the organic movement.

Paul Tukey, founder of SafeLawns.org, has been on the road since 2006 promoting organics. Five years ago, he says, he'd have been "chewed up and spit out." Now, 38 states later, he says audiences "greet me like a hero with answers.'"

And in a growing number of areas, large lawns are simply becoming passé. At In Harmony, an increasing number of clients are requesting lawns be substituted with indigenous plants and vegetable gardens. For my part, that's starting to seem like a more interesting and financially fruitful challenge -- at day's end, I'd be rewarded with something I can consume, as well as gawk at. Talk about impressing the dinner guests.

By: Gwendolyn Bounds
Wall Street Journal; August 23, 2008

Hirst's Marketing End Run

Much hubbub has attended Damien Hirst's decision to sell his art directly via Sotheby's auction house in mid-September without going through his big-name gallerists, Larry Gagosian and Jay Joplin. Some have seen this direct-to-market ploy by the artist as more evidence of his titanic Duchampian originality, as if even the way he plans to sell his work is a radical new art form. According to the Web site Art Observed, Sotheby's spokesman Oliver Barker has offered his perspective that "Damien is totally fearless. He's not just an outstanding artist; he's a cultural phenomenon."

One might forgive Sotheby's its enthusiasm. The estimates for the total value of the coming London sale range from $100 million to $200 million. Unbelievers and obstinate refuseniks, however, view the entire episode as hype piled upon more hype around a ghoulish publicity-monger. The sale includes several more of Mr. Hirst's trademark pickled animal carcasses, such as a shark, a zebra and -- the centerpiece offering -- a cow with golden horns and hoofs (expected to fetch some $25 million).

Increasingly lost amid the noise is this question: What does it mean for the art market that a living artist bypasses dealers altogether and sells his wares directly at auction? There is some speculation that this might be a pivotal moment, like the end of the studio system in movies or the continuing decline of the record labels in the music business. Could the gallerist's traditional role as mediator between the contemporary artist and his market be passé?

Most insiders say that only at the topmost end of the market, where sales at auction are guaranteed by the artist's fame, could the middleman become an anachronism -- and that just a handful of artists, such as Damien Hirst and Jeff Koons, have the kind of fame it takes. Dealers still have a crucial role to play, the argument goes, in building the reputation of artists; in finding the right -- influential -- homes for artists' works; in persuading museums of artists' worth; in taking reviewers out to lunch. Furthermore, it is noted, the art biz differs from show biz in a fundamental way: Movies and music sell to a mass audience, while art sells singly to individuals.

That is where, for now, the debate seems to have stalled, at the consensus that nothing much will change. A comforting thought, perhaps, but one that falls apart at the slightest prodding. It's certainly comforting that the most imperiled are the top-end headhunters, like Mr. Gagosian, who encouraged the cult of celebrity to supplant content and aesthetics as the foremost value in art. But beyond that, one wonders how it will affect the role of galleries when ultimate success automatically carries a built-in penalty: If they create a big enough star, the star will have no need of them. At the very least, dealers and gallerists in contemporary art will face a solid ceiling beyond which they cannot maximize profit on the investment they made nurturing artists. They simply cannot compete with the global footprint of international auction houses, which offer artists instant access to world-wide markets.

In reality, the art biz is more like the movie or music biz than one might think. Mass markets, like mass media, affect the thinking of visual artists all too palpably these days, however uniquely each of their pieces may be made and sold.

As Russian, Chinese and Arab buyers enter the ultraspeculative end of the contemporary market, in which nobody knows why Hirst's dead cow is worth more than Koons's ceramic monkey, dealers will find themselves at a disadvantage to auction houses in other ways, too.

Because Sotheby's and Christie's appear to operate a species of global commodities exchange, with dates and prices instantly disclosed on the Internet, it all feels so much more transparent to, say, a new Chinese millionaire. In the first place, there will be a local office near him co-headed by a Chinese speaker who understands the millionaire's social sensitivities -- so much more pleasant than having to kow-tow to a self-important New York or London gallerist. It puts an end to a long era in which superior dealers could treat outsider clients with the snooty hauteur of a French waiter. Above all, though, the auction houses' relative transparency -- the fact that prices are set and transactions occur out in the open, for all to see -- will appeal to the international new money crowd that knows plenty about how money and markets work.

Dealers have always offered clients a higher degree of discretion than the public space of an auction ever can. That has traditionally been their great asset. But let's be candid: Nobody in Dubai or Shanghai wants a pickled cow to gaze at musingly in solitude for the sheer beauty of its hindquarters. When today's clients buy such wares, privacy is the last thing on their minds. They are buying into celebrity. As Thomas Hoving, the former director of the Metropolitan Museum, once said: "Social climbing and art have gone together since Alexander brought Lysippas to his court, and before."

As the market's top end begins to evaporate for them, contemporary dealers should reconsider the Duchamp-Warhol ethos of shock and celebrity that has come to dominate the art world. Perhaps it is time for dealers to start embracing what will save them: art valued on its merits without the hype.

By: Melik Kaylan
Wall Street Journal; August 23, 2008

When Learning Has a Limit

In the early 1980s, my mother taught at an Oakland, Calif., community college. Her students ranged from blacks born in the rural South to Southeast Asian boat people. When I was myself away at school, she sent me a moving letter describing how much she loved the job. Whatever their backgrounds, she wrote, her students showed a hunger for education and for improving their lot in life. For the most part, she said, their writing got better, too.

The vision that captivated my mother and her students -- that education offers a chance not only for acquiring knowledge but for improving opportunity -- has long been central to the American dream. Yet it is a vision that has too often gone unrealized -- which is one reason that education reform has taken on such urgency in recent decades.

Since the release of "A Nation at Risk" 25 years ago, we have seen the introduction of top-down standards (including the No Child Behind Act), the spread of a bottom-up school-choice movement (including vouchers and charter schools), and the advent of entrepreneurial programs, like Teach for America, that combine a market-oriented approach with a focus on academic results.

Meanwhile, record numbers of students aspire to higher education, many with student loans, not least because the economic returns to a college degree are, despite a recent leveling off, indisputable. Thus all sorts of people are busy trying to make sure that more high-school grads get a shot not only at enrolling in college but at finishing it.

None of this much impresses Charles Murray. In "Real Education," he suggests that teachers, students and reformers are all suffering from a case of false consciousness. "The education system," he says, "is living a lie."

The problem with American education, according to Mr. Murray, is not what President Bush termed the "soft bigotry of low expectations" but rather the opposite: Far too many young people with inherent intellectual limitations are being pushed to advance academically when, Mr. Murray says, they are "just not smart enough" to improve much at all. It is "a triumph of hope over experience," he says, to believe that school reform can make meaningful improvements in the academic performance of below-average students. (He might have noted, but doesn't, that such students are disproportionately black and Hispanic.)

Thus students are being steered toward college when many should be directed toward jobs for which they are better suited. At the same time, Mr. Murray argues, we're giving short shrift to the academically gifted, who ought to be offered a rigorous education appropriate to their abilities rather than having their classroom experience dragged down by low-IQ underachievers.

Mr. Murray believes that Americans should forsake what he calls "unattainable egalitarian ideals of educational achievement" in favor of "attainable egalitarian ideals of personal dignity." For high-school students that would mean more realism about potentially lucrative vocational options.

Mr. Murray would also institute a series of CPA-like certification exams for which students could prepare in a variety of non-B.A.-granting postsecondary schools. Only true high-IQ achievers -- say, 10% or 20% of all students -- would go on to college, study the Great Books and learn virtue, too.

To be sure, Mr. Murray does see a place for a broad liberal education -- but only in elementary and middle school, where he would like teachers to use E.D. Hirsch's Core Knowledge curriculum.

What is one to make of all this? For one thing, it is dismayingly fatalistic. One can accept the idea that inherent academic abilities are unevenly distributed while also believing that many low-achieving kids -- and high-achieving kids, too, for that matter -- could learn a lot more than they are learning now. International tests show that students in many other nations bypass American kids in reading and math. Could such comparative results really be a function of higher raw intelligence overseas -- or are they more likely to reflect superior educational practices? It is telling that hard-headed education reformers like Eric Hanushek, Chester E. Finn and Jay Greene believe that we can do much more to boost the academic achievement of children upon whom Mr. Murray would essentially give up.

In Mr. Murray's deterministic vision of education, IQ scores matter considerably more than teaching or curriculum or effort -- variables that are within the control of individuals and not, as he would have it, mostly their DNA. He wants to make way for what is essentially an IQ-elite.

Let us hope that he has a fool-proof way of identifying this lucky group, beyond the universal IQ testing that he advocates. He does see his certification exams as egalitarian and notes in passing that otherwise nonelite students should be permitted to lobby for admission to advanced classes, so long as they accept the risk of flunking out. But one can't help thinking: Woe to those who get put in the wrong category.

While accusing education reformers of being wooly-headed romantics, then, Mr. Murray conjures up a romantic vision of his own. In his brave new world, the bell curve of abilities is cheerfully acknowledged; students and workers gladly accept their designated places in the pecking order; and happy, well-paid electricians and plumbers go about their business while their brainy brethren read Plato and prepare for the burdens of ruling the world. It is hard to believe that a dynamic, upwardly mobile society would emerge from such an arrangement, or "dignity" either.

The view outlined in "Real Education" seems far from the one that Mr. Murray put forward in "Losing Ground" (1984). In that influential book, a headlong assault on the welfare state, he called for an "infinitely forgiving" education system in which students can try over and over to succeed, even if only some will.

And indeed, there is something in the American creed that sees the classroom as exactly the place for such second chances, a place where the efforts of personal will (those of students, teachers and policymakers alike) can make a difference in what we learn and how we live.

Mr. Murray says that he is deeply concerned about the dangers of overestimating the abilities of students. To which one might reply: Aren't the dangers of underestimating their abilities vastly worse?

By: Ben Wildavsky
Wall Street Journal; August 22, 2008