Story first appeared in USA TODAY.
Facebook on Tuesday agreed to a Federal Trade Commission order that bars Facebook from deceiving consumers about its privacy practices and requires it to submit to monitoring for 20 years.
The sanction stems from privacy setting changes that Facebook made in December 2009, without asking users' permission. The company told users they could keep their information on Facebook private, when, in fact, it repeatedly allowed information to be shared and made public.
Facebook CEO Mark Zuckerberg insisted in a blog posting that the company has a good history of providing transparency and control over who can see your information, but acknowledged that they've made a bunch of mistakes.
The FTC's sanction comes as Facebook readies itself for a high-profile initial public offering of stock, expected next spring. Meanwhile, the company has come under rising criticism in the U.S. and Europe for using Like buttons embedded on millions of websites to monitor Web surfing.
Facebook compiles tracking logs of the webpages viewed by each of its 800 million members, and millions more non-members, the company disclosed in exclusive USA TODAY interviews.
New federal laws are needed to help consumers protect their personal information from companies surreptitiously collecting and using that personal information for profit, says Sen. Jay Rockefeller, D-W.V., sponsor of a Do Not Track law that would restrict online tracking.
Rockefeller commended the FTC's action. Consumer privacy is a right, not a luxury, he says. This action against Facebook is just the first step toward protecting consumer privacy.
Facebook improperly disclosed information to advertisers and continued to display photos and videos even after the accounts were deactivated, according to the FTC.
The consent order, which must be approved by a judge, requires Facebook to:
•Obtain express consent before overriding users' privacy preferences.
•Cut off access to a user's material within 30 days after deletion of an account.
•Establish a comprehensive privacy program covering new and existing products and services.
•Submit to privacy program audits within 180 days and every two years after that for the next 20 years. Monitoring would be handled by an independent professional yet to be named.
Even after the consent order takes effect, Facebook users may not notice anything different.
It's not clear how the FTC's order could affect Facebook's plans for new services, including Timeline, which digitally maps everything a user has ever done on the popular social network, and "Open Graph" applications designed to broadcast user's surfing patterns and interests widely across the social network.
Chris Conley, a tech and civil liberties attorney at the ACLU'S Northern California chapter, notes that Facebook's privacy settings make no reference to Like button tracking.
There's no setting for (the) user to control that, says Conley. It's questionable if something that doesn't have a privacy setting today is covered by the FTC's order.
The FTC stopped short of ordering Facebook to restore the more rigorous privacy settings it had prior to December 2009, noted Marc Rotenberg of Electronic Privacy Information Center.
EPIC and nine other non-profit groups filed the complaint that triggered the FTC probe. If it was unfair to change the privacy settings, then the right response would be to change the settings back.
The order is expected to give technologists and privacy advocates a new, more effective tool to monitor Facebook's privacy practices, says Jeff Chester, executive director of the non-profit Center for Digital Democracy.
Federal lawmakers focusing on privacy issues will also be closely monitoring the aftermath of the FTC's order, says Rep. Mary Bono Mack, R-Calif.
Wednesday, November 30, 2011
Tuesday, November 29, 2011
Exports to Panama Could be Reduced
Story first appeared in USA TODAY.
Members of Congress weighed in Wednesday on long-delayed free-trade deals with South Korea, Colombia and Panama. Proponents claim the deals will create or save as many as 380,000 jobs, while skeptics contend the accords will lead to 214,000 lost U.S. jobs. To mollify opponents, officials coupled the free-trade deals with extra unemployment insurance and other benefits for displaced workers. USA TODAY's Tim Mullaney breaks down the impact of each deal.
South Korea
•How much we trade: $38.8 billion of U.S. exports to South Korea, $48.9 billion of U.S. imports from South Korea last year, according to the Census Bureau. Biggest sources of the trade deficit include cars, wireless communications equipment and appliances.
•What it does: Cuts Korean tariffs on U.S. autos immediately, while more slowly phasing in cuts of U.S. levies on Korean-made cars and SUVs. Lets up to 100,000 U.S. cars into Korea annually that don't meet Korean safety or environmental standards, but do meet U.S. rules. Also opens up Korean markets for U.S.-based sellers of services such as accounting and banking.
•Why business liked it: Companies with European-based competitors feared being left out after South Korea made a trade deal with the European Union. White House claims the pact will boost U.S. exports by $11 billion a year and add 70,000 jobs.
•Unions were split: The UAW backed the deal, while the steelworkers union, which represents many auto parts workers, said U.S. tariff cuts should have taken effect only after Koreans actually bought more U.S.-made cars. The Economic Policy Institute says this deal will cost 159,000 American jobs.
Panama
•How much we trade: $6 billion in exports last year, with a $5.7 billion trade surplus to the U.S. Biggest exports included construction equipment, refined petroleum products and telecom gear.
•What the deal does: 88% of U.S. exports will see Panamanian duties eliminated. Agricultural duties would be cut immediately, and phased out completely in 10 years. The U.S. International Trade Commission declined to quantify its impact on U.S. jobs, citing the small size of Panama's economy. This may be welcomed news for Ag Tires dealers.
•Why business liked it: It lets U.S. companies pursue lucrative deals linked to Panama's plan to upgrade its infrastructure.
•Why unions were critical: Opponents focused on Panama's history as a haven for shady banking activities and money laundering, and said the deal would take away legal tools used to fight fraud.
Colombia
•How much we trade: $12.1 billion in U.S. exports, $15.7 billion in U.S. imports. More than half of U.S. imports represent crude oil. The biggest exports are finished chemical and energy products.
•What it does: The deal eliminates Colombian duties that average nearly 17% on most agricultural goods. Also eliminates duties on manufactured goods that range from 7% to 15%.
•Why business liked it: U.S. farmers who used to supply nearly half of Colombia's imported food have seen market share slip to 21% as other nations lowered trade barriers with Colombia. The U.S. International Trade Commission estimates the deal will boost exports by $1.1 billion and support thousands of jobs.
•Why unions were opposed: Colombia has a history of violence against union organizers and workers, including 23 suspicious deaths this year, U.S. unions say. The Economic Policy Institute study says the pact will cost 55,000 U.S. jobs.
Members of Congress weighed in Wednesday on long-delayed free-trade deals with South Korea, Colombia and Panama. Proponents claim the deals will create or save as many as 380,000 jobs, while skeptics contend the accords will lead to 214,000 lost U.S. jobs. To mollify opponents, officials coupled the free-trade deals with extra unemployment insurance and other benefits for displaced workers. USA TODAY's Tim Mullaney breaks down the impact of each deal.
South Korea
•How much we trade: $38.8 billion of U.S. exports to South Korea, $48.9 billion of U.S. imports from South Korea last year, according to the Census Bureau. Biggest sources of the trade deficit include cars, wireless communications equipment and appliances.
•What it does: Cuts Korean tariffs on U.S. autos immediately, while more slowly phasing in cuts of U.S. levies on Korean-made cars and SUVs. Lets up to 100,000 U.S. cars into Korea annually that don't meet Korean safety or environmental standards, but do meet U.S. rules. Also opens up Korean markets for U.S.-based sellers of services such as accounting and banking.
•Why business liked it: Companies with European-based competitors feared being left out after South Korea made a trade deal with the European Union. White House claims the pact will boost U.S. exports by $11 billion a year and add 70,000 jobs.
•Unions were split: The UAW backed the deal, while the steelworkers union, which represents many auto parts workers, said U.S. tariff cuts should have taken effect only after Koreans actually bought more U.S.-made cars. The Economic Policy Institute says this deal will cost 159,000 American jobs.
Panama
•How much we trade: $6 billion in exports last year, with a $5.7 billion trade surplus to the U.S. Biggest exports included construction equipment, refined petroleum products and telecom gear.
•What the deal does: 88% of U.S. exports will see Panamanian duties eliminated. Agricultural duties would be cut immediately, and phased out completely in 10 years. The U.S. International Trade Commission declined to quantify its impact on U.S. jobs, citing the small size of Panama's economy. This may be welcomed news for Ag Tires dealers.
•Why business liked it: It lets U.S. companies pursue lucrative deals linked to Panama's plan to upgrade its infrastructure.
•Why unions were critical: Opponents focused on Panama's history as a haven for shady banking activities and money laundering, and said the deal would take away legal tools used to fight fraud.
Colombia
•How much we trade: $12.1 billion in U.S. exports, $15.7 billion in U.S. imports. More than half of U.S. imports represent crude oil. The biggest exports are finished chemical and energy products.
•What it does: The deal eliminates Colombian duties that average nearly 17% on most agricultural goods. Also eliminates duties on manufactured goods that range from 7% to 15%.
•Why business liked it: U.S. farmers who used to supply nearly half of Colombia's imported food have seen market share slip to 21% as other nations lowered trade barriers with Colombia. The U.S. International Trade Commission estimates the deal will boost exports by $1.1 billion and support thousands of jobs.
•Why unions were opposed: Colombia has a history of violence against union organizers and workers, including 23 suspicious deaths this year, U.S. unions say. The Economic Policy Institute study says the pact will cost 55,000 U.S. jobs.
Could the US Follow in the Muddy Steps of Japan?
Story first appeared in USA TODAY.
If you wonder what haunts Federal Reserve Chairman Ben Bernanke's dreams, it's Japan.
Japan has suffered more than two decades of subpar economic growth, made all the more miserable by falling consumer prices, a stagnant real estate market and a moribund stock market. The worry: that the U.S. economy devolves into something like Japan's.
Some of the similarities between Japan's economic woes and the U.S.' are striking. Both countries have aging populations. Both have ultra-low interest rates, which don't seem to be having much effect in stimulating the economy. And both countries are struggling with high debt loads.
Could the U.S. be entering a multi-decade recession like Japan's? Probably not, experts say: Japan's main problem was reacting too slowly to its problems, and the U.S. has reacted fairly swiftly to the economic crisis. Nevertheless, some of the problems the U.S. faces now could take another two to five years to fix — and investors could learn a thing or two from the Japanese experience if hard times drag on.
The U.S. recession officially began in December 2007 and ended in June 2009, according to the National Bureau of Economic Research. To most people, though, it still feels like a recession. Unemployment stands at 9.1%, according to the Bureau of Labor Statistics, and gross domestic product grew at a tepid 1.3% in the second quarter and is estimated to have grown at an annual rate of 2.5% from the second quarter to the third.
Miserable as current conditions are, they pale in comparison with Japan's problems. It's not the lost decade — it's the lost two decades, says a portfolio manager for Fidelity International Discovery fund. Japan's period of malaise began in 1990, and the country is still struggling today.
How bad is it? The Nikkei stock index is down 80% from its 1989 peak. Property prices fell more than 80%.
Could the U.S. see a period like Japan's? It's an increasing possibility. Some of the similarities are striking.
For example, Japan's woes started with an overheated real estate market and frenzied borrowing — two problems that will sound familiar to anyone in the U.S. Home prices in the U.S. have fallen more than 30% since 2006, according to Standard and Poor's. The Japanese real estate market has yet to fully recover from its 1980s excesses.
Both the U.S. and Japan have seen heavy losses in their stock markets. The Wilshire 5000, a broad measure of the U.S. stock market, is down 18% from its 2007 high. Both countries suffer from high debt: Consumer debt in the U.S., and corporate debt in Japan. And the aging populations in both countries mean fewer younger workers will have to support more retirees.
The Japanese made matters worse in three ways:
• Japanese banks were slow to write down bad debt. They took 10 years to recognize the non-performing loans.
Japan's corporations gradually paid down their debt, but during that time, they weren't making investments, says a portfolio manager for the Matthews Asia funds. Because the companies weren't investing in factories and employment, economic growth remained anemic.
• After the initial meltdown in 1990, the Japanese central bank kept rates too high for too long. Japan's short-term prime lending rate was 6.88% in 1991 and 3.91% in 1992, even though property values plunged 5.11% in 1992. Japan didn't drop rates to nearly zero until 1995.
• Worried by threats of a credit downgrade because of the country's high level of debt, Japan raised its consumption tax in 1997, which slowed the economy just as it was beginning to recover. It's fair to say that the Japanese repeated what we did in 1937 — raised taxes too soon.
Japan now has persistent deflation — a period of falling prices. Part of that is because China can supply low-priced, quality goods. Even though Japan is cutting supply, for every one unit that Japan cuts, China is there with three more units. Also, Japanese consumers have a deflationary mentality: If you wait long enough, prices will fall.
Japan's declining population plays a role, too. The median age in Japan — half are younger, half are older — is 44.8 years, according to the Central Intelligence Agency. In the U.S., it's 36.9 years. In both the U.S. and Japan, the median age is creeping higher, meaning there are fewer young people to contribute to pensions and health care. But the U.S. population continues to grow, which eventually translates into GDP growth.
Finally, Japan has been hit with bad luck. The balance-sheet recession ended in 2006. Companies became more willing to take on debt to finance growth. The 2008 financial crisis soon put an end to that, and the 2011 earthquake, tsunami and nuclear power station meltdown put a big cramp in Japan's GDP.
Why it's different in U.S.
Economists say that the U.S. may avoid a Japan-like period of malaise. The Federal Reserve was very quick to react to the 2008 financial crisis, pushing interest rates down to near zero.
U.S. consumers are paying down their debt and saving more. Although that's a slow process, consumers have come to realize that paying off a debt is like getting a raise: It increases your disposable income. Eventually, that will translate into more spending.
What could go wrong? Plenty. When I look at the argument between political parties about whether to rein in spending or raise taxes, it reminds me of what happened in Japan, referring to Japan's increase in consumption taxes. In the short term, raising taxes or slamming on the brakes in spending would be a terrible idea.
Similarly, a rate increase could weaken economic growth further. Housing starts are continuing to struggle with mortgage rates at 4%. Raising rates would make the struggle even worse.
Lessons for U.S. investors
For investors, the specter of a long period of malaise means a long period of low returns. Nevertheless, despite the chronically bad market, some Japanese stocks fared well. What investors can learn from Japan:
•Profits. Stock prices follow earnings. Although the broad market fared poorly in Japan, some industries fared better than others. Japanese financial services companies, for example, were a disaster. It's appalling how much wealth destruction they caused. Not surprisingly, Japanese bank earnings have been poor.
But some Japanese industries did well. Autos, for example, prospered until competition from South Korea cut into sales. (The rising value of the Japanese yen also made Japan's autos more expensive abroad.) Japanese factory automation is now doing well, although it, too, may be threatened by competition from China.
•Price cutting. In a deflationary period, people love bargains. Companies that can undercut competitors with quality items flourish in a deflationary environment. So it's no surprise that domestic Japanese stores that cater to bargain-hunters fared well. Any area where the consumer feels like he or she is getting a good deal.
One example — not in Kennedy's portfolio, according to Morningstar — is Don Quijote, a discount store that has grown to 150 stores since 1980. The company offers an eclectic mix of bargain products and amusements, including a yet-unfinished roller-coaster in downtown Tokyo.
•Flexibility. The downfall of many Japanese companies was that they didn't react quickly enough to change. Japan's automakers, for example, have struggled against their Korean competition, as have electronics manufacturers. The big difference between U.S. and Japanese companies is the ability to reinvent themselves.
In the U.S., the low value of the dollar has given manufacturers a boost: U.S. goods sold abroad are now cheaper because of the swooning greenback. And, while the U.S. manufacturing sector is always described as shrinking, that's because U.S. factories are highly efficient. The U.S. manufacturing sector remains the largest in the world.
If you're betting on a long, subpar period — and many investors, such as Bill Gross of Pimco are doing just that — then you can learn some lessons from Japan. Look for domestic companies with rising earnings and an ability to cut prices.
If you wonder what haunts Federal Reserve Chairman Ben Bernanke's dreams, it's Japan.
Japan has suffered more than two decades of subpar economic growth, made all the more miserable by falling consumer prices, a stagnant real estate market and a moribund stock market. The worry: that the U.S. economy devolves into something like Japan's.
Some of the similarities between Japan's economic woes and the U.S.' are striking. Both countries have aging populations. Both have ultra-low interest rates, which don't seem to be having much effect in stimulating the economy. And both countries are struggling with high debt loads.
Could the U.S. be entering a multi-decade recession like Japan's? Probably not, experts say: Japan's main problem was reacting too slowly to its problems, and the U.S. has reacted fairly swiftly to the economic crisis. Nevertheless, some of the problems the U.S. faces now could take another two to five years to fix — and investors could learn a thing or two from the Japanese experience if hard times drag on.
The U.S. recession officially began in December 2007 and ended in June 2009, according to the National Bureau of Economic Research. To most people, though, it still feels like a recession. Unemployment stands at 9.1%, according to the Bureau of Labor Statistics, and gross domestic product grew at a tepid 1.3% in the second quarter and is estimated to have grown at an annual rate of 2.5% from the second quarter to the third.
Miserable as current conditions are, they pale in comparison with Japan's problems. It's not the lost decade — it's the lost two decades, says a portfolio manager for Fidelity International Discovery fund. Japan's period of malaise began in 1990, and the country is still struggling today.
How bad is it? The Nikkei stock index is down 80% from its 1989 peak. Property prices fell more than 80%.
Could the U.S. see a period like Japan's? It's an increasing possibility. Some of the similarities are striking.
For example, Japan's woes started with an overheated real estate market and frenzied borrowing — two problems that will sound familiar to anyone in the U.S. Home prices in the U.S. have fallen more than 30% since 2006, according to Standard and Poor's. The Japanese real estate market has yet to fully recover from its 1980s excesses.
Both the U.S. and Japan have seen heavy losses in their stock markets. The Wilshire 5000, a broad measure of the U.S. stock market, is down 18% from its 2007 high. Both countries suffer from high debt: Consumer debt in the U.S., and corporate debt in Japan. And the aging populations in both countries mean fewer younger workers will have to support more retirees.
The Japanese made matters worse in three ways:
• Japanese banks were slow to write down bad debt. They took 10 years to recognize the non-performing loans.
Japan's corporations gradually paid down their debt, but during that time, they weren't making investments, says a portfolio manager for the Matthews Asia funds. Because the companies weren't investing in factories and employment, economic growth remained anemic.
• After the initial meltdown in 1990, the Japanese central bank kept rates too high for too long. Japan's short-term prime lending rate was 6.88% in 1991 and 3.91% in 1992, even though property values plunged 5.11% in 1992. Japan didn't drop rates to nearly zero until 1995.
• Worried by threats of a credit downgrade because of the country's high level of debt, Japan raised its consumption tax in 1997, which slowed the economy just as it was beginning to recover. It's fair to say that the Japanese repeated what we did in 1937 — raised taxes too soon.
Japan now has persistent deflation — a period of falling prices. Part of that is because China can supply low-priced, quality goods. Even though Japan is cutting supply, for every one unit that Japan cuts, China is there with three more units. Also, Japanese consumers have a deflationary mentality: If you wait long enough, prices will fall.
Japan's declining population plays a role, too. The median age in Japan — half are younger, half are older — is 44.8 years, according to the Central Intelligence Agency. In the U.S., it's 36.9 years. In both the U.S. and Japan, the median age is creeping higher, meaning there are fewer young people to contribute to pensions and health care. But the U.S. population continues to grow, which eventually translates into GDP growth.
Finally, Japan has been hit with bad luck. The balance-sheet recession ended in 2006. Companies became more willing to take on debt to finance growth. The 2008 financial crisis soon put an end to that, and the 2011 earthquake, tsunami and nuclear power station meltdown put a big cramp in Japan's GDP.
Why it's different in U.S.
Economists say that the U.S. may avoid a Japan-like period of malaise. The Federal Reserve was very quick to react to the 2008 financial crisis, pushing interest rates down to near zero.
U.S. consumers are paying down their debt and saving more. Although that's a slow process, consumers have come to realize that paying off a debt is like getting a raise: It increases your disposable income. Eventually, that will translate into more spending.
What could go wrong? Plenty. When I look at the argument between political parties about whether to rein in spending or raise taxes, it reminds me of what happened in Japan, referring to Japan's increase in consumption taxes. In the short term, raising taxes or slamming on the brakes in spending would be a terrible idea.
Similarly, a rate increase could weaken economic growth further. Housing starts are continuing to struggle with mortgage rates at 4%. Raising rates would make the struggle even worse.
Lessons for U.S. investors
For investors, the specter of a long period of malaise means a long period of low returns. Nevertheless, despite the chronically bad market, some Japanese stocks fared well. What investors can learn from Japan:
•Profits. Stock prices follow earnings. Although the broad market fared poorly in Japan, some industries fared better than others. Japanese financial services companies, for example, were a disaster. It's appalling how much wealth destruction they caused. Not surprisingly, Japanese bank earnings have been poor.
But some Japanese industries did well. Autos, for example, prospered until competition from South Korea cut into sales. (The rising value of the Japanese yen also made Japan's autos more expensive abroad.) Japanese factory automation is now doing well, although it, too, may be threatened by competition from China.
•Price cutting. In a deflationary period, people love bargains. Companies that can undercut competitors with quality items flourish in a deflationary environment. So it's no surprise that domestic Japanese stores that cater to bargain-hunters fared well. Any area where the consumer feels like he or she is getting a good deal.
One example — not in Kennedy's portfolio, according to Morningstar — is Don Quijote, a discount store that has grown to 150 stores since 1980. The company offers an eclectic mix of bargain products and amusements, including a yet-unfinished roller-coaster in downtown Tokyo.
•Flexibility. The downfall of many Japanese companies was that they didn't react quickly enough to change. Japan's automakers, for example, have struggled against their Korean competition, as have electronics manufacturers. The big difference between U.S. and Japanese companies is the ability to reinvent themselves.
In the U.S., the low value of the dollar has given manufacturers a boost: U.S. goods sold abroad are now cheaper because of the swooning greenback. And, while the U.S. manufacturing sector is always described as shrinking, that's because U.S. factories are highly efficient. The U.S. manufacturing sector remains the largest in the world.
If you're betting on a long, subpar period — and many investors, such as Bill Gross of Pimco are doing just that — then you can learn some lessons from Japan. Look for domestic companies with rising earnings and an ability to cut prices.
Monday, November 28, 2011
Financial Aid Goes to the Rich Instead of the Poor
Story first appeared in USA TODAY.
Universities and colleges are giving $5.3 billion in aid this year to students who the federal government says don't need financial help, according to figures from the College Board.
An additional $4 billion in federal tuition tax credits went to families making $100,000 to $180,000 — at least double the median income for U.S. households for students such as those getting a Nursing Degree.
The schools use the money — more than 20% of all U.S. financial aid — to compete for applicants who have high grade-point averages and SAT scores. Some discounts serve another purpose: They lure high-income families that can write a check for the rest of the tuition.
The strategy is not unlike department stores that use discounts to encourage customers to spend. Giving $5,000 against a $25,000 tuition charge is just like the discounting you'd see in a retail operation to bring traffic to the door.
Elite universities such as Harvard, Yale and Stanford give aid to families earning as much as $200,000, which less-selective schools say puts pressure on them to also offer grants to higher-income families. Education experts say such subsidies mean less help for lower- and middle-income students, who fall deeper into debt to pay tuition.
The share of financial aid going to low-income students has declined steadily over the past 10 years, and two-thirds of students borrow to pay for college degrees such as an Auto Degree. The Project on Student Debt, a research group that tracks borrowing for college, reports that students graduate owing an average of $25,250. They raised tuition tremendously, and they are giving a lot of the money to people who could be fine without it, says Sandy Baum, a higher-education analyst who collected the statistics for the College Board, an association of colleges that administers the SAT.
Baum found that colleges and universities awarded $5.3 billion worth of grants to families beyond what they qualified for under the federal government's definition of financial need, which is based on income, assets and the cost of the institution a student chooses to attend.
Families with incomes up to $180,000 also get tax breaks toward tuition under the American Opportunity Tax Credit. The credit cost $14.7 billion in 2009, the most recent data available — twice what it cost in 2008.
That's money that goes to students either who have no financial need, or who already have grant aid to meet that need. They're not giving money only to students who can't afford to pay.
One reason universities do this, according to financial aid directors and observers, is to vie for applicants with good grades and high test scores, who often come from affluent communities with top-rated school systems.
If they want to increase their rankings in U.S. News & World Report, an easy way to do that is to bribe high-scoring students to come to your university with non-need-based aid.
Universities say they have been forced to pay out more to people who don't need it since Harvard, Yale, Stanford and other elite schools started waiving tuition altogether for families that earn as much as $130,000 in a battle for cream-of-the-crop students that may go after an Honors Degree.
Families making as much as $200,000 pay an amount equal to no more than 15% of their income. That competition — Brown Admissions Dean Jim Miller calls it the war between the haves and the have lots — has put pressure on less-selective colleges, already contending with huge budget cuts and endowment shortfalls, to give support to families that don't necessarily need it.
Universities and colleges are giving $5.3 billion in aid this year to students who the federal government says don't need financial help, according to figures from the College Board.
An additional $4 billion in federal tuition tax credits went to families making $100,000 to $180,000 — at least double the median income for U.S. households for students such as those getting a Nursing Degree.
The schools use the money — more than 20% of all U.S. financial aid — to compete for applicants who have high grade-point averages and SAT scores. Some discounts serve another purpose: They lure high-income families that can write a check for the rest of the tuition.
The strategy is not unlike department stores that use discounts to encourage customers to spend. Giving $5,000 against a $25,000 tuition charge is just like the discounting you'd see in a retail operation to bring traffic to the door.
Elite universities such as Harvard, Yale and Stanford give aid to families earning as much as $200,000, which less-selective schools say puts pressure on them to also offer grants to higher-income families. Education experts say such subsidies mean less help for lower- and middle-income students, who fall deeper into debt to pay tuition.
The share of financial aid going to low-income students has declined steadily over the past 10 years, and two-thirds of students borrow to pay for college degrees such as an Auto Degree. The Project on Student Debt, a research group that tracks borrowing for college, reports that students graduate owing an average of $25,250. They raised tuition tremendously, and they are giving a lot of the money to people who could be fine without it, says Sandy Baum, a higher-education analyst who collected the statistics for the College Board, an association of colleges that administers the SAT.
Baum found that colleges and universities awarded $5.3 billion worth of grants to families beyond what they qualified for under the federal government's definition of financial need, which is based on income, assets and the cost of the institution a student chooses to attend.
Families with incomes up to $180,000 also get tax breaks toward tuition under the American Opportunity Tax Credit. The credit cost $14.7 billion in 2009, the most recent data available — twice what it cost in 2008.
That's money that goes to students either who have no financial need, or who already have grant aid to meet that need. They're not giving money only to students who can't afford to pay.
One reason universities do this, according to financial aid directors and observers, is to vie for applicants with good grades and high test scores, who often come from affluent communities with top-rated school systems.
If they want to increase their rankings in U.S. News & World Report, an easy way to do that is to bribe high-scoring students to come to your university with non-need-based aid.
Universities say they have been forced to pay out more to people who don't need it since Harvard, Yale, Stanford and other elite schools started waiving tuition altogether for families that earn as much as $130,000 in a battle for cream-of-the-crop students that may go after an Honors Degree.
Families making as much as $200,000 pay an amount equal to no more than 15% of their income. That competition — Brown Admissions Dean Jim Miller calls it the war between the haves and the have lots — has put pressure on less-selective colleges, already contending with huge budget cuts and endowment shortfalls, to give support to families that don't necessarily need it.
Corporations have more debt than cash
Story first appeared in USA TODAY.
Hardly a day goes by without some politician or pundit pointing out that companies are hoarding cash — roughly $3 trillion of it. If only they would spend it, the thinking goes, the economy might get better.But the story is not as simple as that. Though it seems to have escaped nearly everyone's notice, companies have piled up even more debt lately than they have cash. So they aren't as free to spend as they may seem.
U.S. companies are sitting on $358 billion more cash than they had at the start of the recession in December 2007, according to the latest Federal Reserve figures, from June. But in the same period, what they owed rose $428 billion.
Before the recession, you have to go back at least six decades to find a time when companies were so burdened by debt.
Companies borrow money all the time, of course. They borrow to build factories, cover expenses, even make payroll. The problem: Debt doesn't go away. A business can cut costs during a recession. But it can't just shred the IOUs.
Heavy debt means companies could have to dip into those reserves of cash to pay their lenders. And when interest rates eventually go up, companies will have to spend more money just to service the debt.
In the last recession, which ended in June 2009, small businesses that depended on credit cards and bank loans got slapped with higher rates just as sales began to drop. Some got cut off all together.
Peter Boockvar, equity strategist at Miller Tabak & Co., says business debt is too high even if the U.S. manages to stay out of a second recession. If economic growth doesn't pick up, they'll be more bankruptcies, and more defaults, he predicts.
Even if companies used cash to pay off what they owe, they would be left with plenty of debt — in fact, an amount equal to 83% of all the goods and services they produce in a year, according to Federal Reserve data for incorporated businesses.
In March 2009, the low point of the Great Recession, companies owed 95%. To stay afloat, companies tapped credit lines at banks, increasing debt while they were bringing in less money. They burned through cash to meet expenses.
Before that, though, it has been at least six decades since companies owed so much money as a share of what they produce, says Andrew Smithers, a London consultant who has written extensively about debt.
In short, American business is awash in cash like a man who borrowed from a bank is rich. He may have plenty of money in his pocket, but he still has to return it.
Already, there are signs that companies are struggling to pay off debt. Since this summer, buyers of bonds issued by deeply indebted companies — called junk bonds because they're so risky — have been demanding 14% more in annual interest. Some companies haven't been able to sell bonds at all.
The financial picture is at least better for the biggest, publicly traded firms. Non-financial companies in the Standard & Poor's 500 are making more money than ever and adding to their cash fast. It's middle-sized and small companies that appear to be most vulnerable.
But this sunny picture for the largest companies is marred by debt, too. Since the start of the recession, S&P 500 companies have borrowed an additional 44 cents for every additional dollar they've hoarded in cash. For many companies, debt has risen more than cash.
Drugmaker Pfizer added $3.5 billion to cash from the start of the recession. But it added $28 billion of debt, according to FactSet. PepsiCo added $22 billion more debt than cash. Hewlett-Packard added $16 billion more, Wal-Mart $13 billion.
The lack of fear about debt is an about-face from the recession. Back then, Wall Street was worried that many companies had borrowed too much during the boom, and would suffer for it in the bust.
The expectation was that this "wall of debt" would cause some companies to fail. Others would struggle but ultimately pay their lenders. Either way, borrowing would ultimately fall.
But that didn't happen. Instead, the Federal Reserve slashed benchmark interest rates to near zero, lowering yields for conservative investments like money market funds and pushing frustrated investors into riskier corporate bonds offering higher returns. As demand for those bonds rose, businesses were able to issue more of them than ever, and use the proceeds to pay off old ones coming due soon.
That problem could upend the expectations of investors. Many are banking on companies using cash to buy back more of their own stock, which might lift sagging prices.
Smithers thinks high debt will eventually force companies to do the opposite — cut buybacks.
And given the big role these purchases play in the market, that could wallop stocks. Smithers says that buybacks by non-financial companies over the past decade have more than compensated for the wave of selling by individuals and mutual funds.
The problem with debt is you don't need an actual recession to cause trouble for companies, just the fear of one. Spooked lenders can hike rates on new loans needed to pay off old ones, or cut companies off completely.
For companies issuing those risky junk-rated bonds, that day has already arrived.
A maker of private planes in Kansas saw rates on its bonds jump 40 percent in just a month. And on Wednesday, a shipping company in Florida filed for bankruptcy because it was unable to borrow to pay off old loans.
Hardly a day goes by without some politician or pundit pointing out that companies are hoarding cash — roughly $3 trillion of it. If only they would spend it, the thinking goes, the economy might get better.But the story is not as simple as that. Though it seems to have escaped nearly everyone's notice, companies have piled up even more debt lately than they have cash. So they aren't as free to spend as they may seem.
U.S. companies are sitting on $358 billion more cash than they had at the start of the recession in December 2007, according to the latest Federal Reserve figures, from June. But in the same period, what they owed rose $428 billion.
Before the recession, you have to go back at least six decades to find a time when companies were so burdened by debt.
Companies borrow money all the time, of course. They borrow to build factories, cover expenses, even make payroll. The problem: Debt doesn't go away. A business can cut costs during a recession. But it can't just shred the IOUs.
Heavy debt means companies could have to dip into those reserves of cash to pay their lenders. And when interest rates eventually go up, companies will have to spend more money just to service the debt.
In the last recession, which ended in June 2009, small businesses that depended on credit cards and bank loans got slapped with higher rates just as sales began to drop. Some got cut off all together.
Peter Boockvar, equity strategist at Miller Tabak & Co., says business debt is too high even if the U.S. manages to stay out of a second recession. If economic growth doesn't pick up, they'll be more bankruptcies, and more defaults, he predicts.
Even if companies used cash to pay off what they owe, they would be left with plenty of debt — in fact, an amount equal to 83% of all the goods and services they produce in a year, according to Federal Reserve data for incorporated businesses.
In March 2009, the low point of the Great Recession, companies owed 95%. To stay afloat, companies tapped credit lines at banks, increasing debt while they were bringing in less money. They burned through cash to meet expenses.
Before that, though, it has been at least six decades since companies owed so much money as a share of what they produce, says Andrew Smithers, a London consultant who has written extensively about debt.
In short, American business is awash in cash like a man who borrowed from a bank is rich. He may have plenty of money in his pocket, but he still has to return it.
Already, there are signs that companies are struggling to pay off debt. Since this summer, buyers of bonds issued by deeply indebted companies — called junk bonds because they're so risky — have been demanding 14% more in annual interest. Some companies haven't been able to sell bonds at all.
The financial picture is at least better for the biggest, publicly traded firms. Non-financial companies in the Standard & Poor's 500 are making more money than ever and adding to their cash fast. It's middle-sized and small companies that appear to be most vulnerable.
But this sunny picture for the largest companies is marred by debt, too. Since the start of the recession, S&P 500 companies have borrowed an additional 44 cents for every additional dollar they've hoarded in cash. For many companies, debt has risen more than cash.
Drugmaker Pfizer added $3.5 billion to cash from the start of the recession. But it added $28 billion of debt, according to FactSet. PepsiCo added $22 billion more debt than cash. Hewlett-Packard added $16 billion more, Wal-Mart $13 billion.
The lack of fear about debt is an about-face from the recession. Back then, Wall Street was worried that many companies had borrowed too much during the boom, and would suffer for it in the bust.
The expectation was that this "wall of debt" would cause some companies to fail. Others would struggle but ultimately pay their lenders. Either way, borrowing would ultimately fall.
But that didn't happen. Instead, the Federal Reserve slashed benchmark interest rates to near zero, lowering yields for conservative investments like money market funds and pushing frustrated investors into riskier corporate bonds offering higher returns. As demand for those bonds rose, businesses were able to issue more of them than ever, and use the proceeds to pay off old ones coming due soon.
That problem could upend the expectations of investors. Many are banking on companies using cash to buy back more of their own stock, which might lift sagging prices.
Smithers thinks high debt will eventually force companies to do the opposite — cut buybacks.
And given the big role these purchases play in the market, that could wallop stocks. Smithers says that buybacks by non-financial companies over the past decade have more than compensated for the wave of selling by individuals and mutual funds.
The problem with debt is you don't need an actual recession to cause trouble for companies, just the fear of one. Spooked lenders can hike rates on new loans needed to pay off old ones, or cut companies off completely.
For companies issuing those risky junk-rated bonds, that day has already arrived.
A maker of private planes in Kansas saw rates on its bonds jump 40 percent in just a month. And on Wednesday, a shipping company in Florida filed for bankruptcy because it was unable to borrow to pay off old loans.
Tech Start-Ups in the Midwest
Story first appeared in USA TODAY.
Ten of the top 20 most visited websites are based in California, with the remainder in New York, Washington and Georgia.
Is there room in techland for hard-working entrepreneurs from the middle of the USA?
Yes, say members of the close-knit tech community here, best known as the headquarters for the world's largest electronics retailer, Best Buy, retail giant Target and several medical technology companies.
Some 150 young businesses are working to get companies off the ground here, according to tech.mn, a local website which tracks area start-ups.
USA TODAY visited several start-ups here at CoCo, a shared workspace in a bright, open former grain exchange. Allen works from CoCo, as do the founders of Qonqr, a game app planned for iPhone, Android and Windows phones in early 2012.
The game first was seen publicly at the South By Southwest (SXSW) conference in Austin this year; Qonqr was one of 40 companies out of hundreds that applied to present. Even though they're here in Minnesota, there's chances to get out there.
Ben Kazez was a student at the University of Minnesota when he came up with the idea for the Flight Tracker app. Strolling through an airport, he realized there must be a better way to find gate connections and keep abreast of arrivals and departures. His $4.99 app (the pro version is $9.99) gives travelers the lowdown on gate numbers and flight times. More than 1 million downloads have been sold. In November 2010, travel site Expedia bought Mobiata, the company he founded, for an undisclosed fee.
Half of Mobiata's staff is in Ann Arbor, Mich.; the rest is split between Minneapolis and San Francisco. That gives Kazez a good perspective on the Midwest advantage.
Kazez says San Francisco, Boston and Seattle are the big three for tech start-ups. The middle tier: Minneapolis; Austin; Boulder, Colo.; Chicago; and Ann Arbor — home to the University of Michigan, alma mater of Google co-founder Larry Page.
Would you have been an active user of Facebook before it moved from Cambridge, Mass., to California and struck it rich? That question inspires Wahooly, a Minneapolis-based website that marries start-ups with active users. If all goes as planned, new sites get to grow quickly, with help from their readily acquired fan base.
Users who spend a lot of time on the site and exert some online influence get to share in up to 5% of the equity in the firm.
Wahooly works with San Francisco-based social-influence site Klout to spread the word. So far, about 16,000 have signed up to participate, along with 111 companies. Sign-ups close in January.
Some 90% of start-ups will fail.
Gabe Cheifetz left Chicago for the Twin Cities in 2002, a fan of the music scene. He founded several start-ups, then in 2009 moved to CrumplePop, which makes special effects that work with Apple's Final Cut Video editing program. CrumplePop is in a small $725-a-month studio on Minneapolis's south side, next door to a bakery. The four team members work on Macs and have sunlamps on their desks for dark Minnesota winters. They've sold more than 50,000 effects at $75 each in the three years, Cheifetz says.
The Minneapolis advantage: low rent, low cost of living, and the team gets to bike to work — even in the winter.
Jeff Pesek, who runs the tech.mn website, says the difference with a Midwest start-up vs. those in the Silicon Valley is stamina.
Gene Munster, a Piper Jaffray analyst who covers Apple and Google — from Minneapolis — says Chicago, thanks to huge hits such as daily deals leader Groupon and food service company GrubHub, has a more thriving tech scene, but not forever. He says they are emerging, but they're going to give Chicago a good run. They've got more people, but we've got the schools, our people, big companies and a history of innovative thinking.
Ten of the top 20 most visited websites are based in California, with the remainder in New York, Washington and Georgia.
Is there room in techland for hard-working entrepreneurs from the middle of the USA?
Yes, say members of the close-knit tech community here, best known as the headquarters for the world's largest electronics retailer, Best Buy, retail giant Target and several medical technology companies.
Some 150 young businesses are working to get companies off the ground here, according to tech.mn, a local website which tracks area start-ups.
USA TODAY visited several start-ups here at CoCo, a shared workspace in a bright, open former grain exchange. Allen works from CoCo, as do the founders of Qonqr, a game app planned for iPhone, Android and Windows phones in early 2012.
The game first was seen publicly at the South By Southwest (SXSW) conference in Austin this year; Qonqr was one of 40 companies out of hundreds that applied to present. Even though they're here in Minnesota, there's chances to get out there.
Ben Kazez was a student at the University of Minnesota when he came up with the idea for the Flight Tracker app. Strolling through an airport, he realized there must be a better way to find gate connections and keep abreast of arrivals and departures. His $4.99 app (the pro version is $9.99) gives travelers the lowdown on gate numbers and flight times. More than 1 million downloads have been sold. In November 2010, travel site Expedia bought Mobiata, the company he founded, for an undisclosed fee.
Half of Mobiata's staff is in Ann Arbor, Mich.; the rest is split between Minneapolis and San Francisco. That gives Kazez a good perspective on the Midwest advantage.
Kazez says San Francisco, Boston and Seattle are the big three for tech start-ups. The middle tier: Minneapolis; Austin; Boulder, Colo.; Chicago; and Ann Arbor — home to the University of Michigan, alma mater of Google co-founder Larry Page.
Would you have been an active user of Facebook before it moved from Cambridge, Mass., to California and struck it rich? That question inspires Wahooly, a Minneapolis-based website that marries start-ups with active users. If all goes as planned, new sites get to grow quickly, with help from their readily acquired fan base.
Users who spend a lot of time on the site and exert some online influence get to share in up to 5% of the equity in the firm.
Wahooly works with San Francisco-based social-influence site Klout to spread the word. So far, about 16,000 have signed up to participate, along with 111 companies. Sign-ups close in January.
Some 90% of start-ups will fail.
Gabe Cheifetz left Chicago for the Twin Cities in 2002, a fan of the music scene. He founded several start-ups, then in 2009 moved to CrumplePop, which makes special effects that work with Apple's Final Cut Video editing program. CrumplePop is in a small $725-a-month studio on Minneapolis's south side, next door to a bakery. The four team members work on Macs and have sunlamps on their desks for dark Minnesota winters. They've sold more than 50,000 effects at $75 each in the three years, Cheifetz says.
The Minneapolis advantage: low rent, low cost of living, and the team gets to bike to work — even in the winter.
Jeff Pesek, who runs the tech.mn website, says the difference with a Midwest start-up vs. those in the Silicon Valley is stamina.
Gene Munster, a Piper Jaffray analyst who covers Apple and Google — from Minneapolis — says Chicago, thanks to huge hits such as daily deals leader Groupon and food service company GrubHub, has a more thriving tech scene, but not forever. He says they are emerging, but they're going to give Chicago a good run. They've got more people, but we've got the schools, our people, big companies and a history of innovative thinking.
UNEMPLOYMENT FAILING TO REDUCE
Story first appeared in Bloomberg News.
The pace of hiring in November of 2011 probably failed to reduce unemployment in the U.S., showing employers remain concerned growth will slow, economists said before reports this week.
Payrolls climbed by 120,000 workers after rising 80,000 in October, according to the median forecast of 59 economists in a Bloomberg News survey before a Dec. 2 report from the Labor Department. The jobless rate probably held at 9 percent.
DirecTV is among companies saying they will keep a tight rein on spending and employment in 2012 on concern Europe’s debt crisis and election in the U.S. will restrain the world’s largest economy. The lack of jobs will probably pressure wages, depriving consumers of the means to boost spending, which accounts for about 70 percent of the economy.
Other reports this week may show manufacturing picked up, new-home sales stagnated and property prices declined.
The jobless rate has exceeded 8 percent since February 2009, the longest stretch of such levels of unemployment since monthly records began in 1948.
The projected gain in payrolls would bring the average for July through November to 118,000, compared with 131,000 in the first six months of the year.
Shares Slump
Concern is growing that a European country will be forced to default.
The Standard & Poor’s 500 Index fell 0.3 percent to close at 1,158.67 at 1 p.m. close in New York on Nov. 25, falling for a seventh straight day, the longest streak since August.
The payrolls report may also show private employment, which excludes government jobs, climbed 145,000 after an October gain of 104,000, economists forecast.
The crisis in Europe and presidential election in the U.S. make it difficult to predict the level of economic expansion, causing DirecTV to slow their growth rate.
Holiday Hiring
At the same time, companies like Macy’s Inc. are among those adding workers for the holiday season. The second-biggest U.S. department- store chain increased the hiring of mostly part- time employees by 4 percent for the November-December shopping season. See’s Candies Inc., a chocolate maker owned by Berkshire Hathaway Inc., said it would add 5,500 mostly temporary workers to help meet increased holiday production.
The scant number of jobs may explain why Americans’ moods are even more terrible now than during the economic slump. The Conference Board’s index of consumer confidence rose to 44 this month, according to the Bloomberg survey median ahead of a Nov. 29 report. The gauge averaged 53.7 during the 18-month recession that ended in June 2009.
Federal Reserve Chairman Ben S. Bernanke and his colleagues this month cut economic growth forecasts for 2012 and said unemployment will average 8.5 percent to 8.7 percent in the final three months of next year, up from a prior range of 7.8 percent to 8.2 percent.
Manufacturing Pickup
Manufacturing is one area of the economy that continues to grow. The Institute for Supply Management’s factory index of climbed to 51.5 in November, economists surveyed by Bloomberg projected ahead of a Dec. 1 report. Readings above 50 indicate expansion.
Housing remains a laggard as distressed properties depress prices and keep buyers on the sidelines. The Commerce Department may report tomorrow that new houses sold at a 313,000 annual rate in October, the same as in the prior month, the Bloomberg survey showed. That would put the monthly average for the year at 304,000, less than the 323,000 in 2010 that was the lowest since data-keeping began in 1963.
Property values in 20 cities fell 3 percent in September from a year earlier, economists predicted ahead of a Nov. 29 report from S&P/Case- Shiller.
Wednesday, November 23, 2011
Slow Economic Growth
Story first appeared in USA TODAY.
Federal Reserve Chairman Ben Bernanke on Wednesday acknowledged that the pace of economic growth is likely to be "frustratingly slow," after the Fed downgraded its forecast for the next two years.
Bernanke said the central bank is looking for growth and the job market to improve gradually over the next two years, but at a sluggish pace.
Bernanke cited the debt crisis in Europe as a particular concern. He said it could have adverse effects on confidence and growth. As a result, the central bank is closely monitoring the situation, he said.
When asked if the Fed would purchase more mortgage-backed securities to help the depressed housing market, Bernanke said that was a "viable option." But he declined to say if, or when, the Fed would pursue such action.
"We remain prepared to take action as appropriate to make sure the recovery continues," Bernanke said.
Bernanke's comments came at his third news conference this year, a practice he started in April to provide more background on the Fed's actions and its thinking behind its latest economic forecast.
The central bank's latest forecast released Wednesday predicts that the U.S. economy will grow no more than 1.7% for all of 2011. For 2012, growth will range between 2.5% and 2.9%. Both forecasts are roughly a full percentage point lower than the Fed's projections from June.
The unemployment rate has been stuck near 9% for more than two years. The Fed doesn't see that changing this year. It predicts it won't fall below 8.5% next year. In June, the Fed had predicted unemployment would drop to as low as 7.8% in 2011.
The new forecast takes into account the substantial slowdown in growth that occurred earlier this year.
Bernanke said he sympathized with Occupy Wall Street protesters complaints about the state of the economy.
"I am dissatisfied with the state of the economy," Bernanke said. "Unemployment is too high."
But the Fed chairman said criticism from Republicans, both in Congress and those running for president, was not valid. They have charged that the central bank's efforts have set the stage for higher inflation in the future.
Bernanke said he felt the central bank had a very good record on inflation. He said where the Fed has fallen short was in dealing with unemployment.
He declined to comment directly on a letter senior Republican leaders sent in September, which cautioned the central bank not to take further steps to lower interest rates.
At the September meeting, the Fed agreed to shuffle its portfolio to try and lower long-term interest rates.
Federal Reserve Chairman Ben Bernanke on Wednesday acknowledged that the pace of economic growth is likely to be "frustratingly slow," after the Fed downgraded its forecast for the next two years.
Bernanke said the central bank is looking for growth and the job market to improve gradually over the next two years, but at a sluggish pace.
Bernanke cited the debt crisis in Europe as a particular concern. He said it could have adverse effects on confidence and growth. As a result, the central bank is closely monitoring the situation, he said.
When asked if the Fed would purchase more mortgage-backed securities to help the depressed housing market, Bernanke said that was a "viable option." But he declined to say if, or when, the Fed would pursue such action.
"We remain prepared to take action as appropriate to make sure the recovery continues," Bernanke said.
Bernanke's comments came at his third news conference this year, a practice he started in April to provide more background on the Fed's actions and its thinking behind its latest economic forecast.
The central bank's latest forecast released Wednesday predicts that the U.S. economy will grow no more than 1.7% for all of 2011. For 2012, growth will range between 2.5% and 2.9%. Both forecasts are roughly a full percentage point lower than the Fed's projections from June.
The unemployment rate has been stuck near 9% for more than two years. The Fed doesn't see that changing this year. It predicts it won't fall below 8.5% next year. In June, the Fed had predicted unemployment would drop to as low as 7.8% in 2011.
The new forecast takes into account the substantial slowdown in growth that occurred earlier this year.
Bernanke said he sympathized with Occupy Wall Street protesters complaints about the state of the economy.
"I am dissatisfied with the state of the economy," Bernanke said. "Unemployment is too high."
But the Fed chairman said criticism from Republicans, both in Congress and those running for president, was not valid. They have charged that the central bank's efforts have set the stage for higher inflation in the future.
Bernanke said he felt the central bank had a very good record on inflation. He said where the Fed has fallen short was in dealing with unemployment.
He declined to comment directly on a letter senior Republican leaders sent in September, which cautioned the central bank not to take further steps to lower interest rates.
At the September meeting, the Fed agreed to shuffle its portfolio to try and lower long-term interest rates.
The Spread of Malicious Internet Ads
Story first appeared in USA TODAY.
The online-advertising industry is scrambling to quell a long-standing problem that has taken a turn for the worse: the spread of malicious ads on the Internet's top commercial websites.
Several new twists have made so-called malvertisements a fast-rising threat to consumers — and a big headache for publishers, advertisers and ad networks, say technologists and security researchers.
The spread of infected online ads has spiked tenfold over the past year, according to research disclosed by security intelligence firm RiskIQ at a recent Online Trust Alliance conference in Washington, D.C.
RiskIQ documented a peak of 14,694 occurences of malvertisements in May of this year, up from 1,533 in May 2010. Each corrupted ad could have infected the PCs of thousands or millions of website visitors, based on how long the ad ran, says Elias Manousos, CEO of RiskIQ.
Organized crime gangs have streamlined the process of sneaking viral ads into the distribution system run by advertising networks, causing billions of tainted ad impressions to appear on the top 500 websites over the past 12 months, say technologists and security researchers.
Website security firm Armorize recently discovered criminals selling tutorials, tool kits and ad placement services to anyone who wants to get into the malvertising game. "There is a whole ecosystem designed to do this," says Matt Huang, Armorize's chief operating officer.
A recent rash of infections have been triggering bogus security warnings, followed by an offer for fake antivirus protection.
Last month, SpeedTest.net, a site that measures home broadband connection speeds, began displaying legit ads carrying instructions to load pitches for Security Sphere 2012. Simply navigating to the site launched the promos, which locked up the visitor's PC until he or she purchased worthless "protection" for $35.
Doug Suttles, chief operating officer of Web diagnostics firm Ookla, SpeedTest's parent, says his engineers spotted the attack and cleaned it up within three hours. The criminals, in this case, pioneered a novel technique. They corrupted legit advertisements as they arrived in the ad-handling program, called OpenX, used by the SpeedTest site.
However, tens of thousands of other websites that use the free OpenX ad-handling platform are wide open to this new type of attack, says Armorize's Huang.
In another twist, consumers bedeviled by bogus anti-virus pitches have started bad-mouthing websites they believe triggered the fake promos. Armorize has documented numerous consumer complaints that have gone viral on Twitter and other social networks, causing a drop in visits to the sites in question.
Some ad networks have begun participating in a working group discussing "information-sharing about malvertisers and their ads," says Steve Sullivan, the Interactive Advertising Board's vice president of digital supply chain solutions.
The Online Publishers Association, the industry group of major website publishers, has yet to closely examine malvertising. Obviously, stuff like this is disconcerting to the industry, says Pam Horan, OPA's president. They haven't done any research in this area, and she has not specifically heard anything from the members about this.
Even so, validating ads has become a major conundrum. Web publishers trust the ad networks to continually rotate ads to their Web pages. Meanwhile, the big ad networks, such as Google, Adobe, Microsoft and Yahoo, use automation to pull ads into rotation from a series of smaller networks and agencies.
Malvertisements are also used to spread stealthy infections that quietly take full control of the victim's PC, which is then used to steal data, probe deeper into corporate networks and pilfer from online financial accounts.
Consumers can protect themselves by making sure anti-virus programs and all updates for their Web browsers and popular applications, especially Adobe Flash and Adobe PDF, are current. Consumers who want to protect themselves further can use browser plug-ins, such as NoScript and AdBlock, that block all online ads.
Craig Spiezle, the Online Trust Association's executive director, says publishers, advertisers and the ad networks realize what's at stake.
The good news there is growing interest of some of the key stakeholders — including Yahoo, Microsoft and Google — on the need to employ countermeasures. It's clear that validating the ads everyone depends on is a shared responsibility. If consumers don't trust ads, they may not go to the site, or they'll start running ad blockers, and that will compromise everyone's ability to monetize.
The online-advertising industry is scrambling to quell a long-standing problem that has taken a turn for the worse: the spread of malicious ads on the Internet's top commercial websites.
Several new twists have made so-called malvertisements a fast-rising threat to consumers — and a big headache for publishers, advertisers and ad networks, say technologists and security researchers.
The spread of infected online ads has spiked tenfold over the past year, according to research disclosed by security intelligence firm RiskIQ at a recent Online Trust Alliance conference in Washington, D.C.
RiskIQ documented a peak of 14,694 occurences of malvertisements in May of this year, up from 1,533 in May 2010. Each corrupted ad could have infected the PCs of thousands or millions of website visitors, based on how long the ad ran, says Elias Manousos, CEO of RiskIQ.
Organized crime gangs have streamlined the process of sneaking viral ads into the distribution system run by advertising networks, causing billions of tainted ad impressions to appear on the top 500 websites over the past 12 months, say technologists and security researchers.
Website security firm Armorize recently discovered criminals selling tutorials, tool kits and ad placement services to anyone who wants to get into the malvertising game. "There is a whole ecosystem designed to do this," says Matt Huang, Armorize's chief operating officer.
A recent rash of infections have been triggering bogus security warnings, followed by an offer for fake antivirus protection.
Last month, SpeedTest.net, a site that measures home broadband connection speeds, began displaying legit ads carrying instructions to load pitches for Security Sphere 2012. Simply navigating to the site launched the promos, which locked up the visitor's PC until he or she purchased worthless "protection" for $35.
Doug Suttles, chief operating officer of Web diagnostics firm Ookla, SpeedTest's parent, says his engineers spotted the attack and cleaned it up within three hours. The criminals, in this case, pioneered a novel technique. They corrupted legit advertisements as they arrived in the ad-handling program, called OpenX, used by the SpeedTest site.
However, tens of thousands of other websites that use the free OpenX ad-handling platform are wide open to this new type of attack, says Armorize's Huang.
In another twist, consumers bedeviled by bogus anti-virus pitches have started bad-mouthing websites they believe triggered the fake promos. Armorize has documented numerous consumer complaints that have gone viral on Twitter and other social networks, causing a drop in visits to the sites in question.
Some ad networks have begun participating in a working group discussing "information-sharing about malvertisers and their ads," says Steve Sullivan, the Interactive Advertising Board's vice president of digital supply chain solutions.
The Online Publishers Association, the industry group of major website publishers, has yet to closely examine malvertising. Obviously, stuff like this is disconcerting to the industry, says Pam Horan, OPA's president. They haven't done any research in this area, and she has not specifically heard anything from the members about this.
Even so, validating ads has become a major conundrum. Web publishers trust the ad networks to continually rotate ads to their Web pages. Meanwhile, the big ad networks, such as Google, Adobe, Microsoft and Yahoo, use automation to pull ads into rotation from a series of smaller networks and agencies.
Malvertisements are also used to spread stealthy infections that quietly take full control of the victim's PC, which is then used to steal data, probe deeper into corporate networks and pilfer from online financial accounts.
Consumers can protect themselves by making sure anti-virus programs and all updates for their Web browsers and popular applications, especially Adobe Flash and Adobe PDF, are current. Consumers who want to protect themselves further can use browser plug-ins, such as NoScript and AdBlock, that block all online ads.
Craig Spiezle, the Online Trust Association's executive director, says publishers, advertisers and the ad networks realize what's at stake.
The good news there is growing interest of some of the key stakeholders — including Yahoo, Microsoft and Google — on the need to employ countermeasures. It's clear that validating the ads everyone depends on is a shared responsibility. If consumers don't trust ads, they may not go to the site, or they'll start running ad blockers, and that will compromise everyone's ability to monetize.
New Facebook Timeline Feature
Story first appeared in USA TODAY.
When Lisa Hope King created her Facebook account in 2004, things were much simpler. Facebook was a new website with a straightforward format. King's status as a sophomore at Rutgers University granted her access to a social-networking site aimed at college students.
She said it felt very personal. The amount of information Facebook members could share was minimal.
Now, members can share everything from their employer to their current location. Facebook's coming overhaul of its members' profile pages will more prominently show users' Facebook pasts all the way back to the creation of their accounts.
The feature, dubbed Timeline, will roll out to all 800 million Facebook members and is designed to give a more comprehensive view of people's online identities, the company says. Facebook declined to say when it would launch. The come-on to members: "Tell your life story with a new kind of profile."
As with past moves, Facebook's plans are sparking privacy concerns among some members and privacy advocates.
The new emphasis on past posts means Facebook users have to be vigilant about screening who sees old posts to prevent potentially uncomfortable situations, especially for those who have matured since creating their account as students and would rather leave the past in the past.
King said she doesn't think something she did four years ago is really representative of who she is today.
Up until now, Facebook accounts have focused on the most recent posts. With the new profile format, the most recent Facebook activities will be at the top. But as users go back in time, Timeline will summarize past posts — emphasizing the photos and status updates with the most "likes" or comments.
The new profile gets rid of the practical obscurity that has always been part of Facebook, says Marc Rotenberg, executive director of the Electronic Privacy Information Center.
Privacy concerns
Rotenberg's privacy advocacy group has voiced concerns about Timeline and other Facebook features in recent letters to the Federal Trade Commission. Rotenberg worries people won't take the time to screen all their past posts and says that Facebook should honor its past commitments to privacy settings.
Privacy concerns run highest among those who frequent Facebook less often, according to a recent USA TODAY/Gallup Poll. Just 26% of respondents who use the social site at least daily said they were "very concerned" about privacy. That compares with 35% who are "very concerned" and use the social network at least once a week, and 39% who use Facebook less often.
The kind of photos college students post of themselves at parties aren't necessarily the pictures they want others to see when they're entering the workforce, Rotenberg says. Facebook plans to opt all of its users into Timeline and put the responsibility on them to carefully review every bit of past information, he notes.
When users first get Timeline, they will have five days to emphasize or hide aspects of their profiles, Facebook says. And users can still add and delete aspects of their Timeline after they're published.
Facebook declined to comment on its opt-in decision and questions raised over privacy settings.
People have shown that they really want privacy and transparency, Jeschke says. "It looks like these steps Facebook is taking with the Timeline are steps in the right direction."
'Digital grooming'
Keeping tabs on her profile page as Facebook evolves is nothing new for King, who calls herself a digital groomer.
She goes through the information on her account every few weeks and deletes statuses, messages and other things — such as posts on an ex-boyfriend's wall — that she doesn't want to keep on her Facebook page.
Timeline creates an opportunity for everyone to become this aware about their privacy online, says Chester Wisniewski, senior security adviser at security firm Sophos.
But it seems that Facebook continually encourages people to share more and more personal information, says Nadia Bhuiyan, 23.
She doesn't want people to see how many pictures she was tagged in or how many she took in a given year or how many friend requests she got.
And she said Facebook's planned change to members' profiles probably will limit how often she visits her friends' profile pages.
Thomas Kerr-Vanderslice, 22, says he doesn't use Facebook for personal use as much as he did when he was in college. But a large portion of his job at a small Washington, D.C., lobbying firm is spent on Facebook and other social-networking sites.
He has no plans to spend time taking information off his profile once it changes to the Timeline. And he's never been nervous about sharing information online, including where he lives, his employer and his birthday. If identity theft was a major concern, he wouldn't be on Facebook.
When Lisa Hope King created her Facebook account in 2004, things were much simpler. Facebook was a new website with a straightforward format. King's status as a sophomore at Rutgers University granted her access to a social-networking site aimed at college students.
She said it felt very personal. The amount of information Facebook members could share was minimal.
Now, members can share everything from their employer to their current location. Facebook's coming overhaul of its members' profile pages will more prominently show users' Facebook pasts all the way back to the creation of their accounts.
The feature, dubbed Timeline, will roll out to all 800 million Facebook members and is designed to give a more comprehensive view of people's online identities, the company says. Facebook declined to say when it would launch. The come-on to members: "Tell your life story with a new kind of profile."
As with past moves, Facebook's plans are sparking privacy concerns among some members and privacy advocates.
The new emphasis on past posts means Facebook users have to be vigilant about screening who sees old posts to prevent potentially uncomfortable situations, especially for those who have matured since creating their account as students and would rather leave the past in the past.
King said she doesn't think something she did four years ago is really representative of who she is today.
Up until now, Facebook accounts have focused on the most recent posts. With the new profile format, the most recent Facebook activities will be at the top. But as users go back in time, Timeline will summarize past posts — emphasizing the photos and status updates with the most "likes" or comments.
The new profile gets rid of the practical obscurity that has always been part of Facebook, says Marc Rotenberg, executive director of the Electronic Privacy Information Center.
Privacy concerns
Rotenberg's privacy advocacy group has voiced concerns about Timeline and other Facebook features in recent letters to the Federal Trade Commission. Rotenberg worries people won't take the time to screen all their past posts and says that Facebook should honor its past commitments to privacy settings.
Privacy concerns run highest among those who frequent Facebook less often, according to a recent USA TODAY/Gallup Poll. Just 26% of respondents who use the social site at least daily said they were "very concerned" about privacy. That compares with 35% who are "very concerned" and use the social network at least once a week, and 39% who use Facebook less often.
The kind of photos college students post of themselves at parties aren't necessarily the pictures they want others to see when they're entering the workforce, Rotenberg says. Facebook plans to opt all of its users into Timeline and put the responsibility on them to carefully review every bit of past information, he notes.
When users first get Timeline, they will have five days to emphasize or hide aspects of their profiles, Facebook says. And users can still add and delete aspects of their Timeline after they're published.
Facebook declined to comment on its opt-in decision and questions raised over privacy settings.
People have shown that they really want privacy and transparency, Jeschke says. "It looks like these steps Facebook is taking with the Timeline are steps in the right direction."
'Digital grooming'
Keeping tabs on her profile page as Facebook evolves is nothing new for King, who calls herself a digital groomer.
She goes through the information on her account every few weeks and deletes statuses, messages and other things — such as posts on an ex-boyfriend's wall — that she doesn't want to keep on her Facebook page.
Timeline creates an opportunity for everyone to become this aware about their privacy online, says Chester Wisniewski, senior security adviser at security firm Sophos.
But it seems that Facebook continually encourages people to share more and more personal information, says Nadia Bhuiyan, 23.
She doesn't want people to see how many pictures she was tagged in or how many she took in a given year or how many friend requests she got.
And she said Facebook's planned change to members' profiles probably will limit how often she visits her friends' profile pages.
Thomas Kerr-Vanderslice, 22, says he doesn't use Facebook for personal use as much as he did when he was in college. But a large portion of his job at a small Washington, D.C., lobbying firm is spent on Facebook and other social-networking sites.
He has no plans to spend time taking information off his profile once it changes to the Timeline. And he's never been nervous about sharing information online, including where he lives, his employer and his birthday. If identity theft was a major concern, he wouldn't be on Facebook.
What the Frack?
Stories first appeared in Bloomberg News.
In late 1998, Chesapeake Energy Corp., an independent natural-gas producer based in Oklahoma City, exemplified an industry in decline.
The company’s stock price had fallen over two years from above $34 a share to 75 cents. Its market value tumbled 93 percent, to $72 million.
Aubrey K. McClendon, Chesapeake’s chief executive officer and co- founder, announced he might sell the company, however there was little interest.
Falling gas prices had reduced the value of Chesapeake’s reserves from $2.1 billion to $661 million.
Good thing Chesapeake Energy decided not to sell their company.
Thirteen years later, Chesapeake’s market value exceeds $18 billion.
Its stock shares are up 8 percent this year.
Chesapeake Energy's 120-acre neo-Georgian corporate campus bustles with construction crews building new office space. Its workforce has grown 30 percent in a year, to 12,200, and its recruiters have 700 jobs to fill in the United States. Chesapeake has been rumored to become the Saudi Arabia of natural gas.
A tall man who wears his wavy silver hair long by CEO standards, McClendon, 52, exudes the confidence of someone who’s certain he’s seen the future.
Exploitation of newly accessible supplies of gas embedded in layers of what’s known as shale rock, he predicts, will help revive domestic manufacturing and change the terms of debate about global warming.
Diverting Billions
You’d expect that kind of exuberance from a man with everything to gain from seeing his vision made real, but it’s not just independent drillers such as Chesapeake that are talking big. ConocoPhillips is investing $2 billion in gas in 2011, up from $500 million two years ago.
Other multi-national oil giants, such as Exxon Mobil Corp. and Royal Dutch Shell Plc, are likewise diverting billions into domestic shale gas projects.
Conoco CEO James J. Mulva recently told an audience at the Detroit Economic Club that his company has made natural gas a significant portion of it's portfolio.
Last month, the potential for U.S. shale gas spurred Kinder Morgan to acquire rival pipeline operator El Paso Corp. for $21.1 billion. It also drove the proposed $4.4 billion purchase of Brigham Exploration Co. by Norway’s Statoil ASA.
Cheaper Gas
Encouraged by the availability of inexpensive and cleaner domestic gas, some electric utilities are replacing their coal- burning capacity with gas-fired units. Energy-intensive manufacturers of chemicals, plastics, and steel are beginning to bring home operations that they exported years ago.
Natural gas must be part of any discussion on strengthening the United States long-term economic health.
Natural gas is projected to improve energy security, protecting the environment, and helping to create jobs.
On the economic potential of the nascent shale revolution, even some career environmentalists sound impressed, if cautious.
Shale production in the U.S. has increased from practically nothing in 2000 to more than 13 billion cubic feet per day, or about 30 percent of the country’s natural-gas supply.
Cleaner Than Coal
That proportion is heading toward 50 percent in coming years. The U.S.
passed Russia in 2009 to become the world’s largest producer of natural gas. An Energy Dept. advisory panel on which Krupp sits estimated in August that more than 200,000 jobs, both direct and indirect. In the last several years the development of domestic production of shale gas has created many new domestic jobs.
At a moment of 9.1 percent unemployment nationally, additional decently paid work is just one potential benefit.
Natural gas burns cleaner than coal, emits less in the way of greenhouse gases, and avoids mercury and other pollutants.
Geologists have known for generations that immense, deeply buried shale formations contain copious reserves of methane, or natural gas, which can be burned efficiently to make electricity and run factories.
Until recently, however, industry lacked the tools to get at shale gas profitably.
Casing Protects Wells
In the early 2000s, the combination of two existing techniques led to a breakthrough. One method is horizontal drilling. The other is hydraulic fracturing, or “fracking,” a scary-sounding and controversial process involving the high- pressure pumping of millions of gallons of chemical-laced water deep underground to create cracks in shale rock and release trapped gas.
When in 2007 environmentalists began raising reasonable concerns about fracking, industry executives responded with dismissives asking skeptics to trust them the industry for years took the additional step of refusing to disclose the chemicals it uses in fracking.
Lost amid the suspicion and recrimination was a potentially more constructive discussion over improving industry standards for drillers’ concrete-lined steel casing, which, when installed correctly, has successfully insulated wells from drinking water.
Safe and Profitable
Now, though, there’s some surprising good news: Despite all the vituperation on both sides, some people from business and environmental circles are quietly at work in Texas, New York, and Washington on guidelines that should ensure a safe, profitable gas revival.
The Environmental Defense Fund, for example, is drafting model state regulations with Southwestern Energy Co., a producer based in Houston.
The collaboration is rooted in the recognition that the choice between polluting fossil fuels and pristine alternatives is not simple. For the foreseeable future, the U.S. has to burn a whole lot of something to produce power.
The nation now gets 45 percent of its electricity from coal, 25 percent from natural gas, 20 percent from nuclear, 7 percent from hydro, and 2 percent from wind. Solar barely registers. With current technology, wind and solar probably can’t reach into double digits, let alone bear the bulk of the load.
Bridge Fuel
If you want to continue to turn on the lights with the flip of a switch, the real short-term choice is whether to stick with the current mix or replace a substantial amount of coal capacity with less dirty natural gas.
Analysts contend that natural gas can serve as a bridge fuel to a 21st century energy economy that relies on efficiency, renewable sources, and low-carbon fossil fuels. Exploring where that bridge will lead should be one of the country’s most important economic priorities.
Like petroleum, natural gas is a hydrocarbon, a product of decomposed organic material that simmered underground for hundreds of millions of years. Simple in structure--one carbon atom and four hydrogen atoms-- gas has a convoluted history in the U.S.
In the 1970s, federal price restrictions contributed to underproduction and shortages, leading to wintertime shutdowns of Midwestern schools and factories. Utility executives and consumers came to view natural gas as unreliable.
Attractive Alternative
A titanic political fight during the Carter Administration ended in a bizarre compromise: price deregulation combined with restrictions on burning gas to generate electricity. (The coal industry, it should be noted, sponsors a long-established and adroit K Street lobby.) By the 1990s, the limits on using natural gas for power had been eased, and new turbine technology made gas an attractive alternative to coal.
Furious construction of gas-fired power plants ensued, only to be followed by dismay: Gas supplies were not expanding apace. At the turn of the 21st century, some natural-gas basins were nearly tapped out, and once again many utilities, homeowners, and energy-intensive manufacturers dismissed domestic gas as a sucker’s bet.
It might have stayed that way if not for the stubbornness of a Texan named George P. Mitchell. The son of an immigrant Greek goat herder, Mitchell worked his way through Texas A&M University in the late 1930s waiting tables and repairing clothes for students.
Mitchell’s Influence
After World War II, he went into the oil and gas business in Houston, working from a tiny office above a drugstore. All through the ‘80s, Mitchell pondered geological studies showing that gas could be found not only in conventional reservoirs but also in deeper, denser “unconventional” shale formations.
Shale is where gas is actually created. Energy men call it “the kitchen,” where hydrocarbons “cook,” and where large amounts of gas remains trapped. Mitchell wondered: Why not drill all the way down to the kitchen? His exploration company probed the Barnett Shale, a slab sprawling 7,000 feet beneath Dallas and Fort Worth. Competitors scoffed.
He invested his faith and capital in hydraulic fracturing, which had been introduced in rudimentary form in the late ‘40s. Injected at enormous pressures and in huge volumes, fracking fluid creates narrow cracks in the shale. Sand diffused in the fluid stays behind and props open the cracks, allowing gas to flow out and up through the well.
Horizontal Drilling
“Mitchell Energy,” the industry consultant Daniel Yergin writes in his new book, The Quest: Energy, Security, and the Remaking of the Modern World, “cracked the code.”
In 2002, after 60 years in the business, George Mitchell decided to cash out. Devon Energy Co., a better-capitalized independent in Oklahoma City, acquired his company for $3.5 billion.
Devon brought to the Barnett a knack for horizontal drilling.
Improvements in equipment controls and measurement methods allowed its crews to drill down and then turn the gnawing diamond-tipped bit sideways. Drillers penetrate the shale laterally rather than just vertically. This exposes more of the surface area of the formation to extraction and enables multiple wells to be created from each drill pad.
Shale Stampede
Devon could not keep the field to itself. Rivals rushed in to lease tracts in Texas, Arkansas, Louisiana, and Oklahoma. Following geologists’ amazingly precise three-dimensional subterranean maps, the drillers went as far east as the Marcellus Shale, a formation that extends below Western New York State, over into Pennsylvania, and all the way down to West Virginia and Tennessee. Few people outside the industry noticed, but a shale stampede was under way.
After almost selling his company during the late-’90s doldrums, Aubrey McClendon dramatically switched strategy and wagered Chesapeake’s future on shale. (A few years later, he lost much of his personal fortune during the financial crisis of 2008 before gaining it
back.) Today, Chesapeake is the most active driller of new wells in the U.S., with 177 rigs in operation.
It is the country’s second-biggest overall producer of natural gas, behind only ExxonMobil, which announced in late 2009 that it would join the gas rush by buying XTO Energy for $41 billion. Anadarko Petroleum Corp. is the third-largest producer, followed by Devon.
Haynesville Play
McClendon is descended from a prominent Oklahoma oil family, the Kerrs of Kerr-McGee fame. Prospecting is in his DNA. In 2003 he instituted what he called his “land rush plan”: Chesapeake borrowed heavily and bought leases in the Barnett, some of them in built-up parts of the Dallas-Fort Worth metro area. At midnight after the jets stopped arriving at Dallas/Fort Worth International Airport, workers drilled next to the quiet runways. In 2005, McClendon’s geologists discovered gas in a rich shale play in Northwest Louisiana and East Texas called the Haynesville. (Shale projects are commonly referred to as
“plays.”)
Also in 2005, Chesapeake paid $2.2 billion for the second- largest gas producer in Appalachia, becoming the biggest presence in the Marcellus play. McClendon, who got his start in the business as a “land man,”
or oil and gas lease broker, built a one-of-a-kind database of millions of property records from obscure county courthouses. The digitized trove has allowed Chesapeake to beat rivals to the doorsteps of landowners whose farms or backyards sat atop buried shale gas.
Margin Calls
A runup in gas prices--to nearly $14 per thousand cubic feet in mid-2008--made McClendon look like a genius. A few months later, he seemed less smart when the economy imploded, dragging down the price of energy and of Chesapeake’s stock (which fell from a high above $69 a share in July of that year to $11 in December).
McClendon personally had borrowed against his large individual holdings to buy yet more company stock. When the bottom fell out, he was hit with margin calls that forced him to liquidate a big chunk of his investments.
Like most entrepreneurs in the up-and-down energy business, McClendon takes occasional setbacks in stride. It helps to have a loyal board of directors. In 2009, the Chesapeake board gave the CEO a $100 million pay package. The company also paid him $12 million for a collection of 19th century maps he owned.
Better Than Coal
Why the well-timed company largesse? McClendon, citing pending shareholder litigation over his pay, answers guardedly. He was properly rewarded for his work during 2008, he said, and received an appropriate “retention package” to ensure his remaining as CEO.
As for the maps, he said he had paid out of his own pocket for years to decorate the halls and conference rooms of the company, and it was time for Chesapeake to make him whole. The company denies any impropriety. On Nov. 1, the litigation was settled, and McClendon agreed to rescind the map sale and repay Chesapeake the $12 million, plus interest.
Today, he has assets valued at more than $1 billion, including a 19.2 percent stake in Oklahoma City’s National Basketball Assn. franchise, the Thunder.
Burning natural gas for power, McClendon proudly points out, results in about half the equivalent carbon dioxide emissions of coal. Such observations, however, have not kept him from becoming a target of activists who are trying to shut down fracking --- and have succeeded in some places, such as New York State.
Shale Gas Welcomed
Environmentalists, McClendon believes, should feel much more warmly toward him. He readily acknowledges that human activity contributes to global warming. “Why take a chance,” he said, “when we can reduce our carbon emissions through consuming more natural gas and less coal and oil?” It’s in his pecuniary interest to hold that opinion, of course.
Many residents of Louisiana, Oklahoma, and Texas--places accustomed to oil and gas development--welcomed the “shale gale” and its accompanying jobs, packed cafés, land royalties, and rising local tax revenue. The reaction was far more mixed in New York and Pennsylvania, despite the latter’s history of oil and coal exploration.
In the Northeast, some residents objected to heavy truck traffic and rural vistas marred by towering steel rigs and murky wastewater pools.
Even more intense were concerns about the effects of shale drilling on drinking water supplies. Some homeowners complained that after gas operations began, well water started tasting bad and children fell ill.
Industry Defends Fracking
Activists raised questions about whether the chemicals in fracking fluid were contaminating drinking water with benzene, methanol, and other dangerous substances. In 2008, Businessweek published an article by the nonprofit journalism organization ProPublica that identified episodes of water contamination near (although not all definitively caused by) gas activity in seven states: Alabama, Colorado, Montana, New Mexico, Ohio, Texas, and Wyoming.
In 2010, New York stopped issuing permits for fracking to give environmental authorities there time to study the situation.
Hit with pollution lawsuits, Chesapeake and other producers denied that fracking caused water contamination. For one thing, the companies said, the procedure typically takes place a mile or more below drinking water aquifers and is isolated by massive layers of impermeable rock.
According to the industry, drillers had done more than a million frack jobs going back to 1948 without proof of widespread pollution problems. Drillers also pointed to a study of fracking released in
2004 by the U.S. Environmental Protection Agency that supports their position.
Film’s Impact
O.K., environmentalists said, so what chemicals are you mixing into fracking fluid? That’s secret, the industry answered.
The producers blame the furtiveness on big drilling contractors, companies such as Halliburton Co., that actually devise and inject the frack fluid recipes. The contractors insisted that their recipes were safe, but deserved confidentiality as proprietary trade secrets.
The industry’s conduct fueled protests in New York and Pennsylvania, which adopted as their manifesto Gasland, a documentary that made its official debut in January 2010 at the Sundance Film Festival, went on to air on HBO, and was nominated for an Academy Award. The film memorably showed homeowners near drilling operations lighting their tap water on fire and complaining about contaminated waterways.
Fracking Dangers Overstated
While Gasland raised relevant questions, it overstated the dangers related to drilling shale gas. It suggested rampant water contamination caused by gas operations. In contrast, a study by researchers at the Massachusetts Institute of Technology released earlier this year found about 20 reported cases of groundwater contamination between 2005 and 2009.
Some of these problems were traced to flawed cement used in well construction, though not to the fracking process itself. Pennsylvania and other states have since toughened drilling construction standards.
Flammable tap water is a real phenomenon in some areas, albeit a rare one. It’s caused by methane seeping into household wells, and it can happen regardless of whether gas drilling is going on nearby. The challenge in tracing the source of methane seepage is that the gas can occur naturally and contaminate water without any industrial activity.
(Not that anyone would want an incendiary kitchen faucet, but methane gas in water isn’t toxic, and it evaporates quickly.)
Methane Occurs Naturally
This August, Josh Fox, Gasland’s director, accompanied a woman named Natalie Brant when she testified before a hearing on fracking held by members of the New York State Senate. Brant, whose family lives south of Buffalo, testified that before the state’s moratorium on fracking went into effect, several of her eight children developed headaches and nosebleeds, which she attributed to nearby gas drilling. “We’re constantly worried about our children and if they’re going to come down with cancer or other illnesses because of what they’ve been exposed to,” she said. State environmental officials have said that methane occurs naturally in well water in Brant’s part of the state, and that the gas turned up in other water wells in the area before drilling began.
New Casing System
Chesapeake’s McClendon (whose company wasn’t specifically implicated by Brant) said claims such as Brant’s, compelling though they may seem, aren’t based on hard evidence pointing to hydraulic fracturing. But in a speech in September at a conference in Philadelphia, he acknowledged a series of limited gas migration incidents in Pennsylvania in the past three years.
One of those led state regulators to impose a $900,000 fine on Chesapeake for polluting drinking water in Bradford County. “These incidents were not related to fracking,” McClendon said. Instead, they were caused by faulty well casing. “Only a couple dozen homeowners claim to have been affected,” he said. “And more importantly, the industry worked closely with Pennsylvania’s Environmental Protection Dept. officials to implement an updated and customized casing system that has been effective in preventing new cases of gas migration. Problem identified. Problem solved.”
McClendon has a tendency to exacerbate hostilities by belittling his antagonists.
Fracking Chemicals Disclosed
Such condescension notwithstanding, Chesapeake and other natural-gas producers have made concessions. Overcoming some of the concerns of their contractors, Chesapeake and other producers (and the contractors
themselves) have begun to disclose the chemical additives used in fracking. An industry- sponsored website, www.fracfocus.org, allows companies voluntarily to report the additives on a well-by-well basis.
“We just decided to do what we should have done from the start,”
said Chesapeake’s Gipson. Disclosure isn’t universal yet, but it’s headed in that direction. Arkansas, Texas, and certain other gas- producing states have enacted legal requirements for full disclosure as a condition of continued fracking.
At fracfocus.org, visitors will find that some of the stuff in fracking fluid is definitely not what you’d want in your water glass.
Ingredients may include hydrochloric acid (initiates cracks), methanol (inhibits corrosion), glutaraldehyde (kills bacteria), and ethylene glycol (winterizes product).
Accidents Are Rare
Frack fluid is typically 98 percent to 99.5 percent water and sand, with the additives making up the remainder, according to the industry.
When the nasty stuff passes by any drinking water supply, it is supposed to be contained securely within at least two layers of steel casing and two layers of heavy-duty cement.
No one disputes that there can be problems if there are flaws in the steel or concrete. The industry said such accidents have been exceedingly rare.
The 2011 MIT study estimates that between 2005 and 2009 there were some 50 incidents nationwide involving a variety of gas drilling
mishaps: groundwater contamination, surface spills, offsite disposal issues, air quality problems, and well blowouts. To provide guidance on how to reduce gas drilling risks, the DOE set up its seven-person shale committee.
Sniping, Distrust
The EDF’s Krupp sits on the panel, which is chaired by John M.
Deutch, a Director of Central Intelligence during the first Clinton Administration. Other members include the consultant and historian Yergin and several scholars and former regulators.
Despite Krupp’s participation, some environmentalists have written off the DOE committee as an industry-influenced rubber stamp. These critics note that Deutch, a professor at MIT, holds a directorship on the board of Cheniere Energy, a Houston-based liquefied natural-gas company, and formerly served on the board of Schlumberger Ltd., a major drilling contractor.
Even Krupp “has his own connections to the industry,” Dusty Horwitt, senior counsel at the Environmental Working Group, a nonprofit in Washington, said in a radio interview in May.
The sniping reflects distrust of the pragmatism Krupp embraces. A 57- year-old lawyer by training and the son of a New Jersey businessman who recycled rags and cardboard, Krupp heads a nonprofit that promotes the use of market forces to protect the environment.
August Report
He regularly takes flak from harder-line activists who oppose his willingness to work with industry. His “industry connection” to shale gas consists of having hired as a senior policy adviser a former employee of the Texas Independent Producers and Royalty Owners Assn.
After conferring with the Sierra Club, the Natural Resources Defense Council, and other nonprofits, Krupp had considerable influence on the 41-page preliminary report the DOE committee released in August.
The paper calls for mandatory state-enforced disclosure of fracking ingredients, stricter standards on conventional air pollution created by shale operations, and additional research on underground methane migration and greenhouse gas releases associated with gas drilling.
The panel persuasively explains the need for government inspection of casing and cementing and for more careful disposal of wastewater that comes up from wells.
The report doesn’t address the sticky question of whether the EPA should be given more authority over gas drilling. At present, state agencies regulate the industry. Gas executives grimace when asked about the EPA being given responsibility for permitting their operations.
Fracking’s Exemption
“There’s no evidence the states aren’t doing the job adequately,” said Henry J. Hood, Chesapeake’s senior vice- president and general counsel. “The EPA doesn’t have the manpower or the state-by-state expertise.”
Some environmentalists angrily stress that in 2005 Congress made explicit that another federal law, the Safe Drinking Water Act, doesn’t cover fracking. The exemption certainly reflects the strength of the oil and gas lobby, but with a U.S. House of Representatives controlled by anti-regulatory Republicans, the chances of getting the provision reversed at this point are exactly zero.
Debating it is more of a distraction than anything else and obscures that the EPA has authority to take action against gas drillers and producers that violate the Clean Air and Water Acts. Rather than drawing another bull’s-eye on the EPA’s back, a savvier approach would be to use the DOE report as a blueprint for broadly framed principles that state officials enforce vigorously.
Education Needed
Smart industry executives should accept tough standards as the cost of resolving environmental anxiety. In January 2010, one such corporate leader, Southwestern Energy’s executive vice- president and general counsel, Mark K. Boling, picked up the telephone and called Scott Anderson, the Texas-based EDF gas expert whose industry experience makes him suspect in the eyes of some fellow environmentalists.
Southwestern traces its roots to an Arkansas gas concern incorporated in 1929.
Boling, a former partner with the Houston law firm Fulbright & Jaworski, has spent his entire legal career promoting the interests of oil and gas clients. Now, he said in an interview, those interests include demonstrating that fracking is safe. “It’s not enough to say we’ve been fracking for 60 years and no one has proved there’s a problem,” Boling adds. “We’ve got to get out there and educate, encourage better regulation, and pick up our performance in every aspect.”
Working Out Differences
Boling’s phone call to Anderson produced a cautious series of negotiations leading to a 37-page draft state regulatory code for gas operations. “Our idea is not that this should be adopted word for word by any state,” Anderson explains. “This is not one size fits all. Instead, it’s an attempt to show what a responsible producer and a responsible environmental organization consider best practices.
It’s something to work toward.”
The incentives for working out those differences are compelling. In New York, where local opposition to fracking remains strong in some communities, Governor Andrew M. Cuomo inherited a permitting moratorium on the procedure imposed by his predecessor, David A.
Paterson. Since taking office in January, Cuomo has encouraged the drafting of more stringent rules.
Jobs at Stake
Released for public comment in September, the proposal would allow fracking subject to rules suited to New York’s geology and regional politics. It would prohibit drilling within 2,000 feet of public drinking water supplies or 500 feet of the state’s 18 primary aquifers. Drilling within the watersheds that provide unfiltered water to New York City and Syracuse would be banned altogether.
Even with these and many other restrictions, the Cuomo plan would make more than 80 percent of the Marcellus Shale within New York viable for drilling, said Joe Martens, the state’s commissioner of environmental conservation. “Our most conservative estimate is that we could add more than 13,000 jobs, direct and indirect,” Martens said. “The higher estimate is nearly 54,000 jobs.”
Fracking’s Economic Benefits
The potential for creating jobs goes beyond the bereft former farm towns of rural New York. Every day, Dow Chemical alone uses the equivalent of 700 million cubic feet of gas and ethane (a natural gas derivative).
That’s as much as all of Australia consumes on a daily basis. More plentiful domestic gas supplies now priced at around $4 per thousand cubic feet have allowed Dow to announce multibillion-dollar expansions of facilities in Louisiana and Texas, according to Executive Vice- President James R. Fitterling.
Impact on Dow
“We expect to employ up to 1,300 workers per project to construct our two new propane dehydrogenation units and a new ethylene cracker,” he told an energy conference in Houston on Sept. 26. “We also expect between 400 and 500 new, long-term Dow jobs to operate and maintain the facilities.” That’s just one chemical company.
Some electric utilities are overcoming their deep-seated uneasiness over natural gas to shift parts of their operations from coal to gas.
The switch is inviting because many coal- burning facilities are antiquated, and the country already has large amounts of more modern, underused natural-gas utility capacity (a holdover from overbuilding in the late 1990s.)
The coal industry is fighting fierce rear-guard battles to prevent the move to gas. But a variety of federal antipollution rules taking effect in coming years will provide an additional reason to consider gas. Power companies in 15 states, including California, Florida, and Pennsylvania, have recently announced expanded use of natural gas, often at the expense of coal, according to America’s Natural Gas Alliance, a trade group.
Steady Power
We need to find a way to take advantage of this historic opportunity to cut back on burning coal, which is the worst energy option, said the EDF’s Krupp. And he said that as an advocate of more wind- and solar-generated electricity. The best way to exploit renewable power on a large scale is to use it in conjunction with natural-gas plants.
Gas-fired generation ensures steady power when the wind isn’t blowing or the sun isn’t shining.
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