Boston Scientific Charged in Guidant Device Case

Business Week

The U.S. Department of Justice filed charges against Boston Scientific Corp.'s Guidant division Thursday, saying Guidant did not fully disclose problems with its devices to regulators.

The charges are part of a previously announced agreement for Boston Scientific Corp. to plead guilty to the two misdemeanor charges.

The company, based in Natick, Mass., agreed in November to plead guilty to the two counts, which had not yet been filed, and pay $296 million to resolve the investigation.

The investigation concerned three implantable heart devices. The Justice Department said Guidant discovered in 2002 that its Ventak Prizm 2 DR was prone to electrical arcing, which could keep the device from responding when the patient suffered irregular heart rhythms.

Guidant changed the design of the device in November of that year, but in August 2003, it told the Food and Drug Administration that the changes did not affect the safety or effectiveness of the device.

In early 2004, the company allegedly found a similar problem with two other devices. A patient died in July 2004, and the Justice Department says that death was related to a short circuit.

Following the death, Guidant knew the instructions for responding to a short circuit in the device were false and misleading, the Justice Department says. As a result, the company sent out new information that was described only as a product update. The charges say Guidant broke the law by not notifying the FDA about the change within 10 days.

In June 2005, Guidant issued safety advisories on the three devices. The FDA determined these were Class I recalls, which are the most serious type of device recall because there is a reasonable change the devices could cause serious health problems or death.

Boston Scientific acquired Guidant for $26 billion in 2006.

Oil Industry Exploding in North Dakota

The Wall Street Journal

State Is Riding High as Firms Develop Better Ways to Tap Huge Bakken Shale Deposit, Raising Hopes for U.S. Production

Harold Hamm, chief of Continental Resources, one of the biggest producers at the Bakken Shale in western North Dakota. He is pictured in April at an oil rig near Watford City, N.D

KILLDEER, N.D.—A massive oil reserve buried two miles underground has put North Dakota at the center of a revolution in the U.S. oil industry, a shift that has radically altered the fortunes of this remote area.

The Bakken Shale deposit has been known and even tapped on occasion for decades. But technological improvements in the past two years have taken what was once a small, marginally profitable field and turned it into one of the fastest-growing oil-producing areas in the U.S.

The Bakken Shale had helped North Dakota oil production double in the past three years, surging to 80 million barrels in 2009—tiny relative to the more than seven billion barrels consumed by the U.S. every year, but enough to vault the state past Oklahoma and Louisiana to become the country's fourth-biggest oil producer, after Texas, Alaska and California. If current projections hold, North Dakota's oil production could pass Alaska's by the end of the decade.

"Most people felt like they could kind of write off the oil industry in the U.S., and that's just a long way from the truth," said Harold Hamm, chairman and chief executive of Continental Resources Inc., one of the biggest Bakken producers. "The fact of the matter is that a lot of people quit looking for oil." Continental reported Thursday that its North Dakota oil production doubled in 2009 and would continue to grow rapidly this year.



The Bakken Shale could contain up to 4.3 billion barrels of recoverable oil, according to the U.S. Geological Survey. That would make it the biggest oil field discovered in the contiguous U.S. in more than 40 years—and many in the industry believe the amount of recoverable oil could be even greater as new technology allows companies to tap more of it.

U.S. oil production has fallen by nearly 50% since its peak in the 1970s. Even with the Bakken Shale, U.S. oil production isn't expected to ever return to 1970s levels, and even the most optimistic projections of production from the North Dakota field don't account for more than a small fraction of total U.S. oil demand. But new production from the Bakken Shale, combined with other big oil discoveries in California and the Gulf of Mexico, helped U.S. oil production rise last year for the first time since 1991, according to U.S. government figures.

Production has grown so rapidly here, 100 miles south of the Canadian border, that companies had to build a rail line to transport their oil to market, since there wasn't a big enough pipeline in the state to handle the oil. Companies have scrambled to find labor in a state with fewer than a million people, and to keep drilling rigs running when the wind chill pushes temperatures to 50 degrees below zero. Booming Bakken oil production has helped North Dakota escape the worst of the economic downturn. The state's unemployment rate was 4.3% in December—more than five percentage points below the national level—and the state government projects a surplus for the current budget cycle.

The impact has been especially notable in the oil-producing western part of the state, making millionaires of local ranchers who sell access to oil beneath their properties. Oil-field workers have flooded the western city of Williston, leaving it with a chronic shortage of hotel rooms and making housing scarce. In Dickinson, three hours to the south, a labor shortage has the local McDonald's offering $300 signing bonuses. And here in nearby Killdeer, a town of 700 people that lies in the heart of oil country, oil workers jockey with locals for lunchtime tables at the Buckskin Bar & Grill, which serves burgers made from locally raised buffalo.

"Who expected oil? It's just, 'oh, gee whiz, oil!'" said Pam Reckard, 66 years old, as she waited for lunch at the Buckskin on a recent Thursday.

companies had to build a rail line to transport their oil to market, since there wasn't a big enough pipeline in the state to handle the oil. Companies have scrambled to find labor in a state with fewer than a million people

Ms. Reckard and her husband, Ben, said many locals, having seen past booms and busts, are taking a cautious approach to the region's newfound oil wealth. The Reckards are still driving their 1990 Dodge pickup despite having two successful oil wells drilled on their 1,120-acre ranch, which Mr. Reckard's family has owned since 1915. But they have noticed the changes. "There are a lot of people that were not from North Dakota," Ms. Reckard said.

The industry hopes the Bakken's significance could extend far beyond North Dakota. The Bakken formation stretches into Montana and across the U.S. border into Saskatchewan. Other oil-bearing shale formations exist in Colorado, Texas, California and other states.

"It's a true game-changer," said Jim Volker, chairman and CEO of Whiting Petroleum Corp. a Bakken oil producer. "We still think there's a significant amount of oil reserves in the United States left to be discovered."

The field also could have global implications. Besides small producers such as Continental and Whiting, the Bakken has drawn companies like Marathon Oil Corp. that hope to use what they learn in North Dakota to produce oil and gas overseas. "It's been a great laboratory for us," said Dave Roberts, who heads exploration and production for Marathon.

Oil companies have known about the formation, and the oil trapped in it, since at least the 1950s. But they couldn't get more than a trickle of oil from the dense, nonporous rock.

That began to change in the early 2000s, when companies in Texas began using new drilling techniques in a similar formation near Fort Worth known as the Barnett Shale. They would drill down thousands of feet and then turn and go horizontally through the gas-bearing rock—allowing a single well to reach more gas. Then they would blast huge volumes of water down the well to crack open the rocks and free the gas trapped inside.

Several companies, including Houston-based EOG Resources Inc., thought the same techniques could work on oil formations. But oil molecules are larger than gas molecules, and they didn't flow as easily through the cracks. EOG's first several wells in North Dakota were failures.

"The first three or four wells, it was not clear that there would be a viable economic solution," EOG Chairman and CEO Mark Papa said. "But we just felt like, well, it's worth investing $20 to $40 million in this because if it works there's a huge upside."

By 2006, EOG was making money on wells drilled in a small corner of the Bakken that was particularly well-suited to oil production.

The real shift has come in the past two years as companies honed drilling techniques, leading to bigger wells, faster drilling and lower costs. Marathon, for example, last year took an average of 24 days to drill a well, down from 56 days in 2006.

That has opened up new areas that weren't previously worth drilling in and made wells profitable at prices as low as $50 a barrel, down from $80 three years ago, according to analyst Mike Jacobs of investment firm Tudor Pickering Holt & Co.

Dollar Tree Profits Climbing

Forbes

Discount Isn't Dead. High-end retailers are on the mend, but Dollar Tree shows the low-price chains are still attracting consumers.

Pricy retail chains were bruised by the recession, but recent earnings reports show cost-cutting has helped several right the ship. That doesn't mean the other end of the price scale is suffering though, as discount retailer Dollar Tree breezed past fourth-quarter earnings estimates Wednesday.

Bargain-conscious consumers flocked to the discount chain, helping Dollar Tree report better sales and bigger profits. Earnings jumped 32.2% to $1.52 per diluted share from $1.15 per share a year ago.

The discount retailer recorded a 12.4% uptick in total sales to $1.6 billion, while same-store sales, a metric that measures growth at stores open at least a year, were up 6.6%. The company didn't forego expansion either, upping total square footage by 6.6% during the period.

Dollar Tree doesn't plan on slowing down the growth. It forecasts same-store sales improvement in the low-to-mid single digits for the first quarter of 2010 with sales ringing in between $1.29 billion and $1.33 billion. Square footage will climb by 6.3% during the quarter.

"The firm will continue to benefit from healthy customer traffic as value-conscious consumers turn to the deep-discount chain for low-priced daily necessities," said Morningstar analyst Zoe Tan in a note.

Several higher end retailers also reported earnings this week. While Dollar Tree has roped in cost-conscious customers with discounted novelty items and an expanded selection of consumables, Saks and Nordstrom cut costs as the sluggish economy slowed down

Investors sent shares of Dollar Tree rocketing to an all-time high on Wednesday, before closing with a 12.3% gain.

Testwell Labs, CEO Guilty of Enterprise Corruption

Business Week

Testwell Laboratories Inc., its chief executive officer and vice president were found guilty of enterprise corruption for faking tests on concrete and steel at such New York buildings as Freedom Tower, the Jet Blue Terminal at JFK International Airport and Yankee Stadium.

A jury in New York state Supreme Court in Manhattan came back today with the guilty verdicts on charges of enterprise corruption, the top last remaining count against Testwell, its Chief Executive Officer V. Reddy Kancharla and vice president Vincent Barone. The jury had given partial guilty verdicts against the three on a myriad of other counts yesterday and last week.

Enterprise corruption is the state’s version of a racketeering charge. It carries up to 25 years in prison. Sentencing was scheduled for April 7.

Testwell, one of the largest construction materials testing companies in the New York metropolitan area, was accused by the Manhattan District Attorney’s office of fraud involving 102 projects, including well-known buildings, firehouses, schools, apartment buildings, hospitals and hotels.

Faked Tests

Prosecutors alleged that Testwell often failed to perform tests, faking them instead. They also were accused of not performing required field tests.

Defense attorney Paul Shechtman, who represents Kancharla, called the verdict “surprising and disappointing” in light of other charges Kancharla was acquitted on earlier. Kancharla was acquitted on more than 20 counts and other pattern acts, many involving offering a false instrument for filing steel reports and invoices. He also was convicted of 14 counts and 20 pattern acts, including a scheme to defraud.

“Obviously, he intends to appeal,” said Shechtman.

Attorney Andrew Lankler, who represents Barone, declined to comment. Cesar de Castro, who represents the company, said he is disappointed with the “incorrect” verdict and is considering an appeal.

Manhattan District Attorney Cyrus R. Vance Jr. said in an e-mailed statement today that “today’s guilty verdicts should send a loud message to companies tempted to skirt safety requirements: This Office will aggressively investigate and prosecute this type of conduct to the fullest extent of the law.”

“Testwell’s conduct was reprehensible not only for its pattern of theft and deception, but for its utter disregard for the safety of the public at large, motivated by profit,” Vance said.

FBI Raids Offices of Three Toyota Parts Suppliers

The Wall Street Journal

Three Japanese automotive parts suppliers, tightly tied to Toyota Motor Corp., were raided Tuesday by the Detroit office of the FBI over allegations of price-fixing.

Warrants were carried out on the Michigan offices of Yazaki North America in Canton, Denso International America Inc., in Southfield, and Tokai Rika, also known as Tram, in Plymouth, an FBI spokeswoman confirmed Wednesday.

"The antitrust division is investigating the possibility of anticompetitive cartel conduct of automotive electronic components suppliers," said Department of Justice spokeswoman Gina Talamona. "We are coordinating with the European Commission and other foreign competition authorities."

The department is looking at possible anticompetitive behavior of these companies, not at the parts themselves, a person familiar with the investigation said. Toyota has ownership stakes in Denso and Tokai Rika. There is also no connection between the investigation and Toyota's recall problems.

U.S.-based auto parts makers have for years cited frustration in attempting to win new contracts from Toyota when bidding against one of Toyota's "captive suppliers."

Denso confirmed it was inspected by the FBI and said the investigation was based on allegations of violations of antitrust laws.

"We are fully cooperating with the investigation," said a Denso spokeswoman, who added that the investigation wasn't linked to Toyota's recent recalls.

The two other companies couldn't immediately be reached for comment.

Toyota spokeswoman Cindy Knight said the company is still trying to determine why the FBI is investigating Denso, Yazaki and Tokai Rika.

"Toyota is aware that certain suppliers have been contacted by government officials, but we have limited information about the scope of the investigation," Ms. Knight said. "Toyota has not been contacted by authorities."

The raid comes as Toyota and federal automobile-safety regulators are appearing in Congress Wednesday to testify about problems of unintended acceleration in some Toyota vehicles.

Yazaki supplies several electronic components, while Denso makes a variety of parts including accelerator pedals that Toyota has used in its vehicles. Those pedals weren't involved in the recent recalls of Toyota vehicles based on complaints of unintended acceleration.

Tokai Rika makes a variety of safety products including seat belts, door mirrors, power windows and steering switches.

Europe Goes on Strike

The Wall Street Journal

On Wednesday, a union-backed general strike shut down Greece. Roughly a million workers protested their government's plans to bring its 12.7% budget deficit under some semblance of control. Shipping, air traffic, trains, schools, and numerous private industries ground to halt. In the one country that can least afford to put an economic gun to its own head, the unions have decided to pull the trigger.

Nor were Greek workers alone. In Spain, tens of thousands of union members and fellow-travelers rallied in the streets. In France, air-traffic controllers and refinery workers have walked off the job. In Germany, a brief strike by Lufthansa pilots has left Europe's airports even more clogged than usual. Only in the U.K. do British Airways' cabin-crew members remain coy as to when exactly they will bring operations to a grinding halt.

What accounts for this Continent-wide outbreak of unrest at a time when Europe's economies can so ill-afford it? Call it the welfare-state mentality coming home to roost. For decades, European workers have been told that somebody else will provide for them. You want a shorter workweek? Paris is here to help—along with a laughable promise that the 35-hour law will reduce unemployment. Are fuel prices too high? Here's a subsidy, extracted from excise taxes that account for more than half the cost of other people's gas. You want more vacation, longer and better-paid family leave, more generous benefits? Your employer surely has the necessary funds stashed away somewhere or other.

In Greece, one union representative gave voice to the general mentality. "We understand the difficulties in the economy, but the average worker can't give anything more," said Stathis Anestis, a spokesman for a private-sector umbrella union. "If the EU wants more measures [to improve Greece's finances], the rich and those who evade taxes should pay for it."

Mr. Anestis is right that Greece has a serious tax-evasion problem. But it's equally clear that Athens has made promises to its public-sector employees that it cannot afford to keep even if it were to collect every euro cent owed to it by every tax cheat.

In a different world (or on a different continent) the anger and frustration now being vented on Europe's streets would be directed at government policies that have led to economic stagnation, anemic or nonexistent private-sector job creation and a welfare state that in many countries consumes half of all economic output for distribution to others. But a statist mentality has become so entrenched that few people even think to ask for greater freedom to provide for themselves. They demand, instead, that someone else provide for them.

This mindset is not immutable. It's the product of economic and political arrangements that tax the fruits of success at 50% and more. Change the incentives and you change the mentality. The question is whether there's a politician anywhere on the Continent willing to offer his countrymen a better bargain than welfare, unemployment and unrest.

Blockbuster Searching for Ways to Claw Back

Reuters

Blockbuster Inc has hired a law firm and an investment bank to explore how the video rental firm can cut its $1 billion debt load, the Wall Street Journal reported on Wednesday.

Law firm Weil, Gotshal & Manges and the bank, Rothschild Inc, will also look at other strategies, such as acquisitions or partnerships, the newspaper said, citing people familiar with the matter.

Bondholders have also begun talking with potential advisers to move towards reworking Blockbuster's capital structure, such as converting debt to equity, the WSJ said.

"We don't contemplate filing for bankruptcy," it quoted Chief Executive Jim Keynes as saying.

Blockbuster is struggling to pare huge debt it inherited a decade ago when it was spun off from Viacom Inc, while trying to handle the increasing challenge from Netflix Inc and Redbox as well as Apple, Amazon.com, Google, Hulu and cable companies that have expanded video-on-demand offerings.

Blockbuster has also been in talks with Hollywood Video rental chain Movie Gallery Inc MVGR.PK, which filed for bankruptcy the second time in three years earlier this month, about acquiring assets, the business daily said.

Last month, the once mighty U.S. video chain, said it had a weaker-than-expected holiday season, fueling concerns about its viability.

The company, which already has sold off most of its international operations and may shut as many as 20 percent of its U.S. stores this year, said it plans to further reduce costs in 2010 and to remain "conservative" in its spending.

However, the restructuring discussions are in early stages and no major actions appear imminent, the paper said.

Blockbuster could not be immediately reached for comment by Reuters outside of regular U.S. business hours.

Olympic Logo Strays From Tradition

The Wall Street Journal

Michelin Man Meets Stonehenge to Birth an Olympic Rock Star
Inuit-Inspired Logo Strays From Tradition; Stacks of Tuna Cans at the Aquarium

VANCOUVER, British Columbia—Matthias Heimel has the Olympics figured out. The German spectator knows his way to the ice rink where his country's hockey team plays. He can get around downtown Vancouver.

But he's less certain about the Vancouver Games emblem, which can be seen from one end of the Olympic host city to the other on hats, jackets and shot glasses, and in monumental statues made of everything from chocolate to empty shipping containers. "It looks like an alien," says Mr. Heimel.



Olympic logos and mascots usually get plenty of attention, from Moscow's cuddly 1980 teddy bear to London 2012's Day-Glo emblem, whose pink jagged design sparked a flurry of criticism from comparisons to a broken swastika to claims an animated version caused epileptic seizures. Canada's choice of emblem is among the most curious: It's a pile of rocks.

An inukshuk is a stack of stones traditionally used by the Inuit of the arctic to mark anything from a hunting spot to a food cache. In 2005, the Vancouver Organizing Committee for the Olympics chose a multicolored humanoid version of an inukshuk as the games' official 2010 emblem. That sparked an inukshuk boom in Canada that has reached far from the frozen tundra where the figures originated—and precipitated its share of controversy.

In Vancouver, the official inukshuk logo can be found on everything from key chains and T-shirts to rain gear for dogs.

Similar rock piles have inspired unofficial products—from $6 bottle openers to the Inukie Cookie designed by the creator of the Vancouver 2010 logo, which lets you build your own inukshuk out of maple-flavored shortbread.

The Vancouver Aquarium has unveiled a 10-foot-high inukshuk made out of 4,368 cans of sustainably fished salmon and tuna. That one looks more like a Japanese robot, admits aquarium spokesman Kent Hurl. "From far away, it kind of looks like a Transformer," he says.

Other rock piles are sprouting up across Canada, as emblems of the Canada Speed Skating team and latest Group of Seven finance ministers meeting. Cities including Niagara Falls, in Ontario, and La Ronge, in Saskatchewan, have commissioned massive stone statues to commemorate the passing of the Olympic torch through town. Home-goods store Canadian Tire Corp. says its plastic $38 Inukshuk garden statue is a top seller, along with its Golfing Gnomes and Canadian Moose.

In the Inuktitut language, inukshuk means "something that substitutes for a person." (For the grammatical record: One inukshuk. Many inukshuit.) Archaeologists say some piles up north have been around for thousands of years. Luke Suluk, president of the Inuit Heritage Trust, says there are many old inukshuit around his home in Arviat, on the western Hudson Bay.

Some mark boat landings, Mr. Suluk says. Others point out caribou routes or good camping spots; a few memorialize local tragedies such as illness or starvation.

While old versions were meant to stand in for a person, the latest ones are increasingly anthropomorphic: The Michelin Man meets Stonehenge. And as the things sprout all over southern Canada, some Inuit are bemused.

"It can be misleading," says Mr. Suluk, explaining that Inuit don't build inukshuit indiscriminately. "All Inuit are told not to make any inukshuk without a purpose."

 Elena Rivera MacGregor, the designer of the Vancouver logo, had never seen a real one up north. Her inspiration was a big gray granite statue by her home in Vancouver, built for the city's 1986 Expo as an expression of northern hospitality and friendship.

Ms. MacGregor created a multicolored version: two vertical blocks for legs, a horizontal chunk for a torso, a longer horizontal for outspread arms and, for a head, a crowning block with a gouge for a mouth. She dubbed it Ilanaaq, or "friend" in Inuktitut.

"When you find an inukshuk in the snow, you find friendship, shelter," she says. "The inukshuk kind of gives you a hug."

Not everyone found the idea so cuddly. When the logo was unveiled, Mark Busse, then-head of British Columbia's graphic-design association, was quoted in press reports as calling the logo a "cutesy little smiley-faced Pac-Man on a pile of stones." ("It's grown on me," Mr. Busse says now.)

Some Inuit elders, meanwhile, protested that the humanoid design isn't authentic. Others fret the original meaning is being lost. "Inuit are concerned that inukshuk are being used everywhere without having much meaning or respect to Inuit," says Mr. Suluk.

All that hasn't damped the appeal, in part because an inukshuk is pretty easy to make. Touchstone Site Contractors Inc., an Ontario provider of commercial landscaping and security fencing, had never made a stone sculpture before it landed the contract for the Niagara Falls inukshuk. Office manager Brandon Bradley whipped the design up himself on AutoCAD.

"As long as you keep it somewhat proportional—that's it," he says.

Inukshuit have also been popping up along the highways in central Ontario during the past few years. The stone piles have drawn the wrath of some environmentalists who have complained on blogs that they're eyesores and that building them damages local rock formations from which they say the raw materials have been taken.

On the streets of Vancouver these days, it's hard to go a few blocks without bumping into inukshuit. Some 1,000 Inuit carvers in the arctic territory of Nunavut have been conscripted to make authentic inukshuit for sale at the Olympics as well, says Dennis Kim, head of merchandising for the Vancouver Organizing Committee. A 15½-inch statue goes for about $1,880.

Vancouver's souvenir shops are selling inukshuk statuettes made of pewter, glass, crystal, wood and British Columbian jade, as well as a full collection of inukshuk snow globes and playing cards.

Then there's the monumental approach. In Vancouver's downtown shopping district, the display window of chocolatier Daniel boasts a 320-pound inukshuk made of solid Belgian chocolate. The shipping hub of Richmond, just south of Vancouver, has built a six-story inukshuk out of several empty cargo containers.

So look out, maple leaf.

Cameron Dix, the manager in Vancouver of one of Canada's biggest souvenir trade shows, says the ramp-up in inukshukery he has seen since last year points to a bigger destiny for the inukshuk.

"It's become a Canadian symbol," he says.

Insurer Blames Health Costs for California Rate Hikes

LA Times

WASHINGTON-- The head of the major health insurer that wants to boost rates in California by up to 39 percent defended her company before Congress on Wednesday, saying the increases would be tough for many customers but were necessitated by soaring medical costs.

In prepared testimony for a House investigative subcommittee, Angela Braly, president of WellPoint Inc., blamed the increases on the growing price tags for hospital care and pharmaceuticals. She also cited the ailing economy, which has caused many younger, healthier people to save money by dropping coverage, leaving her company covering an older, sicker population.

"Raising our premiums was not something we wanted to do," Braly said. "But we believe this was the most prudent choice."

WellPoint owns Anthem Blue Cross, whose plan to boost rates in California has made it a poster child for Democrats arguing that the nation's health system must be overhauled. Wednesday's hearing comes a day before President Barack Obama hosts bipartisan congressional leaders for a daylong, televised discussion of health care, a session he hopes will provide new momentum to Democrats' stalled legislation.

It also was occurring the same day the House planned to vote on legislation repealing the health insurance industry's exemption from federal antitrust laws. Obama and Democrats say the measure would help spur competition, but analysts say it would have little impact on how insurers do business because they already are regulated by states.

Democrats on the House Energy and Commerce oversight and investigations subcommittee also invited some California residents to describe their experiences with Anthem.

In prepared testimony, Jeremy Arnold of Los Angeles said Anthem informed him last month that his rates would grow by 38 percent to $319 a month, which could force him to take a less expensive policy with higher deductibles and hope he doesn't get sick.

"Hope is not an adequate health care policy," Arnold said.

Braly expressed some sympathy.

"Clearly, we understand that rate increases create a challenge for many of our members," Braly said. "However, it is important to know that many of our members often have a choice of coverage."

She said the company was dismayed when the health overhaul debate in Washington turned into "an attack on the health insurance industry," which she said was "very misleading."

After its rate announcement generated criticism, Anthem said it was postponing the increase from March 1 until May 1 while it is reviewed by California regulators.

Anthem covers more than 8 million Californians, including about 800,000 who buy their policies directly. It is on those individually covered people that Anthem has proposed rate increases of up to 39 percent, though the company says the average increase is 25 percent -- which the company says is in line with competitors.

Braly said the company lost $10 million on individually insured Californians last year.

In a report earlier this month, the Obama administration cited WellPoint's reported profit of $2.7 billion in the fourth quarter of last year as evidence that insurers' rate boosts need to be curbed.

But Braly cited a one-time sale of an asset and said the profit excluding that was $380 million after taxes. She said even if the company returned that profit entirely to its customers, they would each receive an average $5.13 per month.

Braly said the rate increases and growing costs show why a health overhaul is needed. She said the Democratic bills debated so far have been inadequate because they don't control the growth of medical costs and thus the tilt in California health insurance quotes.

"Changing how we finance health care without changing how we deliver health care is simply not sustainable," she said.

In California, Exhibit A in Debate on Health Insurance

NY Times

A letter to Steven Mandel from Anthem details the rate change that is proposed for his policy.

LOS ANGELES — When Bernhard Punzet opened the dreaded envelope from Anthem Blue Cross one recent Saturday, it ruined his weekend.

Although he had no known medical problems, the company was raising the premium on his individual health insurance policy by 34 percent, to $254 a month. The policy for his partner, who is 12 years older, would rise 36 percent, to $369.

“Ten percent I could have rationalized,” said Mr. Punzet, 34, a financial controller for a Los Angeles recruiting firm. “But a 34 percent increase? I don’t even have any data points for that, nothing to compare it to. I’ve never seen anything go up 34 percent.”

With health care negotiations stalled in Washington, the Obama administration is seizing on the seething fury felt by Mr. Punzet and nearly 700,000 other Anthem customers in California who have received notices of increases that average 25 percent. About a quarter of them are seeing leaps of 35 percent to 39 percent, the company said, at least four times the rate of medical inflation.

At a moment when the health care debate seemed drained of urgency, the rate increases have permitted Mr. Obama to remind Americans of what is at stake, not just for the uninsured but for those whose coverage is threatened by unregulated hyperinflation.

The spike in Anthem’s premiums, Mr. Obama warned last week, were “just a preview of coming attractions” if the country failed to overhaul its health insurance system.

But if Anthem was the whipping boy the White House needed, the confrontation has also reinforced an emerging shift of focus in Washington from the need for universal coverage to the need for serious cost control. And it brought into clear relief the deep rift between the administration and the insurance industry concerning a central question: whether such unsustainable pricing is driven by the bloodless economics of risk or a corporate culture of greed.

Recognizing a no-lose proposition when they see one, politicians in Sacramento and Washington chastised Anthem relentlessly last week, and hearings are scheduled in both capitals. On Saturday, Anthem’s parent company, WellPoint Inc. of Indianapolis, agreed to a request from California’s insurance commissioner to delay the increases by two months, to May 1, so he could determine whether they comply with loss-ratio regulations.

Health and Human Services Secretary Kathleen Sebelius challenged the company to justify its “extraordinary” rate increases and, when it did in a five-page letter, volleyed that she was not satisfied. She expressed indignation that some of Anthem’s increases would be up to 15 times the rate of inflation, and that WellPoint had earned $2.7 billion in the fourth quarter of 2009.

“Too many Americans are at the whim of private, for-profit insurance companies who are raking in billions in profits each year,” Ms. Sebelius wrote on the White House blog.

She did not mention that most of WellPoint’s fourth-quarter surge came from the one-time sale of a business unit or that Anthem lost money on the individual market in California last year, as company officials assert. California’s insurance commissioner, Steve Poizner, said Saturday that he had a “healthy skepticism” about the claim.

Although Anthem, the state’s largest for-profit insurer, has seemed outmaneuvered by the White House so far, it has tried to transform its defensive position into a teachable moment.

In statements and letters, Anthem and WellPoint have explained what the industry calls a recessionary death spiral: as unemployment and declining wages prompt healthy people to drop their insurance, the remaining risk pool becomes sicker and more expensive to insure, which in turn forces up prices and pushes more people out of the market.

Bernhard Punzet, a financial controller, is an Anthem Blue Cross policy holder whose health insurance premium was increased by nearly 40 percent.

A study released this week found that the five largest health insurance companies collectively lost 2.7 million customers last year, including 1.4 million by WellPoint. Yet they reported record profits of $12.2 billion.

The death spiral “highlights why we need sustainable health care reform to manage the steadily rising costs of hospitals, drugs and doctors,” Anthem, which is based in Los Angeles, said in a statement.

To many in recession-racked California, however, the Obama administration’s populist rhetoric has sounded pitch perfect.

“As a trial lawyer, I’d make it Exhibit A,” said Joshua C. Needle, 57, of Santa Monica, whose premium is rising 33 percent. “I have no problem with profits, but they’re maximizing profits without any concern that they have a captive audience.”

Mr. Needle, like many of the 13 million Americans who buy insurance individually rather than through employers, cannot shop for a better deal because he has medical conditions like high cholesterol and glaucoma that would probably disqualify him with other carriers.

Once accepted by an insurer, consumers cannot be dropped for medical reasons. But in California, where Anthem controls more than half of the individual market, regulators have little power to prevent insurers from raising individual rates as high as the market will bear. That often forces consumers to move to less-generous policies with higher deductibles in order to hold down their costs.

Mr. Poizner, who is running for governor in the Republican primary, has hired actuaries to study whether Anthem is spending at least 70 percent of premium revenues on claims, as required by state regulations. WellPoint officials said they were confident that Anthem exceeded the threshold.

In the health care bills that have passed each chamber, but not been reconciled, Congressional Democrats would attack the cost of premiums in several ways. Everyone would be required to have health insurance, spreading risk among larger pools. Health insurance marketplaces, or exchanges, would force insurers to compete more transparently. Insurers would be prohibited from denying or canceling coverage because of medical conditions, and would be forced to spend at least 80 percent of premiums on claims.

Paradoxically, since WellPoint has lobbied vigorously against the legislation, the company argued last week that its “unfortunate but necessary” rate increases demonstrated the need for a major fix.

But the company found fault with the Democrats’ proposals, particularly what it sees as soft enforcement of a health insurance mandate that would allow millions of people to remain uninsured. Only if everyone is covered, the insurance industry argues, can it spread its risks sufficiently to stop rejecting those with pre-existing conditions.

“The reform being discussed in Washington will not do anything to address the underlying increases in costs,” said Brian A. Sassi, president of consumer business for WellPoint.

Medical costs have typically risen by 5 percent to 10 percent during each of the last five years. Mr. Poizner said he was starting to see significant increases for individual policies sold by some of Anthem’s competitors, and double-digit increases have been reported in other states.

Several insurance analysts said it was possible, but not necessarily likely, that such increases would become common, at least while the economic downturn persists. Insurance brokers in Los Angeles said they had never seen jumps of such magnitude in California health insurance quotes.

“It’s more astonishment than irritation,” a Pasadena broker, John W. Barrett, said of the reaction from his customers. “Irritation was last year and the year before. Now they’re astonished.” 

Lufthansa Pilots Begin 4-Day Walkout

NY Times

Air travellers endured cancellations and disruptions Monday as pilots for Lufthansa, Europe’s largest airline, began a four-day walkout that has already forced the grounding of hundreds of flights.

The German flag carrier was operating a sharply reduced schedule that involved scrubbing roughly half of Monday’s 1,800 scheduled flights, up from an initial plan of 800 daily cancellations for the duration of the strike. The airline said some pilots that had been scheduled to work through the strike were not showing up and a spokesman estimated that as many as 1,000 flights might not get off the ground Monday.

The airline said most of the canceled flights were on domestic German routes, where Lufthansa was offering to rebook passengers on trains to their destinations. For European and intercontinental flights, the carrier said it was re-booking passengers whenever possible with its partners within the Star Alliance. Lufthansa said it planned to maintain all flights on routes where it has no airline partners.

Lawyers for Lufthansa asked a Frankfurt labor court to issue a temporary injunction to halt the strike by the Cockpit Association union, arguing that a four-day work stoppage would cause excessive harm to the airline. A hearing on Lufthansa’s request was expected later Monday.

The Cockpit union, which represents about 4,500 pilots at Lufthansa and two German subsidiaries — Lufthansa Cargo and Germanwings, a no-frills carrier — voted last week to strike after failing to secure guarantees from the airline that it would not seek to transfer cockpit jobs to the company’s foreign subsidiaries such as Austrian Airlines and Swiss International Airlines which pay their flight crews less.

Salaries for first officers at Lufthansa start at €60,000, or $82,000, while for captains it is €110,000, according to the airline’s recruiting website. That compares with around €40,000 for a first officer and €75,000 for a captain at Austrian Airlines. Swiss first officers start at around €46,000 per year and captains at €68,000.

Lufthansa argues that the number of its pilots in Germany has increased by 20 percent since 2001, due to the expansion of its network through acquisitions and new airline partnerships. The airline last week offered pilots assurances that their jobs would be secure through at least 2012.

Last-minute efforts over the weekend to avert the strike were unsuccessful. The German transport minister, Peter Ramsauer, brokered a series of telephone calls between Wolfgang Mayrhuber, Lufthansa’s chief executive, and Winfried Streicher, Cockpit’s president, but the two sides were unable to agree on ground rules for re-opening negotiations. Both the union and the airline expressed the hope that talks could resume on Monday.

Pilots demonstrated in the rain Monday outside Frankfurt International Airport, where Lufthansa has its main hub, with orange strike buttons pinned to their uniforms and signs such as: “If it says Lufthansa on the outside, it must be Lufthansa on the inside.”

Lufthansa has estimated the cost of the strike at around €25 million, or $34 million, per day.

People's Republic of Hacking

The Wall Street Journal

'Panda' Exploit Offers Rare Inside Look at China's Cybercrime Networks

WUHAN, China—Some of today's biggest cybersecurity worries trace their roots to this central Chinese city, where a hacker with a junior high school education slapped cartoon pandas onto millions of computers to hide a destructive spy program.

The Panda Burns Incense computer worm, created by 27-year-old Li Jun, wreaked havoc for months in China in 2006 and 2007, eventually landing Mr. Li in jail. Jumping one computer to another by tricking users into opening what appeared to be a friendly email message, the Panda funneled passwords, financial information and online cash balances from game Web sites to Mr. Li's cohorts—leaving a panda as its calling card.

When Google Inc. last month alleged that it and more than 20 other companies were breached in a cyberattack it traced to China, the attack, dubbed Aurora, appeared orders of magnitude more complex than the Panda attack. Unlike the Panda attack, which left a calling card and spread quickly and randomly, the perpetrators of Aurora targeted specific employees within the companies they attacked and went to great lengths to cover their tracks.

There is no evidence thus far that the Google hack has any connection to the Panda's pandemonium. What is clear is that Mr. Li learned his craft and launched his attack within a hacker network in China that remains an active and growing threat to global computer users.

The identity, motivation and methods of Chinese hackers are rarely traceable. But based on interviews with security experts, forensic reports from independent tech firms, and the hackers themselves, the Panda case offers a rare window into how the underground world of Chinese hacking operates.

Mr. Li's Panda attack became known as "the first case of organized cybercrime in China, using a computer virus," according to U.S. technology security firm Symantec Corp. Once a computer was infected, the desktop icon of every executable file, such as Microsoft Corp.'s Word, would change into a picture of a panda. Clicking the panda would prompt the computer to immediately download software from the Internet that in turn allowed Mr. Li's computers to siphon off financial information stored deep inside it.

Cyber experts say hacker forums are very likely fertile recruiting grounds for the Chinese government, which is increasingly anxious about its own cybersecurity. In fact, one person formerly involved in spreading the Panda virus says he was later hired to work with Chinese police to break into accounts of Internet users. That couldn't be independently verified.

China rejects as nonsense that it is a hacker haven. "The government has never supported or been involved in cyber attacks, and it will never do so," Peng Bo, an official with the State Council Information Office's Internet Bureau, told state media in mid-February. "In fact, China is the country worst hit by worldwide hackers."

Investigators probing the Google matter still don't know where it began but have been examining whether computers at China's Shanghai Jiaotong University and Lanxiang Vocational School in Shandong Province were involved in the attacks, according to a person briefed on the matter. The New York Times reported Thursday that the attacks have been traced to computers at the two schools.

Mr. Li was released from prison in December after serving three years of a four-year term for destruction of property related to hacking. He declined a formal interview, but in a series of brief phone calls, online chats and email messages, he said he is looking for a "fresh start," perhaps as a cybersecurity specialist, a so-called "white hat." After his release from jail, Mr. Li spent a few days at his parent's red tiled three-floor house outside Wuhan. Instead, he has crisscrossed the country with his Acer laptop to visit others involved in the Panda attack. Mr. Li says he's interested in working with former co-conspirators on legitimate businesses.

Mr. Li's hacking career began in May 1999, a month before his 17th birthday, when U.S. warplanes bombed China's embassy in Belgrade. Angered by the strike, Mr. Li, who was hanging out at cybercafes in Wuhan, stopped playing computer games to become a hacker.

Mr. Li took lessons from a childhood acquaintance named Lei Lei. He learned how to control thousands of computers as zombie-slaves, or "chickens" in Chinese slang, to attack Websites, Mr. Lei said in an interview. While students in Beijing pelted the U.S. Embassy with rocks, the two skinny teenagers, from the second floor of a dimly lit Wuhan cybercafe called the "Network Club," waged their own "U.S. hacker war," disrupting 20 or 30 U.S. Websites, according to Mr. Lei. "We were too young at the time, doing wild things," Mr. Li said by email.

Over the next few years, the two hacked as teammates, stealing money from Internet users, Mr. Lei recalls. They downloaded simple attack programs found on the Internet to break into gaming accounts to steal and then sell virtual-money credits used by players. To advance in their games, players buy special weapons and other items, which are tradeable for cash.

Mr. Lei, 27, spent a year in the same jail as Mr. Li in Hubei province on similar charges for the Panda attack and was released in 2008. Today he works for his father's manufacturing firm in Wuhan and plans to open an Internet security business. A fan of American hip-hop music, he still flouts authority, steering his luxury Toyota the wrong way down Wuhan streets during an interview to avoid traffic.

The two hackers say they sharpened their skills as part of an online hacker alliance that took its name from a Qing Dynasty insurgency group, the Small Swords Society. Mr. Li adopted the online moniker WHboy, for Wuhan.

In general, Chinese hackers don't fit the Hollywood stereotype of geeky loner-geniuses in American basements or steely smooth Russian mobsters who design and execute hits, reaping all the benefits, cybersecurity experts say. On the contrary, China's hacker community is a widely dispersed, fragmented chain of digital craftsmen. In Chinese, hackers are known as "heike," or black guests.

"As for Chinese hackers, their overall technological skill isn't as good as American or Russian hackers," Mr. Li said in an email, answering questions from the Wall Street Journal. "However, China has the biggest population of hackers in the world." Noting his own communication with foreign hackers, he added, "I often downloaded hacker software from their sites to compare them with programs I wrote or other Chinese hackers wrote."

In China's hacking community, each person does a specific job and, rather than working for a big score, gets paid piecemeal by selling his work, cybersecurity experts say. The programmer of malicious programs usually assembles his program, as Mr. Li did, with lines of computer code he bought elsewhere. The operation works like an assembly line: The programmer then makes customers of others who pay to undertake the broader attack, spreading the malicious software, triggering it and sharing the payoff.

"The chain business is uniquely Chinese," says a Chinese security expert for a major U.S. technology company in Shanghai. Hacker conspiracies in China are structured like multi-level sales networks and even pyramid schemes, he said, not tight-knit criminal gangs that write "technically clean" code designed from the ground up.

Like most Chinese hackers, Mr. Li says he was nurtured inside the informal but active network of online chat rooms where technology break-ins are plotted. According to hackers and Internet security people, such forums are little more than criminal training schools and hardware stores, a cyber underworld where the locks on technological secrets that power online games, bank Websites and Apple Inc.'s iPhone undergo brutal stress tests from the world's largest Internet population.

To sidestep laws against selling malicious software, programmers euphemistically advertise their hacks as "training" and "tutoring," hackers say. Would-be distributors tout themselves as "mail senders," while "script kiddies," keen to build an underworld reputation, will buy hacker tools and pull the trigger.

Anyone along the chain can tweak a virus, for instance, so it attacks another target or trolls for different data. The bounty, benignly called "envelopes," is for sale too: source codes to mimic existing Websites sell priced at 50 yuan, about $7, and data from their users go for 500 yuan. Forum owners and participants mask their identities. The chief barrier to participation is the Chinese language.

Hacker "crowd sourcing"—when large numbers of people contribute to writing code and executing it—reduces the risks individuals face and leaves the network intact if someone does get caught or a forum is shut, Internet security experts say.

By October 2006, looking to filch from several types of online accounts at once, Mr. Li turned to these forums, hoping to steal enough money to buy a Land Rover, he recalled in an email sent to the Wall Street Journal.

Using a Dell computer in a rented apartment in central Wuhan, Mr. Li designed his panda worm, now formally known as W32.Fujacks, to deliver a package of software to Internet users that would steal virtual-money credits and other items from 10 different sources like online game sites. The software exploited poorly protected firewalls to infect virtually any computer connected to the Internet.

Mr. Li fished these hacker forums for usable lines of code, settling on script for a worm called Nimaya. For feedback, in the hacker equivalent of a professional peer review, he dropped samples of his own work into bulletin boards like delphibbs.com, according to Mr. Lei. Hacking "can't have made such fast progress and be here today without innovation, sharing and exchanging of technologies," Mr. Li said by email.

Weeks later, Mr. Li branded his tens of thousands of lines of code with an icon stolen from a chatting website called QQ: a black-and-white panda gripping three incense sticks. He offered the tool that siphoned money out of sites for sale, initially tapping 10 distributors who he charged about $120 each.

With "astonishing frequency," according to Symantec, the panda replicated itself by the millions. For some recipients, it was a reminder of a bug dubbed "ILOVEYOU" that had spread from the Philippines six years earlier. But the panda added a malicious feature: hackers could deploy its "backdoor" to grab virtual money from popular online games, including those run by Tencent Inc. A spokeswoman for Tencent said many companies were affected and declined to comment on the Panda case.

Mr. Lei recalls the two spent every waking moment trying to resell their virtual trove. They fenced it at 10% discounts to face value to online buyers, "like on Ebay," Mr. Lei said. How much the scam brought in isn't known, but Mr. Lei says they could earn $1,200 some days. They partied and Mr. Li bought a $2,000 computer but otherwise Mr. Lei says they didn't spend their winnings much.

Soon Chinese Internet users, including government agencies, were decrying the "poisonous panda." Modified or copycat versions of the panda started doing other kinds of damage: turning screens blue, slowing computer speeds, crashing systems and erasing programs.

By early 2007, the two realized the Panda was "out of control" and set plans to flee to western China. By then, police had tracked the Panda to the $72-per-month apartment in Wuhan rented by Messrs. Li and Lei. Only Mr. Li was home when they swooped in on Feb. 3.

Mr. Li appeared in court handcuffed with a newly shaved head and was convicted of destroying property and stealing $18,000.

Mr. Lei was caught later. Police arrested others in Zhejiang, Yunnan and Shandong provinces for their involvement in the Panda attack, some of whom were jailed as well. Many others were never identified, including people who spurred the Panda's spread and profited from it.

As Mr. Li began his four-year sentence, state media pictured him behind bars in a yellow jumper using a prison computer to exterminate his panda virus. (It didn't work. Last November, McAfee Inc., the Internet security firm, warned fresh strains of the panda bug were spreading.)

In December, Mr. Li was released early for good behavior. His first call was to Mr. Lei.

To his fast-expanding 17,000 following on a Twitter-like service, Mr. Li issued a cryptic message about what he planned for the future: "Bread will come. Milk will come. Everything can be restarted all over again."

Hack Attacks and Technical Snafus at Facebook and Twitter

NEW YORK (AP) - Facebook users have been complaining about problems at the social media site.

Users in the U.S. and other countries reported problems beginning Saturday morning. Some could not log in, and the site was unusually slow and glitchy for others. Users in London, Bangkok and Mexico City reported problems. Many used Twitter to complain.

Facebook spokesman Matt Hicks said it was a "small percentage of users" who had problems accessing Facebook, their friends' profiles or specific site features because of an isolated server problem.

At 6 p.m. Saturday, Facebook said it had restored access to the users who were having access problems.

Facebook, which has more than 100 million users, has occasionally experienced such hiccups. Twitter has had bigger problems. Last August, hackers shut down the short messaging service for several hours. Facebook also experienced problems, though it was never shut down completely.

The Real Greek Tragedy

Newsweek / Robert J. Samuelson

Why this is just the opening act.

It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues that affect hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency, the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, and aged. All face similar problems: burgeoning costs as populations age, an overreliance on debt financing, and pressures to reduce borrowing that create parallel pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece seems the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt—basically, the sum of past annual deficits—was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost €17 billion of bonds (about $23 billion) maturing in April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal, and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are now debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others.

But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand—or require—rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut government workers and to raise taxes on alcohol, tobacco, and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble.

To some economists, the dire situation makes default inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen the existing unemployment rate of about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and might revert to its old currency (the drachma).

Conceived as a way to unite Europe, the euro increasingly fosters conflict. No one wants Greece to default, but no one wants to pay the price of prevention. With its own currency, Lachman thinks, Greece will pursue depreciation to spur exports and economic revival. If other countries dump the euro, currency wars could ensue. But the threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birthrate and a rapidly graying population automatically increase old-age assistance even as the government tries to cut total spending. At issue is the viability of its present welfare state.

Almost every advanced country—the United States, Britain, Germany, Italy, France, Japan, Belgium, and others—faces some combination of huge budget deficits, high debts, aging populations, and political paralysis. It's an unstable mix. The unpleasant choices now confronting Greece await most wealthy nations, even if they pretend otherwise.

Gold Heads for Weekly Gain on Speculation Dollar Rally to Stall

Business Week

Gold, little changed in New York, headed for a second straight weekly gain on speculation that the dollar’s rally will stall, boosting the appeal of the precious metal as an alternative investment.

The dollar rose as much as 0.6 percent against the euro before paring gains. The Federal Reserve yesterday raised the discount rate it charges banks for direct loans for the first time in more than three years, a signal that the U.S. economy is recovering from the longest recession since World War II.

“Gold looks strong,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “People are realizing this isn’t a tightening. Raising the discount rate isn’t going to have an effect on the American household. It all goes back to the credibility of fiat currencies. People will continue to buy gold on dips.”

Gold futures for April delivery slipped $1.30, or 0.1 percent, to $1,117.40 an ounce at 11:51 a.m. on the New York Mercantile Exchange’s Comex unit. A close at that price would leave the metal up 2.5 percent this week.

Credit-Card Fees: the New Traps

The Wall Street Journal

Law Allows Some Aggressive Lender Tactics to Continue

A new federal credit-card law that takes effect Monday could erase billions of dollars a year in fees and interest charges paid by consumers. But card issuers are already deploying new tactics that could prove costly for even the most cautious cardholder.

The law made some important changes. Card companies must now tell customers how long it would take to pay off the balance if they only make the minimum monthly payment. Customers can only exceed their credit limit if they agree ahead of time to pay a penalty fee. And unless a cardholder misses payments for more than 60 days, interest-rate increases will affect only new purchases, not existing balances.

Banning these and other profitable tactics is expected to cost the card industry at least $12 billion a year in lost revenue, according to law firm Morrison & Foerster. This has sent the industry scrambling to find new sources of revenue. So get ready for higher annual fees, higher balance-transfer charges, and growing charges for overseas transactions.

"There are countless fees that can be introduced and rates can go through the roof," says Curtis Arnold, founder of U.S. Citizens for Fair Credit Card Terms Inc., a consumer-advocacy group.

Consider the new offer from Citigroup Inc. The bank will give cardholders a credit of 10% on their total interest charge if they pay on time. That sounds enticing, except that if you don't pay on time, your interest rate is 29%.

The new regulations, dubbed the Credit Card Accountability Responsibility and Disclosure Act of 2009, couldn't come at a worse time for banks, which have been trying to rebuild balance sheets hit hard by the collapse of the housing bubble and the recession. Now, their credit-card operations are getting pounded by a downturn in spending and sharply higher defaults as unemployed Americans and other cash-strapped customers stop paying their debts. Last year, Bank of America Corp. and J.P. Morgan Chase & Co. suffered combined net losses of $7.8 billion in their credit-card operations, and this year will bring more red ink unless there is a miracle rebound.

The banks could be hurt further as consumers try to clean up their finances, especially high-cost credit card debt. The average American was running a credit-card balance of just over $5,400 at the end of 2009, down about $200 from five years ago, according to TransUnion, a Chicago-based firm that tracks credit data. In such an environment, consumers may push back against new card fees or jump to a rival issuer determined to compete by keeping fees low or nonexistent.

All this represents a huge change from three years ago when banks were tripping over themselves to issue credit cards to just about anybody, and consumers were on a spending spree. Banks have pruned many of their more profligate cardholders, and are using higher transaction fees to raise more money from cardholders who pay their bills each month rather than run up huge balances.

The biggest new tactic may be one of the oldest: raising rates. As long as credit-card companies inform you ahead of time and don't make any sudden rate changes, they are mostly free under the law to charge whatever they want. They can raise the rate on new purchases made as long as they provide 45 days notice that they are doing so.

U.S. banks on average increased the interest rate on their credit cards by about two percentage points between December 2008 and July 2009, according to Pew Charitable Trusts, a nonprofit group. Some consumers say that their accounts have been hit with sudden interest-rate increases even if they haven't been late on a payment.

Bank of America says it hasn't raised interest on credit-card accounts since the law was passed last spring, except in the case where a cardholder has repeatedly paid late.

In a statement, Citigroup said: "We understand that customers don't like price increases, especially in difficult economic times. However, these actions are necessary given the doubling of credit card losses across the industry from customers not paying back their loans and regulatory changes that eliminate re-pricing for that risk."

Card companies also plan to collect more interest by switching customers to variable-rate cards from fixed-rate cards. Variable rates, which are linked to an index like the prime rate, are low now. But they give the companies more flexibility to collect a higher rate in the future as long as they alert customers to the terms now. Many card companies have already sent out notices that change the terms of the card contract to a higher or variable rate.

Cardholders should expect to see more fees for extra services, such as requesting a year-end itemization of all your purchases, paper statements or getting extended warranties on purchases. "You're going to see a lot more tricks in terms of fees," said Robert Manning, author of "Credit Card Nation" and founder of the Responsible Debt Relief Institute.

Banks already are reaping more fees on overseas transactions. Not only are they raising foreign-exchange transaction fees—the cost customers pay for purchases made in foreign currencies—but they are expanding the definition of what qualifies as a foreign transaction.

In the past, people who made online purchases from foreign merchants, or who traveled to a country where the purchases are often in U.S. dollars such as the Bahamas, were generally immune from paying such fees. But Citi and Bank of America recently imposed their 3% foreign-transaction fees on all foreign transactions—even if that purchase is charged in U.S. dollars. Discover Financial Services also began charging a new 2% for foreign purchases last year.

American Express Co., which is known for its lucrative rewards programs, recently added new fees to its co-branded Hilton Hotels, Starwood Hotels and Delta Air Lines cards. Cardholders who pay late will lose their rewards points. They can reinstate them to their accounts if they pay a $29 fee. An American Express spokeswoman said the fees are consistent with policies on its other cards and is aimed at encouraging cardholders to pay their bills on time.

For new customers, the days of 0% teaser rates and no-annual-fee boasts are dwindling. After cutting back substantially on mail offers, card companies are once again trying to woo new cardholders. But this time around, the avalanche of pitches are for cards that have annual fees or balance-transfer fees as high as 5% of the balance.

Avoiding such fees is sure to get trickier. Only about 20% of U.S. credit cards currently have an annual fee, according to industry statistics. But that number will likely rise because most direct-mail card offers are for premium cards loaded with reward programs—but also fees. Plain-vanilla cards that don't have any annual fees (or rewards programs) represented just 11% of mail offers in the fourth quarter, according to Mintel Comperemedia, which tracks credit-card mail offers. J.P. Morgan's Chase card unit and American Express are among those that have recently introduced new cards with annual fees.

Consumers can fight back against some of the industry's tactics. You only need one or two credit cards that are widely accepted. So it can make sense consolidating debt on the card that has the lowest interest rate, assuming it makes sense after taking into account the balance-transfer fee.

True, shedding cards can hurt your credit score. But John Ulzheimer of Credit.com has a rule of thumb to preserve it while closing accounts: If you are able to keep your overall "credit utilization" on your cards—the amount of credit used as a percentage of your overall available credit—below 10% then closing accounts to avoid paying extra fees could make sense, he said.

So use the card or lose it because there may be a price to pay for inactivity. Fifth Third Bancorp is charging customers $19 if they don't use their credit card in a year.

And there are ways to avoid annual fees. Citigroup is alerting some customers that it is assessing a $60 annual fee on their cards. The cure for that is simple. If you spend $2,400 on the card in a 12-month period, the bank will refund the fee.

Bob Depweg, who owns a security-consulting firm in the Los Angeles area, intends to keep playing hardball in order to what he wants out of his credit-card companies. Since the law was passed by Congress, he says he has successfully convinced American Express to drop its annual fee on his card by threatening to take his business elsewhere. And when Citi raised the interest rate on his wife's credit card to 29.9% from 14%, he closed the account.

Regulations going into effect later this year will place even more constraints on credit-card companies. Starting Aug. 20, card companies will be required to review a customer's interest rate every six months. Consumers will have the right to tell a credit-card company that they don't accept a change of terms in their card agreement. The company will then be required to close the account and allow the customer to pay off the balance under the old terms.

Consumers who carry a balance may want to steer clear of retail cards, which woo customers with discounts. The money you save in the beginning could be eclipsed by the higher rates these cards typically charge as you pay off the balance.

Credit unions often offer lower rates than large banks, although some of their rewards programs are less generous than those of big banks. There are more than 8,000 credit unions in the U.S., and they tend to have pretty expansive definitions of who can join. The criterion for joining some credit unions is as simple as your Zip Code. Navy Federal, the nation's largest retail credit union, offers rates as low as 7.9% on a basic platinum Visa card for three million members of the Army, Navy, Air Force, and Marine Corps and their families.

That compares with an interest rate as low as 11.99% on a Citibank Platinum Select MasterCard, touted as one of the cheapest rates around by Lowcards.com, a card-comparison Web site. The average rate at the end of last year was roughly 14%, according to the Federal Reserve.

Besides rates, reward programs are one of the other big considerations in choosing the right card. Cash-back cards are likely to offer the best deals in the new regulatory environment since banks have been making their own reward programs less rewarding. They are shortening the expiration periods, raising redemption fees or implementing earnings caps on rewards.

Although issuers have also been trimming cash-back rates in general—the standard rate today is 1% compared with 3% to 5% a few years ago—consumers can still earn higher rates by shopping in certain categories, such as gas or groceries.

"For the average person, if you're going to do a loyalty rewards program, simple is best," said Mr. Manning of the Responsible Debt Relief Institute. "Take the cash back."